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| Candlestick
Statistics - Dojis and Gaps Combinations -
Power Profits. |
The
Doji is one of the most revealing signals
in Candlestick trading. It clearly indicates
that the bulls and the bears are at an equilibrium,
a state of indecision. The Doji appearing
at the end of an extended trend has significant
implications. The trend may be ending. Just
this fact alone creates a multitude of investment
programs that produce inordinate profits.
What is the best method for making big trading
profits? Knowing the direction of a trading
entity and the strength of that move. Candlestick
analysis perfects that trading strategy. Candlestick
formations reveal high probability profitable
reversals. Hundreds of years of investing
refinement has proven that point.
The Japanese say that whenever a Doji appears,
always take notice. A well-founded rule of
Candlestick followers is that when a Doji
appears at the top of a trend, in an overbought
area, sell immediately. Conversely, a Doji
seen at the bottom of an extended downtrend
requires buying signals the next day to confirm
the reversal. Otherwise, the weight of the
market could take the trend lower.
What could be better than knowing which way
a market or a trading entity is going to move?
One additional important element! How powerful
is that new move going to be? A powerful indication
that a strong trend is beginning is the appearance
of a “window” or gap. Gaps (Ku) are called
windows (Mado) in Japanese Candlestick analysis.
A gap or window is one of the most misunderstood
technical message. It is usually advised by
a good percentage of investment advisors to
not buy after a gap. This is very bad advice.
The gaps will reveal powerful high profit
trades. Candlestick signals, correlated with
the appearance of a gap, provide valuable
profit making set-ups.
The ramification of a gap pattern is an important
aspect to Japanese Candlestick analysis. Some
traders make a living trading strictly off
of gaps. Dissecting the implications of a
gap/window makes its appearance easy to understand.
Once you understand why a gap occurs in different
locations in a trend, taking advantage of
what the gaps reveal becomes highly profitable.
Where a gap occurs is important.
Consider what a window or gap represents.
In a rising market, it illustrates prices
opening higher than any of the previous day’s
trading range. What does this mean in reality?
During the non-market hours, something made
owning this stock tremendously desirable.
So desirable that the order imbalance opens
the price well above the prior day’s body
as well as the high of the previous day’s
trading range (the same is true for a bearish
indication, gapping down from the previous
range). As seen in Figure 1, note the space
between the high of the previous day and the
low of the following day.
Figure 1 - Gap Formation.
Witnessing a gap or window at the beginning
of a new trend produces profitable opportunities.
Seeing the gap formed at the beginning of
the trend reveals that on a reversal of direction,
the buyers have stepped in with a great amount
of zeal. A common scenario is witnessing a
prolonged downtrend. A Doji appears, indicating
that the selling may have stopped. To verify
that the downtrend has stopped, indication
of buying the next day is required. This can
be more pronounced if the next day has a “gap”
up move.
Many investors are apprehensive about buying
a stock that has popped up from the previous
day’s close. A risky situation! Yet a Candlestick
investor has been forewarned that the trend
is going to change, using a signal as that
alert. A gap up illustrates that the force
of buying in the new upward trend is going
to be strong. The enthusiasm shown by the
buyers trying to get into the stock demonstrates
that the new trend should have a strong move
to it. Use that gap as a strength indicator.
Dojis and Gaps at the Bottom
Knowing that a gap represents an enthusiasm
for getting into or out of a stock position
creates the forewarning that a strong profit
potential has occurred. Where is the best
place to see rampant enthusiasm when you are
buying? At that point you are buying, near
the bottom. Obviously, seeing a potential
Candlestick buy signal at the bottom of an
extended downtrend is a great place to buy.
In keeping with the concepts taught in Candlestick
analysis, we want to be buying stocks that
are already oversold to reduce the downside
risk. What is even better is the evidence
that buyers are very anxious to get into the
stock.
Note in Figure 2, XMM, Cross Media Marketing,
after Doji/Harami's, one on November 5th,
another on December 18, 2001, that the gap
up the next day clearly indicated that the
trend had stopped. The resulting trades produced
28.5% and 49.3% respectively. Probabilities
demonstrate that a gap up is going to preclude
an advance in price under these circumstances.
Unofficially, candlestick statistics illustrate
an 80% and better probability that a trade
will be successful when stochastics are oversold,
a Candlestick “buy” signal appears, and prices
gap up. (The Candlestick Trading Forum provides
candlestick statistics that they represent
as “unofficial.” Even though over fifteen
years of observations and studies have been
involved, no formal data gathering programs
have been fully operated. However, currently
the Candlestick Trading Forum is involved
with two university studies to quantify signal
results).
Figure 2, XMM, Cross Media Marketing
Having this statistic as part of an investor’s
arsenal of knowledge creates opportunities
to extract large gains out of the markets.
The risk factor remains extremely low when
participating in these trade set-ups.
Many investors are afraid to buy after a gap
up. The rationale being that they don’t like
paying up for a stock that may have already
moved 3%, 5%, 10% already that day. But this
rationale is unimportant to the Candlestick
investor. Witnessing a Candlestick “buy” signal
prior to the gap up provides a basis for aggressively
buying the stock. If it is at the bottom of
a trend, that 3%, 5%, 10% initial move may
just be the beginning of a 25%, 30%, 40% move
or a major trend that can last for months.
Dojis and Gaps at the Top
Gaps and windows reveal a strong force in
a direction whether it is bullish or bearish.
The Candlestick signal is the prime factor
for looking for a reversal. A gap down after
a “sell” signal verifies that the signal was
effective. The Japanese say that a Doji at
the top of a sustained trend warrants immediate
liquidation. That becomes more evident if
the prices gap down the next day. Note in
Figure 3, ISSI, Integrated Silicon Solutions,
the Doji at the top, with stochastics in the
overbought area, would have been the warning.
If investors were long, upon seeing the Doji,
they should liquidate at the first sign of
a weaker open. The gap down the next day would
have been more than enough to convince the
Candlestick investor that the sellers had
stepped in.
Figure 3, ISSI, Integrated Silicon Solutions
The investor that does not utilize the information
revealed by gaps/windows is leaving massive
profits for somebody else. Just as the Candlestick
signals have different meanings at different
points in a trend, the gaps have different
messages at certain points in a trend. The
Candlestick signals, signals that have imbedded
information in their formation, combined with
a gap/window, also a signal that implies a
magnitude of buying or selling interest, creates
one of the most powerful investment tools
found in technical analysis. The major function
of technical analysis is to find trade patterns
that put probabilities highly in our favor.
Hundreds of years of profitable observations
have identified the Doji as a prime reversal
signal. Gaps have demonstrated many times
over that they are the driving force of a
trend direction. The combination of these
two indicators produce profits that cannot
be ignored.
Stephen W. Bigalow is the author of “Profitable
Candlestick Trading” and the principal of
www.candlestickforum.com, one of the leading
websites on the Internet for educating investors
in the use of Candlesticks. |
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