Candlestick Trading Blog

---

An investment newsletter is defined as a publication which is sent at regular intervals and which discusses one primary stock investing topic for the benefit of its readers. Investment newsletters are published by associations and businesses to present their clients and prospects with information relevant to their company and the basics of stock market investing.

A stock market investment newsletter is written to provide stock market investors with time-sensitive information on the market's current trends and normally include free stock picks. These types of newsletters are distributed by trading companies to their clients and subscribers.

A stock market investment newsletter provides interpretations, commentaries, news, and analyses which are applicable to the current market developments and which are interesting to a company’s clients, prospects, and subscribers. It is designed to help the stock market investor review and analyze the best stock picks, choose the correct investment opportunities, and learn how to invest wisely.

An investment newsletter is akin to other accepted paid and free stock market newsletters. It is frequently written for stock market investors and traders and usually incorporates the following:

Company profiles – this information includes the business’s description, past trading performance, and its recent stock charts.

News articles – these articles keep stock market investors up to date on the current trends in the market and the company’s recent developments and notable accomplishments in the stock market.

Stock portfolio – a stock portfolio is the compilation from the corporation’s stocks and bonds, in addition to other investment related resources.

Feature articles – these articles are made up of features regarding the company, stock market tips and other helpful information about the stock market.

Monthly top gainers and losers – this section of the newsletter is very supportive because it illustrates and compares the price movement of stocks over the previous month. It could also be distributed on a quarterly or annual basis.

Stock performance tables – the investment newsletter can include and discuss all the stocks which are similar in type and present financial and other valuable content.

Stock market newsletters can be published online via the company's websites or printed and mailed. Subscribers can get both free and paid versions of most company investment newsletters and client prospects can download and view investment newsletters from the company's website. These websites normally also provide archived versions of previous newsletters that can be printed directly from the company's website or read online.

Others say that investment newsletters give investors, as well as other subscribers, investment and trading tips, presented with all possible styles and methods. Investors can now effortlessly discern which stocks to buy, which companies to buy stocks from, and what particular stock market trading tools work for him/her – all by using the stock market investment newsletter.

Risk reward ratios are a critical component to successful trading. Trading can quickly become gambling if you continue to press your bets by taking positions with poor risk reward ratios. While identifying good risk reward ratios does not guarantee success, ignoring them usually guarantees failure.

Candlestick traders look for patterns with proven higher probabilities for placing trades. Once the pattern is identified, the next step is determining entry and exit points. For both, profit targets and stop loss targets. These points can be determined based upon moving averages, Bollinger bands, or other technical indicators to evaluate possible support and resistance levels. The onslaught of computerized trading programs provides traders with quick calculations to base one’s risk/reward targets.

Calculating Risk Reward Ratios

Let’s assume our computerized scanning program provides us with a dozen high probability patterns from which to choose. Most traders will only be able to add one or two new positions to their portfolio. This is where utilizing risk reward ratios come into play.

The simplest calculation will take into account:

1) Entry Price

2) Profit Target

3) Stop Loss Target 

For example:

Stock XYZ has the Entry Price of $20.35 with our Profit Target of $21.50 and Stop Loss target of $19.85.  Our Risk = the difference between our Entry Price of $20.35 and our Stop loss of $19.85 or Risk = .50.  Our Reward is the Entry Price of $20.35 plus the Profit Target of $21.50  or Reward = $1.15. We are risking .50 to make $1.15. In this example a little better than a 2:1 ratio.

The rule of thumb for a reasonable risk reward ratio is a minimum of 2:1. It is important to analyze your potential loss in the event your analysis is wrong and the trade does not follow in the expected direction. And, no fair setting your targets using fuzzy math! The risk reward ratio is meant to provide an unemotional evaluation before risking your hard earned money. Don’t ‘jiggle’ the figures to justify the trade.

Use this approach to narrow down your trades until you find the highest probability patterns with the greatest risk reward ratio. The more systematic you become in evaluating your trades the more likely your portfolio will prosper. Additionally, this approach helps to remove emotional trading which is a continued struggle for many investors.

Where to Begin

Evaluate your previously closed positions, using both your winning and loosing trades. Since you should constantly be evaluating your previous trades to evaluate the success of your most important technical analysis tools, you will kill two birds with one stone. Yes, I realize this is a boring exercise but it is essential to your success. The old adage ‘Insanity is doing the same thing over and over again but expecting a different outcome’ was never more true. At least take the time to consider whether you want to add the risk reward ratio to your trading criteria.

There is another other element to consider after the risk reward ratio has been determined. What is the length of time you expect to be in the trade? The shorter the time period the more trades you can place and the more money you can make. A 5:1 ratio is less attractive if your opportunity money will be tied up for too long a period. You must use your capital on the highest probability trades. Using the simple risk reward ratio should produce more profits to your portfolio.

To summarize; you should be willing to risk $1 to make $2. You should not be willing to risk a $1 to make a $1. Keep it simple and keep your targets honest, (the data is only as good as the person plugging in the figures).

By doing the risk reward calculations for every potential trade you will have your exit criteria before placing your trade. This keeps you from getting greedy when your profit target has been reached. You can take your profit and re-enter if the new trade meets your criteria. This also helps you from dropping your stop-loss, in the hopes that your trade will soon go your way.

What if I determine one of my open positions has a poor ratio?

Over the years, I have found one of the best ways to evaluate if it is time to take a loss is to look at my existing trade as if I were considering placing it today. If I could not justify taking it at the current price, using the same criteria I use for entering a trade, then it is time to take a loss. If you would not buy it today then more than likely, you already know the answer. Allowing your losses to grow is not a good habit to get into. Hoping and praying are not profitable stock market trading tools. The key is to win more than you lose. Loses are simply the cost of doing business. Every business has an income and expense allowance and candlestick stock trading is no different.

Making sense out of the recent stock market activity is a challenge, to say the least. Our society has become so complacent that we rely upon the latest stock market tips from CNBC instead of doing our own market research. Some investors consider ‘sound bites’ from these sources as sufficient market research, and maybe that explains why the market is so sporadic. On any given day, you will hear conflicting views for predicting stock market activity on the same stock. Take the opinion of  four ‘talking heads’, all disagreeing on the same stock, and flip a coin as to who is correct. One authority insists the growing earnings will cause the price to move up, while the other is adamant the stock has hit its peak and is already overpriced. Is it any wonder we sit mesmerized in front of our stock screens in a state of suspended animation? Even the experts cannot agree on the explanation behind the recent stock market activity.

No one can predict with any certainty when the Bulls will take over (or vice versa). There is but one certainty, eventually, all trends will change direction. This causes many investors to sit on the sidelines to wait for more predictable stock market activity. While this is an understandable emotion, it is not going to allow you to build any profits. Investors need to take advantage of human emotions behind the uncertain stock market activity.

Fear and greed are the main emotional drives behind any stock market activity. This type of emotional investing often results in bad decision-making, and the ultimate demise of many investment portfolios. The emotional investor may pull out of strong Bear market activity, only to miss out on the early stages of a recovery where the biggest gains may be recorded. Sadly, many investors allow fear and greed to propel them into exactly the wrong moves during any stock market activity.

We are uncertain exactly when a trend will end or begin. But, one thing that can be said with certainty is that sitting on the sidelines, until one understands the rationale behind recent stock market activity, is not a proven stock market investing strategy.

Stay invested! Learn to read investor emotions that are clearly illustrated in Japanese Candlesticks. Use the uncertainty of the recent stock market activity to your advantage. Stay disciplined by trading the candlestick signals and stop falling prey to your emotions.

If you are waiting for more predictable stock market activity, you may be waiting for a long, long time. There are too many factors contributing to the sporadic activity behind the market. The war in Iraq, the possibility of a housing bubble, the increasing budget deficit, and continued oil rises. This doesn’t mean you should avoid beginning investing in the stock market. But, it does mean you better know what you are doing. The stock market will provide you with excellent returns if you will take the time to educate yourself. Pull yourself away from the television and take charge of your own investment decisions.

Utilize the information that is built into candlestick signals. The signals provide valuable stock market information. No matter what the rhetoric is being verbalized on the investment stations, the signals reveal exactly what investor sentiment is doing. This makes candlestick analysis very easy. The Japanese Rice traders have spent centuries of surveying high probability reversal signals. Identifying the signals at the tops or bottoms of major trends provides a very valuable advantage. Investors that understand candlestick technical analysis can immediately start taking action.

The appearance of a candlestick reversal signal produces a high probability situation. It also aids an investor to understand how to utilize investor sentiment to analyze what the market trends are doing. This permits an investor to better understand how the markets work. The common-sense that is built into candlestick evaluation  enhances the ability to move portfolio positioning in the proper direction. Candlestick chart analysis is not a hard process to learn. Learning the important candlestick reversal signals, the 12 major candlestick signals, produces a market evaluation process that investors will utilize for the rest of their investment career. Take the time to understand what is being conveyed with the appearance of candlestick reversal signals. It provides an extremely important format for investing in any trading market.