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Profit Candlestick Patterns And Conventional
Technical Analysis - A Beautiful Synergy |
Technical
analysis is the pursuit of finding indicators
or chart patterns that anticipate when a reversal
may occur. Adding Candlestick analysis to
any conventional technical method improves
the return results multifold. The weak link
in most technical analysis is the “anticipating”
factor.
Trend lines, for example, become established
when they connect previous peaks or bottoms
and a relatively straight line can be drawn
through those points. This is one of the most
widely used techniques in technical analysis,
because it is simple and obvious to even the
inexperienced investor. When a trend line
becomes so obvious, it can become a self-fulfilling
support or resistance level due to the number
of people buying or selling once the line
is hit. However, the subjective part of this
investing technique relies upon whether that
level is going to maintain as a support or
resistance level again.
Candlestick analysis dramatically reduces
the subjectivity of that technique. Simple
observations are all that is required. First,
where are the stochastics as a price approaches
the trend line? Next, is there the semblance
of a Candlestick signal formation about to
develop? Upon the approach of a support line,
if stochastics appear to have no indication
altering its downward course and the candle
formations show no signs of a reversal potential,
at least the investor has the warning that
maybe this time the support level may not
hold. However, if the stochastics show signs
of the downward trajectory starting to wane,
and a candlestick “buy” signal developing,
the investor has an early indication that
the support level is going to hold once again.
This allows the Candlestick investor to step
in prior to the rest of the support line watchers,
who need to have more confirmation that the
support level held.
This visual evidence creates opportunities
for investors to take advantage of numerous
patterns. It allows the Candlestick investor
to establish positions at the extreme bottoms
of a potential move. The conventional technicians
add profits for the Candlestick investor as
they commit money to the move after their
indicators confirm the move. What the candlestick
signal makes obvious today, the conventional
technical investor may not see for another
two or three days.
The added visual information provided by the
candlestick formations produces profitable
pattern opportunities that other techniques
do not even identify or only recognize well
after the move has begun.
The J-Hook pattern is an example. See Figure
1, LTR - Loews Corporation. Once the trend
started up, the pattern formed when the price
pulled back for a few days. However, the stochastics
never reached the oversold area and they came
down only part way before hooking back up.
The signals indicated buying before it pulled
back too much, showing the buyers were going
to test the high of the previous week. The
gap above the recent high indicated that the
buyers were very anxious to see prices go
to much higher levels.
Figure 1, LTR - Loews Corporation.
A J-Hook pattern provides a double profit
opportunity. First, the move has a good probability
of testing the recent high. This move alone
could be a 4%, 6%, or 10% profit potential.
Once it gets to the recent high level, the
Candlestick investor has another immediate
advantage. Analysis of the stochastics and
observation of whether a signal is forming
gives the Candlestick investor the ability
to maximize profits. If a weak signal occurs
as the recent high is being approached again,
and the stochastics are flattening out or,
even worse, curling down, that is usually
an indication that the high is not going to
be breached. Take profits here. If, however,
no selling is indicated and the stochastics
have curled upward and appear strong, that
is a good indication that the high will be
broken. When that happens, the conventional
technicians, watching to see if a breakout
will occur at the old high, start piling in.
Strong patterns that are not obvious to investors,
other than the Candlestick investor, are Fry-Pan
Bottoms and Dumpling Tops. See Figure 2 and
Figure 3. The combination of white bodied
days and black bodied days that set up the
Fry-Pan Bottom and Dumpling Top, provides
insights to a reversal that the conventional
technical methods do not have to ability to
identify. Tower Tops and Tower Bottoms are
additional patterns that are more apparent
using Candlesticks. (See "Profitable
Candlestick Trading", pages 168 - 175,
for more information on all the formations
mentioned here.)
Figure 2, Fry Pan Bottom.
Figure 3, Dumpling Top.
Whether one is using simple trend line techniques
or more sophisticated Elliot Wave analysis,
the Candlestick formations provide immediate
information allowing more intelligent use
of those techniques. The same approach, analyzing
where the stochastics are and if a signal
is forming, better pinpoints which Fibonacci
retracement level will be the reversal level.
Studying and becoming familiar with the different
patterns can boost profits immensely. Knowing
when to commit funds ahead of the rest of
the crowd takes advantage of their buying
or selling after you have established your
position. Being able to anticipate where buying
or selling will occur from investors using
the conventional technical methods, now acts
as alert indicators versus being the main
impetus for putting on a position. Your correct
trade ratio will climb dramatically.
The Candlestick Trading Forum Stock Pick of
the Day utilizes the patterns to spot potential
trades ahead of conventional technical analysis.
Reiterating the purpose of investing, maximizing
returns with the minimization of risk, the
use of profitable patterns is another element
for putting more of the probabilities in our
favor. If you follow the Stock Pick of the
Day, you will become familiar with the different
high-profit patterns. Our soon-to-be-published
e-book “High Profit Candlestick Patterns”
provides in-depth insights on how and why
the patterns work so successfully. These patterns
are what the professional traders use to extract
consistent profits out of the markets.
Candlesticks make “relatively” high probability
trades into “extremely” high probability trades.
The fact that a pattern has been identified
through the years with conventional technical
analysis provides the format for taking full
advantage of a candlestick formation. The
difference between anticipating or wondering
whether a potential reversal point will be
effective becomes immediately apparent if
a candlestick signal is witnessed at the same
point. Beating the crowd adds profits almost
at the initiation of a trade.
Learn the patterns and you will create a constant
source of income for the rest of your life.
Next
- Who Is Stephen W. Bigalow? |
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