Candlestick Trading Forum
keyword search

Candlestick Trading Forum

Candlestick Analysis Provides a Clear Format Stock Trading Strategy -

Developing a profitable stock trading strategy requires knowledge of how price trends move. Whether that strategy involved years of experience, or utilizing established price movement projection methods, a stock trading strategy needs to have a basis for entering and exiting trades. Candlestick signals provide a format that has been tested successfully for centuries. The signals work very successfully in their own right or it can be added to an existing successful trading program and dramatically enhance the results.

Understanding the investment psychology that forms the major signals provides an extremely powerful advantage when analyzing price trends. Utilizing this information creates a very easy-to-follow stock trading strategy. Price movements have very identifiable candlestick trading patterns or cycles. This is evident in the development of stochastics, Fibonacci numbers, Elliott wave theory, and a number of other technical patterns. This lends credence to the concept that prices move based upon investor sentiment, not on fundamentals. Prices move based upon investor perception of what the fundamentals will do. That was clearly evident going into the bubble of the year 2000.

The Japanese rice traders learned to exploit the oscillations of investor psychology. When the Candlestick signals are used correctly, they will produce quick visual chart analysis of what is going on in a trend. What was the investor sentiment during the Thanksgiving week? Being able to visualize the investor perceptions during specific time periods creates an advantage. Understanding what a trend will do when seeing specific Candlestick signals produces an excellent format for a stock trading strategy. Candlestick charts reveal high profit signals very quickly

Market Direction - Although the volume was lighter during the Thanksgiving week, the chart analysis on the Dow and the NASDAQ still provides some valuable information. Keep in mind, the candlestick signals are the cumulative knowledge of everybody that was buying and selling during a specific time frame. The fact that the volume was lighter during the holiday week does not change what the existing buyers and sellers were thinking.

As previously analyzed in the last week's newsletter, there were two evening Star signal formations that developed in the week prior to this past week. That was a clear signal that they sellers had stepped in. As seen in this past week of trading, there was nothing that would have negated the sell signals of the previous week.

Evening Star

The Evening Star pattern is a top reversal signal. It is exactly opposite the Morning Star signal. Like the planet Venice, the evening star, it foretells that darkness is about to set or that prices are going to go lower. It is formed after an obvious uptrend. It is made by a long white body occurring at the end of an up-trend., usually when the confidence has finally built up. The following day gaps up, yet the trading range remain small for the day. Again, this is the star of the formation. The third day is a black candle day, and represents the fact that the bears have now seized control. That candle should consist of a closing that is at least halfway down the white candle of two days prior. The optimal Evening Star signal would have a gap before and after the star day.


1. The up trend has been apparent.
2. The body of the first candle is white, continuing the current trend. The second candle is an indecision formation.
3. The third day shows evidence that the bears have stepped in. That candle
should close at least halfway down the white candle.

Signal Enhancements

1. The longer the white candle and the black candle, the more forceful the
2. The more indecision that the star day illustrates, the better probabilities
that a reversal will occur.
3. A gap between the first day and the second day adds to the probability that a reversal is occurring.
4. A gap before and after the star day is even more desirable. The magnitude,
that the third day comes down into the white candle of the first day,
indicates the strength of the reversal.

Pattern Psychology

A strong up-trend has been in effect. The buyers can't imagine anything going wrong, they are piling in. However, it has now reached the prices where sellers start taking profits or think the price is fairly valued. The next day all the buying is being met with the selling, causing for a small trading range. The bulls get concerned and the bears start taking over. The third day is a large sell-off day. If there is big volume during these days, it shows that the ownership has dramatically changed hands. The change of direction is immediately seen in the color of the bodies.

What did the trading during the Thanksgiving week tell us? Although the trading was positive for the week, there was nothing yet that's show that the buyers had overcome the sell signals. Realizing that, being able to see what the market will do on Monday gives us a clear visualization of what the current trend could do. A positive open on Monday, followed by a strong up day, would indicate that the buyers had stepped in and negated the implications of the two Evening Star signals.

The Dow average formed a doji on Friday, one half- day of trading. Remember, one of the basic rules in candlestick analysis is that the trend will likely move in the direction of how the open occurs after a doji signal. This becomes an important factor when analyzing what the indexes might do going into next week.


Candlestick Trading Forum