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Capturing Profit with Technical Analysis: Hands-On Rules for Exploiting Candlestick, Indicator, and Money Management Techniques

The candlestick way of technical analysis traces its roots to Japan from where it originated and now is very popular and used worldwide. Several patterns of candlestick exist on paper as well as on ancient Japanese texts that throw in depth light on the theory and fundamentals of it. It is said that in the seventeenth century the rice trade carried out by the Japanese was done through such form of technical analysis. In 1900, Charles Dow supposedly used this as the basis to create a modern United States version of candlestick technical analysis. But the real credit of this charting process is bestowed upon Homma, a rice trader hailing from a place called Sakata.

This method is quite useful to get accurate low, high, close, open prices in a given timeframe. While the shadow of the candle, depicts low and high price points, its body the opening and closing prices.  Some kind of shading is done to which way the price is going. If the candle is shaded going downwards, it means that the price at which a stock closed, was lower than what it opened up to. Similarly, a candle shown shaded upwards shows the opposite. It depicts that the opening price was lower than the closing price. Candlestick technical analysis has lots of variations which are used by different people according to their convenience. Like variation of patterns, of colors used for shading.

In the current times, a stock trader needs to be acting as a candlestick technical analyst as well. This is to correctly gauge and understand prices of stock better. Nowadays, there is software also available in the market which does the job of this analysis for the stock trader. It analysis better, accurately and gives several options to the user like of shading, of different patterns that can be used.

Technical analysis is a huge trend in the stock markets worldwide. For sustainment and survival of any trader here, one has to ingrain technical analysis into his/her businesses. Candlestick technical analysis in one of the most important components of technical analysis for the features it has and for the way it understands the mind of the trader.

Feb 21, 2009 copyright © David S.Y. Wong, published in ArticlesBase.com

The Japanese candlestick, hereafter simply referred to as candlestick or candle, is a very effective way to convey the open, high, low, close price points for the period in question, which may be minute, hour, day, week, etc. as supported by the charting software.

The body of the candlestick is defined by the open and close prices. The tails of the candlestick (some call them wicks or shadows) indicate the high and low prices. A color or shading convention is used for the body of the candlestick to convey the up/down direction of the candlestick. An up candle has the closing price higher than the opening price. A down candle has the closing price lower than the opening price. Colors used for the body include red and blue for down candles; green and white for up candles â?? subject to the convention used in the charting software which may allow user customization.

Visually, candlestick charting is very effective in conveying the up and down periodic movements of the stock price. At a glance, the user is able to see whether a stock closed higher than its opening price (up candle), or vice versa, a stock closed lower than its opening price (down candle). The length of the body as well as the tails show the range of price movement for the stock. And the user is able to follow the progression of candlesticks in successive periods.

There are various candlestick patterns such as doji and hammer (just to cite two from the long list of patterns which may span 1, 2, 3 or even more periods) that are used in candlestick technical analysis where significant conclusions are attached to each pattern.

StockTradersPlace (http://stocktradersplace.com) provides a trend following system based on candlestick technical analysis. http://stocktradersplace.blogspot.com provides a “Stock Trading with StockTradersPlace” companion guide. Show yourself that you can repeatedly execute winning trades using StockTradersPlace as an element of your trading tool box.

Feb 21, 2009 copyright © David S.Y. Wong, published in ArticlesBase.com

Do you marvel, as I do, at the ingenuity and complexity which is involved in delivering a landing vehicle from Earth onto the surface of Mars after a trip of millions of miles and of many months’ duration?  Do you now take for granted, as I do, our ability to send documents in color from one point on Earth to almost any other point on Earth -instantaneously?  The human intelligence and dedication which is required in order to accomplish these seeming miracles is almost beyond comprehension.

 

In the field of Finance, many people are turned away too soon – or give up too soon – when they hear the term “Japanese Candlestick technical analysis.”  Perhaps one reason is that it sounds “foreign,” or that “technical analysis” implies a substantial amount of hard work and expenditure of time even to begin to understand what it is all about.  This is unfortunate, because this is nothing when compared to landing a vehicle on Mars or sending documents around the world in a flash.

 

The fact of the matter is that Japanese Candlestick technical analysis is a breeze to learn, and takes very little time at all.

 

What’s it all about?  Let’s start with an understanding of the usual method of price display of a certain stock.  The price action of the trading day is shown as a vertical line, or bar, which is associated with a price scale (in dollars) at the edge of the page.  The top of the bar is the highest price of the day; the bottom of the bar is the lowest price of the day; the little wing on the left is the opening price of the day; and the little wing on the right is the closing price of the day.  Simplicity itself.

 

The difficulty is that the display is inert; lifeless.   It doesn’t readily disclose what went on during the day, or much of anything about the psychology of the buyers and sellers which drove prices during the day.  The Candlesticks cure that defect.  Rather than simply showing price action as a narrow vertical line or bar, the line is “fattened out” into a cylinder.  If the result of trading during the day is that prices closed higher than the opening price, then the cylinder is left hollow, or “white;” if prices closed lower than the opening price, then the cylinder is filled in, and is shown as “black.”  Ah!  Now we see, at a glance, that the mood of the day, overall, was Down.  The Candlestick really comes into its own when streaming data are shown on the screen, so that the viewer can see the changes in mood as the day progresses.  It’s like a movie in progress.

 

The second major advantage of Candlestick presentation lies in the interpretation of the patterns which the candles produce over various units of time.  Some of the patterns are one-day affairs; others have meaning when they develop over a course of several days or other time frames.  The operator quickly learns to recognize them on sight.  For example, if – after a long rise in prices – a daily pattern appears, well above prices to date, which involves a substantial range between the upper and lower prices of the day but only a narrow range between the opening and closing prices – and if that happens at the low end of the total range, that is called a “Shooting Star,” because that’s exactly what it looks like, and it has bearish implications.

 

Another favorite of mine is the “Evening Star,” which is a combination of the candle bars over (say) a three-day period.  It occurs at the top of a long rise in prices.  If the first candle is a long white candle, the middle candle is a little higher, but smaller, and the third bar is a long black candle which is lower than the middle candle, that’s an “Evening Star” and is very bearish.

 

This is not rocket science or putting a lander on Mars!  There are only about a dozen Candlestick patterns which need to be memorized at the outset.  It’s really fun to learn them, and to put them into practice.  The beauty of the patterns is that they are so instantly recognized by the eye, and disclose at a glance the underlying psychology of the participants in the market on that particular day.

 

They are an enormously valuable trading and investing tool.  Once you learn them, you will never go back to the “old way.”

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