January 20, 2019

Longer Term Trading with Candlesticks

You have probably heard that all of your technical analysis tools can be used on “any timescale”, and thought that this meant that your methods of trading analysis of daily charts could be applied to intraday, say 5 min. charts, if you became interested in day trading. While that is true, the “any timescale” comment also applies to longer periods, such as you should consider when investing. Here’s some more trading info on longer term trading with candlesticks.

I am classifying “investors” as people who are not terribly interested in staying on top of the comings and goings of the stock market, and prefer to lodge their money in financial instruments on a long-term basis. They turn a blind eye to the ups and downs of the market from day to day, focusing instead on long-term gains. This is in their overriding belief that over the course of time and over history the stock market will always come out on top. While the nature of the market has changed, which caused some to question whether this is still a worthwhile strategy, there are many who still stand by this policy. But it is a mistake to think that any investors should only consult fundamental analysis, looking for the underlying earnings and marketing results in order to direct their portfolio.

A more sound methodology is to use fundamental analysis in your initial selection, but to consult weekly candlestick charts for any early sign of weakness. By the time weakness becomes obvious in earnings reports, it is likely that you will have lost far more than if you simply applied your candlestick charting knowledge to the weekly price chart.

Long Term Trading with Candlesticks

Here is a weekly price chart of the Dow Jones Industrial Average. It serves to illustrate how candlestick patterns can still be found at this time scale. The arrows point to particular candlestick patterns that the charting software has located. For instance, “A” is the Hammer pattern, usually thought of as “hammering out the bottom” and reversing a downtrend. “B” is the Bullish Engulfing pattern, where a bullish white candlestick totally covers the real body of the previous bearish candle.

As you should expect, not all of the discovered patterns work, but it is clear that they are as effective in this context as in a daily chart. Before relying on them, you should consult other technical analysis including indicators, volume, support and resistance levels, etc. A candlestick pattern alone is simply an indication of the week’s trading, and while it is indicative of market sentiment it is no substitute for corroborating evidence.

If you decide to use candlesticks in your investment portfolio, you still have to take a longer-term view towards your money. For instance, the weekly candlestick chart will not give you an indication of a failing trend until the end of the week when you review it. Thus you might have a higher loss than if you had treated it as short-term trading, and checked for patterns each day. Nonetheless, the superior information which you can get from using candlesticks in your investing can still save you significant amounts compared with buy and hold tactics which are used by most small investors.

Candlestick Trading Tools

To hear some people talk, you would think that

candlestick trading tools

are the Holy Grail for the trading community. Devotees may claim that market sentiments are magically revealed to them, and this transparency allows them to achieve far greater profits.
Yet on the other hand, it seems that other traders just don’t “get it”. They locate the common candlestick patterns that they are told to watch for, yet their trading statistics do not improve. The question is how both attitudes can coexist in a single trading market.

The answer is that it all depends on the approach that you take to incorporating knowledge of candlesticks and their patterns into your regular trading life. When you start using candlesticks, a little enthusiasm is appropriate but it is important not to forget the other principles of trading that you have learnt. Candlesticks are only tools, another “string to your bow”, and must be used in conjunction with traditional trading concepts.

There are a number of important principles that you should remember when bringing candlestick charting into your trading.

  • First and foremost, remember that all traditional Western charting tools can and indeed should be used on a candlestick chart, just as they are on the original Western bar chart. The candlestick chart shows exactly the same information, simply in a more easily readable form.
  • Candlestick patterns are only relevant if they occur in the correct trend. For the most part, candlesticks are used to identify reversals, so even more obviously there must be a trend to be reversed.
  • A candlestick pattern by itself, no matter how “perfectly formed”, should almost never be considered a good reason for a new trade.
  • If a candlestick pattern confirms a separate indication that you have gleaned from technical analysis, then the reversal is more likely.
  • In fact, the more signals that you see, both in candlestick patterns and in Western indicators, the more likely the predicted action.
  • The candlestick shows not only the prices traded, but also the strength of sentiment behind the move.
  • Candlesticks can be useful for timing trades, and may initiate action when other indications are favorable, such as the start of a breakout.
  • Candlesticks should not be used to identify price targets. Other Western tools, such as support or resistance levels, trendlines, or Fibonacci ratios are more appropriate.
  • There is always a price that says that the trade was wrong, and that it should be exited – the “cut your losses” principle. You must know this price before you open your trade.
  • Finally, you should always assess the risk/reward of each trade you are considering, to determine whether the trade is worth taking in the first place.

Many of these principles will be familiar to you from traditional trading. For some reason when traders “discover” candlestick patterns, they sometimes abandon the experience and common sense that they have accumulated in the past in pursuit of more intricate and satisfying pattern recognition, and then become frustrated that the patterns seem to “work” less than they were led to believe. Trading is a percentage game, and used correctly candlesticks can and will serve to better your odds.

Candlesticks with Context

Candlesticks are exactly the same as any other charting method in that they represent historical market activity in one form or another. A moving average for example is just an average of price over a set period rather than the price at a particular point within a set bracket of time. Whichever method is employed, it must allow the user to see certain facets to how a market traded historically and thus give them a better idea of what the activity might mean for future prices. Candlestick patterns are particularly helpful in quickly and visually identifying the various repetitive price movement patterns which often lead to the market subsequently moving in a particular direction. However, if it were always as simple as just trading the occurrence of a candlestick pattern, far more traders would be successful than there currently are. The key to adding a greater level of consistency to trading these patterns resides in knowing what the market has done and where the pattern is located. This is technical context.

All markets where you can buy or sell a product or contract are fundamentally auctions. The very basics of this idea are that current prices can be seen as fair with the market moving back and forth through accepted fair value or they can be seen as unfair and the market moves directionally ‘searching’ for fair value. What it really boils down to is that any market can be range-bound or it can trend and all markets move from one to the other and back again in various different timeframes. Using this principle, we can identify places where a market changes from one condition to the other or remains the same and therefore gain some context about how it might move given a certain reaction to this context. This reaction can be interpreted using candlestick formations. Merely spotting a formation and assuming it will always mean the same thing however, is never going to be as consistent as assessing each occurrence on its own contextual merits.

Here’s an example from Apple (AAPL) where I’ve simply highlighted a few different patterns:-

Clearly there are many more candlestick patterns within this snapshot, but for the purposes of this exercise I wanted to point out a few which clearly failed.

Let’s elaborate on the context of the same example. Here’s a zoomed out view AAPL over a longer period, just prior to the previous chart:-

Although there is a clear uptrend in force in the longer term, the reason I’ve noted that the trendline is only “possible” is due to the fact that it’s only touched twice up to this point. So it’s there to be aware of, although not necessarily to be used as a support line.

Moving forward in time and back into the first chart we looked at:-

You can see much better now that once the short-term trend (green line) breaks, a range is established. You might have decided that actually it would be better as a pennant-like formation with a descending trendline from the top of the range. Even though you’ll probably notice that there are opportunities by doing this, I’m focusing on going with the long-term trend. Therefore what matters is where support is coming in and that the market has come into balance. Ranges can break or they can expand. Here, we see two expansions down. The first is followed by a decent move upwards and the second is followed by a test and break of the entire range in the opposite direction. Taking another look at the long-term picture:-

In the second expansion, you can clearly see that not only was the attempted downside range break a bullish hammer reversal candlestick, but also it completed or verified the potential long term trendline already in place. Using all of these ideas in combination to form broader context would have given a trader the confidence they needed to place a very good trade indeed. So when you trade with candlestick patterns, make sure you use them with technical context.

Trade well.

Simple & Logical Candlesticks

Many people believe that using candlesticks as an approach to trading is outdated and it can’t possibly extract profits consistently from the markets. I’m not sure that I agree with this view entirely. Personally I don’t see candlestick charting as a direct trading methodology at all, but what I often see is that by taking the standpoint that they don’t work, traders miss out on the strengths which candlesticks offer. Many if not all traders at some point will look at a candlestick chart (or its bar chart equivalent), if not to identify specific candlestick patterns to trade from, then to use as a reference for price history. Whilst so many look at these charts, many traders by not a having a solid understanding of what candlesticks really tell them, are missing out on the extremely useful information which is staring them right in the face.

So what’s this precious information which they show? Apart from the obvious OHLC (Open, High, Low, Close) data for each and every candlestick, they offer a glimpse at how the market has moved. This really is the most vital aspect of candlestick charting and whether or not you want to trade the specific named patterns, it allows you to monitor how the market is moving compared with your expectations.

Let me give you an example. Certain types of candlestick or formation appearing in specific price zones can illustrate market intent. If say the market retests the recent highs, breaks out and yet somehow manages to close back below those highs, there’s likely to have been some strong selling present for this to have been achieved and therefore the market has every chance of a subsequent move lower. It’s market logic that’s of fundamental importance. This is what that logic might look like in the form of candlesticks:

You can even see that the bearish “dark cloud cover” formation is directly equivalent to a “shooting star” candle in this case. It may not be quite as bearish as it happens more slowly over two candles rather than one, but nevertheless it paints a similar picture. Yet these are two well-known examples of bearish formations. What happens if you don’t see these appear? Does it mean that bearish conditions don’t exist? Not necessarily. You wouldn’t have been aware in this particular case had you just been looking at a 5 minute chart on these two days:

However, understanding the principles behind what they’re showing means we can see that on the first it moves higher and rallies into close and then on the second day it opens higher, fails to push up much further and ultimately closes very near to the first day’s open. Realizing that this failure to push higher coupled with a strong reversal would alert a trader to the possibility of an impending reversal.

For me, the key to getting the most out of this centuries old charting method was the realization that formations are just the illustration of important market behaviors such as rejection, continuation or indecision. Specific candlesticks and patterns frame these behaviors very well and train the mind to be more aware of them, so that even when they don’t appear the logic is still clear. In any profession, a sound understanding of the tools at your disposal can be the difference between being quite good and excelling at something. Trading is no different. A trader with a solid understanding of candlestick charting is well positioned to read the rhythm and flow of the markets compared with a trader who simply applies indicators to the very same charts!

Trade well.

Swing Trading With Candlesticks

Swing Trading with CandlesticksThe recent market action has not been kind to long term investors with prices going up and mostly right back down again. But to the swing trader this market volatility has really been nice to trade. Long term holders have seen little increase or worse in their portfolios while the swing trader has been able to take advantage of the ups and downs the market has given us.

Here at Candlestick Trading for Maximum Profits we have been able to take advantage of these price swings to profit both long and short. Candlesticks, coupled with our unique trading system, have really been successful trading these market moves. While candlestick reversal patterns are a great tool to find changes in trends for the longer term trader to ride out they really shine when used to swing trade. [Read more…]

Candlestick Charting Is Much More Than Reversal Patterns

Bullish and bearish engulfing, morning and evening star patterns or the bullish and bearish kicker have become well known among traders everywhere as common candlestick reversal patterns. Yes there’s more but for the purpose of this article I wanted to use these examples to get the juices flowing just a bit knowing that they are some of the most popular patterns to trade. Reversal patterns have become synonymous with candlestick charting but if you’re using them as a tool for trend reversal recognition only you’re missing half of the benefit candlesticks give.

Trend trading is undoubtedly the safest method of active trading. We’ve all heard the old adage; the trend is your friend and it’s as true today as it was when it was first thought or said.  Candlestick reversal patterns, or for the purpose of this article, candlestick patterns can alert the trader to trend continuations with as much reliability as any method available. The best part is it is also one of the simplest methods available today! [Read more…]

Common Sense Candlestick Charting

Candlestick ChartingI’ve become pretty well known for pointing out what I believe is a lot of misinformation about candlestick charting over the years. Too many fly-by-night websites feature articles or even pages of information dedicated to trading with candlesticks without any regard to common sense. Many who write these articles make candlesticks seem like magic and act as if the stock price will simply “obey” candlestick reversal signals and rise or fall accordingly. Well, we all know there is no magic in the stock market and candlesticks are no different.

Candlesticks are a powerful trading system of used with a little common sense. As I teach the students of our course, candlesticks need to be applied with the rules of price action and used at price levels where price reversals or continuations are likely to happen. [Read more…]

Candlestick Charting – Why We Misunderstand

So you’ve decided to use candlestick charts and are searching for information to learn the trading methods of candlestick charting. You’ve found lots of information on the web, most giving you the same information you’ve seen many times before and you are beginning to wonder if anyone really knows how to properly and profitably use candlestick charts much less teach it. Maybe you plot your charts using candlesticks because of the visual appeal and the ease of interpreting the daily candles but you really don’t know how to rely on candlesticks to make your trading decisions. This article explains why many traders begin to use candlestick charts and give up without gaining the benefit valid candlestick patterns can give.

The first mistake most traders make when using candlestick charts is assuming that every reversal pattern that forms on the chart will lead to a reversal. This is simply not true! In fact, for every candlestick reversal pattern that signals a reversal there is an average of four that will give an invalid signal. Not a very good probability is it? Candlestick charting and trading on valid signals is an extremely profitable method of trading but reliable information explaining the techniques are very rare. [Read more…]

Price Action Trading With Candlesticks

Inverted HammerThere are many trading systems to confuse the trader these days and almost all of them have one thing in common…indicators! It seems that price action trading, which is what technical analysis is really all about has been all but forgotten. In my opinion, price action is not only the most effective method for analyzing trades but also a simple method to learn for traders at any level.

Price action trading is the study of price movement using nothing more than the stock chart and maybe some moving averages to show dynamic support and resistance levels. The best method of price action is the study of candlesticks which give simple and reliable signals when following the rules of price action theory. Candlesticks as well as the study of price action are actually easy ways to learn trade entry levels for both long and short trades. Candlestick Trading for Maximum Profits has been teaching both since 2007 and is the reason for our great success. [Read more…]

Candlestick Charting Software

Evening Doji StarMany new traders looking for charting software begin their search looking specifically for candlestick charting software. I may be wrong (and if I am correct me please) but I don’t believe there is a robust software package completely dedicated to candlestick charting. Most, if not all, of today’s most popular charting software packages can be plotted in candlesticks. Candlesticks have become very popular in recent years and many choose to plot their charts in candlesticks for the visual appeal. While it’s true that candlesticks are visually appealing it’s the power of candlestick theory that makes them so profitable if used correctly.

To plot your charts in candlesticks the trader simply chooses this format in the chart properties of the charting software which ever that may be. But there is so much more to candlestick trading profitably than just having your charts displaying in candlesticks! [Read more…]