February 24, 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.