Candlestick Charting - A Peek Into Market Psychology

Candlestick charting was developed by Japanese rice traders over four centuries ago and could quite possibly be the oldest form of technical analysis. Since technical analysis is not only predicting probable price moves but also assessing market psychology, candlestick charting is probably the best tool to give the trader these answers in the shortest amount of time. Once a trader becomes familiar with candlestick charting, he or she can get a quick and highly visual signal because of the story candlesticks tell. Strict adherers to candlestick methodology take positions based on very short term patterns given by candlestick tradition. While candlestick charting is relatively unknown, and therefore unpracticed by the common investor, their use among active traders is growing. The greatest benefit candlestick charts provide the technical analyst is the ease of use and interpretation. The same price action, quickly seen using candlestick charts, may go unnoticed while scrolling through bar charts.
While analysis of chart patterns takes experience and some practice, so too will candlesticks. However, after learning the basic signals, candlesticks can provide the novice trader a shorter learning curve and also shorten the learning curve to chart reading in general. I like using bar charts to find chart patterns, and then switch to candlesticks for a closer look. Candlestick charts are especially useful when analyzing areas of consolidation such as triangles and flags for signs of reversal or continuation.

The major signals in candlestick theory are reversal signals. Some of these signals are considered so strong by serious candlestick practitioners they will enter a trade based on its signal alone, without the need for conformation. Since I rarely see the price of a stock "turn on a dime", I usually keep an eye on the stock and enter a trade when the price retests support or resistance.

While I've incorporated candlestick charting into my trading strategies for quite some time, I have learned that there are a few technical criteria that will enhance the candlestick reversal signal. Some of these criteria include:

• Heavy volume on the reversal day – I look for volume to be greater than one and a half times normal volume.

• Greater than average price movement on the reversal day – I look for the price to exceed its normal daily price range and appear longer on the chart than most daily candles.

• Stock price that is heavily overbought or oversold – I look for the price to accelerate away, but in the same direction as the current trend.

• Signal forms on technical support – I look for the reversal signal to reveal itself on a trend line, moving average or horizontal support.

While candlestick charting is enjoying a following that has grown in recent years, it should be viewed as just another tool the trader uses to profit in the market, not as a foolproof method of entering or exiting a stock. The signals tell a story of the psychology of the market. Sometimes the signals are only valid for a short period of time, but at key levels of support and resistance the reversal signals given by candlestick patterns can tip the trader off to a healthy price move.

My suggestion to any active trader is to take some time and learn the major candlestick reversal signals. There are many good books and courses available on the internet that are reasonably priced and will allow the trader to learn at his or her own pace.



Stock Analysis – Technical vs. Fundamental



There are two different methods most stock traders employ to analyze a stock as a potential investment and each is a different from the other as night and day. In fact, the subject has caused more than one healthy debate between successful traders and investors and will likely continue do so for quite some time. Fundamental vs. technical analysis, which is the best way to trade? First, I have to admit I am a devout technical analyst. I write about the subject and own a company who publishes a technical analysis stock trading course. I didn't start out in the stock market that way but gradually came to the conclusion I understood technical criteria better than fundamental criteria. Even though I believe that technical analysis leads to more profit, less loss, and is easier to understand, I do leave room for possibility that there are investors who perform just as well as I do using fundamental analysis.
Fundamental analysis is the study of the financial condition of a publicly traded company. When you visit a financial website such as MSN Money, Yahoo Finance or CBS Market Watch and enter a stock symbol, the information that will be displayed is mostly fundamental criteria. It includes figures such as gross sales, gross profit, sales growth, income growth, net profit margin, debt to equity ratio, institutional analyst recommendations among other various criteria. The fundamental analyst compares these numbers to those of other companies in the same industry group of against the S&P 500 average and decides if the stock is worthy of being added to his of her portfolio.

Many fundamental analysts are buy and hold investors. They're willing to add a stock to their portfolio and wait until the investment matures, which is different than most technical analysts. Fundamental analysts by nature are patient with their investing approach. They may hold an individual stock for years, allowing it time to gain a return (hopefully) and in some cases reap the dividends the stock may or may not pay.

Technical analysts decide which stock they will invest in based on criteria they see on a stock chart. The technical analyst believes that the stock chart also charts the mood of the specific market. To put it another way, the stock chart gives the investor a peek into the market psychology. While large financial institutions and brokerage houses recommend stocks to their customers based on fundamental criteria, they all have traders on the floor who honor technical criteria on a daily trading basis. You can actually watch technical rules being "obeyed" on an intraday chart as the price forms patterns indicating the stock is losing steam or there is strong buying taking place. These intraday patterns are traded by day traders but the same rules apply to daily charts and allow the technical analyst the ability to read market psychology in charts of many time frames.

The technical analyst uses the daily chart to forecast his or her trades. The different continuation, topping, bottoming and reversal patterns are to numerous to list in this article. Most technical traders buy on a price breakout and sell on the first pullback or consolidation in price. The breakout is forecast on the chart and the entry is strategically timed to a precise buy point. It takes some study and training but the rewards are great and quick.

The technical analyst is usually impatient and not willing to keep their money tied up in a stock for very long. Most usually hold for less than a couple of months, with a couple of weeks being more common. The trade is placed only to "ride the wave" and the position is exited once the wave is over.

If you haven't begun to trade stocks and are thinking about starting, you need to decide which way YOU feel comfortable analyzing and trading stocks. It's a personal decision based on what you feel comfortable with. Technical traders are usually a little more aggressive in their approach to trading stocks than their fundamental counterparts. Either way is ok as long as you are willing to put the time into studying your craft.




Candlestick Reversal Patterns - More Than Meets the Eye



Anyone who studies the stock market has undoubtedly heard of candlestick charting. Their history goes back almost four centuries as a method of technical analysis used by Japanese rice traders. It wasn't until the early 1990's that candlestick charting made its way to the western world. As popular as the technique has become in the west, it's hard to imagine a time when there was little information able to be found on the subject. All a person needs to do is type the term "candlestick charting" into their favorite search engine and they are presented with all types of information on the topic. There are numerous websites, articles, books, software, courses, and videos. There are even candlestick games and flashcards! The subject has been highly commercialized due to the desire of new traders wanting as much information about the subject as possible.
One of the drawbacks of the excess information available on the topic of candlestick charting is that there is as much bad or incomplete information as there is good. Unfortunately, the trader new to candlesticks takes this partial or downright bad information into the trading arena and experiences financial loss at the hands of the stock market. Why? Well, just like any other type of stock analysis, "it's never quite as simple as it sounds". Candlestick charting is often touted as a "holy grail" in the world of trading stocks, but nothing could be further from the truth.

While it's true that using candlesticks can give the trader a method determining whether or not a trend may be getting ready to reverse, it's also important to remember that stocks rarely just turn on a dime and reverse course. If you look at a healthy trend on a stock chart, you'll notice the price movement from one end of the trend to the other takes kind of a zigzag course while the overall price movement moves toward the direction of the trend. If you are looking at a candlestick chart, you'll also notice there will be a multitude of reversal signals that mean nothing more than a slight pullback in price as investors take profits, NOT a trend reversal.

So are candlestick reversal signals a viable method of technical analysis? You bet they are! In order to use candlestick reversal signals successfully you need to understand technical analysis in general. There are points of price resistance and support that will show up on the chart and most technical analysts learn them early in their studies. Just like any other method of "predicting" a change in trend, candlestick reversal patterns need to be applied to these areas of support and resistance as well. Once the trader understands the proper application of candlestick reversal patterns they can also see the results in their portfolio.




How the Stock Market Works


There are many people who are invested in the stock market. Many of us who have money in any type of retirement account can count ourselves as a participant in the market as a whole. But have you ever stopped and wondered how the stock market actually works? Have you ever attended an auction? If you have then you might be able to relate with the daily operation of the stock market because it's basically just that, an auction for shares of ownership of publicly traded companies.
As in an auction, there is an auctioneer. But in the New York Stock Exchange (the largest stock market in the world) and the American Stock Exchange he is called a market maker. The market maker tries to match buyers with sellers just as an auctioneer would. There is no set price for a share of stock. Institutions and traders bid to buy and offer to sell and the price is set by the market maker. The price will fluctuate throughout the day depending on supply and demand. There is no fixed price for a share of stock. Bidders buy on the expectation that the price will go higher and sellers sell because they think the price will go lower. It's a huge psychological game that repeats itself daily.

Many of you have seen the floor of the NYSE on the news or on CNN during news reports about the trading day. Maybe you have seen the ringing of the bell to announce the beginning or the end of the trading day. It really is a sight to watch floor traders buy and sell their shares with the emotions of fear of loss and the greed of potential profit. The actual participants look at the stock market as something completely different as most investors.

The NASDAQ operates completely different from the New York and American Stock exchanges. The NASDAQ operates completely electronically. The trades placed on the NASDAQ are placed through a huge computerized network. It's still an auction but buyers and sellers place their bids and offer shares through the network. If you can imagine a sheet of paper split down the middle into columns with bidders on one side and sellers listing their ask prices on the other. On each side both are put into different levels depending on their bid or ask price. The highest bid price gets the honor of the top slot in the buyer’s column and the lowest sell price receives the same on the sell side. This is basically a description of the quote system called Level II which active traders pay close attention to as they make their daily trades.

To many of us all this goes on behind the scenes. For a growing number of people this has become an area of study as the internet has given them access to the daily auction called the stock market. The number of online traders has steadily grown since the nineteen-nineties and some have profited handsomely and continue to do so. Others consider themselves fortunate that all this goes on behind the scenes and are content with their mutual fund. Whichever camp you find yourself in, the objective is the same…to make a profit in the greatest auction in the world.




Candlestick Trading May Shorten Learning Curve For New Traders


As more and more new traders are entering the financial markets, just as many are finding trading to be a bit more difficult than they might have thought. While I believe trading is the best method for the average person to earn an income online, I also believe many enter the markets too early and become frustrated. There is a lot of information on the subject of technical analysis and it's difficult for the new trader to sift through the rubble to find his or her own trading strategy. When training new traders, I recommend candlestick charting and analysis because of the shorter learning curve. Bear in mind, I'm a devout technical analyst and believe this method produces quicker profits. This method of analysis is what I teach new traders.
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