Candlestick Education: Master the Mindset of Successful Traders

CANDLESTICK EDUCATED

The Candlestick investor is mentally prepared to move contrary to the emotional flow. The most important element of investing comes into play: Probabilities. We invest in particular situations because we will probably make a profit. The next chapter demonstrates how the Candlestick signals can put all the probabilities in the investor's favor. The signals are still being successfully used, after hundreds of years of refining, for one specific reason. The probabilities of the signal yielding a profitable trade warrants acting upon its presence. Otherwise, it would not have sustained its credibility. The results keep making the signal important.

The Candlestick methodology prepares the user for high potential trades. Being able to recognize the potential set up for a reversal gives the investor the edge. Being mentally prepared is as important as having the operation requirements in place: funds available and execution points established.

Utilize the Best Tools Available

An important confirmation indicator of the Candlestick signals is the stochastics. Again, referring back to probabilities, the assumption has to be made that existing technical indicators have to have statistical credibility. Otherwise, they would not be a part of today's technical universe. Track records have to produce noticeable results through the years or they would not be used today. Combining a well-tested confirmation indicator with a well-refined reversal system creates a high probability combination. The function of stochastics is to provide a valuable input into the investment decision-making process. It compels the investor to buy in the low-risk (oversold) areas and sell in the high-risk (overbought) areas. This function is magnified due to the nature of the signals. A buy signal does not have the credibility in an overbought condition as it would in an oversold condition. Conversely, a sell signal, presenting itself at the end of a downtrend, does not have the same importance as it has at the top of an uptrend.

Step One to Changing Your Investment Psychology

Patience. Our past investing habits, such as jumping into hot stories that we hear about, can be explained somewhat. Prior to the past decade or so, getting specialized research information was hard to come by. Any hot news tip was usually more news than we had access to most of the time. Being able to research industries, let alone individual companies, was almost an impossibility. If we had excess investment capital, any investment news was something to take advantage of. Computer access has dramatically changed all that.

Buy low, sell high. It is much easier to abide by these simple principles provided that the tools to analyze them are available. Today they are. It is probably safe to say that the universe of stocks that individual investors can follow has jumped from an average of 20 stocks, 10 years ago, to 200 today. Ninety-nine hundred companies—that is the rough total of companies that investors can reasonably expect to be able to invest in—include Dow Jones, S&P, NASDAQ, and Russell 3000. This does not include the many hundreds of penny stocks available on the pink sheets. This does not include the thousands of mutual funds or foreign companies available.

“Patience and the mulberry leaf becomes a silk gown.”

Today, we have a multitude of research capabilities. Candlestick analysis is available on every charting service on the Internet. Fundamental research is accessible all over the Internet. Instead of having to move on the limited amount of investment information that was at our disposal years ago, our investment universe is now dramatically expanded. Each individual has the ability to analyze and compare from a multitude of investment sources. As recently as 10 years ago, information on the vast majority of companies was hard to get. Today, however, all company information is at your fingertips in the matter of seconds.

So how does patience fit into the scenario? Evaluate Figure 7.8, showing the Spectrasite Holdings Inc. chart. As shown in Figure 7.6, selling days get bigger as it nears the bottom.

This provides the insight that the bottom is getting close, but when is the most profitable time to get in? When do you grab the falling knife? A Candlestick signal eliminates that problem. Buy when a signal tells you to. Will you get the absolute lowest price? Not necessarily. But you will be buying when the trend is now moving in your favor.

The Spinning Top, followed by an up day, indicated the downtrend had stopped. However, a week later the bearish Engulfing Pattern told the investor that it was time to get out. A worthwhile trade? Not really. But look at the results: a trade that didn't work well but at worst it broke even. At best it made 3 to 5 percent. Still not too bad for a nonworthwhile trade!

Two weeks later the falling knife has stopped, and a bullish Engulfing Pattern appears. Stochastics are oversold. Remember, the Japanese say to always sell when a Doji appears at the top? That trade, closed at the Doji, provides a good return. Bought on the close of the bullish Engulfing Pattern or on the open of the next day at $12.95 and sold on the close of the Doji at $19.50 returned 50 percent.

This is an excellent example to illustrate how Candlesticks tell you when to get in and when to get out. Some may argue that the Doji was not the ultimate top; that another Doji formed at the $21 price. The answer to that should be part of the Candlestick thought process. Why remain in a trade that was in the overbought area and had potential sell signals forming, for an extra 7.6 percent return after a 50 percent profit had been made in less amount of time? Take the profits and go find a low-risk trade situation.

The Ultimate Investment Criteria

The old subliminal investment rationale was "Is this the best possible place for my investment dollars, considering the time and effort required for exploring more possibilities and hunting down additional research to compare it with what I know now?" Considering the difficulty of obtaining any research years ago, most investment decisions were based upon placing funds in positions where the research was already available.

Today, both fundamental and technical research can be viewed on our personal computers in a matter of seconds. This dramatically alters the investment rationale. With no restrictions on available information, the investment program should be "Is this the best place for my investment dollars?" This creates a much more powerful investment stratagem.

Identify the stocks that fit the best possible risk/reward potential. For the investor who is anxious or impatient to have his or her money at work, Candlestick analysis satisfies that need. If you are buying, searches can be conducted in the matter of minutes to find the stocks that meet the strongest buy scenarios. Software programs have been written to find the positions that best fit the description of the low-risk, high-return chart pattern. 

Figure 7.9 clearly illustrates an excellent trade potential. The stochastics are in the oversold area. Common sense visualization sees a couple days of the decline flattening out. A Doji indicates indecision between the bulls and the bears. The next day forms a bullish Engulfing Pattern, showing that the buyers were stepping in. Further investigation would reveal that the volume was up dramatically. A look at the MACD may reveal that it just crossed the midline. Or analyze any other indicators you might want to use.

On any given day there will be many potentially excellent trades such as this one. The probabilities all point to this being a good trade. Why risk investment funds elsewhere? You may never have heard of this company before, but who cares? Without massive research expenses for finding out what is going on in a large number of companies, the Candlestick signal informed you that buyers were starting to buy this stock for some reason.

For those who may take longer to trust the pure technical indication of a reversal move, learning about a company's fundamentals does help the confidence level. You have the best of both worlds. If a Candlestick search finds a perfect buy signal, the fundamental background of the company can be researched online in the matter of minutes. But do not mistake this as a recommendation. Incorporating fundamental research into an investment stratagem is purely for making investors more comfortable with placing a position based upon what the signals are telling you. Fundamentals do not move stock prices in the short run.

Investor sentiment is what moves stock prices. A stock price that moves up 5 percent from one day to the next did so not because the fundamentals changed. The price moved because investors perceived that the company was worth more today than yesterday. Why does not matter. Being able to profit from that move is what matters.

The investment universe has over 9,900 possibilities. A search with all the right ducks lining up properly will probably produce between 10 and 100 good prospects each day. Even on the worst days there will be at least five prospects to choose from. The ease of Candlestick searches will always produce more opportunities than most investors can handle. That means an investor can afford to be patient and wait for the best possible investment situation to appear. No more running after hot stocks when they have already moved a great percentage. No more moving funds into mediocre positions due to the lack of research accessibility.

Knowing that high probability reversal moves are always appearing each day, the investor can reduce his or her risk by buying at the bottom in oversold situations. The same is true for the opposite end of the investment spectrum. Candlestick sell signals provide a format for taking profits or going short. Knowing the signs of a top and the investor psychology for setting up a sell signal allows the investor to hold until the probabilities dictate taking the maximum profits for the risk. This takes into consideration the risk/reward opportunities being presented every day through the searches. Why hold a position that has good profits in it while the upside potential is being overweighed by the possibility of a pullback? Those same investment dollars can now be moved to a chart signal that has low downside risk and high upside potential.

Take Control

Japanese candlestick investing will dramatically change your investment psychology. All the elements for high-profit investing are available. The signals themselves represent fully researched, high-probability occurrences. That alone puts probabilities in the investor's favor. Once you become familiar with the consistent results of the reversal signals, you become the director of your own results. Candlestick investing eliminates hoping for good trades or not being completely sure of what to do with portfolio positions. Every aspect of producing greater profitability will be established before the trades are executed. Coping with and eliminating losing trades becomes a mechanical function. Emotions will be out of the equation.

The following chapters demonstrate how to cultivate the good signals from the false signals. Descriptive illustrations prepare you for managing your own emotional weaknesses. These same weaknesses being exhibited by other investors provide profits to the Candlestick investor.

The investment strategies that follow range from using the simple common sense applications that are easily understood to the overlaying of Candlestick signals on Western technical analysis, directed toward the experienced investor. Whichever end of the spectrum you feel that you fit into, do not be concerned. Japanese Candlestick signals provide basic investment truisms that greatly enhance every level of investing.

Inherent benefits are produced from the detailed research of the signals. Basic human traits are identified through graphic chart formations. Understanding the emotional input that creates the formations provides tremendous profitable advantages. Eliminating them from your own investment reactions produces a platform of sound and controlled investment judgments.

When you learn how to utilize the signals to their fullest extent, your investment acumen will improve beyond your expectations. You take control of your own financial future. Your investment abilities need not be anything more than being able to identify a signal, knowing what that signal represents, and acting upon it in a disciplined approach. Extensive research is not required for placing a trade. The fact that the signals illustrate what is occurring in the stock price and being able to interpret that information eliminates the need for hours of laborious research. The hours of investigative efforts are made apparent in how the stock price is acting. The best use of your time is to find out what stocks are able to produce an investing profit. Why a stock price is moving is not important. Researching stocks that should move does not increase your assets. The Candlestick signals are only concerned with what is moving or has a high probability of producing profits in the next day or so. This is the truism stated in Will Rogers' investment philosophy: Buy a stock that is going up; if it doesn't go up, don't buy it.

Putting Candlestick analysis together with common sense disciplines produces what every investor is searching for: profitable trading programs. Signals simplify the basic concept of investing: buy low and sell high. Candlestick analysis is the roadmap to achieve those ends. The following chapters incorporate the elements of the signals into logical investment trades. The visual aspect of candles provides a clear insight into the direct and the force of a trend. Improve your investing abilities substantially by experiencing the insights the remaining chapter reveal. You are among the first to receive tested successful trading practices. Read with the mindset that these few programs can be easily adapted to your specific interests. The frameworks illustrated in each program will expand your investment horizons.