Candlestick Entry and Exit Strategies

Profitable Candlestick Entry and Exit Strategies

“It is a great folly to struggle against such things as thou const not over­come.”

Candlestick signals tire in existence today because of their statistical probabili­ties. As can be imagined, the signals would not be in existence today if they did not produce noticeable profits throughout history. Profits showing significantly more than random luck or normal market returns. The purpose for utilizing the Candlestick signals is to put as many probabilities in your favor as possible. The fact that a signal is still around is due to its observed results over centuries. Assuming that the probabilities of making a profit from that signal is above 50%, maybe 60%, 70% or even 80%, and those percentages can be enhanced by an additional factor. The signals indicate when to get out of failed trades immediately, thus cutting losses. (To date, statistical performance has been diffi­cult to obtain. The combination of severe misunderstandings of when a signal is truly a signal by most investors has been a deterrent. That lack of knowledge and the multitude of parameters required to do a statistical analysis makes program­ming for statistical results an overwhelming task. What can be visually accessed in the matter of milliseconds involves a multitude of numeric calculations and pa­rameters. The Candlestick Forum is currently directing projects to accumulate these statistics and will make them available to Candlestick Forum members as results are obtained. Because of the magnitude of this project, information will most likely be released in bits and pieces as completed.) How a position is per­forming, once the signal has appeared, is an immediate filtering element. We are all eternal optimists and want every position to go up as soon as we buy it. However, keep in mind, even with the possible phenomenal results of 80% positive trades, that still leaves 20% that will not work. The more steps taken to reduce bad trades, the better your results will be in your investment funds.

The information revealed in this book and on the Candlestick Porum website is not the revealing of ancient “secrets” or the development of sophisticated computer-generated formulas. It is the assembling of commonsense observa­tions from centuries of actual profitable experience.

Candlestick information has been around in the U.S. investment arena for several decades. Everybody knows about them. They use the candlestick graphics for better viewing of charts. However, most investors do not know how to apply the signals for effective results. You, taking the time and effort to re­search the Candlestick method, are still in an extremely small minority of the investment community. The Japanese rice traders made huge profits from the Candlestick method. They used rice paper to draw charts and backlit the charts in candle boxes. The concepts applied to Candlestick analysis eventually be­came the backdrop of the Japanese investment culture.

Common Sense

As you learn about the Candlestick method, keep in mind that the commonsense approach is what distinguishes this investment technique from most investors trading practices. The information you are receiving is knowledge that is avail­able to everyone. However, you have the benefit of learning the correct inter­pretation, which means you get the desired results. Take advantage of this knowledge. It will create a confidence in investing that most people never experience.

Just as the signals produce valuable information as to when to buy a posi­tion, they are just as valuable for demonstrating when to sell. This, sometimes, is much sooner than expected. Simple logic tells us that if a Candlestick “buy” signal appears in the right place with the right confirming indicators, the trade should have a high probability of being a profitable trade. Unfortunately, real­ity may show a different outcome. How a price ‘opens’ the next day is a very important indicator as to how aggressive the buyers are. (The same parameters apply to sell transactions, but for illustration, the buy side will represent all trades.) Utilizing that information can be instrumental in weeding out less favorable trades.

The logic behind the results of an opening price the next day after a signal is simple. Is there evidence that the buyers are still around? That information is readily available through inexpensive live-feed services. Being able to view how a stock is going to open, before the market opens, improves an investor positioning dramatically. Returns expand dramatically by eliminating bad trades.

The shorter the trading period, the more critical the ‘open’ pricing. Op­tions are trading vehicles that require as exact timing as possible. Longer-term investors have more leeway when putting on a position. A six-month trade or a one-year trade is usually being bought when the monthly, weekly and daily candlestick charts all coordinate, each chart shows that it is time to buy. (The monthly and daily charts are the pivotal charts for long-term investors. The weekly chart is sometimes out-of-sync. It is better to do your own testing with a four-day, six-day, seven-day, or eight-day chart. They may have more rel­evance than the one-week chart.)

“Buy stocks that are going up; if they don’t go up, don’t buy them.”

Each formation is not a signal. A Candlestick “buy” signal in the overbought area does not mean the same as a Candlestick “buy” signal in the oversold area. Conversely, a Candlestick “Sell” signal does not mean the same in the oversold area as it does in the overbought area. Many investors confuse the formations as signals. They do not take into consideration where the overbought or over­sold indicators (Stochastics, settings of 12,3,3) might be.

When do most investors want to buy into a stock? They usually want to buy after the price has gone consistently up for days or weeks! Finally, they become convinced that the stock is going to go up forever. That is tire reason an inordinate amount of volume appears at the tops. Finally, everybody has gained enough confidence and wants in. After a sustained uptrend, the broadcasts begin on the financial news stations. The “experts” discuss how great the com­pany or the industry is doing. The average investor perceives they will be left behind if they do not get into the stock. Of course, that is usually the first sign that the top is near. Prices start to pull back because of profit taking. The new investors hang on anticipating the uptrend will continue after some profit tak­ing. However, the pullback lasts a few weeks longer than everybody expects. Then it moves slowly up to the area that diose investors bought, bumps into resistance, then pulls back again. Soon they are sitting in a stock they have owned for three months where the price still is not back where it was bought. This is not a good return on the invested dollars.

Alternatively, the inexperienced investors are going to try another approach. They are going to buy a stock that they have followed because it has pulled back a hefty percentage. This is at least more logical than buying a stock be­cause it has gone up a great deal. However, this also has its flaws, if done without using any buying parameters or signals. Enron Corporation is a prime example of not buying a stock just because it has backed off a good percentage from its high. The person, buying a stock without any buying signals because it has gone down, is just grabbing for the fallen knife. One of three things can happen from that point and two of them do not make you money. The price could easily continue its downward trek. Buying because you think that the sellers have sold enough may not be a viable approach. The stock price could level out and trade flat for the next six months, not a profitable endeavor. Finally, because you have a wonderful sixth sense, you happened to buy the stock at the bottom and it turned up reasonably quick. If that is the case, you do not want to read this book or any book that would screw up that talent.

The best investment strategy is to buy a stock that has bottomed and the buying is becoming more prevalent. Tall order? Not really, when you can visually see the buy signs. The probabilities are much greater to find the stocks that are just starting to make an ‘up’ move. It is better to buy a stock where fresh buying is recently coming into the stock and getting in on strength. Participating with other buyers at least indicates that there are other buyers, logical! As in the famous investment strategy of Will Rogers, “Buy stocks that are going up, if they don’t go up, don’t buy them”. As backward as that philosophy appears in the real world, the Candlestick signals get investors close to that concept.