Candlestick Trading Made Easy: Top Rules to Trade Like a Pro

CANDLESTICK TRADING RULES

“Better one safe way than a hundred on which you cannot reckon.”

Through the years, because of the inherent nature of the signals, some basic rules can help an investor maximize profits. These rules were developed because of profits, created by using the signals. Acting against the signals provides clear lessons on what not to do. Just as in Mom telling you not to put your hand on the hot stove, it becomes clear in your mind what she was saying the first time you do it anyway. In this case, a trading rule can be reinforced by watching how a trade would have performed whether you participate in the trade or just watch the trade results. Some of the rules are derived from the great alterations the Candlestick investing program provides for investment thinking.

When in Doubt, Get Out

The hardest aspect of investing is trying to eliminate the emotional element. Well thought-out decisions made under rational conditions disappear once our money is exposed to the trading environment. Emotional attachment creeps into a trade after the intellectual prowess expended to establish the trade. Using computer search software provides the investor with more opportunities than he or she could possibly handle. Having a bountiful supply of trade possibilities creates the maneuverability to place funds in a multitude of situations. Investing has the basic function of being a by-product of probabilities. We invest our funds in trade situations that have good probabilities of making money. the Candlestick signals have high probabilities of making profits, but not all signals are going to result in gains. Hopefully three out of four will be profitable; even four out of five is obtainable. But that leaves 20 to 25 percent of all trades should not workout.

You need to understand when one-in-four or one-in-five investment situations are not going to work. When these situations become apparent or if the analysis of a position does not have clear directional indications, get out.

Why stay in a trade that has questions surrounding it? Take that money and put it into the next batch of clear Candlestick signal situations. A questionable trade situation does not put the probabilities in your favor. Liquidate it. There will be a plentiful supply of signals waiting to be evaluated at the end of the day or week or whatever timeframe you are investing. When in doubt, get out. There will be many places to put investment funds that have the probabilities clearly in your favor.

Don’t Look Back

How many times have we held onto a position too long because it was projected by somebody else or we wished for a price level much higher than where it was at the time? All indications show that it was time to sell but how stupid we would be if we sold at the first signs of weakness, only to see the price skyrocket later. As a consequence, the price backs down. We don't sell it now because we know that it should have been sold at the higher level. We will wait until it bounces back up to that level. When it goes lower, we now try to get out at the level that it just came from. This keeps happening until we've held the stock through a whole cycle. Not only does it not get back up to the initial level that we felt that was the right time to sell, that position has encumbered those funds that could have been making money elsewhere.

The only reason time and profits were wasted was the fear that doing what appeared to be right at the time, selling at the appearance of a sell signal, could have resulted in the price shooting up after we sold the position. Embarrassing. But embarrassing to who? Mostly to ourselves. How stupid we would feel to make a decision to get into a position, and then get scared out of the position only to have left the big profits on the table. The Candlestick signals provide the format to eliminate that trauma. Take it right back to the foundation of the signals. They are in existence today good reason. Hundreds of years of observations have proved that the signals demonstrated a reversal occurring. Why doubt it? If your observations and the best of your investment decision processing tells you to liquidate the trade, don't fight the percentages.

Investment decisions have to be made with the best information available at the time. If the price skyrockets after you have closed the trade, you still made the right decision with the information you had at the time. Disciplined trading programs involve making the decisions that follow the parameters of that program. If signs say that holding the position was a low probability situation, do what the trading program dictates.

If there is still a strong conviction that the stock price will go higher, there is nothing to stop an investor from monitoring the price action. If a buy signal reappears, buy back into the position. Otherwise, those funds should have been reallocated to a position that has better upside probabilities. If the original position does turn around and head back up, so you missed it. Your investment funds should have been working in another good trade situation.

Don't look back. Make the best decision you need to with the evidence presenting itself at the time. For every instance where looking back creates anguish, there will be a dozen times that you are thankful for taking the right action when you did.

Plan Your Trading

The identification of the reversal signals takes only a few minutes each evening. Having uninterrupted time to analyze which of the potential trade signals is the most promising is essential. Once careful study determines the order of the best potentials for the next day, keep that order. Slight changes should occur, depending upon how the stocks and the market in general open the next day. Rarely, if ever, will there be a reason to deviate from that list. If the top one or two stocks open in a manner that does not demonstrate the continued participation of what the Candlestick reversal signal was indicating, then look at the next best positions. If the market opens in the manner that makes all the potentials doubtful of being a good trade, just stay out. For example, if five excellent long positions were the best prospects for the next days open and the next days futures showed a major bearish open, then one of those stock potentials may be opening with the evidence of buyers still participating. They all are opening lower. If a strong bearish open was not what was anticipated for the next day, then keep your investment funds on the sideline. Do not attempt a shot at shorting.

“To do nothing is sometimes a good remedy.”

Attempting to find a good trade situation off the cuff does not have the structure of analysis needed to consider all the probabilities. Sit back and get ready for the next day. It is better to miss potential profits than to have to make up losses before being able to get to a profitable balance. There will be good trade situations the next day.

If a Trade Is Not Working, Move On

Not all trades are going to be instant winners. Always keep the probabilities in mind. A vast majority of the trades should work. Some will not. Some will be fizzlers, not doing much of anything. When a signal is observed and a trade is established, expect good results. Those results should involve some subjective visual expectations. The results of the trade can be visually interpreted at the end of each day. If a stock price does not seem to be confirming the signal, whether the next day or three days after the trade has been placed, do the same evaluation the should constitute the underlying premise of your investment program. "Is this the best place to have my investment funds?" If the bullish sentiment appears to be less than expected after a strong bullish buy signal, compare it to other opportunities. The three days after a trade was established may not have revealed any selling pressure, but it may not have demonstrated any significant buying presence either. A fizzler. Don't be apprehensive about liquidating that position and putting the funds into a current strong signal. However, if a strong buying signal had enticed you into making the trade in the first place, that illustrates that a buying force had existed for some reason. Keep the stock price closely monitored. It may produce another strong buy signal in the next few days. This would be evidence that the buyers were still interested. Then funds can be recommitted to the position, even if the entry point is higher than the original entry point.

The only important decision process should be whether this signal was going to produce a profit, not what happened with the position in the prior few trading days. As a rule, keep the investment funds in trades that have the best potential. If an existing potential is now performing as expected, move on to one that has that potential to maximize profits.

Don’t Allow the News to Influence Your Trading Decisions

A major influence upon the investment world is the easy access to investment news. CNBC and Bloomberg are on all day long keeping investors bombarded with every piece of news. But this news fits into a specific category: reported news. Reported news is the actual reporting of the news that somebody has known about for days, weeks, or months. You make your investment decisions based upon the Candlestick signals. You are convinced that the formations are based upon the cumulative knowledge of all the investors participating in the buying and selling of that stock/trading entity that day. Do not make different investment decisions based upon the reporting of news. Unless an item comes to the public forefront that is a total surprise to the investment community, the reporting of the news is the consummation of what the stock price has been illustrating.

If you live by the sword, you may die by the sword. If you invest based upon the principles of Candlestick formations, then trust the formations to lead you to successful circumstances the vast majority of the time. To deviate from the basics of the probabilities demonstrated by the existence of the signals leaves the investor flopping around with no accounting procedure for tracking successes and failures. Stay with what the signals tell you.

Candlestick-Specific Rules

Being able to anticipate the development of a reversal pattern can result in getting into or out of a position before the rest of the crowd. For example, witnessing a Shooting Star at the end of a lengthy uptrend, when the stochastics are well into the overbought area, forewarns that the trend may be over. Upon seeing the price open weaker the next trading day, the Candlestick investor knows to take profits immediately. This is a situation that does not require waiting until the end of the day to view the completion of the candle formed that day.

Under different circumstances, the rule would be to wait until the end of the day to see what candle formation was making itself present. There will be a good many instances where a trade has been put on based upon the presence of a Candlestick signal. The stochastics are in an extreme range, confirming the signal. After the third or fourth day the price opens and makes an immediate move back in the opposite direct, eating up most of the trade's profits. The first inclination is to liquidate the trade before it gets any worse. If the indicators are such that it does not warrant considering that a reversal has occurred (for example, the stochastics are still near the range that it started), hold the position until the end of the day, if no news would suggest that the position should be liquidated. The reason is simple. The purpose for establishing the position was due to the Candlestick signal, a completed Candlestick signal. An early day pullback during a long position uptrend or a price bounce occurring during a downtrend can be normal buying and selling forces at work. The current trend does not change until a reversal signal appears. That reversal signal is formed by the close of a day's trading activity. Profit taking is apt to enter into the price movement of a stock at any time. What goes on during a candlestick formation time frame is not important. It is the final price of that time period that will demonstrate cumulative results of investor sentiment. An important rule is to make entry and exit decisions based upon the candle formations that present themselves at the end of the day.

The Doji at the Top

Always sell when you witness a Doji at the top. The signals are representative of successful trading formations. The Japanese did not come up with the rules for signals without a great amount of research behind them. Why play against the probabilities. The Japanese have witnessed many times over that indecision at the top of a sustained rally warrants selling the position immediately. Modern-day evaluation confirms that rule. If the Doji does not represent that exact top, which an extremely high percentage of the time it does, it indicates the existence of sellers at this price level. If prices do go higher over the next day or two, the price gain from the point of the Doji is not great enough to warrant the risk to obtain the last remaining profits. Money could have been placed elsewhere for the same, if not better returns, without the potential downside exposure.

Stay with the Rules

Always remember that the signals are still around after hundreds of years because the evidence of their success could not be ignored. Profits have been the result. Don't project the potential of a trade to the point that you expect it. Despite the fact that a projection exercise is needed to establish whether the trade is worth putting on, that projection should remain a guideline only. The signals are statistically accurate for putting on a trade. They are just as accurate for ending a trade. If a trade shows signals opposite the entry signal well before what you mentally projected to be the target, don't fight the signal. Get out. As stated in the first rule, when in doubt get out. Price movements don't care one iota what you think the price should go to. Always let the market (signals) dictate your course of action. A sell signal can always be followed by another buy signal. If so, get back in. However, the signals are formed by the change of investor sentiment. Why would you want to try to buck that reality?

Use the signals to your advantage. Maintaining simple rules always keeps results accountable. As long as you keep the playing field level, the results can be analyzed correctly. Keeping basic rules allows the investor to keep from letting emotional reactions interfere with disciplined trading practices. The statistics will be the guiding force of your discipline. Once you realize that the signals produce trades greatly in your favor, deviating from the rules that take advantage of those statistics leaves you out in the realm of investing with no improvable program. The Candlesticks are successful. Don't think fate or good fortune is going to come to your aid when ignoring the proven results.