Candlestick Trading Rules

Trading Rules

“If you step in a puddle, do not blame the puddle.”

Having the ability to identify reversal signals creates an extremely beneficial dynamic for investors. Once an investor becomes comfortable that the signals represent a high-probability situation, investment trading rules can be better followed. The elimination of emotions, especially fear and greed, should be the prime goal for investors.

The biggest failure factor for most investors is the emotion element. Investment trades become skewed with investors “hopes” versus what indicators are telling. Every time an investor puts on a position or takes off a position, a mental decision process has been made. Our mental decision process! Our egos come into play. Of course, we are all smarter than the rest of the world. That is what we all like to believe. To confirm that, our mental prowess be­comes quantified every time an investment decision is made.

To buy a stock and watch it go down not only hurts the pocketbook but also hurts the ego. We cannot be smart in somebody else’s eyes if our invest­ment decision was wrong. When we are right, and get into a position of big profits, our sell parameters become fluid. What was our original selling strat­egy now gets modified by the euphoric rhetoric that may be surrounding the circumstances. The “sell” decision now becomes based upon other people’s opinion or a few more points higher will allow us to buy a better car, new set of golf clubs, pay for next quarter’s tuition, or anything else that has absolutely nothing to do with what the price should do.

The candlestick signals produce a high-probability format for when it is time to buy and when it is time to sell. Utilizing that format creates a self-imposed discipline. Why trade against the probabilities? As we are often told by the professionals, you cannot time the markets. However, as can be clearly seen, the Japanese Rice traders have successfully timed the markets for centu­ries. The ability to see high-probability potential reversals in market trends allows an investor to apply simple trading rules.

The following list of rules has been derived from many years of investing experience from numerous sources. It will also incorporate rules specifically applied to the use of candlestick signals. Since investing has become a more active part of people’s lives, general investing rules are also included in this chapter. The mental state of an investor, as well as mechanically imposed disci­plines, is important to successful investing.

Incorporate Good Investment Procedures

Just like any profitable endeavor, investing requires a structured business plan. Successful money managers establish a set of business disciplines. Money allo­cation, trading environment, consistent evaluation processes, and clear and concise planning are all required to maintain a good mental analytical process. The analysis of candlestick signals and patterns, although a primary element of a successful investment program, still requires a business atmosphere for suc­cessful implementation. The trading area should be organized, whether at a business office, a home office, or a laptop on the back deck overlooking tire lake. Having one’s mind clear of distractions allows for better evaluation of tire investment signals and patterns.

Document Winning and Losing Trades

A well-maintained accounting of transactions and writing the results of good and bad trades in a journal is a good investment habit. Having a jour­nal of what the thought processes were during a good or bad trade situa­tion frees an investor’s mental energy for analysis versus trying to remem­ber previous trade occurrences. The mind is a very nebulous entity. Impor­tant factors that should be remembered can often slip away through time or be lost when trying to analyze massive amounts of information. Having a documented journal of past trades allows an investor to refresh their memory on what worked or did not work in the past. Keep a journal at your work­station.