How to Use Candlestick Pattern Trading to Maximize Your Profits in Any Market

MAXIMIZING PROFITS

“Unless you enter the tiger's den you cannot take the cubs.”

Now it is time to make bold statements. In the professional investment field, being correct on trades 55 to 65 percent of the time is considered extremely good. In commodity investing, being correct 55 percent of the time will make you a fortune. Knowing how to identify the Candlestick signals is just part of successful investing. Knowing how to use the signals profitably creates powerful investment results. Candlestick analysis, performed properly, and coordinated with simple, but disciplined trading rules, results in an investment program that can produce a correct trade ratio close to 80 percent.

Bold statements do not mean a thing unless they can be proven. This chapter will describe the ingredients that produce these results. To restate, the major advantage the Japanese Candlesticks provide for the investor lies in determining probabilities. Proper evaluation of a Candlestick signal, aligned with confirming indicators, produce extremely high probabilities that a reversal is occurring. Although this chapter is directed toward equity traders, commodity traders can benefit as well. Using Candlesticks for individual commodities, bonds, or even currencies requires less evaluation. Sugar, British Pounds, Thirty-Year bonds, and so on have a smaller number of outside factors that move prices. Stocks seem to have more outside influences affecting their direction: market direction, industry concerns, competition, management problems, supply factors, and many more too numerous to mention.

The examples demonstrating how to maximize the Candlestick's potential have one important element: common sense! As seen in the descriptions of the signals themselves, the Japanese use one common denominator. The explanations of their formation are all with simple rationale: no sophisticated formulas, no deep-rooted psychological underpinnings. After hearing what the explanation is for each signal, it is easy to think, "Yeah, that makes sense." Each of the cultivating elements, for producing the highest probability trade, embodies the same approach. Basic common sense will be evident through the whole process.

With that in mind, it is best to exploit all the information available. The more positive factors that line up at the same time, the more effective the signals become. As stated in earlier chapters, the signals exhibit an extremely high degree of accuracy. But to get successful trades, a minimal amount of preparation is required. This preparation requires nothing more than the basis for candlestick signals. Common sense! Simple logic is implemented into the evaluation process. Common sense factors generate the best probabilities for producing profits.

This may sound simplistic; yet, it is the "common sense approach" that most investors do not follow when they hear about a good investment situation. Broken down, the evaluation for establishing a position is logical. This evaluation should include:

1. Which direction is the market moving in general? Market being defined as the indices NASDAQ, Dow, or S&P.
2. Which direction is a sector moving?
3. Which stocks have the best upside potential in that sector, with the least amount of risk?
4. How does the stock open the next day?

Following these simple steps vastly improves the possibilities of putting on correct trades. However, before dissecting each step, there are two important elements that need to be established before a successful investment pro-gram is formulated:

1. Your investment capabilities
2. The condition of the markets

As mentioned earlier in this book, most investors do not have a well thought out investment program. Each investor should evaluate his or her particular investment capabilities. Investment capabilities do not refer to investment abilities. Capabilities refer to the time and energy that each investor can allot to investments. When the investment resources were dispensed solely through the brokerage firms years back, individuals were limited to how actively they wanted to invest. Fortunately, the advent of the home computer has provided investors with many additional tools that were not available a decade ago. How you invest your funds now has a whole new dimension. Investors have much greater control over their investment future. Greater scrutiny should be put into the investment approach that each investor would prefer to take.

Today, each investor can decide how much time and effort to put into his or her investment program. Having access to live quotes opens a wide range of possible investment plans. These plans range from day trading all the way to the buy-and-hold strategy. Computers provide the opportunity to keep in constant contact with the markets. Checking the evening paper for closing quotes has progressed to being able to view live quote prices on the computer screen all day.

"Plans get you into things but you have to work your way out."

Each investor needs to establish an investing program that fits his or her schedule. If getting to a computer screen once a day is difficult, a longer-term holding period should be considered. If your job provides constant access to the computer screen, a two- or three-day swing trade program can be considered, or even a day-trade program can be effectively maintained. Conversely, trying to do day trades when the computer is not always accessible is not going to be the most profitable trading program.

Once you establish an appropriate investment schedule, you can implement procedures to maximize profits. Every investor should mentally establish the trading program that he or she feels will best use his or her time capabilities.

The second major element for maximizing returns is the analysis of the market conditions. This procedure dramatizes the need to break away from customary investment planning. Most investment programs are directed toward long-term holding periods. What dictates a long-term holding period? The IRS! How many people do you know who will watch an investment price drop 20 percent from where they should have sold to save 8 percent on their taxes? The market conditions should dictate how long an investment should be held—not artificial investment criteria. If it is obvious that sectors are moving from peak to valley every five months, why hold onto a stock that may back off 40 percent before it turns back up? Is it not more logical to pay taxes on a 40-percent gain at the higher tax rate than pay the lower tax rate on a 12-percent gain? Candlestick signals provide an accurate method for seeing the tops and the bottoms. Why knowingly watch profits disappear? If the markets are demonstrating that the best profit potential is in 90- or 30-day holds, develop a trading strategy that produces the greatest amount of returns using those parameters.

Another major misconception is that money cannot be made when the markets are going down. That thought process negates a vast potential for making profits. With Candlestick analysis as the investor's tool, the direction of the markets in general can be projected easily. Take advantage of that benefit. For instance, Candlestick indicators may show that the market will be in a decline for the next two years. You can put a trading strategy into action to exploit that knowledge. In that case, shorting stocks may be the best possible trading strategy. Why let profits slip away when they can be easily captured?

Shorting Stocks

The concept of shorting stock is not a clear or comfortable concept with the majority of investors. "How do you sell something that you do not own?" is the most asked question. If you are not clear or comfortable with shorting stock, please read this section carefully.

The idea of shorting stock is sometimes portrayed in some way as being un-American. There seem to be bad connotations associated with shorting. In actuality, this has been the message usually conveyed by stockbrokers. The simple reason for this is that it means extra work for the broker. The broker could not just write a ticket and put it in to the order room, but instead they had to have another person check with their stock position division to see if certificates were in a margin account of one of the firm's clients. If so, then it could be borrowed and lent to you to sell short. If they did not have the certificates, the back office could check with another brokerage firm and ask to borrow some of that firm's stock certificates, a practice common on Wall Street. But as you can see, this is a lot of extra work compared to just writing a simple buy ticket or sell ticket. To eliminate this extra hassle, stockbrokers would rather discourage their customers from shorting. However, when a stock is running up too fast, you can bet that the brokerage firm floor traders are shorting into the exuberant buying.

If you analyze the concept of shorting, you will realize that it goes on all the time in everyday life. When you walk into the local Cadillac dealership, put in an order for a car with specific colors and options because they didn't have it on the lot, they have just shorted you a car. When you order a birth-day cake at the grocery store, to be made and picked up tomorrow, they have shorted you a cake. (Where do you think the term "short cake" came from?)

The market goes up and the market goes down. Then it goes up and down again. And again. Why restrict your opportunities to make a profit? Is there anybody who would not have liked to short the high-technology stocks when they were selling at $125 in March 2000 and be buying them back at $15 in September 2000? Buy low and sell high is the method for making money in the stock market. It does not matter which order it is done. This concept is easier for commodity and futures traders. Going long and short is the accepted standard business practice for investing in those markets.

Alternatives to Shorting Stocks

If shorting still makes you uncomfortable, there are alternatives. One method is to put extra effort into finding rising stocks in a declining market. As imagined, the pickings are going to be slim. However, to paraphrase the basic premise of the Candlestick signals: The signals are the cumulative knowledge of all investors participating in the investment decision process pertaining to that stock during a given time period. That means that if a stock is showing a buy signal during a declining market, the buy signal was formed by the actions of all investors that day. Those investors, both buyers and sellers, affected the stock price. They created a buy signal, while knowing that the market was in a downtrend. Finding those opportunities may be few and far between. When they do appear, the high probability is that something company-related, not market- or sector-related, is moving the stock. The number of trade possibilities may be greatly diminished in a declining market, but the probability that something good should be happening in that stock may warrant more investment funds allocated to fewer positions.

Some investment accounts, such as retirement accounts, are restricted from shorting stocks. This obstacle, however, can be circumvented easily. Some of the mutual fund companies have funds that are short funds. This means you can buy a fund that is short stocks. The buying of such a fund will provide a vehicle to profit from a declining market or sector. Having this capability greatly enhances the magnitude of profit potential. The direction of the market does not inhibit the opportunity for making a profit. The degree of accuracy from Candlestick analysis, for determining the general market direction, will induce measures to find and participate in investment vehicles that take advantage of downside moves as well as upside moves.

Maximizing All Probabilities

With money in your pocket, you are wise and you are handsome and you sing well too. 

What direction is the market moving? This is the million-dollar question for most investors. But as demonstrated earlier, the Candlesticks are efficient for identifying investor sentiment. They work as well with indices as they do with individual stocks. Performing the same evaluation on an index, Candlestick signal identification and the status of the stochastics provide a relatively high degree of directional accuracy.

Logic would dictate that if a market that has advanced for a certain number of days, weeks, or months, and is now showing Candlestick sell signals, then we would want to consider whether or not the markets are overbought —especially if the stochastics are in the overbought area! As illustrated by the major reversal of the NASDAQ in March 2000 (see Figure 9.1), simple visual analysis identifies a Shooting Star, confirmed the next day, producing all the requirements to warn the Candlestick investor that a top was put in. Further visual analysis identifies a second sell signal approximately two weeks after the first signal. It was also confirmed that the bears were taking over the controls.

Candlestick signals work effectively for illustrating a general change in investor sentiment. Using this knowledge gives an enormous advantage for establishing profitable trades.

 

It is obvious that if the market indices are showing overbought conditions, the majority of the stocks involved with forming that index should show similar conditions. Probabilities should favor looking for short signals.

Another relevant method for identifying market direction is using the results from software signal searches.

Computer Searches Help Confirm Market Direction

Logical deductions can be made when confirming the market direction. This input is derived by software searches. An efficient search program is marketed through TC2000. This program has a number of aspects that make it invaluable to an investor.

TC2000 can run a search for the best possible Candlestick trades available on all exchanges—DOW, NASDAQ, and S&P. This software program can scan the entire universe of stocks, approximately 10,000 possibilities, almost instantly. It can be programmed to scan for your personal parameters, signals that you can customize, as well as provide dozens of technical indicator searches that are built into the program. For the price of an inexpensive dinner for two each month, TC2000 can save you hours upon hours of time.

A directed search fulfills two important functions. The first is that of identifying the best possible Candlestick potential trades. The second is that it produces valuable information on where investment funds are being placed. Distinguishing where investment funds are flowing to and from furnishes the investor with extremely profitable opportunities. The parameters of a search can be developed to identify the best potential long positions and the best potential short positions. The results can project and/or confirm what you have identified by viewing the index charts. If a search, with equal parameters for both long and short positions, produces more potential situations for one direction versus the other, it can be logically deduced that the market is going to move in that direction.

For example, you have established parameters for the best potential Candlestick trades. After scanning the universe of stocks (or the universe that you developed as tradable stocks), the results of the search produce common- sense information. If 400 stocks fall into the category of being overbought and have potential for creating sell signals and 100 stocks show to be oversold and have the capability to produce buy" signals, it becomes obvious that four times as many stocks are ready to turn down. If this information is correlated to a chart that has been in an uptrend for a period of time, it should make you wary that the market is about to reverse and head down. Four hundred potential sells in markets that are ready to start a decline are better probabilities than 100 potential buys.

The market trend does not need to be timed perfectly. A top or a bottom could take one day to make itself apparent or it could take weeks, maybe months of volatile, choppy consolidation before the trend reveals itself. As long as you can produce a rough evaluation of the market's direction, the probabilities of successful trades are enhanced dramatically.

Logic dictates that a portfolio of stock positions will not perform tremendously well if it is positioned opposite the major market trend. That does not rule out the potential of long stocks that are going up during a downtrending market, but the probability of that happening is not as high as the alternative. Use whatever cliche you prefer—"The trend is your friend" or "Don't try to swim upstream." Why place investment funds into positions that do not provide the highest probabilities of making money? If the charts tell you that the general market trend is down and the sell potentials greatly out number the buy potentials, put the majority of your investment funds into shorting stocks.

The Candlestick signal is the most important factor in technical analysis. It reveals that buyers were coming in during unfavorable surrounding conditions. The strength reveals that other factors had to be affecting the movement of the stock price. One such possibility can be the "investor consensus" pertaining to a specific industry.

Revisit the previous example where the index signal appeared to indicate a top and the search produced 400 good sell signals and 100 good buy signals. Despite the fact that there were four times as many short potentials as there were long potentials, long potentials were still available. Depending upon each individual's investment plan, specific results of the search will  benefit investors with different investment goals. These 100 stock possibilities produce valuable information. For instance, it might reveal that a large percentage of these 100 stocks, showing excellent buy signals, are coming from one or two industries. This valuable information can be identified quickly. These industries should be looked at closely. Something fundamental may have occurred to make a large number of stocks in a particular industry move up while the rest of the market was moving down.

In Which Direction Is Each Sector Moving?

TC2000 also has the ability to search individual industries. These searches can sort the industry indices from the most overbought to the most oversold. The same visual analysis can be applied to industry indices as they can to individual stocks. Has a Candlestick signal been identified? What is the status of the stochastics?

Note that in the OSX Philadelphia Oil Service Index chart, shown in Figure 9.2, a confirmed Harami reveals the start of a rally. If this occurred when the rest of the market was declining, the open of the first day after the Harami signal would make it obviously apparent to the Candlestick analyst that strength was coming into this sector. It may take another day or two for the conventional Western chart analyst to pick up that there had been a reversal in this particular industry.

The short-term Candlestick trader will be alerted to where the funds are flowing. Even in a down market, long trading opportunities can be identified. The short-term trader has something to trade in a down market. The long-term investor may have discovered the beginning of a major uptrend for an industry. If the weekly and the monthly charts correspond with the daily chart, the long-term investor has identified where to place funds for a long term hold. The option trader may have found a good option-buying situation. A steadily declining market should have greatly reduced option premiums. Identifying an industry or group of stocks, prior to the majority of the investment community, at the beginning of an upmove, produces highly profitable opportunities. In a nutshell, when the best probabilities are on the short side of trading, longs can still be found. Of course, the opposite is true. There will be good short opportunities during roaring bull markets.

Back to putting all the probabilities in our favor. Our analysis is that the index most associated to the stocks that we trade has an observable trend. Use the following scenario as an example. The markets have all had clear reversal signals. It is time to go long. The TC2000 search produces 500 excel-lent buying opportunities and only 60 good sell opportunities. You are only looking for two long positions for tomorrow's trading. How do you narrow down which stocks have the greatest upside potential?

The next TC2000 search can be for specific industries. Which industries have had the greatest percentage decline during the previous downtrend? Which industries appear to have the strongest buy signals developing? Which industries have the lowest stochastics that are now starting to turn up? These are all parameters that can be applied to a TC2000 search. The results are produced instantly. These results now direct the investor to the highest profit potential groups. For example, the TC2000 search narrows the best potential trades to three industry groups. These industries had the most pronounced declines during the downtrend. They are now showing the strongest buy signals. Within these industries, the field of great potentials is narrowed down to 50 positions. From that number, the investor can evaluate which are the four or five best potential trades.

Which Stocks in That Sector Have the Best Upside Potential and the Least Amount of Risk?

The objective of any investment program? Producing the maximum return while minimizing risk. How does Candlestick analysis accomplish this? Back to the basics: common sense! How is the potential field of 50 great prospects narrowed down to three or four?

Let us review. To get to this point, the Candlestick charts visually illustrated the direction of the market. Then an excellent buy signal presented itself on the index chart. The TC2000 search program verified the beginning of a new direction with over 500 excellent long possibilities, compared to 60 sell potentials. A further TC2000 search identified the best potential industry groups. The combination of these groups provided 50 excellent prospects.

What parameters are used to pick the best of these excellent prospects? Each industry index is comprised of a number of these stocks. If the evaluation of the index resulted in recognizing that a buy signal had appeared, and the stochastics were in the oversold area and turning up, it can be assumed that the stocks representing that index will have somewhat the same appearance. However, there will be differences in each stock chart. Some did not decline as fast in the downtrending market. Others were extremely oversold. Some may have started to climb a few days or a few weeks ago. These stocks now have less upside potential because a portion of their upside has already been expended.

The best picks are derived from finding the stocks that have the best parameters aligned that day. Which stocks have produced a strong buy signal today? Or yesterday? Or will be confirmed by the correct opening the next day? Our evaluation is to determine the strongest signal, confirmed by the stochastics being in the optimal status. That does not diminish the potential of the 45 positions that were cultivated out. They are still excellent situations. The evaluation process is to maximize profit potential. Each parameter that fits our evaluation process increases the odds in our favor.

Effective Stop-Loss Placement

Along with obtaining maximum upside, consideration has to be given to minimizing the downside. The Candlestick signals make it easy to establish stop-loss levels. This process is based upon pure common sense. If the buyers start stepping in at a particular level, and that signal forms a Candlestick reversal signal, the probabilities (confirmed over the past four hundred years) are relatively high that the trend has changed direction. What made that buy signal? The buyers created an environment that started to overwhelm the sellers. An easy concept from which an easy stop-loss strategy can be implemented. Refer to Figure 9.3, the Marvell Technology Group Ltd. chart, for an example.

The first obvious signal, the bearish Engulfing Pattern, clearly illustrates that the sellers started showing their colors at the $42 range. Break the signal down to the elementary points. At the $42 price level, the buying stopped. The next day, sellers took over, creating the bearish Engulfing Pattern. The following day, with its evidence of more selling on the open, would have been the logical entry point for establishing a short position at approximately $373A

What is the stop-loss level? If the signal resulted from the sellers making their presence known at the $42 level and demonstrating that they were controlling the price, logic would tell the Candlestick investor that, if the price got over $421/8, the bulls were still in control. Shorts should cover. Will this happen often? The probabilities say no. The fact that the signal was formed put the probabilities in the favor of the downside. The stochastics, being in the overbought range and turning down added to those factors. Could prices go back up from the entry point of $3 73/4? Of course! But as long as the price movement didn't negate the sell signal, the downside would be the bias.

A sell-stop at $42/8 closes out a position where selling caused a signal but the bulls gained back control. How much further can the bulls move up the price? Who knows, but why risk it? Take the money and find a signal that has high probabilities of producing a profit. However, don't forget about this stock. What has been disclosed by the signals that was not evident to the conventional chart followers? One major element: The sellers stepped in with force. Keep this information in the back of your mind. The aspects of a profitable trade have already presented themselves. Stochastics show this stock to be overbought. Sellers have been evident at these levels. It is not unlikely that the buying gets hit again by the sellers. Unless the buyers can take the price up to new levels, be alert for another sell signal in the near future. A second sell signal usually creates a greater potential for the move to persist. The first signal started creating doubt in the current trend advocates. The second signal convinces those trend advocates that the trend has now been reversed.

The same logic could be applied to the buy side. The bullish Engulfing Pattern illustrates that the bulls have taken control. Stochastics have turned up out of the oversold range. If the bulls demonstrated buying pressure at the bottom of the white candle that day, it should be apparent that if the price came back down through that level, that the bears were still in control. The stop should be set one tick below the open price of that day.

Notice how the Morning Star pattern formed on the Fidelity National Financial chart in Figure 9.4. Two days after the signal, the trend had a dramatic reversal. If the gap open to the downside didn't make you close out the position, a stop at the bottom of the white candle of the Morning Star pattern should have been the final exit point. Was this an unprofitable trade? Of course! But the loss was minimal and the time spent having money tied up in a bad trade was also minimal. The Candlesticks are quite efficient for letting you know when to get into a trade and when to get out.

Find the obvious level that indicates that the move did not work. Always keep in mind the interpretation of the signals. A reversal of the previous trend has occurred. If prices go below the signal level, then it is obvious that the trend did not reverse.

How Does the Stock Open the Next Day?

What constitutes a strong reversal signal? The Candlestick definition states that there is a change in investor sentiment. That is as complicated as it needs to get. The signal itself represents the presence of investors doing the opposite of what the existing trend was doing. The two exceptions in the Candlestick signals would be the Inverted Hammer and the Hanging Man, as explained earlier. Where the price opens, the day after the signal appeared, has an important role in how strong the new trend will move. Also, it can determine whether the new trend will develop at all.

Consider the strong buy signal evident in Figure 9.5. The assumption is that the bulls are now taking over control. What should be expected the next day? More indication that the bulls are still around. The sellers should be backing away. The next day should demonstrate the presence of continued buying strength. The price, at least, should not show any great amount of weakness. The fact that the signal occurred in the first place provides proof that there were a lot of buyers. Strength should be demonstrated in the next day's opening. Opening near or above the closing price of the prior day assures the bulls that buying is still present. A gap up is the best bullish indicator. It portrays that the buying is getting aggressive.

If the price had a big day on its signal-producing day, a Doji or a small- range trading day near the upper end of the previous day's range is not a terrible sign. There will be a reasonable amount of profit taking or non- convinced bears still putting in trades. A consolidation day is expected. Figure 9.5, representing Spectasite Holdings Inc., notes how the second day showed a little indecision. But it did not show signs of weakness. The gap up the following day would be good evidence that the bulls were still around and in force. To increase the probabilities of being in a good trade, observe the obvious. A Candlestick signal indicates that a change of investor sentiment has occurred. If so, the next day should not negate that fact. Simple logic! If the buyers are now taking control, then that should still be evident the next day. Figure 9.6, representing Powerwave Technologies Inc., illustrates the apparent lack of buyer participation the very next day. A Morning Star pattern fizzles the next day. A good rule of thumb is that if a position were put on at the opening and if the price comes back down to the fifty percent level of the previous days white body, liquidate the trade. The reasoning behind this is if the bulls were actively involved, the price would not be backing off that far.

Prices opening at the lower end of the signal day's white candle body does not represent buyers showing strength. It illustrates that the sellers were right back in, controlling the price movement.

In Figure 9.7, the next day forms a Harami. What is the significance of a Harami? It tells you that the current direction has probably been stopped. Where the Harami closed versus the trading range of the previous day is important. Visually, an investor can easily interpret the investor psychology that underlies what occurred. A Harami, closing at the lower end of the previous day's candle body, signifies a severe lack of bullish ambition. Be prepared for more weakness.

The higher the Harami closes on the previous day's candle body, the less enthusiastic the sellers appear. A Harami closing at the top end of the previous trading range will usually indicate one to three days of flat or slightly lower trading before the upmove resumes.

A weak open, after a strong buy signal does not eliminate that stock from being a potentially good trade. It does alert the investor that the upmove is not happening now.

 This gives the investor the opportunity to put investment funds elsewhere to maximize profits. The presence of the buy signal should make the Candlestick investor aware that buying did start in this stock. Keep it on close monitoring. Note that in the Dell Corp. chart, shown in Figure 9.8, the first signal fizzles but the second signal provides the impetus for a strong rally. If the stochastics are already in the oversold condition, a second buy signal may be developing within the next few days.

The establishment of the trade itself can greatly enhance the probability of a successful trade. It boils down to a simple question. Is the opening of the stock consistent with the scenario of the buy signal? In other words, is a buy signal being followed up by more buying? A gap up demonstrates profound buying demand. An open at or close to the previous day's close indicates that the buyers are still around and are sopping up any selling or profit taking from the day before.

Use this simple procedure to cultivate the best trade situations. There will be times when the research process provides more trade possibilities than what is needed. That provides the opportunity to take advantage of the positions that are opening in the manner that demonstrates continued buying pressure. 

Simple Cultivation Process

Putting the probabilities in your favor is a relatively easy process. Fifteen additional minutes of analysis each week will produce a highly efficient evaluation process. This is a process, however, that most investors either don't understand or don't take the time and effort to do.

Analyzing the Candlestick signals through visual interpretation and search results creates a well-founded basis for finding profitable trades. Emphasis is put on investing in the direction of the market trend. Why try to swim upstream? Specific sectors and industries perform better at certain times than others. Search programs find where the investment funds of Wall Street are flowing. Candlestick signals alert the Candlestick analyst when this process is starting, well before the rest of the investing community notices the change.

Once the industries are identified, searches cultivate the best individual stock situations. The cultivation process reduces potential candidates down to a number that can be closely analyzed. From this group, each potential position can be scrutinized to the fullest. The most powerful reversal signals can be found and correlated with the status of the stochastics.

The final group of candidates may still number more than the positions required to be put on the next day. Those positions should be evaluated for minimizing the downside possibilities. Stop-losses should have obvious levels. This process may not reduce the number of candidates for the next day. It should prioritize which stocks would be the top candidates.

The final stage of the cultivation process can narrow down the trade choices. The opening prices of the next day. To verify the signals implications, that a reversal had occurred, the opening price the following day should continue the same message. Hopefully at least two stocks opened the next day confirming the previous days buy signal. If more than two open and confirm the buy signal, you now have the subjective option of picking the positions you feel have the most upside potential.

If less than two confirm the signal, the previous list of candidates that you used to narrow down the final four or five picks, can be analyzed to see if any of them opened in a manner that warranted upgrading their potential. The final candidates exhibited all the makings of being the best candidates. But that did not mean that the other candidates weren't excellent possibilities. If the final candidates do not pass the final test, go back to the previous broader list of candidates. The manner in which some of those stocks open may provide the proper trade.

If you follow all these steps, you will dramatically improve the probabilities that the majority of the positions placed in your portfolio will be profitable. Not only does this provide good profits, it creates a comfortable peace of mind. Gone are the doubts about whether you got into a stock too late or too early. If a trade does not work out, emotion is not involved. The Candlestick investor should have the presence of mind to realize that a trade that did not work is just a cost of business, part of the probabilities. The attachment to that trade becomes nothing more than saying, "That was a bad one, now get out and find another trade that shows good probabilities." Once this mental process has been established, bad trades will have minimal losses and good trades will produce gains until the next reversal signal appears.

The following chapter will describe in more detail how to implement a trading program that maximizes profits, minimizes losses, and eliminates all emotional influences.