What Does the Signal Tell You?

What Does the Signal Tell You?

Keep in mind, not all trades work. “Probabilities” of a successful trade, after witnessing all the parameters that make for a successful trade, is the key word. Although the probabilities are greatly in your favor, there is also the small probability that a trade will not work.

The signal itself is still the result of centuries of observations. Observations that were reinforced by profitable trades! The signals have meaning. They rep­resent the change in sentiment of the buyers and sellers. The signal comprises that new change. The candle formation is the basic element of the reversal signal. However, when that reversal signal illustrates that a new force has en­tered the market but it is immediately negated by the original trend force, that makes it clear that the new trend is now nullified. Get out of the trade immediately.

Does that mean the analysis was not correct after identifying the signal? No. If a buy signal was formed in an oversold condition, Candlestick analysis establishes that there is a high “probability” for that trade to make money. Again the word “probability” is what needs to be addressed. The trade should make money. However, if the trend does not establish itself, it becomes obvious when knowing the candlestick signals. Your stop loss strategy now becomes customized to that particular trade setup. This is an easy visual process. Take each signal setup, knowing what makes it work, and set your stop loss price based upon where that signal would be negated.

Negating the Signal

What created the signal? The Bullish Engulfing pattern, the Doji followed buy a bullish confirmation day, a Hammer signal confirmed, a Kicker signal? When a signal is created, we will see the candle formations that established the new trend. Trading back down through the signal formation indicates the sellers are still in control. That becomes the stop loss criteria. The same rules for what makes a successful signal can be used for showing what makes the signal un­successful.

A candlestick investor is able to establish the level where the signals dem­onstrate the trade is not working, gaining more control in the investment psyche. Establish where to get in and out of the trade instead of arbitrarily setting stops that have nothing to do with how a trend should be performing. That control can be directed to making pro-active decisions versus reactive decisions. It also allows the candlestick investor to prepare strategies to re-establish a trade in the same position, selling when the trade was not working and getting back in when the trade was working again.