Candlestick Charting Explained

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Candlestick Charting Explained
Candlestick charts are the oldest form of charting but their use in western markets is relatively new so many traders need to learn how to use this wonderful technical analysis tool. Chart analysis has become more and more popular in the past decade as on-line trading expands as more and more ordinary people learn how to successful trade the markets for monthly income. Charts can be used for more than just analyzing stocks. You can use them for commodity trading, futures trading, options trading, FOREX trading, Bond trading, etc. Charts are a graphical view of what is going on with price. Since every transaction, no matter how small or how large is recorded and documented it is possible to make a precise and highly accurate recording of what price is doing. But for most people who are just starting to learn about candlesticks, the task may seem daunting as there are so many different candle patterns all having strange names. Then too, most candlestick books offer complicated methods and confusing methods that can frustrate the average trader. Our approach is different. TechniTrader specializes in teaching students an easy, simple, and reliable method for using candlestick charts that anyone can learn quickly. We start by teaching you about charts in general and why you should use candlestick charts. To understand why candlesticks have become so popular so quickly for stock chart analysis, we need to compare them to other types of charts available for technical analysis. Below are examples of the 3 most common charts: Line, Bar, and Candlestick Charts. (note: there is also a charting method called “Point & Figure” but this is rarely used anymore due to the lack of charting software that has it available, the popularity of candlesticks, and the complexity of learning point and figure. It was primarily used for long term investing during the 1950-1980’s.

DAILY CHARTS We will use what are called “Daily Charts” in the lesson. A daily chart shows a day’s worth of price activity over a period of time. In this instance we are seeing 3 months of price action day by day for each of the charts. Charts can be set for a variety of time frames from 1 minute, a day, a week, a month, a quarter, or even one year of data in one candlestick. We are going to use daily as this is the most popular setting for swing, velocity, and position trading.

LINE CHARTS This is an example of a LINE Chart that only uses the end of the day price to calculate the graph of price on the chart. The line chart uses only 2 pieces of information from the markets: the “end of day” price for each day. So all you have is the last price the stock traded at on that particular day. As you can see, it is rather hard to read line charts. It is hard to tell what happened during the day and if what the stock price will do next. Line Charts are the first charting that was used for stocks so it has been around more than 100 years. In the 20 th century, most people invested for the long term and institutions such as a mutual fund or pension fund were not allowed to short term trade most of their funds. Therefore, line charts have always been used mostly for long term analysis. They do not provide enough information for short term trading. There is not sufficient information for trading. So the popularity of line charts has been declining since the elimination of the Rule of 3 and the onset of online trading.

Chart provided by TC2007, a Worden Charting Software ©copyright 2010, with our thanks.

This is the same stock using what is called a BAR Chart: The Bar Chart gives traders 4 pieces of price information for each day: The price the stock opened at, the high the stock rose that day, the low for the day, and the close or ‘end of day’ price. This information is far more than what we get from a line chart and helps traders analyze what price has been doing to determine what price will probably do over the next few days. Traders who learn to determine what price will do over the short term can buy and sell stocks for monthly income. So let’s learn how to read a BAR CHART The tick to the left is the open for the day. The tick to the right is the close or end of the day. The top of the bar is the high, and the low of the bar is the lowest price the stock went for that day. As you can see, this gives you a lot more information for trading. Bar Charts were popular during the later decades of the 20 th century and some older, veteran traders still prefer to use them. However, Bar Charts have several disadvantages.

Chart provided by TC2007, a Worden Charting Software ©copyright 2010, with our thanks.

The problem with Bar Charts is that it takes a long time to determine whether a stock moved up or down that day. You have to check the bar closely and study each bar carefully to be sure of what you are reading. Bar charts take a long time to learn to read and this slows down the analysis for short term trading. It is too easy to make a mistake with bar charts.

CANDLESTICK CHARTS Now let’s look at a CANDLESTICK Chart: This is the same chart only using candlesticks. You still have the open, close, high and low as you did for the bars but the graphical view is vastly different and far easier to read and interpret. This speeds up the analysis dramatically and eliminates common errors and mistakes that occur when you use bar charts. On down days the candles turn black, and on up days the candles are white. This immediately tells you whether the stock moved up that day or down, AND the candles show you how much it moved.

Chart provided by TC2007, a Worden Charting Software ©copyright 2010, with our thanks.

By studying the relationship and the different kinds of candlestick patterns that form, traders can learn to reliably determine what the stock will do over the next few days to few weeks. This is why candlestick charts have become so popular so quickly. However, it is important to realize that the traditional candlestick charting was developed for the rice commodity markets in ancient Japan. Most Japanese candlestick books teach the traditional Japanese form of candlesticks. These are the ancient patterns that formed in those days. To understand Japanese candlesticks you must first understand the culture and society under which they were created. Ancient Japan was a warlord state that also had a highly developed national passion for beauty and artistry. Every person was expected to write poetry. They had a deep respect for nature, and artistry.

Each candlestick for charting has an elegant descriptive name for its perceived role in the prices of rice. Terms such as “dark cloud”, “three rivers” all express the reverence the Japanese have for nature and beauty. Because of this love of nature and attention to detail, Japanese candlesticks have a vast number of Japanese names for every unique candle that might form. Many candlestick names also include war terms such as three soldiers, and night attack. This was due to the 200 year war between Samurai Clans that ended in a unified Japan.

Because of this love of nature and attention to detail, Japanese candlesticks have a vast number of Japanese names for every unique candle that might form. This creates a complex, hard to remember and even more difficult to use list of candlesticks that might form. TechniTrader has created a unique method of using candlesticks, simplifying the candles and identifying only those that work optimally and occur frequently in our western markets.

The Rice commodity market of ancient Japan was a very different place from the markets of the U.S. and most western markets of today. First of all, everything about the markets moves much faster today due to on-line trading and huge processing computers. Contrary to popular opinion, it is much more complex with 8 different levels of what is called “market participants” each group trades or invests for very different reasons, with different agendas and goals, experience, knowledge, and access to critical information. And there is a huge difference between the eastern and western mindset. The cultures of the east, how people think is very different than the western culture.

Most candlestick books do not teach buy and sell signals but tell traders to use candlesticks as a confirmation of an indicator cross-over. However since price is the most important aspect of a chart, it makes far more sense, and is far more reliable to use a candlestick pattern as the buy signal and the indicators to confirm the strength of that buy signal. In this way you can learn to do what the professional traders, market makers, and institutional traders do: use a controlled order for precision entries and exits. For example below is a candlestick buy signal that only TechniTrader teaches. It is called the springboard and it occurs often in lower priced stocks poised to move up quickly. It is a very reliable candlestick buy signal based on a group of candles forming in a specific way. The volume and institutional accumulation indicators—the bars below confirm there is sufficient energy and buying activity behind the price to move it up for good swing trade profits.

Chart provided by TC2007, a Worden Charting Software ©copyright 2010, with our thanks.

And the stock moves up quickly for swing trade profits.

Chart provided by TC2007, a Worden Charting Software ©copyright 2007, with our thanks.

TechniTrader® Candlestick Chart Training takes the guess work out of reading stock charts. It eliminates the complicated hard to remember candlesticks that seldom form in our western markets and are unreliable. TechniTrader® has identified the most common, most reliable candlestick buy and sell patterns for you so that you can quickly learn how to use candlestick charting for short term trading. TechniTrader® recommends the following charting programs as they have proven to have reliable data feeds, good support and instructions for use, and are good for swing, velocity, and position trading, which are the most reliable and popular short term trading styles for people who do not have time to spend 8-10 hours a day trading stocks but want to make monthly income and only have 2-8 hours a week to spend on trading.

Recommended Web Based Charting Programs:
Web based software: there are many web based charting programs that are free on the internet but the best of these is: www.freestockcharts.com is by far the best free stock charting program available at this time and is easy to learn to use with reliable data. You can create watchlists and alerts for stocks. There are limitations for this software but it offers a quick way to check stocks and to learn about charting software. Martha Stokes C.M.T. regularly offers tips and discusses stock charts in her notes area. To see her notes on charts, simply register as a ‘friend’ under: ‘Stokes, Martha’ or ‘TechniTrader’. And be sure to follow her early morning comments on Twitter.

Recommended Charting Software Subscription Services:
Most traders will need more than just a web based charting program. You will need a regular charting software program loaded onto your computer that you can work from in your trading office. All data that comes from the market costs the charting software companies. They must pay a fee to the data feed companies. So these programs have monthly data feed costs. This is a low fee that will pay for itself quickly and is a part of the cost of doing business as a trader making monthly income trading stocks. Recommended Charting Software for Swing, Position, and Velocity Trading: Worden Telechart charting software: has excellent scan capabilities, leading indicators, and is easy for the novice to learn to use. MetaStock charting software: is more sophisticated and offers scanning features, more indicators, and more drawing tools and analysis tools. StockFinder charting software: is a highly sophisticated program for traders who want to develop their own unique trading platform and indicators. All of the above are best used for end of day analysis. This makes trading easy, fast, and fun.

Recommended Charting Software for Day and Intraday Traders: Intraday trading is where you buy and sell a stock many times in one day. High frequency traders are the professionals, (originally called SOES bandits) that trade every millisecond huge share lots. Day trading is holding a stock for a single day, and either buying in the morning and selling just before the market closes, OR buying late in the day and then selling the next day. All day and intraday traders and high frequency traders need high powered intraday charting programs. The best is Trade Station but it is a highly complex, sophisticated charting software program that requires strong skills and a lot of training to use properly. It is not recommended for novices or beginners. It is also expensive. Summary: Candlestick charting is the best tool for analyzing price action for stocks, bonds, FOREX, commodities, options, etc. If you are new to trading or have limited experience in the financial markets, start by learning to trade stocks. Stocks are the easiest of all the trading instruments and offer the highest returns for the lowest risk. Later once you are successful trading stocks you can take your skills in chart analysis to whatever financial market you choose to specialize in for your trading goals. All of the trading platforms require chart analysis skills. It takes time to develop these skills. It is just like any other profession that has a high income potential: learning to use the tools of the profession with a strong skill set requires a commitment of time and a proper education.

For more information about TechniTrader training programs, visit our course page at technitrader.com.

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