Stock Trading System Applying Candlestick Signals to
What is the most advantageous aspect of a stock trading system? Being able to identify the trend of the market! A stock trading system becomes extremely profitable when the reversals are correctly identified. Most stock trading systems are predicated upon parameters that do not necessarily correlate with the direct movement of the markets. For example, a fundamental research-based stock trading system establishes positions based on the projection of companies in a sector or industry improving their earnings over a specific period of time. However, what is lacking in this stock trading system is the fact that investor sentiment can change many times before the results of those increased earnings finally occur. The advantage of Candlestick signals is being able to identify what investor sentiment is doing in those stocks, no matter what the long-term earnings projections might be. Candlestick charts reveal where the flow of funds are moving.
The Candlestick signals are the result of a simple premise. Investor sentiment is going to change based on price movement. The best company in the world, one with great earnings expansion, is going to have price movements that do not correlate with the rhetoric that surrounds that company. A stock price that moves from $10 a share to $15 a share during a 10-day time frame may have profit taking occurring. The price at that point may start backing off, no matter how great the earnings expectations are for the next 12 months, because some investors felt they were happy with a 50% profit in two weeks. Price movements occur based on investor sentiment. A stock trading system that utilizes Candlestick signals exploits the oscillations that occur.
Becoming educated on how Candlestick signals work effectively allows an investor to create a stock trading system that takes advantage of human emotions. The fact that most investors panic-sell at the bottom and buy exuberantly at the top is not going to change. That investor mentality has occurred ever since the beginning of investing. And it will remain in effect for centuries to come. Understanding that most investors sell at the wrong time and buy at the wrong time allows the Candlestick investor to graphically recognize that occurrence. A very powerful stock trading system can be put into place by very simple rules using Candlestick signals.
Taking advantage of the incorporated knowledge, especially in the 12 major Candlestick signals, will greatly enhance an investors returns, whether trading in stocks, bonds, commodities, or currencies. Having the ability to analyze other markets that are affecting the markets you are trading in also greatly enhances the probabilities of being in a correct trade.
As illustrated in the March Crude Oil chart, the Long-Legged Doji, right at the 50-day moving average, followed by a gap-up, produced an excellent short term trade in Crude Oil. However, many Crude Oil stocks showed dramatic sell signals in Thursday's trading. Is it time to short Crude Oil related stocks? Maybe there is some profit-taking going on after the strong run up. This profit taking may be enhanced as we saw a Bearish Engulfing signal occur in Crude Oil prices at what could be considered a strong resistance trend line.
For the investor that might be considering taking profits in oil stocks, the analysis from the Crude Oil chart may assist in that decision making process. A stock trading system should take advantage of all the analytical tools provided by the Candlestick signals. This is not rocket science. This is a common sense application of signals that have occurred in tread reversals for the past few centuries. Learn the 12 major signals and you'll have a great advantage for trading any market that you want to participate in.
As illustrated in the Kerr-McGee chart, oil related stocks have had a nice run-up for the last month and a half. There were many bearish Candlesticks signals formed in the oil sector today.
The Bearish Harami, with stochastics in the overbought area starting to turn down, provides an excellent signal that profit-taking may be coming into the Kerr-McGee stock price. A lower open on Friday would warrant shorting the stock or buying puts. This stock trade will get confirmation from seeing lower Crude Oil prices Friday.