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Stock Market Trading System Using Japanese Candlesticks

Market analysis is the keystone to any successful trading program. Knowing which way the markets are going, in general, simplifies the investment strategies. Understanding how the candlestick signals are formed provides an excellent framework for that market analysis. The tools for successful market analysis do not need to be difficult. Candlestick signals can be used to analyze market trends just the same as they can be used for individual trading entity trends. Understanding what investor sentiment formed the signals allows an investor to do their own market analysis without having to rely on the multitude of opinions from the so-called investment professionals.

Being able to project, with reasonable probabilities, which way the general market trend is heading helps establish the nature of your portfolio positions. If your market analysis projects that the market is heading up, why try to swim against the current? You can now establish your positions in your portfolio to the long side. Will there be times when the market direction cannot be defined? Of course! But those of the times where you will either stay out on the market or be situated in 50% long positions and 50% short positions. Having a good program for market analysis allows the investor to make the big money by being positioned correctly when the market moves in a certain direction. When you hear the investment professionals tell you to hold long-term, that you cannot time the market, then you are listening to somebody that does not understand that the markets move in waves. The candlestick signals are the most proven indicators for you to identify those waves.

Market Direction - The Long-legged Doji at the 50 day moving average was the indicator that gave us the signal of which way they were going to take the market. As we saw last week, the next move from the long-legged doji was down. That became plain to see when they broke it down through the 50 day moving average. But how far down were they going to take it? The 200 day moving average became an obvious target. However, after a retracement, a bullish harami formed in the Dow. The bullish harami indicates that the selling has stopped. The stochastics being in the oversold area also gave credence to the bullish harami. But as we saw, the next day negated the bullish harami. This could have led to the markets moving much lower, to the 200 day moving average for example. But we see another harami forming the second time in the oversold area. Now the stochastics are bottoming in trying to curl up.

Knowing that a Bullish Harami signifies of the selling has stopped, while the stochastics were in the oversold condition, should have been the first alert that we may be near a bottom. Seeing the negation of the bullish harami the following day puts the trend direction in doubt. This is where your market analysis needs to analyze what is happening. Your stochastics are in oversold area, you see bullish harami telling you the selling has stopped, and then we see further selling. That produces an indecisive condition of the market. At that point, the candlestick signals can only prepare you for what the next move will be. If on Tuesday, the sellers continued the downward pressure, then it could be evaluated that the harami was just a one-day bounce in a downtrend. Now we can start looking for the 200 day moving average as our next support.

On the other hand, seeing a second harami appear illustrates once again that the buyers are stopping the downtrend. Two harami's in three days of trading with stochastics in the oversold area starts indicating that we are at a short-term bottom at least. Upon seeing the strength on Wednesday morning was the opportunity to close out the short positions and add some long positions.

Additional confirmation comes from the NASDAQ. Stochastics are in the oversold area and an Inverted Hammer is confirmed the next day with a gap up bullish day. But that signal is negated but is then followed by a homing pigeon, a homing pigeon is the same as a harami but instead of the body being a different color, it is the same color as the previous days candle. However, it indicates the same as a harami, that the selling has stopped. That was also confirmed by the gap up bullish day on Wednesday.


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