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Trading in the Stock Market

Trading in the Stock Market using Technical Analysis

Many investors opt to practice trading in the stock market using technical analysis as opposed to fundamental analysis. Both methods are used to study the financial markets however technical analysis focuses on the price movement of a security and uses the data to predict future price movements. Traders who practice stock technical analysis when trading in the stock market believe that there is no reason to analyze a company’s financial statements because that information is accounted for in the stock’s price. Conversely, fundamental analysis looks at economic factors, SEC filings for the companies of interest and is used more for investing rather than trading stocks. Investors using fundamental analysis buy assets that they believe will increase in value, while traders utilize technical analysis and buy assets that they think they can sell to another trader at a higher price.

When using technical analysis, traders will analyze three types of trends in order to determine the general direction that a security is going. These trends are explained below.

1) Uptrends – an uptrend is when each successive peak and trough on a stock chart is higher that the ones found earlier in the trend. It describes the price direction of an asset when the overall direction is moving upward and the goal is to identify a strong uptrend to profit from until if reverses.

2) Downtrends – a downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend. Once a downtrend is established on a stockchart traders are very careful about entering into new long positions. Most stock traders opt to avoid downtrends and they can last for minutes, days, weeks, months and even years. Downtrends can significantly affect the value of any investment when trading in the stock market.

3) Sideways – sideways trends form when there is little movement up or down in the peaks and troughs. Sideways trends happen when the price is traveling between strong levels of support and resistance and is actually considered by investors to be a lack of a trend. It is very common to see a sideways trend sustain itself over a long period time before it begins to move higher or lower.

There are three types of charts that are utilized by investors to predict price movements in the stock market. These include the line charts, bar charts, and candlestick charts. The line chart is the most basic of charts and it only displays the closing of prices over a set period of time. Bar charts are somewhat more useful than line charts when trading in the stock market. They display more information than line charts including the high and low for a trading period, along with the closing price, but they still don’t provide as much useful information as Japanese candlestick charts. Candlestick charts show the information that both line and bar charts display, however they also show the period’s trading range. These charts are more visually appealing and they can tell you more about what is happening in the markets than any other type of chart.

Technical analysis is a proven method used by some of the world’s top traders and continues to gain popularity with the advent of the internet. It should be noted however, that in order to make a profit using this method it takes serious study, practice, and dedication. Continue to learn about fundamental and technical analysis and decide how you want to invest.

Market Direction: The utilization of candlestick signals can be put into multiple applications for profitable investing. The foremost use is identifying trend reversals. Our trading scans are oriented for finding the strong reversal signals. However, understanding the information incorporated into each of a candlestick signals allow for anticipating the different possibilities of a continued trend movement. The perfect reversal usually involves a candlestick reversal signal in the correct conditions of a trend. When a reversal occurs and all the indicators are not setting up perfectly, alternative projections can be made. If a candlestick 'sell' signal occurs in an uptrend well before stochastics get into the overbought condition, this may not imply that a full scale reversal has occurred. The possibility of a quick pullback during the uptrend should be kept in mind.

Having the knowledge of what each individual signal represents creates a huge advantage for evaluating a price trend. When the possibility of a reversal has occurred and other elements of trend analysis can be identified, the confirmation of a candlestick reversal signal becomes that much more important. The confirmation of an end of an uptrend may be as simple as witnessing continued selling after a candlestick sell signal. However, if there are other elements of a trend that may suggest the possibility of the uptrend continuing, knowing what could be expected the next day will allow the candlestick investor much more clarity of what the trend is doing.

A good example is currently in the banking stocks. They have produced very strong gains over the past two weeks. The FITB chart illustrates the use of candlestick information in trend analysis. It can be easily observed an uptrend has been in progress. The tee line has been an obvious factor as far as a support level. In the last few days, the price has now moved up to the 50 day moving average. What is one of the rules about moving averages? They will usually act as resistance. Why? Because major money managers use the moving averages as an integral part of their investment strategies. As FITB approached the 50 day moving average with the stochastics having moved up into the overbought condition. It would not be unusual to see resistance the first time it approached the 50 day moving average. As can be seen, some selling has occurred at that level.


Also note how today's selling appeared to support at the tee line. This makes the trend analysis relatively simple. Trading below the tee line tomorrow would indicate the sell signal today, a Bearish Engulfing signal, right at the 50 day moving average, is now the critical signal. Weaker trading tomorrow would provide the sell signal confirmation. On the other hand, positive trading tomorrow could create a Bullish Harami. A Bullish Harami conveys a message. The selling has stopped. If this information is expressed in tomorrow's trading, two simple assumptions can be made. The tee line is acting as support again and the uptrend is still in progress. The simple if/then assumption makes the decision process for which trades to execute much simpler.


Candlestick analysis involves using candlestick signals for projecting which direction they trend will move with a fairly high degree of accuracy. The visual aspects of candlestick signals make the evaluation of price movements much easier to assess. Fortunately, candlestick analysis is more than just identifying a change of investor sentiment. Candlestick analysis incorporates the visual elements, as well as the psychology built into the signals, to provide a map of a trend. Take the time to learn what each signal conveys. Once you know this information, you obtain a powerful analytical tool that most investors do not utilize. This is not difficult stuff. It is merely applying common sense investment practices derived from the graphic depiction of what investor sentiment is doing right now.

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The Candlestick Forum Team


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