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Trading Education

When a new investor decides that he or she would like to learn stock trading, there is a lot of information they must research. New investors have many decisions to make any many areas of stock trading to explore. In today’s article we discuss some of the major concepts that a new investor would learn throughout their trading education.

Perhaps one the first concepts that investors come across is the study of fundamental analysis. Stock fundamental analysis measures the level of success for each company and takes a look at things such as the company’s earnings, their success in their industry, competitiveness, and other characteristics of a company. When a company is growing and profitable their stock will typically increase while. Fundamental analysts typically practice long term investing based on a company’s fundamentals. These analysts feel that buying and holding over a longer period of time is the best investment strategy.

Throughout your trading education you will learn that stock technical analysis is based on price patterns, price fluctuations, and trends. Technical analysts believe that the stock’s fundamentals are reflected in the stock’s price and that the past is a good indicator of the present. Technical analysts use technical indicators as part of their technical analysis process while others will study stock charts of a security’s past activity. There are different types of stock charts that traders using this form of analysis can use. They can use line charts, bar charts, point and figure charts, and candlestick charts. Candlestick charts, however seem to be the most popular as they are considered to be more visually appealing and they tell the trader more about the market sentiment.

Additionally when receiving a trading education about technical indicators you will learn such terms as gap analysis, trading ranges, trend analysis, etc. There are also other types of indicators in addition to these such as the Relative Strength Index (RSI), and pattern analysis. These indicators are used to predict future price movements and are typically used by day traders and other traders who practice short term stock trading. Again, technical analysis are not interested in a stock’s intrinsic value, but rather study and learn to identify patterns that may predict future activity of a stock.

When trying to decide how you want to invest money and what type of trading you would like to practice, there is a lot to learn. It can be overwhelming at first so it is important to give yourself ample time to become familiar with the stock market, the different ways of trading, and the different technical analysis tools available to traders. Perhaps you are no longer interested in trading but would rather practice long term investing. These investors typically rely more on fundamental analysis. However, if you are interested in learning about how you can practice short term trading, you may want to look more into technical analysis. Whatever you decide, just be sure you do your homework and asses your risk tolerance before you begin.

Market Direction: The longer a trend remains in existence, the more compelling a reversal signal needs to be. Keep in mind, a candlestick reversal signal is the result of a change of investor sentiment. The longer a trend continues in a direction, the more solidified investors' mindsets become. This is why a reversal signal needs to be substantial and confirmed to demonstrate a definite change. Obviously, investor sentiment had become very negative over the past few months. To change that cycle required evidence of bullish trading that would dramatically alter the prevailing sentiment.

As mentioned in previous newsletters, the change in the downtrend required both a candlestick buy signal and a close above the T-line. That combination did not occur until Tuesday of this week. The Dow, trading up 379 points, created a Bullish Engulfing signal after a couple of indecisive trading days and closed above the T-line. This became compelling evidence that something new had occurred in investor sentiment. Once that occurred, the analysis of what would happen over the next couple days of trading was easy. Wednesday produce the expected indecisive trading day, the Doji day, after the huge bullish reversal day. This is not an unusual occurrence. After the initial reversal signal, there will usually be conflict between the bulls and the bears. The Doji day represents that conflict. The message drawn from that day is relatively simple. The Bears realize they cannot push the market back down.


There are simple expectations after that day. When the Bears realize the Bulls are still participating in force, they start to step out of the way. This allows for another day with approximately the same magnitude of price movement as the initial reversal day. Having this information is extremely profitable for day traders as well as longer-term position traders. The daytrader has one simple expectation. If continued buying is evident on the third day, they can be establishing bullish positions immediately. This is based upon the high probability results that occurs from this type of reversal set up. The swing trader and the long-term holder can start placing long positions that are coming up off of strong candlestick buy signals.

Understanding the rationale behind the formation of the signals allows for a much greater degree of accuracy. This is true for analyzing a trend both on a long-term basis as well as a day trade basis. Knowing the simple reoccurring patterns allows investors to exploit strong profits in all market conditions. Each signal provides a set of simple rules that allows them to be used effectively. Obviously, having a technique for correctly analyzing the direction of the overall market creates the opportunity to be in the right individual stock trades at the right time. When a reversal has been identified, what becomes the obvious criteria for finding good bullish positions? Finding the positions that have the highest profit potential!

Candlestick signals and gaps provide a powerful combination for being in the best possible price trends. The use of candlestick signals and gaps allows for positioning the portfolio into the best and strongest uptrend candidates. While many investors have been tentative about committing funds to the markets, candlestick investors have already produced some substantial gains. What is occurring in many investor psyche right now? A lack of confidence that the downtrend has reversed. This is not an issue when witnessing candlestick reversal signals. Is this a bounce or a full-fledged reversal? That does not really matter if extensive profits can be made in either case.


As illustrated in the FAS chart, a three times leveraged fund, extensive profits can be made utilizing the leverage and having an accurate evaluation of the general market trend. The extent of the potential price move is signified by the initial gap up in price. A gap up in price is easy to understand. It indicates a dramatic desire to get into a position. This is exactly what is wanted when utilizing a candlestick signal. Witnessing a candlestick reversal signal in the oversold conditions followed by a gap up in price is the ultimate trend indicator.

Chat session tonight 8 PM ET -- Everybody is welcome. We will be discussing the price patterns that correlate with these market reversal conditions,  already producing 15 % to 20% profits in the portfolio. Click here for instructions.

Good investing,

The Candlestick Forum Team


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