Candlestick Charts Provide a Huge Advantage to Technical Analysis

Candlestick charts provide huge amounts of information.

Candlestick charts allow an investor to develop trading strategies that maximize profit potential. Unlike bar chart that illustrate what price movements did during a specific time frame, candlestick charts reveal ‘how’ that price moved. Candlestick charts demonstrate what investor sentiment was doing during the time frame and how it did it. This additional information creates a huge advantage for the candlestick investor. Although a price may have been up on the day, the candlestick chart will reveal whether a specific candlestick signal had been formed.

This information becomes valuable for projecting a reversal or a continuation of a trend.  The simple logic that is built into candlestick charts makes the evaluation for trade entry and exit strategies much easier to execute.  For example, a candlestick chart that reveals a price that closed higher on the day in an overbought condition may not have any relevance to somebody that does not  recognize a candlestick signal. However, if that price, during that day, had been much higher but closed near the lower end of the trading range, it may still appear as a positive day to somebody using bar charts or just reading the results of the day from the Wall Street Journal. Utilizing a  candlestick chart would reveal a different story.  A Shooting Star signal would have formed, providing a completely different scenario.

When the major signals appear  on candlestick charts, an investor can prepare for when they get in and out of trades with a much more clear analysis.  Being able to execute trades at an early stage of a reversal keeps an  investor from having to  execute less favorable trades when a trend is already in motion, trying to sell when the buyers are stepping away.  Candlestick charts produce the evaluation graphics that allow an investor to make decisions instantly.

Market Direction

What are the markets telling us? Both the Dow and the NASDAQ have been in the overbought conditions for the past few weeks.  The Dow has now reached the obvious resistance level at the 10,700 level.  The past three days of trading have demonstrated spinning tops.  This indicates indecision occurring at an important technical level.

Stochastics are now in the process of turning down.  As of yet, the selling has been indecisive.  Two scenarios can be put forth upon seeing this type of market condition.  The spinning tops could be illustrating the prelude to a pullback.  That will be confirmed by a long bearish candle in the next day or so. This would give a clear indication that the spinning tops were a reversal action. If the next few days show more spinning tops, doji, or other indecisive trading formations, without confirming signals, hold off on your trade.

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