The Doji is one of the most revealing signals in Candlestick trading. It clearly indicates that the bulls and the bears are at an equilibrium, a state of indecision. The Doji appearing at the end of an extended trend has significant implications. The trend may be ending. Just this fact alone creates a multitude of investment programs that produce inordinate profits. What is the best method for making big trading profits? Knowing the direction of a trading entity and the strength of that move. Candlestick analysis perfects that trading strategy. Candlestick formations reveal high probability profitable reversals. Hundreds of years of investing refinement has proven that point.

The Japanese say that whenever a Doji appears, always take notice. A well-founded rule of Candlestick followers is that when a Doji appears at the top of a trend, in an overbought area, sell immediately. Conversely, a Doji seen at the bottom of an extended downtrend requires buying signals the next day to confirm the reversal. Otherwise, the weight of the market could take the trend lower.

What could be better than knowing which way a market or a trading entity is going to move? One additional important element! How powerful is that new move going to be? A powerful indication that a strong trend is beginning is the appearance of a “window” or gap. Gaps (Ku) are called windows (Mado) in Japanese Candlestick analysis. A gap or window is one of the most misunderstood technical message. It is usually advised by a good percentage of investment advisors to not buy after a gap. This is very bad advice. The gaps will reveal powerful high profit trades. Candlestick signals, correlated with the appearance of a gap, provide valuable profit making set-ups.
The ramification of a gap pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly off of gaps. Dissecting the implications of a gap/window makes its appearance easy to understand. Once you understand why a gap occurs in different locations in a trend, taking advantage of what the gaps reveal becomes highly profitable. Where a gap occurs is important.

Consider what a window or gap represents. In a rising market, it illustrates prices opening higher than any of the previous day’s trading range. What does this mean in reality? During the non-market hours, something made owning this stock tremendously desirable. So desirable that the order imbalance opens the price well above the prior day’s body as well as the high of the previous day’s trading range (the same is true for a bearish indication, gapping down from the previous range). As seen in Figure 1, note the space between the high of the previous day and the low of the following day.

Gap Formation

Witnessing a gap or window at the beginning of a new trend produces profitable opportunities. Seeing the gap formed at the beginning of the trend reveals that on a reversal of direction, the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Doji appears, indicating that the selling may have stopped. To verify that the downtrend has stopped, indication of buying the next day is required. This can be more pronounced if the next day has a “gap” up move.

Many investors are apprehensive about buying a stock that has popped up from the previous day’s close. A risky situation! Yet a Candlestick investor has been forewarned that the trend is going to change, using a signal as that alert. A gap up illustrates that the force of buying in the new upward trend is going to be strong. The enthusiasm shown by the buyers trying to get into the stock demonstrates that the new trend should have a strong move to it. Use that gap as a strength indicator.

Doji and Gaps at the Bottom

Knowing that a gap represents an enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential has occurred. Where is the best place to see rampant enthusiasm when you are buying? At that point you are buying, near the bottom. Obviously, seeing a potential Candlestick buy signal at the bottom of an extended downtrend is a great place to buy. In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold to reduce the downside risk. What is even better is the evidence that buyers are very anxious to get into the stock.

Note in Figure 2, XMM, Cross Media Marketing, after Doji/Harami’s, one on November 5th, another on December 18, 2001, that the gap up the next day clearly indicated that the trend had stopped. The resulting trades produced 28.5% and 49.3% respectively. Probabilities demonstrate that a gap up is going to preclude an advance in price under these circumstances. Unofficially, candlestick statistics illustrate an 80% and better probability that a trade will be successful when stochastics are oversold, a Candlestick buy signal appears, and prices gap up. (The Candlestick Trading Forum provides candlestick statistics that they represent as unofficial. Even though over fifteen years of observations and studies have been involved, no formal data gathering programs have been fully operated. However, currently the Candlestick Trading Forum is involved with two university studies to quantify signal results).

XXM Gap Trading

Having this statistic as part of an investors arsenal of knowledge creates opportunities to extract large gains out of the markets. The risk factor remains extremely low when participating in these trade set-ups.

Many investors are afraid to buy after a gap up. The rationale being that they don’t like paying up for a stock that may have already moved 3%, 5%, 10% already that day. But this rationale is unimportant to the Candlestick investor. Witnessing a Candlestick buy signal prior to the gap up provides a basis for aggressively buying the stock. If it is at the bottom of a trend, that 3%, 5%, 10% initial move may just be the beginning of a 25%, 30%, 40% move or a major trend that can last for months.

Doji and Gaps at the Top

Gaps and windows reveal a strong force in a direction whether it is bullish or bearish. The Candlestick signal is the prime factor for looking for a reversal. A gap down after a sell signal verifies that the signal was effective. The Japanese say that a Doji at the top of a sustained trend warrants immediate liquidation. That becomes more evident if the prices gap down the next day. Note in Figure 3, ISSI, Integrated Silicon Solutions, the Doji at the top, with stochastics in the overbought area, would have been the warning. If investors were long, upon seeing the Doji, they should liquidate at the first sign of a weaker open. The gap down the next day would have been more than enough to convince the Candlestick investor that the sellers had stepped in.

ISSI, Integrated Silicon Solutions

The investor that does not utilize the information revealed by gaps/windows is leaving massive profits for somebody else. Just as the Candlestick signals have different meanings at different points in a trend, the gaps have different messages at certain points in a trend. The Candlestick signals, signals that have imbedded information in their formation, combined with a gap/window, also a signal that implies a magnitude of buying or selling interest, creates one of the most powerful investment tools found in technical analysis. The major function of technical analysis is to find trade patterns that put probabilities highly in our favor. Hundreds of years of profitable observations have identified the Doji as a prime reversal signal. Gaps have demonstrated many times over that they are the driving force of a trend direction. The combination of these two indicators produce profits that cannot be ignored.

Training Tutorials
Gap Trading

 

Utilizing a stock trading system provides an investor with many benefits. The most important benefit is utilizing proven trading techniques. Most investors do not have a stock trading system. They tend to buy what is most advocated by investment publications and the experts on the financial news stations. The problem with that investment style is that when most industries and stocks are already highly publicized, most of the price move is already gone.

A true stock trading system is one that finds price moves before everybody is aware of them. Candlestick signals are a highly productive means for finding price patterns that work effectively. When one coordinates Candlestick signals with known high profit patterns, an investor can develop a stock trading system that constantly puts the probability in their favor. Making a study of the Candlestick signals, especially the 12 major signals, in conjunction with recognizing some simple high profit patterns allows an investor to consistently place investment funds in trades that will produce profits an inordinate percentage of the time.

When developing a stock trading system, one of the objects should be to keep it very simple to apply. The J Hook Pattern provides the Candlestick investor with some very simple profitable applications. The first uptrend will usually show clear Candlestick sell signals when it comes to an end. The top may be formed with the stochastics in the overbought area or very close to the overbought area. Because of the strong initial uptrend, the first evidence of sell signals should be acknowledged. Even if it is suspected that the uptrend could be forming a J Hook Pattern, why a risk remaining in the trade? When sell signals become evident, take profits.

What criteria makes a Candlestick investor suspect a J Hook Pattern to form? The analysis of the market trends in general might provide that information. For example, if a stock price has had a strong run up while the market indexes have had a steady uptrend, and the market indexes do not appear to be ready for a significant pullback, continuing its uptrend, then a strong stock move could warrant some profit-taking before the next move up in its trend. The benefit of being able to identify Candlestick signals is being prepared for the witnessing of some Candlestick buy signals after a few days of pullback. These signals would also alter the trajectory of the stochastics that should also be pulling back.

Witnessing Doji’s, Hammers, Inverted Hammers, or Bullish Haramis after a few days a pullback becomes an alert that the sellers are starting to wane. If the stochastics are flattening out during that same time frame, then a set-up for a J Hook Pattern is taking place. Taking profits when the first sell signals occurred in the initial uptrend eliminate the downside risk. Those Candlestick sell signals indicate that it is time they get out of the trade. Even though the strength of the initial move would cause us to suspect that a J Hook Pattern may form, there is no guarantee that the pullback couldn’t retrace 20%, 40%, 60%, or even greater, of the initial up-move.

This creates a trading strategy that allows for an investor to utilize the common sense built into the Candlestick signals. When it is time to get out, get out. If, after a few days, small Candlestick buy signals start forming, there is nothing wrong with buying back into the position. The second entry of this trade now has some targets that can be clearly defined. The first target should be the test of the recent high. Although this may not be a huge percentage return to that level, at least the probabilities indicate that it should be profitable.

The benefit of Candlestick signals, once again, can be applied if and when that recent high is tested. Witnessing another sell signal as the price approaches the recent high trading level would be a clear indication that the recent high was going to act as resistance. This would induce taking quick profits and getting back out of the trade. On the other hand, if strong signals are seen as the recent high is breached, that would be a clear indication that the recent high was not going to act as a resistance level and that the new leg of the trend is in progress. Recognizing this pattern and the elements that form it allows an investor to move decisively at the right points of a trend. Being prepared for the pattern and knowing what signals to look for creates opportunities to participate in a profitable trend while greatly reducing risk.

LTR

Note the J Hook Pattern in LTR. Once the trend started up, the pattern formed when the price pulled back for a few days. However, the stochastics never reached the oversold area and they came down only part way before hooking back up. The signals indicated buying before it pulled back too much, showing the buyers were going to test the high of the previous week. The gap above the recent high indicated that the buyers were very eager to see prices go to much higher prices.

The Candlestick signals should be the basis for a successful stock trading system. The signals consist of hundreds of years of actual analysis, not simulated back-testing. Investment patterns have also been identified through the years. When the Candlestick signals are applied correctly to the high-profit potential patterns, their effectiveness becomes all that much greater. For the investor that wants to create a stock trading system that can be monitored for a success/failure ratio, he should input as much proven trading techniques into his program as he can accumulate. The strongest element for starting any stock trading system should be the Candlestick signals.

Technical analysis chart formations provide high profit return potential when using Candlestick signals. Candlestick analysis involves the visual identification of patterns that have been recognized for hundreds the years. Identifying technical analysis chart formations that have produced a statistical probability result makes for an excellent trading format.

One of the most powerful technical analysis chart formations is the gap. Gaps occurring at different locations in a trend have different meanings. Taking advantage of what they reveal becomes highly profitable. Dissecting the implications of a gap/window makes its appearance easy to understand. Where a gap occurs is important. The ramification they reveal in a chart pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly from gap trading.

Gaps (Ku) are called windows (Mado) in Japanese Candlestick analysis. A gap or window is one of the most misunderstood technical messages. It is usually advised by a good percentage of investment advisors to not buy after a gap. The explanation being that it is too dangerous to predict what will happen next. That advice usually comes from somebody that does not know how to use gaps successfully. Gaps reveal powerful high profit trades. Candlestick signals, correlated with the appearance of a gap, provide high-probability profitable trade set-ups. The unique built-in forces, encompassed in the Candlestick signals, and the strength of a move revealed by the existence of a gap, produce powerful trading factors. The knowledge of what this combination of signals reveal will produce consistent and strong profits.

These technical analysis chart formations are not “hidden” secret signals or newly discovered formulas that are just now being exposed to the investment world. These are a combination of widely known but little used investment techniques. Candlestick signals obviously have a statistical basis to them or they would not still be in existence after many centuries. Gaps have very powerful implications. Combining the information of these two elements produces investment strategies that very few investors take the time to exploit.

Consider what a window or gap represents. In a rising market, it illustrates prices opening higher than any of the previous days trading range. What does this mean in reality? During the non-market hours, something made owning a stock, or any other trading entity, tremendously desirable. So desirable that the order imbalance opens the price well above the prior day’s body as well as the high of the previous day’s trading range. As seen in Figure 1, note the space between the high of the previous day and the low of the following day.

Gap Trading Example

Witnessing a gap or window at the beginning of a new trend produces profitable opportunities. Gaps formed at the beginning of the trend reveal that upon the reversal of direction, the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Candlestick signal appears; a Doji, Harami, Hammer, or any other signal that would indicate that the investor sentiment is changing. What is required to verify a Candlestick reversal signal at the bottom? More buying the next day! A bullish candle indicates a reversal has occurred. A “gap-up” bullish candle indicates that a reversal has occurred with extraordinary force.

Many investors are apprehensive about buying a stock that has popped up from the previous day’s close. A risky situation! The hesitancy is caused by the percentage move. When most investors are happy with a 10% return annually, it is hard for an investor to commit funds to a position that has moved 12% in one day. Understanding what the gap-up represents eliminates that fear.

A Candlestick investor has been forewarned that the trend is going to change, viewing the Candlestick signal as the alert. A gap-up, illustrating buyer enthusiasm, reveals excessive strength. Use the gap as a strength indicator. The fact that the initial move is substantial should act as an indication that the remaining move of this new trend could be more substantial.

Always keep in mind, the markets do not care what investors fears and perceptions are. A price that has moved dramatically in one day may be cause for fear to enter a trade from most investors. They do not have the knowledge to understand what that strong move illustrates for the future.

Gaps form in many different places and forms. Some are easy to see, some need to be recognized. Utilizing the technical analysis chart formation information provides the capability to be involved with high profit trades. The information provided from the combination of a Candlestick buy signal or sell signal, followed by a gap, reveals an immense amount of information. And being able to analyze the technical analysis chart formation correctly provides an investor with the opportunity to make good consistent profits.

The major Candlestick reversal signals are very illuminating. They are hundreds of years of visual observations revealing high probabilities of a reversal occurring. Not to overstate the obvious, but if Candlestick signals didn’t work, we would not be looking at them today. The Japanese rice traders that they used candlestick signals became enormously wealthy.

The major benefit of Candlestick signals is that they are very easy to learn and identify. You do not need to learn formulas. You do not have to do extensive fundamental analysis. A Japanese Candlestick reversal signal is a visual identification of a change in investor sentiment. Of the 50 or 60 Candlestick signals, there are 10 major signals that occur at the reversals the majority of the time.

The Morning Star signal is one of the most clear, symmetrical candlestick reversal patterns.

Morning Star

The Japanese rice traders described it as the planet Mercury, the morning star. It foretells that brighter things, sunrise, is about to occur, meaning that prices are going to go higher. It is formed after an obvious downtrend. The three day signal consists of a long black body, usually one produced of the fear induced at the bottom of a long decline. The following day gaps down. However, the magnitude of the trading range remains small for the day. This produces an indecision type – day. The third day is a white candle day. The white candle represents the fact that the bulls have now stepped in and seized control. The optimal Morning Star signal would have a gap before and after the star day. 

The make up of the star, an indecision formation, can consist of a number of candle formations, however a Doji or a spinning top is usually the predominant formation in a Morning Star signal. The important factor is to witness the confirmation of the bulls taking control the next day. That candle should consist of a closing more than half-way up the black candle of two days prior.

Identifying the Morning Star signal is relatively easy. It is visually apparent to the eye. There are some very simple parameters that can enhance the Morning Star signal’s probabilities of creating a reversal.

1. The longer the black candle and the white candle, the more forceful the reversal. This demonstrates a more severe change in investor sentiment.
2. The more indecision that the star day illustrates, the better probabilities that a reversal will occur, such as a Doji signal.
3. A gap between the first day and the second day adds to the probability that a reversal is occurring. A gap before and after the star day is even more desirable.
4. The higher the close of the third day, coming up past the middle point of the black candle of the first day, reveals more potential in the strength of the reversal.

The probability of a Morning Star signal reversing a trend becomes extremely high when found in oversold conditions. Using a simple indicator such as stochastics, in the 20 area or below, represents an oversold condition.The most important element of the signal is the magnitude of the white candle’s close during the third day.

Candlestick analysis can be used in all trading entities. Whether doing a long-term evaluation on a monthly Dow chart or a one minute chart trading the e-minis, the signals working just as effectively for revealing change in investor sentiment during that time frame. As seen in the daily Dow chart, the Morning Star signals revealed when the Dow established a bottom. Being able to analyze the direction of a DOW l increases the probabilities of being a correct trade when analyzing individual stock charts.

Do you chase a stock that is already up 12% on the day? What do you do when one of the your stocks announces an earnings warning? What do you do when one of your stock positions announces an SEC investigation and after a pleasant up-trend, it crashes and goes the other direction? Or a company you own announces a huge new surprise contract, reversing its down-trend, gaps up, continues higher. Will prices bounce right back after the news is digested? These situations baffle most investors. However, having the knowledge of Candlestick formations provides huge advantages. The formation that the price move creates is an important function of how to profit from that price movement. 

Big dramatic moves! What do you do? Many investors act like deer in the headlights, do nothing as most advisors suggest. But Candlestick analysis tells you instantly what to do. An announcement can completely reverse a trend direction. For example, if a trend has been in progress, whether strong or mild, and a surprise announcement occurs, how that formation rolls out will tell the investor what to do. One viable possibility is observing the previous day’s candle formation, with the open price, then the closing price continuing in the direction of the existing trend. After the announcement, the price alters its direction, opening at the same level as the previous day, a gap open, and proceeding to close in the complete opposite direction of the previous day. This is known as the Kicker signal. It is a high-powered candlestick signal. This signal should never be ignored. It can create huge easy profits.

The Japanese rice traders identified approximately 50 reversal and continuation signals through their centuries of developing candlestick signals. Of these, about 8 major signals will provide more trades than most investors will ever need. We put the Kicker signal in the category of a “major” signal because the results created from the aftermath of the Kicker.

Kicker Top and Kicker Bottom Formations

The Kicker Signal is the most powerful signal of all. It works equally well in both directions. Its relevance is magnified when occurring in the overbought or oversold areas, but is effective no matter where it appears in a price trend. 

Consider the investment sentiment that formed this pattern. It is formed by two candles. The first candle opens and moves in the direction of the current trend. Investors are continuing with the established trend, closing the price further in the existing direction. Then, something has occurred to violently change the direction of the price. Usually a surprise news item is the cause of this type of move. The signal illustrates such a dramatic change from the current price direction that the new direction will persist with strength for a good while. (There is one caveat to this signal. If the next day prices gap back the other way, liquidate the trade immediately. This does not happen very often, but when it does, get out immediately.) The second candle opens at the same open as the previous day, a gap open, and heads in the opposite direction of the previous day’s candle. The bodies of the candles are opposite colors. This formation is indicative of a dramatic change in investor sentiment. The candlesticks visually depict the magnitude of the change.

DLTR, Dollar Tree Stores

Due to the change being so dramatic, and the initial reversal effecting a large percent of the price, the trend usually persists in the new direction for an extended period of time. First, the news report takes investors by surprise. The people that heard it from the time it was reported bailed out on the open. Others will hear about the news later, making their investment decisions during the next day or so. Others may not hear about it for a week or so. If it is bad news, the overhanging supply keeps weighing down the price for a few weeks. If it is good news, it will take a good while for the enthusiasm to wane. These moves can usually be substantial, especially if it is moving in the same direction as the market in general.

The Kicker Formula

The Kicker Signal is can be easily formulated for search purposes. The position of the signal, in a trend, is not important. The important factor is that a severe change in investor sentiment has occurred. Because the Kicker signal is a two-day signal, two opposite elements are required. First, in a Bullish Kicker Signal, the predominant trend should have been downward. The first day of the signal would have opened, traded down, then closed lower than where it opened.

(O1 > C1)

Day two should have opened equal to or above the open of day one and then closed higher than the open of day two.

AND (O => O1) AND (C > O)

Do not let the magnitude of a kicker reversal signal deter you from making the trade. The announcement or event that created the Kicker signal in that stock is not going to be a one-day affair. It has reversed the direction of investor sentiment. That was the surprise in which the investment community reversed its outlook. The big percentage move, that first day before you got in, is just a small part of the rest of the move.

Many investors will mistakenly wait for the price to pull back so that they can get in. The candlestick investor does not want to see a pullback. The buyers should maintain their buying to make this trade a strong one. To wait for a pullback is not the buying pressure that you would want for a strong up-move stock.

The Bearish Kicker Pattern has the opposite formulas. Of course the trend should be in a predominantly upward direction. Usually a bad news announcement will send the stock price crashing. The formula should be.

(O1 < C1)

The open on the following day is equal to or lower than the open of the previous day and continues down, closing lower than the open.

AND (O <= O1) AND (C <= O)

The more overbought when the signal started, the better. Again, the magnitude of the reversal is directly related to the strength that should be conveyed in the remaining portion of the new trend. Do not be afraid to participate in the move despite the magnitude of the initial move. Because the news was a surprise, it will take at least a few days, if not much longer, for the investment community to digest and assess the ramifications of the surprise.

Candlestick Advantage

Knowing what a candlestick signal looks like creates tremendous profit making advantages. If a surprise announcement occurs, the Candlestick trader can take advantage of the price movement immediately versus waiting to see what direction the trend will evidentially take. These opportunities will happen almost every day. Having the proper search criteria provides a constant supply of highly profitable trades. In a universe of 9,900 stocks, it is likely that one or two will have a surprise external event that will drastically alter the perception of the future of those companies. Violent price moves usually leave investors in their tracks. Having the foresight of what candlestick signals can be forming creates great opportunities to make big profits. Somebody is taking advantage of the big profit situations. No reason it can’t be you.

Training Tutorial available on The Kicker Signals

The most striking facet of Japanese candlesticks is their ease of identification. Hundreds of years ago, Japanese rice traders become ultra-wealthy using Candlestick signals to trade rice. These signals were developed through simple observation. As years of successful utilization of the signals progressed, they even were able to analyze the psychology behind forming the signals. This provided a very powerful tool for projecting future price movement.

Two of the most compelling candlestick signals are the Bullish Engulfing Pattern and Bearish Engulfing Pattern. They are most effective when founding the oversold area, at the end of a substantial downtrend or the overbought area for the Bearish pattern. The Bullish Engulfing pattern consists of two bodies. The first body is the same color as the current trend, the second is the opposite color. The signal day opens lower than the previous days close, then it trades higher so by the end of the day, it will close above the previous days open. This new white candle now engulfs the previous days candle, known as the DAKI, or the embracing line.

Bullish Engulfing Pattern

Witnessing a white bullish candle, engulfing the previous black candle, stands out like a neon sign after a series of black candles. It becomes very plain to see that a change has occurred in investor sentiment. A couple of simple factors make the Bullish Engulfing pattern more convincing. The bigger the previous days candle being engulfed, the more effective the new trend signal will be. Or the lower the open of the white candle, then coming back up to engulf the previous day, the more powerful the next advance should be.

The formula is relatively simple:

(O1>C1) and (O O1). Defined as the open of yesterday is greater than the close of yesterday. And the open today is less than the close of yesterday, And the close of today is greater than the open of yesterday. 

The Bullish Engulfing pattern represents a complete change in investor sentiment. Using this pattern as a buy signal eliminates the need to grab for the fallen knife. When is “low” the right time to buy? The Bullish Engulfing pattern reveals when the buyers have stepped in. Note in the Dow Jones industrial chart that the whole market sentiment reversed at the Bullish Engulfing formations. The signals work equally well when analyzing indexes as they do for individual stocks, commodities, futures or any other trading entity.

Having the knowledge of just eight or nine Candlestick signals, the Bullish and Bearish Engulfing patterns being on that list, produces huge advantages for analyzing the direction of the markets in general. This reinforces the analysis of an individual stock price. Training Video for Engulfing Patterns 

Dow Jones Industrials

The Bearish Engulfing pattern is the exact opposite that of the Bullish Engulfing pattern. After an obvious uptrend, the bulls finally gap it open due to their exuberance to get in the position. If stochastics are showing that this is occurring in the overbought area, the candlestick investor becomes very diligent. A gap, however slight, away from the previous days close, should alert the candlestick investor that the trend may be ending. If long, putting a stop one half way down the last bullish candle is usually prudent. If trading comes back through that point and closes below the open of the previous day, a bearish engulfing pattern has formed. Now you can short the stock with confidence. If nothing more than being long, you now know to close the position. Knowing the direction of the market allows the investor to establish positions with more confidence. Knowing that the market indexes have turned positive permits an investor to commit funds to the long side with more aggression than normal. As seen in the above DOW chart, being able to visualize the Bullish Engulfing patterns after extensive downtrend would have allowed an investor to get in and make impressive profits.

As in the Bullish Engulfing pattern, the Bearish Engulfing pattern is very easy to see. It stands out as a blatant change of direction in the trend. The white bodies in the uptrend now have a large black candle stopping the trend.

Bearish Engulfing Pattern

The black candle acts as an obvious sign against the uptrend. The formula is exactly opposite of the Bullish Engulfing pattern formula. ( C1 >O1) and the(O>C1) and (C>O1), The close of the first day is higher than the open, thus a white candle. The next day has an open than is higher than the previous day’s close and closes lower than he previous days open.

The visual depiction of a Bearish Engulfing pattern creates an ominous darkness at the top of a trend. It does not take learning complicated formulas or analyzing numerous indicators to understand a candlestick signal.

Enron

Note how the Bearish engulfing pattern terminates the uptrend in the Enzon Inc. chart.. As the trend persists, buyers finally get so exuberant, they gap the price up. It immediately starts losing ground until it finally closes lower than where it opened the previous day. This clearly illustrates that the sellers have gained strength. That confirmation of selling starts a trend of selling.

The Engulfing patterns are statistically valid for indicating reversals at the tops and the bottoms. As stated early, the signals are highly accurate when a bullish Engulfing pattern is witnessed during oversold conditions. Conversely, the Bearish Engulfing pattern is valid in the overbought area. But both have a recognized indicator at the other end of a trend. A big bullish Engulfing pattern observed at the top of a trend usually represents the last gasp of the trend. The same occurs at the bottom of a trend with the Bearish Engulfing pattern. The last gasp sellers create a bearish engulfing pattern which usually is followed by increased buying. Remembering this fact provides another opportunity to extract profits out of a price trend. When the “hopeful” are buying once more at the top or the “panicked” are selling their last stock position at the bottom, the Candlestick investor is already familiar with what that last bullish or bearish engulfing pattern indicates at the wrong end of a trend. Putting on positions becomes a comfortable endeavor while everybody else is buying or selling the wrong way.

The Candlestick Engulfing patterns have survived centuries of investment skepticism. The Japanese Rice traders become ultra-wealthy utilizing these patterns. This is not rocket science. Rice traders developed high profit trading programs using purely visual recognition of reoccurring high probability formations. This is the most convincing form of statistical analysis. Use it to your advantage.

Stephen W. Bigalow is author of “Profitable Candlestick Trading, Pinpointing Market Opportunities to Maximize Profits” and principal of the www.candlestickforum.com, the leading website on the Internet for providing information and educational material about Japanese Candlestick investing. Over fifteen years of extensive study and utilization of candlestick analysis has produced an array of easy-to-learn educational material about Candlesticks. As one of the leading Candlestick experts in the nation, Mr. Bigalow, through his consulting with major trading firms, has developed multiple successful trading programs for the day-trader to the long-term hold investor.

There are technical analysis basics that can greatly enhance the production of extraordinary profits in the markets. Candlestick signals amplify the ability to identify high profit chart patterns. The visual aspects of Candlestick signals make evaluating high profit trades very easy.

One of the technical analysis basics is identifying a Candlestick bullish signal followed by a gap-up. A gap, witnessed after a Candlestick “buy” signal, also has powerful implications. Knowing that a gap represents enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential situation is about to occur or has occurred. Where is the best place to see rampant enthusiasm? At the point you are buying, near the bottom. Obviously, seeing a potential Candlestick “buy” signal, at the bottom of an extended downtrend is a great place to buy. In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold, to reduce the downside risk. What is even better to see is the evidence that buyers are very eager to get into the stock.

Reiterating the technical analysis basics of finding the perfect trades, as found in the book “Profitable Candlestick Trading”, having all the stars in alignment makes for better probabilities of producing a profit. The best scenario for a high profit trade is a Candlestick “buy” signal, in an oversold condition, confirmed with a gap-up the following day.

As illustrated in the Bombay Company Inc., the uptrend was obviously instigated after a gap-up and large bullish candle following a Doji. The fact that prices gapped up was immediate demonstration that buyers wanted to get into this stock with great fervor.

Unofficially, statistics illustrate an 80% or better probability that a trade will be successful when stochastics are oversold, a Candlestick “buy” signals appears, and prices gap up. (The Candlestick Forum will offer our years of statistical figures as “unofficial.” Even though over fifteen years of observations and studies have been involved, no formal data gathering programs have been fully utilized. However, the Candlestick Forum is currently involved with two university studies to quantify signal results. This is an extensive program endeavor. Results of these studies will be released to Candlestick Forum subscribers upon completion.)

Having this technical analysis basic statistic as part of an investor’s arsenal of knowledge creates opportunities to extract large gains out of the markets. The risk factor remains extremely low when participating in these trade set-ups.

Many investors are afraid to buy after a gap-up. The rationale being that they don’t like paying up for a stock that may have already moved 3%, 8%, 10%, 20% already that day. Witnessing a Candlestick “buy” signal prior to the gap-up provides a basis for aggressively buying the stock. If it is a the bottom of a trend, that 3%, 8%, 10% or 20% initial move may just be the beginning of a 50% move or a major trend that can last for months.

Utilizing this technical analysis basic concept will dramatically increase the potential of profits being produced in one’s portfolio. This is not difficult analysis. Candlestick analysis is the application of common sense investment practices put into graphic depiction.

Training Tutorial
Gap at the Bottom

One of the most effective commodity trading systems is the analysis of Candlestick signals. Candlestick signals were developed trading rice for hundreds of years. Most commodity trading systems are usually implemented using fundamental analysis to determine what the supply and demand of that particular commodity will be in the future.
Candlestick signals provide a very effective format for setting up profitable commodity trading systems.

Commodities, usually leveraged extensively for trading purposes, need to have a trading system that immediately tells you what is going on with price movement. A small move in price can affect profits dramatically one way or the other.

Commodity trading systems require much closer analysis. Major reversals in trends are much more easily identified when using Candlestick signals. In normal commodity trading movements, “normal” meaning other than extraordinary events causing massive price movements, investor sentiment is much easier to identify than in the equities. The investor sentiment usually evaluates the supply and demand influencing that commodity price.
Crude Oil prices can be effectively analyzed. The major corporations that utilize commodity trading systems for hedging their energy or inventory costs can benefit immensely through Candlestick analysis.

As demonstrated in the Crude Oil chart, the June contract, the recent Dark Cloud signal illustrated that crude oil prices may not have too much strength left in the current up-move. A gap down below the 50 day moving average was an indication that investor sentiment was back to the bearish direction.

Commodity trading systems evaluated correctly can also be utilized for analyzing the direction of the equity markets. Crude oil prices, which have recently been affecting the market direction, are a prime example.

The fact that crude oil prices are now showing weakness, due to the larger than expected reserves, can add strength to the equity markets. For commodity traders, the analysis of the weak Candlestick signals, close to the 50 day moving average, becomes a clear indication that prices might be in a bearish mode.

One of the most effective commodity trading systems is the analysis of Candlestick signals. Candlestick signals were developed trading rice for hundreds of years. Most commodity trading systems are usually implemented using fundamental analysis to determine what the supply and demand of that particular commodity will be in the future.
Candlestick signals provide a very effective format for setting up profitable commodity trading systems.

Commodities, usually leveraged extensively for trading purposes, need to have a trading system that immediately tells you what is going on with price movement. A small move in price can affect profits dramatically one way or the other.

Commodity trading systems require much closer analysis. Major reversals in trends are much more easily identified when using Candlestick signals. In normal commodity trading movements, “normal” meaning other than extraordinary events causing massive price movements, investor sentiment is much easier to identify than in the equities. The investor sentiment usually evaluates the supply and demand influencing that commodity price.
Crude Oil prices can be effectively analyzed. The major corporations that utilize commodity trading systems for hedging their energy or inventory costs can benefit immensely through Candlestick analysis.

As demonstrated in the Crude Oil chart, the June contract, the recent Dark Cloud signal illustrated that crude oil prices may not have too much strength left in the current up-move. A gap down below the 50 day moving average was an indication that investor sentiment was back to the bearish direction.

Commodity trading systems evaluated correctly can also be utilized for analyzing the direction of the equity markets. Crude oil prices, which have recently been affecting the market direction, are a prime example.

The fact that crude oil prices are now showing weakness, due to the larger than expected reserves, can add strength to the equity markets. For commodity traders, the analysis of the weak Candlestick signals, close to the 50 day moving average, becomes a clear indication that prices might be in a bearish mode.

Being able to analyze a commodity chart can produce extremely large profits. Not only does Candlestick analysis produce profitable trades, the stop loss process involved with Candlesticks allows an investor to set up a format for cutting losses quickly.

To learn more about Commodity and Futures Trading – Click Here for our Free 10 Part Lesson

Learn the 12 major signals in Candlestick analysis and you can develop very effective commodity trading systems.

The basic characteristics of Candlestick signals can produce extremely strong profits. The signals become an integral part of analyzing that a high profit pattern may be forming. The first indication of the development of a high profit pattern can be identified when Candlestick signals appear.

Stock market graphs have become dramatically more sophisticated in the past 10 years. Computer software services provide excellent stock market graph capabilities. Candlestick signals allow investors to clearly evaluate price movements using online stock market graphs.

The major benefit today’s investors have is the ability to do multiple technical analysis research processes instantly. Most online stock market graphs can be customized to the investors specifications. Having stock market graphs clearly illustrating Candlestick signals makes finding high profit patterns very easy to find.

Candlestick signals make analyzing reoccurring patterns much easier to evaluate on stock market graphs. An investor will be able to identify reoccurring human reactions much faster when knowing the implications of the signals. The benefit of being able to identify Candlestick signals is that it alerts an investor that high profit patterns are developing. Candlestick signals can provide immediate proper analysis of many patterns. Being able to identify a high profit pattern developing, and visualizing the confirmation with the signals, allows an investor to exploit profits at the most opportune times. One of the most profitable signals is the Scoop pattern.

The Scoop pattern works very effectively. It can be visually recognized easily. The Candlestick signals allow an investor to exploit it properly. The explanation of how and why it works is subjective.

The pattern is formed after a lengthy period of flat trading. The flat trading is usually composed of small, indecisive trading days. After a recognized flat trading time frame, the price starts to back down. The flat trading period is considered the “handle” to the scoop.

The term “recognized” is visually determining a flat trading area. The flat trading will usually sustain for a longer length of time than what is usually seen in the price movement of that trading entity. It becomes obviously lengthy to the point where it becomes boring.

It may be the boredom that finally makes the price head down. Investors get tired of waiting for it to do something. However, after a few days the small “buy” signals start showing up. The price starts moving back up toward the flat area, creating the scoop.

An inordinate percentage of the time, when the price comes back up to the flat trading area, the trend continues in a strong upward direction. This may be the result of everybody that was bored with the trading seeing that it is finally moving and start adding to their positions again.

Scoop Pattern

The visual recognition of the handle, being followed by the pullback, should be the “alert”. Seeing new buying, after a few days of a pullback, is a set up for a low risk trade. Buying near the bottom of the scoop allows the stop loss area to be at the low of the scoop. The first test should be the flat trading area. A breakout through that area indicates that a good trend is in the making.

The Affiliated Computer Services chart reveals a flat trading period followed by the price breaking down. After just a few days of a pullback, bullish Candlestick signals started to appear. Being able to visualize the handle, followed by a pullback, then witnessing Candlestick “buy” signals, should alert the Candlestick investor to the potential of a Scoop pattern forming.

Affiliated Computer Services

Having the ability to recognize when a potentially high profit pattern is forming will dramatically increase profit potential. The use of simple visual chart analysis can be fine-tuned when recognizing when a trend is about to reverse. That knowledge allows an investor to take advantage of Scoop pattern profits at their optimal buying points.

Stock market programs, what every investor should have!!! However, most investors have no inkling of how to research stock market programs. Unfortunately most investors put their portfolio together with a scattered approach to buying positions. Because they do not have stock market programs for defining when to buy, they definitely do not have a program for when to sell.

Candlestick signals are as accurate for defining the time to sell as they are for showing the time to buy. Considering that the signals are still around after hundreds of years of utilization and producing profits, it should be assumed that there is something in the signals that work. As hard as it is for most investors to find a system that produces many good trades, it is even harder to figure out when to sell, especially when the enthusiasm is running over for owning a particular stock.

Buy low, sell high. The same emotional problems that most investors have when buying into a stock, when there is panic in the streets, occurs just as frequently when investors try to figure out when to sell.

The Japanese traders say “let the market tell you what the market is going to do.” The utilization of Candlestick signals makes analyzing the direction of the markets and stock price trends relatively easy. It becomes difficult at times to sort out what the price intentions are when listening to the many scenarios from the so-called “market experts.” Watching the financial news stations will always provide a multitude of opinions on where the market or a stock price is going. Using Japanese Candlestick signals will circumvent all that noise.

The one basic factor built into Japanese Candlestick signals is that they are formed by the cumulative knowledge of all of the investor input, the buying and selling, of a trading entity or trading entities, during a certain time period. No matter what you hear elsewhere, the Candlestick signals tell you exactly what the investor sentiment is doing.

When an investor is fortunate enough to be holding a stock that has made a strong up-move, the same emotional factors enter the selling decision. Where do I sell? Two emotional elements enter the picture. First, there is greed. The average investor wants to hold on to profitable stock positions because one could keep going to the moon and ‘make me rich’. We imagine how much money we would make if the trend continued for another profitable 20 points. This emotional strategy now deters the rational decision of selling when it is time to sell. Instead of analyzing where the trend could be ending, what the stock price could potentially do becomes the overriding factor. Unfortunately investment prices do not give a hoot about what an investor is “hoping” for.

Fear is the next factor. How stupid we would look if we sold a stock at $20.00 and it went to $30.00. The biggest fear becomes selling out too early. Investors usually have a hard enough time identifying profitable trades. They definitely do not want to sell out too early. That fear now causes investors to hold on to a position well past the time that it should have been sold, giving back a good portion of the profits. Candlestick signals eliminate that dilemma. Hundreds of years of refinement have defined “high probability” sell signals. Using the major Candlestick “sell” signals will immensely increase your profits. Candlestick analysis provides a format for establishing buys and sells.

Most investors do not have a game plan when it comes to their investment dollars. They buy when somebody tells them about a good stock to buy. The next purchase might be something they read in the newspaper or a magazine article. After a while, they have a portfolio of positions of which they don’t remember why they bought each position, which certainly means they do not have a program for when to sell the positions.

Buying a position using a Candlestick buy signal puts the probability of being in a correct trade highly in the investors favor. Conversely, selling a position when the Candlestick sell signals start to appear puts the probabilities of being out of a trade near the optimal sell areas highly in the investors favor also. The critical word is probabilities. The probabilities already have been identified through the use of Candlestick signals for centuries.

Does that mean that every buy signal is going to work correctly? Definitely not! But it does put the Candlestick investor into positions that have a great probability of working. It also allows the investor to close out trades that aren’t working immediately, cutting the losses short.

The Candlestick sell signals create a high probability situation indicating that is time to take profits. Does this mean that every sell signal indicates the absolute top of a trend? Definitely not! But it does provide a format to indicate that the probabilities are that the top is near. Additionally, there is nothing wrong with selling a position when the probabilities say it is time to sell and buying back later when the signals indicate that is time to buy again.

There is nothing wrong with getting out of a position when the signals say it is a good time to get out and buying back, even at a higher price, when the signals indicate the buyers are coming back in. The point of investing is not to maximize your profits on each trade. The point of investing is to maximize your profits in your account.

When the Candlestick signals indicate that the probabilities are not in your favor, why fight it? As illustrated in the Dow chart, the bullish trend from late October into mid-November started to reveal Candlestick sell signals, an Evening Star signal, a Bearish Engulfing signal, and a few Doji’s. This congestion area became an opportune time to take profits in some of the stock charts that had moved up and were now getting toppy. And with simple analysis, upon seeing the trend exhibiting bullish Candlestick formations coming up out of the congestion area would have been a signal to buy back into the positions that had pulled back or buy new positions that were showing good strong buy signals at the time the Dow was moving up again.

This is not rocket science. This is being able to visually analyze what the Candlestick signals are telling us. The final trend has come to an end when stochastics show an overbought condition and Candlestick sell signals appear. Once again, the probabilities tell us that it is time to take profits.

When the market in general starts to get toppy, the valuation of individual stock charts becomes more easy to analyze. If the markets are getting toppy and a stock position is getting toppy, again, why go against the probabilities? Take profits. If the market turns back up or the stock starts showing buy signals again, it can always be bought back. Why sit in a position when the Candlestick signals that have worked effectively for centuries are challenging investors to get out?