How to Make Money Trading with Candelstick Charts [Dec 01, 2011] Sadekar, Balkrishna M. Summary

How to Make Money Trading with Candelstick Charts [Dec 01, 2011] Sadekar, Balkrishna M.

by Balkrishna M Sadekar • 2011 • 204 pages
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Finance Business
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Key Takeaways

1. Candlestick charts visually reveal market psychology

Candlestick signals depict change in investor psychology.

Visual representation of emotions. Candlestick charts provide a unique visual representation of market sentiment, allowing traders to "see" the emotions of fear and greed playing out in price action. Each candlestick formation tells a story about the battle between bulls and bears, buyers and sellers.

Key components of candlesticks:

  • Body: Represents the difference between open and close prices
  • Shadows (wicks): Show the high and low prices for the period
  • Color: Typically white/green for bullish and black/red for bearish candles

By understanding these visual cues, traders can gain insights into market psychology and potential trend reversals before they become obvious through other forms of analysis.

2. Major candlestick signals indicate potential trend reversals

As a trader, you should always be buying into other's fears and selling into other's greed.

Recognizing reversal patterns. Candlestick formations often signal potential trend reversals, allowing traders to enter or exit positions at opportune moments. Some key reversal patterns include:

  • Doji: Indicates indecision and potential reversal
  • Hammer and Hanging Man: Bullish and bearish reversal signals respectively
  • Engulfing patterns: Strong reversal signals in both directions
  • Morning Star and Evening Star: Powerful three-day reversal patterns

These patterns are most effective when they appear in overbought or oversold conditions, as indicated by technical indicators like stochastics. By mastering these signals, traders can identify high-probability trading opportunities and act before the broader market recognizes the shift in sentiment.

3. Combine candlesticks with technical analysis for higher accuracy

Candlestick signals are the primary source for decision making.

Synergistic approach. While candlestick patterns are powerful on their own, combining them with Western technical analysis tools can significantly enhance their effectiveness. This multi-faceted approach provides a more comprehensive view of market conditions and potential price movements.

Key technical analysis tools to use with candlesticks:

  • Trend lines and chart patterns
  • Support and resistance levels
  • Moving averages
  • Momentum indicators (e.g., stochastics, RSI)
  • Volume analysis

By confirming candlestick signals with these additional tools, traders can increase their confidence in potential trades and filter out false signals, leading to more profitable decision-making.

4. Use moving averages and support/resistance levels with candlesticks

Moving averages act like magnets for the price.

Dynamic support and resistance. Moving averages and traditional support/resistance levels provide additional context for candlestick signals. These tools help identify key price levels where reversals are more likely to occur.

Integrating moving averages and support/resistance:

  • Use multiple timeframe analysis for a broader perspective
  • Look for candlestick signals at key support/resistance levels
  • Identify potential reversals when price approaches moving averages
  • Recognize when previous support becomes resistance (and vice versa)

By combining these concepts with candlestick analysis, traders can pinpoint high-probability entry and exit points, as well as set more accurate price targets for their trades.

5. Implement proper risk management and stop-loss strategies

Just as there is a reason for buying a stock, there should be reason for taking a loss.

Protect your capital. Effective risk management is crucial for long-term trading success. While candlestick signals can be highly accurate, they are not infallible. Implementing proper stop-loss strategies helps protect capital when trades don't go as planned.

Key risk management principles:

  • Set stop-losses based on candlestick formations, not arbitrary percentages
  • Use the concept of "signal invalidation" to determine stop-loss levels
  • Calculate and maintain favorable risk-reward ratios for each trade
  • Practice proper position sizing and portfolio diversification

By adhering to these principles, traders can minimize losses on unsuccessful trades while maximizing profits on winning positions, leading to consistent growth over time.

6. Avoid common trading pitfalls and maintain emotional discipline

Do not turn your losing trades into a long term investment.

Emotional control is key. Successful trading requires not only technical knowledge but also strong emotional discipline. Many traders fall victim to common psychological pitfalls that can derail their performance.

Common pitfalls to avoid:

  • Hesitation in entering trades (being "trigger-shy")
  • Holding onto losing positions too long
  • Overtrading or revenge trading after losses
  • Becoming fixated on buying exact bottoms or selling exact tops
  • Falling into "analysis paralysis" by using too many indicators

Maintaining emotional discipline involves sticking to your trading plan, accepting losses as part of the process, and continually learning from both successes and failures. By developing a disciplined mindset, traders can make more rational decisions and avoid costly emotional mistakes.

7. Apply candlestick analysis for both short-term trading and long-term investing

Candlesticks work very well for investing purposes, too.

Versatile analysis tool. While candlestick analysis is often associated with short-term trading, it can also be valuable for longer-term investors. By applying candlestick concepts to weekly or monthly charts, investors can identify potential entry and exit points for their investments.

Applying candlesticks to long-term investing:

  • Use weekly and monthly charts to identify major trend reversals
  • Look for powerful candlestick patterns at key support and resistance levels
  • Combine candlestick analysis with fundamental analysis for a holistic approach
  • Use candlesticks to time entries into long-term positions more effectively

By incorporating candlestick analysis into their investment strategy, long-term investors can potentially enhance their returns and better manage risk in their portfolios. This versatility makes candlestick analysis a valuable skill for market participants with various time horizons and investment goals.

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