Candlestick Patterns – Are All Signals Valid?

 

I lately had been questioned by a trader that he could not properly use candlestick reversal patterns to forecast a change in market psychology. He was searching in the stock placed a quick trade after seeing a Bearish Engulfing Pattern that completed itself about the eleventh. The price of the security promptly rallied almost ten percent a couple of days right after the trade, stopping him out with a loss. Immediately after a look in the chart, the difficulty was obvious; he hadn’t learned to filter out invalid reversal signals.

You have to know that invalid reversal signals are typical with candlestick charts as well as the trader who wishes to be profitable merely has to learn how to filter out the invalid signals. Can it be performed? Absolutely, and it’s not that difficult! You see, the stock in question had just made a strong move via technical resistance two days prior to the Bearish Engulfing pattern completed itself. It’s essential to don’t forget that once technical resistance has been broken and successfully retested, it then becomes service. The stock did truly pullback slightly for a few days immediately after forming the Bearish Engulfing Pattern but stayed above the broken resistance line.

This brings us to the question: so what was the correct signal? What the trader failed to at least notice was the Bullish Kicker that presented itself directly at the point with the new found support (former broken resistance). With that signal, the stock has rallied nicely ever since. The Bearish Engulfing pattern was just the initial day of a successful retest of technical support. The stock was simply forming a slight consolidation that proved to be a continuation pattern, not a reversal.

An effortless candlestick trading rule to recall is to trade short or close long positions at a bearish reversal signal that presents itself at technical resistance. Go long or close short positions on a bullish reversal signal that presents itself at technical assistance. Candlestick trading is, in my opinion, the easiest and most profitable method to trade stocks when performed properly. The dilemma is there is a lot of details readily available about the subject that does not tell the complete story and traders become frustrated and stop using candlesticks. Study the art of candlestick trading, keep trying and soon profitable trades will practically jump off the chart at you.

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