STOCKCHARTS USERS BLOG

"Candlestick Pattern Analysis" by Martha Stokes CMT

Candlestick Patterns Analysis

Market Participant Groups Candle Footprints

There are “time progression” chart examples of one stock in this article, to help readers focus on the candle patterns and Market Participants creating those patterns in the charts. Therefore a portion of the chart has been covered in charts 1 & 2 creating a white space on the right side.

Candlesticks are a language unto themselves. It takes a bit of practice reading the candlestick patterns to be able to understand who is buying, where they are buying, and when they stop buying.

When studying just candlesticks you must also include Volume. This is because there are 3 pieces of data that come from every stock transaction which are the Price, the Time, and the Quantity of shares that exchanged hands. All 3 pieces of data are required if you are going to do a proper and complete analysis. All too often, Retail Traders think Volume is unecessary or unimportant. This comes from 40-50 years ago when Volume was not as easy to come by, as the market was all manual in those days. With the consolidated ticker tape, every trade is recorded precisely with Price, Time, and Quantity stored for future reference. This makes Stockcharts.com totally reliable for analyzing stocks as the data is pure, cleaned, and verified which is one reason why I recommend stockcharts to my Students as an excellent charting software.

We are going to look at Candlestick Pattern Analysis differently than you have before, unless you are one of my TechniTrader Students.

When reading the broad aspect of the price using candlesticks I prefer to start from the left and move to the right of the chart. This analysis is not “finding a stock to trade,” that is the super easy part of trading. This is about understanding the relationship between the Candlesticks and Volume so that a clear picture of what is going on appears, rather than just a jumble of white and black lines.

The chart example below has a huge gap down, then a candle with a long wick and a small white body. Volume has spiked to the top of the Volume Bar chart indicator window on unusually high red, or down day Volume.

This is a High Frequency Trading Firm HFT footprint and should be obvious on any chart. This was preceded by a runaway trendline pattern which was speculative. Usually this type of gap is either news or an earnings gap, however HFTs can also trigger in the wrong direction.

The next day is a extraordinarily long black candle that gaps slight at open, falls for the remainder of the day, then moves up slightly in the last couple of minutes of trading. The next several days are small black candles with 2 small white candles. However price is not running down instead it is shifting sideways, which is a big signal that even though price appears to be moving down it actually is being supported by buyers with sufficient capital resources and powerfully controlled orders that hold the stock at this level. If these large lot buyers were not countering the selling, the price would be collapsing.

The stock moves down slightly further then next day, then recovers with a candlestick that has a tail that is as long as the body, see candlestick indicated by red arrow. The next few resting days convert to a run up with small candles. Again we see control of the entry Price and Volume just above average. Those larger lot buyers took control of price and the sellers evaporated, causing the buying to be revealed as more Professional buyers moved in.

However the stock stalls at a around $39 and slip-slides down. This is partly profit taking and partly a void of large lot buyers. As the large lot buyers halted their automated orders at a specific high price, and with Professional Traders taking short-term profits, the stock inches down but does not run down.

The stock now moves down to the prior low, forms another small body candle with a long tail that is white this time, then runs back up close to the prior high. Now you should see that there is a PATTERN here. The larger lots are controlling their entry price and the high range they will pay for the stock. This is important for Swing, Day, and even Position Traders to recognize.

Profit taking starts again, large lot buyers halt their buying and the stock gaps down going a bit lower this time. However, this dip beyond the prior low buy in price triggers more large lot buyers with a gap and run that again halt near a previous high where buyers stopped buying.

IF this was Professional Technical Traders, the runs would be more technical. This is automated orders triggering on price and halting at price levels.

There have now been 3 hits on the high of the Buy Zone™ range. Often that is all that is needed to expose the liquidity draw of large lot accumulation.

Professional Traders drive price up on rising Volume, then quickly take profits ahead of a resistance level. This is a technical candlestick pattern without a Buy Zone restriction.

Since Professionals use carefully constructed exit orders, the stock barely dips. 

The stock runs up on retail crowd  and Smaller Funds buying action, smack into resistance and ends with a reversal tailed candle as Professionals that held, sell into the retail crowd buying frenzy.

To see the TechniTrader customized tools, indicators, scans, and webinars available for StockCharts users go to the TechniTrader.com partner page HERE. Sign Up for full access.

Followers of this blog may request a specific article topic by emailing: info@technitrader.com

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com

www.TechniTrader.com

Chartered Market Technician

Instructor & Developer of TechniTrader Stock and Option Courses

©2016 Decisions Unlimited, Inc. dba TechniTrader.  All rights reserved. 

TechniTrader is also a registered trademark of Decisions Unlimited, Inc.

Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.

Posted on September 29, 2016 by Registered CommenterMartha Stokes CMT | Comments Off

"Spatial Pattern Recognition Skills Are An Essential Trading Skill Set ANSWERS" by Martha Stokes CMT

Spatial Pattern Recognition Skills Are An Essential Trading Skill Set ANSWERS

Calculating Costs to Determine True Profit is Important

Spatial Pattern Recognition Skills™ are an area where Retail Traders fall far behind their counter-parts, which are the Professional Traders.

To succeed at trading and by that I mean making serious income you must have both the Candlesticks which represent analysis of PRICE and the indicators which represent analysis of Volume, Accumulation/Distribution, Relational Analysis, Comparative Analysis and more. The combination of candlesticks and proper indicators is crucial, and is what all the Professionals use.

The question posed last week was which of the three charts had an excellent Engulfing White, for a strong entry and run for Day or Swing Trading. Only one of the 3 Engulfing White patterns in the QUESTIONS article had a good run.

Spatial Pattern Recognition Skills Are An Essential Trading Skill Set ANSWERS are below.

The Chart 1 example was First Solar Inc. (FSLR: NASDAQ ) with a pattern that appeared to be starting a bottom. Here is what happened:

FSLR continued down instead of moving up. Do you know why? It should be obvious on the chart if you have excellent SPRS abilities. Look at the chart again. Study it now that you have the action AFTER the Engulfing White. What is wrong? If you chose this one, what did you miss? 

The Chart 2 example was OceanFirst Financial Corp. (OCFC: NASDAQ ). It moved up, however it did not move with momentum. 

If you had been in this stock, most Day or Swing Traders would have gotten discouraged OR would have exited for a small loss even though netting a slight gain because of the all of the cost factors, not just the transaction fees. The gain of 20 to 40 cents does not cover all of your trading expenses. That is why at the end of the year, traders have minimal to no profit from trading, so calculating costs to determine true profit is important. Study the chart again. What did you miss?

The Chart 3 example was Simpson Manufacturing Company, Inc. (SSD: NYSE) and it had the kind of run you WANT to trade, which is a solid run up with excellent point gains. 

What is different about SSD from FSLR or OCFC candlestick patterns? Look at the charts again and see if you can identify WHY SSD was the only chart that actually was a strong entry and a great Day or Swing Trade. If you did not pick this one, what did you miss? Why did you not select this one?

This lesson is a BASIC skill. You need to be able to quickly look at a small group of charts and candlesticks, select the best one, and then confirm with proper indicators for a complete analysis.

How did you do? Did you get the correct answer? If you have been trading for more than 5 years, it should have been an easy task to choose the right chart.

What I find with most Retail Traders who have been trading for decades and are still trying to find a magic indicator or holy grail that will make them successful, is they simply lack basic skills of Technical Analysis.

Keep in mind that learning Technical Analysis, Candlestick Patterns, or Indicator Patterns is NOT learning to trade. You have to combine all of these into a Trading Process that works.

Summary

Spatial Pattern Recognition Skills are a basic skill that is crucial to success in the Stock Market. Now I expect some of you will be grumbling that it could be too hard to learn, does not matter, or why not just use the indicators?  Well you would not be reading these articles if you were making 6 digits a year, now would you? 

For me, teaching in my retirement when I could be doing many other things is about helping Retail Traders see what they need to focus on, to help them become successful. So go over the charts again. YOU matter to the stock market, and your success matters to the stability of the market and that is why I teach.

I invite you to watch a Video or download an eBook about beginning trading on my website at TechniTrader.com CLICK HERE. Sign Up for full access to the website.

For information on the TechniTrader standard course on how to successfully trade and invest in the stock market CLICK HERE. Sign Up for full access to the website.

To see the TechniTrader customized tools, indicators, scans, and webinars available for StockCharts users go to the TechniTrader.com partner page CLICK HERE. Sign Up for full access to the website.

Followers of this blog may request a specific article topic by emailing: info@technitrader.com

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com

www.TechniTrader.com

Chartered Market Technician

Instructor & Developer of TechniTrader Stock and Option Courses

©2016 Decisions Unlimited, Inc. dba TechniTrader.  All rights reserved. 

TechniTrader is also a registered trademark of Decisions Unlimited, Inc.

Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.

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