Imagine using an X-Ray machine on the stock market.

Like a medical doctor, imagine peering inside price action to tell what will happen next.

What I’m talking about is not some kind of new analysis technique, tool or computer software.  Not at all. Instead, I’m talking about something traders have relied on for the past 175 years.

Today, everyone is looking for advanced software and the latest strategies to make better investing decisions.

The truth is, sometimes, it’s way more effective to look to the past. One ancient trading tool, in particular, is the go-to option for savvy traders.  For nearly two centuries, traders relied on it to diagnose the inner workings of financial price.

This X-Ray tool dates all the way back to 1850.  A Japanese rice trader named Homma (from the town of Sakata) stumbled upon it. He is credited with taking the idea and turning it into an actionable trading tool.

Trader and author, Steve Nisson, popularized this powerful analysis tool in the West.

If you haven’t guessed already, I’m referring to Japanese candlestick charts… or…  candlesticks for short.

Candlesticks allow any trader to analyze and accurately predict price action.   Compared to standard bar charts, candlesticks act like an X-Ray into price. Traders (who understand how to read candlesticks) tend to know which way a price is heading. Often they know is information before the market at large.

Let’s look at the benefits of using candlesticks.

technical-analysis-candlestick-SC

 The Benefits of Candlestick Analysis

 Simplicity

When compared with the traditional bar charts, candlestick charts are easy to see and interpret quickly.  Although the candlestick chart uses the same data as a regular bar chart, the way it is displayed provides traders with much more information at a glance.   In addition, many traders find candlesticks much easier on the eyes than the standard bar charts.

Candlesticks provide active traders flexibility.  They work in any time frame from minute intraday trading charts to monthly long term analysis charts.  Scalpers, day traders, and long term investors gain insight into the market price by using candlestick charts.  Remember, the same analysis techniques apply regardless of time frame.  Financial markets are fractal.  This means that the same candlestick patterns are inherent in every time frame.Flexibility

 Look Inside Price

Candlesticks provide the trader with deep market insights into price movements.  Regular bar charts merely show the open, high, low and close for the bar’s time period.  Candlesticks show the strength of the move during each candle’s time period. They also reveal the entire trend of multiple candlesticks. Plus, they display “building patterns”… which… often have an uncanny forecasting ability.

 Market Agnostic

This means candlesticks apply to any financial market. Once you learn candlestick analysis, you can use it in any financial market around the world.  This includes forex, commodities, futures, or even bonds.  Learning how to read candlesticks opens up tremendous global financial opportunity for the trader.

 Speed

Candlesticks allow for quicker analysis. Trend changes and other price moves become evident faster than in traditional bar charts.  In today’s market, particularly for day traders, speed is everything.  Determining a trend change and placing a trade ahead of others can be the difference between a winning or losing trade for many scalpers and day traders.

Candlestick analysis simply makes solid sense for anyone using technical analysis as a means to make trade decisions.  It also can play a crucial role in long term market analysis when used in conjunction with fundamental analysis.

 Here’s How The Candlestick X-Ray Works

Candlesticks provide an easy to understand picture of price action.  At a glance, you can compare and contrast the relationship between the open and close, in addition to, the high and the low.   Candlesticks also have upper and lower shadows that reveal the extreme price tics during the candlestick’s time frame.

Patterns formed by several candlesticks also provide powerfully accurate trading signals.  We will delve into several of these patterns in a later article.

candlestick manny

The simplest way to use candlesticks is to determine buying or selling pressure during a particular candlestick formation.

A long white candlestick is signaling strong buying pressure during that time period.  While a long black candlestick is a sign of strong selling pressure.

Remember, long or short candlesticks are not exactly defined.  They are relative to the surrounding candlesticks of the same time frame.

Long white candlesticks appearing after downtrends can be a signal that the trend has reversed and it’s time to enter long positions.

A long black candlestick appearing after an extended uptrend often signals that the upward trend has exhausted itself and its time to short the stock.

Short white candlesticks indicate bullish consolidation. Short black candlesticks generally signal bearish consolidation pressure on the shares.

This diagram illustrates the difference between candlesticks and bars on the price chart.

bar vs candle

 

 A Trading Secret

This may seem counter intuitive… but… most trading truths are counter intuitive. My research indicates the following: An uptrend made up of small white candlesticks is much more likely to continue higher than an uptrend of long white candlesticks or long mixed candlesticks.

 Marubozu Candlesticks

These candlesticks do not have upper or lower shadow lines.  A white Marubozu is a clear signal buyers are in control of the market during the time frame represented by the candlestick.

A black Marubozu candlestick is a clear signal sellers are in control of the price action during the time frame.

marubozo

My favorite candlestick is called a doji.  A doji consists of a very small white or black body and a shadow from the top and bottom.  It can also be just two lines making a cross like pattern.

doji1

Doji’s signal indecision in the stock price. This often means a change of trend.  If a doji candlestick is observed during an uptrend or downtrend, traders can wisely consider fading or taking the opposite direction of the trend.

Future articles will delve into candlestick patterns and how to use this tool to enter and exit trades.

Recently, analysts at Wealthpire, Inc. noticed a curious rise in demand for biometrics when analyzing this industry using candlesticks. Upon further research, it’s becoming obvious a $23.5 billion mega trend in this industry is on the horizon.

http://tradingtips.com/daily/technical-analysis/19th-century-x-ray-tool-predicts-market-direction/


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