This One Move Fixes All Your Trading Woes

If you make just one simple change to your stock charts, you will instantly improve your trading profits.

How can you pull off such a miraculous feat?

You’re about to find out…

What I’m about to show you doesn’t require any special skills. Heck, you don’t even need to do any math to make this quick change. Your computer will perform all the heavy lifting for you.

All you need is a candle.

No, I’m not saying you need to light a candle and pray (although let’s face it, you could probably use it). I’m saying you need to learn how to read candlestick charts if you want book consistent, double-digit trading gains.

I know many investors who aren’t familiar with candlestick charts are intimated by the bedlam of lines on the page. But once you understand the basics of candles, you’ll be able to instantly absorb all the relevant information on any candlestick chart. More importantly, you’ll be able to use that information to perfect your buys and sells. That means siphoning more money out of the markets.

Why use candles instead of a simple line chart? It all comes down to information. On a daily line chart, the closing price is plotted. That’s it. It’s not a problem if you’re only interested in the overall trend. But if you’re planning a trade, you want as much information as possible. That’s where candlesticks come into play.

Candlestick charts not only show you the closing price of a given stock—but also its opening price, its high of the day, and its low of the day.

Take a look at this example:

Candlestick

Depending what website you use, the charting program might display bullish and bearish candles in different colors—so keep that in mind before venturing off on your own. Typically, candles with green or white bodies are for bullish days, while red candles signify bearish days.

Now, as you can see, these candles convey a lot of information—even with just a quick glance. There are two parts of the candle you need to be able to identify to properly understand how valuable these charts are. They are the shadows and the real body.

Candlestick body

Why are these important?

For starters, the shadows show you the daily range, which gives you a lot more context than just the open and the close. For instance, a candle with a long upper shadow indicates that the stock rose to higher levels during the trading day—but gave back much of its advance before the close.

In contrast, a bullish candle showing no upper shadow and a long real body tells you that the move higher is extremely strong, with the stock closing at its highs without a significant retreat.

Then there are candles with no real body at all. These occur when a stock opens and closes at the exact same price. They’re called dojis – and they signify indecision from buyers and sellers. Dojis can even have very long upper and lower shadows, denoting even more indecision as the stock bounces around intraday, only to settle right back at square one…

DIJA

As you’ve probably already guessed, candles can tell you a lot more about a stock’s short-term prospects than a line chart that only reveals the daily closing price.

Let’s put your newfound candle knowledge to work. Groups of one to several candles can form bullish and bearish patterns that, when used alone or along with trendlines, can offer great entries for profitable trades.

Once you learn these unique candlesticks, the patterns will quickly help pave the way to fast, double-digit gains:

1. Hammer

A hammer is an important (and popular) reversal candlestick formation. A hammer is formed when a stock takes a huge dive at the open, then recovers and plows higher towards the close. What results is a hammer-like shape with a long lower shadow on the candle. That’s bullish.

Hammer

A hammer means one thing: all the sellers have been flushed out and buyers push the stock higher into the close. And when a hammer occurs at an important support area after a big swoon, you should pay close attention. Looking for hammers is a great way to plan your entry for a trade on the long side. This is what it looks like when a hammer helps trigger an upside reversal:

Hammer2

Beautiful, ain’t it?

But what if a hammer shows itself during a strong uptrend? In this case, you’re looking at an entirely different outcome—and another name for this important reversal candle, as you’re about to find out…

2. Hanging man

Hanging man candles might look like hammers – but these actually have bearish implications.

When you see a hanging man in an uptrend, it’s an indication that the stock in question might be running out of steam.

Hanging Man

Yes, a hanging man candle closes well off its lows. But the intraday selloff is a hint that buyers are becoming exhausted.

As you’ve probably already guessed after learning about hanging man and hammer candles, you can’t view these signals in a vacuum. A stock’s overall trend is vital to deciphering a candle’s meaning.

3. Engulfing candles

Engulfing candles are another key reversal clue. An engulfing candle can give you strong indication as to when bulls or bears are gaining control to change a trend’s direction…

As the name suggests, an engulfing candle’s real body completely engulfs the real body of the previous day’s candle.

Hanging Man

Think about what this means in terms of buyers and sellers. If a stock in a downtrend opens below the previous day’s close, then powers higher all day to close above the previous day’s open, it’s clear that buyers are quickly gaining an upper hand over the sellers. This action can lead to a rapid change in trend.

Of course, the same is true for a bearish engulfing candle. If a stock in a strong uptrend experiences a day where it opens higher, then closes below the previous day’s open price, it’s probably a good idea to take profits…

So there you have it—three crucial candle patterns. Hopefully, this quick look at candles has given you a glimpse into the struggle between buyers and sellers and how you can take advantage of their tendencies in your trading.

We’re just scratching the surface of countless candle formations used by traders around the world. If you’re interested in diving deeper into the candlestick game, I highly recommend Japanese Candlestick Charting Techniques by Steve Nison.

Nison is the man responsible for bringing candlestick charts to the West—and his book is considered by most pros to be the bible of candlestick charting.

If you want to improve your trading, it’s well worth your time.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning