Advanced Techniques in Candlestick Patterns
Candlestick patterns have been used for hundreds of years to predict and plan things from rice demand in Japan to financial securities in the Western world. Due to its longevity in the world of business and finance, candlestick patterns are often one of the first things that traders learn to utilize.
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However, a basic knowledge of these formations may not be enough for many traders to use them to bring about successful results. Using only basic analytical tools will cause the trader to lose the advantage of using the tools in the first place. Instead of relying on the same techniques time and time again, a set of advanced methods should be used to cause the desired results.
Island Reversals
When looking for strong short term reversals, the island reversal is the best indicator of a strong change in trend. The trader must look for a gap between a reversal candlestick and two candlesticks on either side. Traders must remember to look for a few certain indicators in order to confirm that an island reversal did actually occur. Being able to identify entry and exit points will cause the difference between being able to correctly predict what will happen next.
Entry
Being able to correctly identify an entry point is the first thing to do for traders. An entry point is really a battle between bulls and bears, with both sides pushing each way. Typically, the doji, which looks like a cross, will appear clearly above the trending bullish market, or clearly below the bearish one. This forms the characteristic island look. When a trader sees this sort of pattern using candlestick analysis, he/she knows that it is a clear indication that a reversal will be occurring soon. Due to the speed of some markets, traders may have to identify an entry that occurred within the course of only five minutes, thus identifying this part of the island reversal is necessary.
Exit
Thankfully, the trader was able to identify the entry point for the island reversal. Now they can sit back and relax, right? Wrong, the trader must continually monitor the situation to predict the time of the trend exit. When a sharp reversal is noted in the trend of the security, it is time to exit the stock.
The San Ku Pattern
Otherwise known as the Three Gaps Pattern, this is not something to follow that actually indicates a trend reversal. Rather, it shows the trader that a reversal will occur in the near future. This reversal can occur with day traded penny stocks or massive corporate stocks. The pattern occurs in each scenario, so it should be noted well. Again, the entry and exit points are very important, but they are slightly different from other entry and exit points.
Entry
The entry is based on the theory that after sharp increases in the price of a security, traders will start to rapidly sell the security off in order to book profits on the transaction. This creates opportunity for other traders to initiate deals of their own. The entry is relative to the presence of increases that are statistically above average. This can be noted by using common tests for the average, such as the MAD, which is the mean absolute deviation equation. Using this will produce a number of standard deviations in which the value of the security should not go above or below. Once the stock enters an abnormal zone like this, it should be earmarked for being an entry.
Exit
Once again, the exit will be noted by three gaps occurring. When the gaps finish, and no breakout occurs, the security should be exited. Traders should be wary of such breakouts so that their positions are not compromised.
Summary
These advanced candlestick pattern techniques will put the trader at an advantage over the competition trading for the same profits.
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