Using Japanese Candlesticks for Technical Analysis

| June 19, 2009 | 0 Comments

I’ll come right out and say it.  The secret to getting rich trading stocks is to buy low and sell high.

Ok, it’s not much of a secret.  But market timing is a skill most investors never master.

If you’re trying to time the market based on fundamentals, you’re going about it all wrong.  To make matters worse, you’re probably losing money.  The truth is a good P/E ratio or solid earnings growth won’t tell you where a stock’s price will be in the next day, week, or even month.

No, the best short term indicator is technical analysis.

Technical analysis looks at price patterns.  You can think of price patterns as a record of investors’ interpretation of the fundamentals.  In essence, it adds a psychological element to the market.

You must take market psychology into consideration in any market timing strategy.  Because in the end, a stock’s price moves because people are buying or selling.  And the only way to gauge market psychology is by the price people are willing to pay.

One type of technical analysis I use is especially good at calling tops and bottoms.  A top or a bottom is where one trend comes to an end, and then starts going in the opposite direction.  Identifying the end of one trend, or a start to another, helps determine the perfect time to buy or sell.

That’s how you time the market!

In fact, Sector ETF Trader subscribers were able to lock in a 35% gain thanks to this strategy… more on that in a minute.

What analysis technique am I talking about… Japanese candlesticks. These charts are called candlesticks because the lines often look like, you guessed it, candlesticks.

This method of price charting was developed by Japanese rice traders in the 1700s.  But it was virtually unknown in the western world until the 1990s.  That’s quite a secret.

Why have western traders been so interested in Japanese candlesticks? Because they work.

On a personal note, I enjoy using them because I find the patterns easy to spot… once you know what you’re looking for.  I also find the terminology entertaining.  You’ll find terms like: Three Advancing White Soldiers, Gravestone Doji, and Counterattack Lines, just to name a few.

But entertaining or not, it’s all about performance.

At first, candlestick charts look a bit odd.  The white lines (also called the body) are days the ETF closed higher than the open.  The black line (or body) are days with a lower close.  The lines extending out from the bodies (shadows) mark the high and low reached during the day.

A lot of information is available at a glance.  Each line tells you the ETFs opening price, closing price, daily high, daily low, and if it closed up or down for the day.

The last four days is when our trade got interesting.  You’ll see a rare chart pattern.  It indicates a reversal of the uptrend.  This one’s a mouthful, it’s called Upside-Gap Two Crows.  (The name reminds me of an old Alfred Hitchcock movie.  Clearly it implies bad things are about to happen.)

On May 28th, GDX had a solid day closing higher.

Then on May 29th and 30th after gaping higher, the ‘two black crows’ appeared.  This is an ominous sign GDX’s bullish momentum is fading.  The only thing that could save GDX from avoiding the Upside-Gap Two Crows would be a strong rally above the previous day’s high on day four.

As you can see, it wasn’t meant to be.  The early morning rally was turned back once again.  Since it failed to reach and stay at a new high, the pattern was complete.  It was time to sell.

GDX fell off a cliff since then.  It’s given back 23% of its gain and it continues to fall.  Clearly, reading the Japanese Candlestick allows us to capture a big gain and avoid heartburn.

Our subscribers were able to capture 99% of the gain.  That’s calling a top to perfection.

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Category: Technical Analysis

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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