Powerful Implications of Gaps 2. Gaps at the Bottom 3. Measuring Gaps 4. Gaps at the Top 5. Selling Gaps 6.
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Powerful Implications of Gaps 2. Gaps at the Bottom 3. Measuring Gaps 4. Gaps at the Top 5. Selling Gaps 6. Gapping Plays 7. Dumpling Tops and Fry Pan Bottoms 8. San-Ku - Three Gaps Up 9. Breakouts The J-Hook Pattern Island Reversals Bad News Gaps Kicker Signals Summary 1. A gap or window is one of the most misunderstood technical messages.
Most investment experts advise not to buy after a gap. Candlestick signals, correlated with the appearance of gaps, provide valuable profit-making set-ups.
These are not "hidden" secret signals or newly discovered formulas that are just now being exposed to the investment world. These are a combination of widely known but little used investment techniques. Candlestick signals obviously have a statistical basis to them or they would not still be in existence after all these centuries. Gaps have very powerful implications. Combining the information of the two produces investment returns that very few investors take the time to exploit.
Consider what a window or gap represents. In a rising market, it illustrates a price opening higher than any of the previous day's trading range. For illustration in this book, the "day" will be the representative time frame. What does this mean in reality? During the non-market hours, something made owning this stock tremendously desirable.
So desirable that the order imbalance opens the price well above the prior day's body as well as the high of the previous day's trading range. Witnessing a gap or window at the beginning of a new trend produces new opportunities. Seeing the gap formed at the beginning of the trend reveals that upon a reversal of direction, the buyers have stepped in with a great amount of zeal.
A common scenario is witnessing a prolonged downtrend. A Candlestick signal appears, a Doji or Harami, Hammer, or any other signal that would indicate that the selling has stopped. What is required to verify that the downtrend has stopped is more buying the next day. This can be more solidly verified if the next day has a gap up move. Gaps occur in many different places and forms. Some are easy to see, some are harder to recognize.
This book will take you through the different situations where a gap has appeared. Each situation will be explained in detail, 1 to give you a full understanding of what is occurring during the move and 2 to provide a visual illustration to become familiar with the formation, making it easy to recognize. This allows the Candlestick investor to spot an investment situation as it is developing. Knowing that a gap represents an enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential has occurred.
Where is the best place to see rampant enthusiasm? At that point you are buying near the bottom. Obviously, seeing a potential Candlestick "buy" signal at the bottom of an extended downtrend is a great place to buy.
In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold to reduce the downside risk. What is better to see is the evidence that buyers are very anxious to get into the stock. Consider the Housing construction industry mid-September The Housing stocks indicated the best evidence of capital inflow. The initial move to the upside was evident with a large number of good signals found in those stocks after doing a scan of the charts.
Investors were really liking the residential home builders. It gapped up the same day, illustrating that buyers were coming into this stock with a vengeance. The initial gap is very important. It will indicate how strong the new move will be. Upon witnessing a gap up, an individual signal, such as the dark candle in the above chart after the gap up, has less relevance.
When a large gap occurs, it is not unusual to see immediate selling as the traders take their quick profits. The overall message is that the bulls are in strong. The next few days demonstrated that the price was not going to back off, the new trend had started. The long-term investor, after analyzing the monthly chart, could have established a position, with the knowledge that funds were flowing into this sector with much more enthusiasm than other sectors, which could have been just rising with the overall tide.
For the trader, seeing a Candlestick "buy" signal followed by a gap up, when the prices are in the oversold range, makes for an extremely attractive trade. Notice the Doji formed on the day of the gap up. Logic tells you that the bulls are buying.
Thus a Doji. The major indication is that the trend has changed. The resulting trades produced Probabilities demonstrate that a gap up is going to preclude an advance in price under these circumstances. The gap initiates a move that sends this price to a higher level to stay.
The following day gaps up significantly, consolidates for a few days and then gaps up again. The second and third gaps are considered "measuring gaps". These types of gaps will be explained later in this book.
The important aspect from this chart is the initial gap up, revealing that the buying was overwhelming the selling. Many investors are afraid to buy after a gap up. Witnessing a Candlestick "buy" signal prior to the gap up provides a basis for aggressively buying the stock.
The Homing Pigeon, a form of Harami, shows the selling has stopped. The bigger the gap up, the more powerful the new trend will be. This was evidenced by another small gap 3 days later. The next black candle also didn't close in the white candle's range.
Profit taking. The bears could not move the price back to the big white candle's trading range. The bulls took note of this and came back strong after their confidence was built back up. This moved prices to the next level. If the position was not liquidated then, it would have been logical to do so a few days later when a new high was not reached and an Evening Star formation was seen.
COH, Coach Inc. Late April, shows bottoming, a couple of Dojis appearing. If investors had been observing these signals, they would want to see bullish signals confirming the reversal. The long-term investor would have more than doubled those gains over the next few months. The Morning Star signal is an obvious visual reversal signal. A more potent signal is the Abandoned Baby signal. This is formed by the sellers gapping down a price at the bottom of a trend, trading through a day of indecision with the bulls, then the bulls taking over the next day, gapping prices back up and moving them higher.
The bigger that gap, the more powerful the next up move. The weak sellers finally give up and get out at the bottom. They are met with bargain collecting bulls. The trading that day forms a Spinning Top, a day of indecision, almost like that of a Doji. Quite often you will witness a big volume day during this three-day period.
It is most effective if it occurs on the indecision day, showing an inordinate amount of stock moving from the weak traders to the strong traders. The big volume day can still occur on any of those days. What is most important is to see this big amount of stock change hands at this bottom period. When the stock price gaps back up after the indecision day, this illustrates the sellers are now finished and the bulls have taken control.
Example after example can be given on how a gap up at the bottom gives investor a hint to see that a downtrend is ready to reverse. What can happen from this point? The price has gapped down after weeks of a lengthy decline.
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Japanese candlestick charting and analysis is one of the most profitable yet underutilized ways to trade the market. Signals created by this unique method of technical analysis-represented in the form of graphic "candlestick" formations-identify the immediate direction and effects of investor sentiment through price movements, allowing traders to profit by spotting trend reversals before other investors. This updated version of Profitable Candlestick Trading: Pinpointing Market Opportunities to Maximize Profits makes learning the method fast and easy by introducing specific patterns, as well as the psychology behind them. The book. Learn how to quickly search, view, and profit with candlestick formations with Profitable Candlestick Trading.
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About Stephen W. If someone told you they had uncovered a year old secret that had the potential to bring great wealth, would you listen? If they could explain the mysteries behind the secret so that you could profit as well, would you be interested? Then, a little over 18 years ago, I discovered Japanese Candlesticks.