The one basic factor built into Japanese candlesticks signals is they are formed by the cumulative knowledge of all the investor input, the buying and selling of a trading entity, during a certain time period. No matter what you hear elsewhere, the candlestick signals tell you exactly what investor sentiment is doing. The Kicker Signal illustrates a very dramatic change in investor sentiment.
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Big dramatic moves in whatever you are trading! What do you do? Many investors act like a deer caught in the headlights. They do nothing, as most advisors suggest. However, Candlestick analysis tells you instantly what to do. An announcement can completely reverse a trend direction. For example, if a trend has been in progress, whether strong or mild, and a surprise announcement occurs, how that formation rolls-out will tell the investor what to do.
Recognizing the formation of a potential Kicker Signal requires observing the previous day’s candle formation, with the open price, then the closing price continuing in the direction of the existing trend. A bullish kicker is formed after an announcement or some event, a down-trending price alters its direction, opening at the same level or higher than the previous day, a gap open, and proceeding to close in the complete opposite direction of the previous day.
The bearish Kicker is formed when the open is at or below the previous day’s bullish candle formation open price and immediately proceeds to go lower. These formations are known as Kicker signals, a very high-powered candlestick signal. This signal should never be ignored. It can create huge easy profits.
Do you chase a stock that is already up 12% on the day? Or, the Federal Reserve Board announces a surprise rate hike causing bond prices to gap down from one minute to the next and move in the opposite direction of the previous trend? What do you do when one of your stock positions announces an earnings warning? What do you do when one of your stock positions announces an S.E.C. investigation and, after a pleasant up-trend, it crashes and goes the other direction?
These situations baffle most investors. However, having the knowledge of Candlestick formations provides huge advantages. The formation created by this price action forms a kicker signal. The kicker signal has powerful implications.
Candlestick analysis allows investors to project trend reversals with a relatively high degree of accuracy. One misconception about candlesticks signals is there are too many to learn.
Of the 50 or 60 candlestick signals, there are only about 12 signals that will occur a vast majority of the time: The Doji, the Bullish and Bearish Engulfing signal, the Hanging Man, Shooting Star, Hammer, Inverted Hammer, the Bullish and Bearish Harami, the Dark Cloud, the Piercing Pattern, and the Kicker Signal.
Knowing these signals alone will dramatically improve your analysis of trend reversals and make learning Candlestick analysis much easier. Having this analysis capability in your mental arsenal allows the candlestick investor to have their portfolio or trades positioned in the correct direction when a move occurs.
Understanding the psychology of how candlestick signals are formed provides investors with better foresight in where to place positions.
Candlestick signals are fractal. They can occur on a daily, weekly, or monthly chart just as well as they can occur on a one-minute, five-minute, or fifteen-minute chart. The Japanese rice traders identified approximately 60 reversal and continuation signals through their centuries of developing candlestick signals. Of these, about 12 major signals will provide more trades than most investors will ever need.
We put the Kicker signal in the category of a “major” signal because of the results created from the aftermath of the Kicker.
The Kicker Signal is the most powerful signal of all. It works equally well in both directions. Its relevance is magnified when occurring in the overbought or oversold area, but is effective no matter where it appears in a price trend. Consider the investment sentiment that formed this pattern. It is formed by two candles. The first candle opens and moves in the direction of the current trend. Investors are continuing with the established trend, closing the price further in the existing direction. Then, some occurrence violently changes the direction of the price.
Usually a surprise news item is the cause of this type of move. The signal illustrates such a dramatic change from the current price direction that the new direction will persist with strength for a good while. The second candle opens at the same open as the previous day, or gaps open, and heads in the opposite direction of the previous day’s candle. The bodies of the candles are opposite colors. This formation is indicative of a dramatic change in investor sentiment.
The candlesticks visually depict the magnitude of the change. (There is one caveat to this signal. If in the next time frame prices gap back the other way, liquidate the trade immediately. This does not happen very often, but when it does, get out immediately.)
Candlestick analysis is the process of utilizing high probability recognized reversal signals. This process can also be enhanced by applying Western technical analysis for increasing the probabilities of being in a correct trade. Logic dictates that if a candlestick signal appears at a strong support level or resistance level, the evidence that a reversal is in the process becomes that much more compelling. Understanding how a candlestick signal is formed provides huge advantages. It allows the candlestick investor to exploit high profit trade potentials in early stages of a trend. When a news announcement or an event is going to affect the price movement of a trading entity in the following time frame, the candlestick investor can make an immediate decision. Having the knowledge of how a kicker signal is formed allows an investor to enter a trade upon seeing a gap up in price, on an open that is above the previous time periods chart formation.
As illustrated in the NASDAQ chart, the bullish sentiment stopped the downtrend initially with the appearance of a Kicker signal. Having the knowledge of what is represented in individual candlestick signals allows an investor to project the next trend with much greater accuracy.
When a news announcement or an event produces a strong open (or a dramatically weak open, depending on the direction of the current trend) provides an excellent trading opportunity for both the long-term investor and the day trader. This is not rocket science. This is the observations of hundreds of years of successful utilization of candlestick signals. The statistical analysis provided in a graphic formation. Use this to your advantage. Candlestick signals are the graphic depiction of a change of investor sentiment. Investor sentiment, when it comes to emotions in their investment decisions, will remain the same as has been witnessed through the centuries. The Japanese Rice traders provided the documentation for observing successful reversals in trends.
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Stephen W. Bigalow is author of “Profitable Candlestick Investing, Pinpointing Market Turns to Maximize Profits” and principal of the www.candlestickforum.com .