The Daily Reckoning UK

Market Direction Change Imminent!

Frank Hemsley

by

Posted 17th February 2017

In today’s Profit Watch:

• Clues that can point to a trend change
• How to read what the candles are saying
• PLUS: Three crucial candlestick patterns

Trading is all about trying to put the odds in your favour. Do that and you stand a far better chance of being profitable over time.

Your trades are most profitable when you can pinpoint when a market will most likely experience a reversal of fortune.

So it pays to know the early signs of a change in trend. And candlestick charts are some of the best market visuals you can use to get advance notice that a trend change is on the way.

I’ve used candlestick analysis to help spot some of my best trades. And if you take a few minutes to learn how to read candle charts, I can all but promise you’ll see bigger gains and instantly improve your trading profits.

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 candlesticks, 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. And that means the chance of 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 in…

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

Depending on your charting programme, bullish and bearish candles might be different colours – so keep that in mind before venturing off on your own.

Typically, candles with green or white real bodies (that’s the rectangular main part) 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.

So let’s start putting all your newfound basic candle knowledge together. It’s time you learned some unique candlesticks that can help pave the way to fast, double-digit gains.

The first two I’ll show you – the ‘hammer’ and the ‘hanging man’ are types of ‘pin bar’ – the reversal formation we looked at on Monday.

1.Hammer

A hammer is an important (and popular) reversal candlestick formation. A hammer is formed when a market takes a huge dive at the open, then recovers and moves higher towards the close. What results is a hammer-like shape with a long lower shadow (the shadow is the pointy bit, also sometimes called the ‘wick’) on the candle. And guess what? That’s bullish…

A hammer means one thing: all the sellers have been flushed out and buyers push the market 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 bottom-fish for a trade on the long side. This is what it looks like when a hammer helps trigger a big run:

Beautiful, isn’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 market in question might be running out of steam.

Yes, a hanging man candle closes well off its lows. But the intraday sell-off 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 market’s overall trend is vital to deciphering a candle’s meaning.
Let’s look at the next set-up…

3.Engulfing candles

Sounds awful, right? But it’s another key reversal clue. An engulfing candle can give you a 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.

Think about what this means. If a market in a downtrend opens at or 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 – and a chance for you to book fast double-digit gains.

Of course, the same is true for a bearish engulfing candle. If a market 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 into candles has given you a glimpse into the struggle between buyers and sellers and how you can take advantage of sharp reversals 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 Japanese 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.

Use this scanner to find high-probability reversal set-ups

By the way, that “turnaround indicator” of Guy Cohen’s I told you about on Saturday is designed to find high-probability reversal set-ups.

So if you’d prefer not to go picking through chart after chart looking for hanging men or hammers to alert you to reversals, then this scanner of Guy’s may be more up your street.

His software scans the US stock market for a different kind of reversal pattern and then alerts you to the ones worth a closer look.

Guy’s put a lot of thought into this system – and he had a bunch of requirements he set out to meet in order to satisfy a disgruntled customer of his. Here’s the system spec he was aiming for:

• Under ten minutes a day to run.
• £2,000 – £3,000 a month profit, tax free.
• No studying charts and figures!
• Bog standard PC – nothing fancy. One screen!
• No expensive software or ‘hidden extras’.
• Can be done by anyone who can drive a PC and visit a web site.

Well Guy reckons he’s ticked off all those boxes and one more that you can read about here.

See what you think of Guy’s system. And if you like the sound of it, use his trial offer to put it to the test and see if it’s right for you.

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