Candlestick Reversal Patterns

Anyone who studies the stock market has undoubtedly heard of candlestick charting. Their history goes back almost four centuries as a method of technical analysis used by Japanese rice traders. It wasn't until the early 1990's that candlestick charting made its way to the western world. As popular as the technique has become in the west, it's hard to imagine a time when there was little information able to be found on the subject.

All a person needs to do is type the term "candlestick charting" into their favorite search engine and they are presented with all types of information on the topic. There are numerous websites, articles, books, software, courses, and videos. There are even candlestick games and flashcards!

The subject has been highly commercialized due to the desire of new traders wanting as much information about the subject as possible.One of the drawbacks of the excess information available on the topic of candlestick charting is that there is as much bad or incomplete information as there is good. Unfortunately, the trader new to candlesticks takes this partial or downright bad information into the trading arena and experiences financial loss at the hands of the stock market. Why? Well, just like any other type of stock analysis, "it's never quite as simple as it sounds".

Candlestick charting is often touted as a "holy grail" in the world of trading stocks, but nothing could be further from the truth. While it's true that using candlesticks can give the trader a method determining whether or not a trend may be getting ready to reverse, it's also important to remember that stocks rarely just turn on a dime and reverse course. If you look at a healthy trend on a stock chart, you'll notice the price movement from one end of the trend to the other takes kind of a zigzag course while the overall price movement moves toward the direction of the trend. If you are looking at a candlestick chart, you'll also notice there will be a multitude of reversal signals that mean nothing more than a slight pullback in price as investors take profits, NOT a trend reversal.

So are candlestick reversal signals a viable method of technical analysis? You bet they are! In order to use candlestick reversal signals successfully you need to understand technical analysis in general.

There are points of price resistance and support that will show up on the chart and most technical analysts learn them early in their studies. Just like any other method of "predicting" a change in trend, candlestick reversal patterns need to be applied to these areas of support and resistance as well. Once the trader understands the proper application of candlestick reversal patterns they can also see the results in their portfolio.