Table Of Content•
High Profit
Candlestick Patterns
Turning Investor Sentiment
Into Profits
Stephen W. Bigalow
Profit Publishing
Houston. TX
VlI
Preface
As candlestick signals become more indoctrinated into the invesonent arenas.
the information conveyed in thesignals is being better understood. Candlestick
analysis is becoming a very powerful invesnnent technique. Up until recently,
it's under-use was a function of not fully understanding how candlestick sig
nals truly worked. As more investors become acquainted with the benefits that
candlestick signals provide, an additional benefit is developing. Candlestick
signals, developed over the last few cennuies, makes it the oldest investment
technique in existence. The information and implications that are revealed, by
centuries ofobservations, is now being enhanced with computer related tech·
niques. Overlaying the information derived from candlestick signals on tOp of
technical analysis that has been dramatically improved with computer gener
ated programs makes for a very powerful trading platfoml.
There have been a numberofbooks written about candlestick signals. At
the time they were written, they conveyed the best possible knowledge atrrib·
tired to candlestick signals at that time. As computer generated scanning pro·
grams and research techniques improve with the development of computer
software programming, the utilization of candlestick analysis constantly im
proves.
This bookwas writtentoeducate invesrorson how to useJapanesecandle·
stick analysis profitably. The easy-to-follow procedures detailed in this book
provide the reader with profit-making techniques that can be leamed quickly.
More importantly; learning of the principles detailed in this book will provide
the reader with invesonem techniques they can use immediately. As candle
stick signals become better understood, their applications to high profit pat
terns allows investors to exploit profits from high profit situations.
Candlestick signals produced gocxl remms in their own right. Investment
patterns, the reoccurring psychology found in all trading markets goose by
investorsentiment, also are capable ofproducing good returns. Combining the
two techniques produces an investment platfonn that dramatically improves
high profit probabilities. This is not a difficult process.
Having the ability to recognize what candlestick ~ignals are conveying
creates a tremendous investment advantage. Wimessing those signals appear
ing as potential trading patterns are fanning creates a fonnat for establishing
potentially high profit trades as well as common sense stop loss procedures.
VIII
Notonlydoes the knowledgeofwhata signallooks like benefitthe candle
stickeducated investor, but learningthe commonsense psychologythat formed
a signal provides the investor with a whole new perspective into successful
investing. Somebodyis making huge profits in the markets. Itis those that have
established successful trading methods for interpreting when to buy and when
to sell. Reading this book shouldand enhance your investmemabilities forever.
The improved perspective ofwhat dictates low risk, high profit situations cre
ates a very positive investmentsrruchlre. Utilize the infOlmation that hundreds
ofyears ofprofitable obselvations have produced. Utilizethe capabilities found
in computer related sorting techniques. The probabilities of producing signifi
cant profits will always be in your favor when visually identifying signals and
panems that have worked a high percentage of the time in the past. Learn
candJestick signals and patterns and reap the benefit of that knowledge put
into a very simple graphic fonn.
Stephen W Bigalow
Houston. Texas
IX
Acknowledgments
Writinga bookis nota stand-alone effort. Thewriting ofthis bookinvolved the
efforts of many people. The constant support of a loving family makes the
lengthy endeavor much easier. My mother, June Bigalow, has been a constant
source ofencouragement.
MybrotherAndyand mysisterDiane, alongwith theirfamilies, have been
a constant supply ofsupport through the years.
Pat Johnson, the business manager of the Candlestick Forum u..C, pro
vided invaluable services for making sure the many details for publishing a
bookwas in place. The huge time and effort that she expended will always be
greatly appreciated.
David Elliott has been a good friend and has provided many profitable
applications of technical analysis in conjunction with candlestick signals. His
spirit ofsharing profitable uses ofmodem technical applications and combin
ing them with candlestick signals has produced some very easy to use trading
setups.
KenMelberdeservesaspecialthanksforhis patienceandfriendshipd1rough
manyyearsofdevelopingcandlesticktradingprograms.Also,MarkStoreyneeds
to be acknowledged for the many hours of business consultation.
Many thanks go to myCornell University, DU fraternity buddies and fanli
lies for their constant support. They have been an inspiration in striving to
provide quality information.
Manythanksgo to BillJohnson and Tina Logan for their generous contri
bution of actual trading experience and knowledge. They both unselfishly
contributed their knowledge ofcandlestickanalysis with theirexpertise to help
make this book provide information from different insights.
A special thank you goes to Donna Love, Kermit and Karin Prather, and
Rick Saddler for the generous contribution ofediting the writing ofthis book.
Unfortunately for them, the task was probably much greater than theyantici
pated. Their time and efforts are greatly appreciated.
Ron Kaye and Connie Schmidt ofSchmidt Kaye & Companydeserve spe
cial acknowledgment for their work in a:;sembling amJ. formatting the uuuk.
Theirprofessionalliteraryservicesmadethe publicationofthis bookverysmooth.
x
Thanks to the CQG company for providing clear and easy to work with
charts. Also, thanks to Worden Brothers for providing an efficient search soft
ware program.
Many thanks go to the members of the Candlestick Forum website. The
spiritofsharing infonnarion and successes has been a greatconnibution inthe
continuing learning process of how to use candlestick signals successfully.
To keep from possibly blemishing any reputations associated with those
acknowledged as providing something toward the completion of this book, it
should be noted that any factual errors or a missions found with in this book
are solely the responsibility ofthe author.
Contents
Preface vii
Acknowledgments ix
Chapter 1: Altering Your Investment Perspectives 1
Chapter 2: The Major Signals 15
Chapter 3: Moving Averages 119
Chapter 4: High Profits Using Gaps 153
Chapter 5: Candlesticks with Technical Patterns 195
Chapter 6: High Profit Patterns 219
Chapter 7: Option Trading With Candlestick Signals ..... 263
Chapter 8: Profitable Trading Insights 299
Chapter 9: Profitable Candlestick Entry
and Exit Strategies 321
Chapter 10: Candlestick Stop Loss Strategies 349
Chapter 11: Trading Rules 373
Chapter 12: Candlesticks Applied 391
Glossary 399
Index 407
1
Chapter 1
Altering Your Investment
Perspectives
Bring ideas in and entertain them royally, for one ofthem may be the
king.
Mark Van Doren
Japanese candlestick investing has inherent aspects that cannot be ignored.
This book was written based on one major assumption. Ifyou are reading this,
you are looking for a better investment program than what you have been
experiencing. You have come to the right place. Candlestick analysis has some
very compelUng aspects. It will completely alter your investment perspec
tives. This book was wrinen to educate investors on how w use the Japanese
Candlestick technique profitably. The easy-to-follow ptactices described will
provide the teader with profit-making techniques that can be quickly learned.
More importantly, learning the principles of market psychology underly
ing the Candlestick methodology will revolutionize your overall invest
ment psycheforever. This statement can be made because candlesticksignals
have already proven themselves. Fortunes have been made using the Japanese
Candlestick techniqu"".
Knowing "how" to use the candlesticks and "why" they work will immedi
ately improve the reader's investment profitabilityand permanentlyalterover
all invesunent perceptions. This newly acquired perception will produce con
sistent profits along with an associated mental re·programming designed to
maximize investment returns. Onceone becomesconvinced ofthe reliabilityof
the Candlestickmethodology, one also acquires a pre-programmed invesonent
discipline. As a result, Candlesticks add a whole new dimension to enhancing
the investor's profit-making capabilities.
2 High Profit Candlestick Patterns
You will be exposed to an investment philosophy that will immediatelyjar
you outofyour current investmentviewpoints. The information that you glean
from this reading will notbe something new or provocative. All the investment
concepts incorporated into candlestick signals are derived from commonsense
applications. Additionally; the signals are easy to visualize. Do not be surprised
to see smatterings of information directly out of "Profitable Candlestick Trad
ing," the previous book and the basis for the writing of this book. There are
many aspects ofcandlestick analysis that bear repeating.
In learning and using Candlestick analysis effectively, a few assumptions
need to be made up front. The signals have been developed through hundreds
ofyears ofactual usage. Japanese traders started charting the price movement
of rice, utilizing the application of the open, close, high and low. Much the
same as western bar charting but with the addition of boxing in the open and
close. This method ofcharting created a new analysis rool, a rool that was used
as a statistical analysis centuries before the adventofthe computer. The details
of how candlesticks were developed will not be illustrated in this book. That
information is better studied in previouslywritten books. (See suggested read
ing list.)
JapaneseCandlesticksignals possessone majorattribute thatis not present
in other technical systems. The signals are created by the CHANGE in inves
tor sentiment. This point is the crux of the success of Candlestick analysis.
Again, ro emphasize the importance ofwhat you havejust read. THE SIGNALS
ARE CREATED BYmE CHANGE IN INVESTOR SENTIMENT. Understanding
tins truism will make it easy for your investment psychology to become accli
mated to this successful rrading discipline.
The secrets of the effectiveness of the signals can be learned in a fast and
easy process. An invesror does not need ro be highly knowledgeable about
technical charting ro take immediate advantage of the signals. Asignal's graphic
fonnation makes it visibly easy ro identify reversals. A Candlestick formation
provides a visual graphic of investor psychology during a specific time period.
Forthe purpose ofillustration in this book, the standard time frame will be one
day. The trading entity will be srock, equity as opposed to commodity. Invest
ment strategies can be structured, ofcourse, for whatever time period is suited
for your rrading style: miome-ro-minute all the way through monthly. Appli
cable trading instruments include any vehicle that has the key elements of
investorjeal" and greed.
Alrering Your l/lvesonent ~r.:ipecrives 3
Forming the Candlesticks
Horizomallines represent the open and the close. Once both lines are added to
the chart, they are boxed. This box is called the BODY. If the close is higher
than the open, the body is white or empty. If the close is lower than the open,
the body is black or filled. Keep in mind. this does not necessarily mean that a
white body represents that the price was up for the day or that a black body
represents that the price was down for the day.
BarChart Candlestick
HIGH
CLOSE
OPEN
LOW
HIGH
OPEN
CLOSE
LOW
The body color only illustrates where the close was as compared to the
open. The contrasting colors of the bodies provides for rapid visual interpreta
tions. Adecliningcolumnofdark candlesisobviouslyinterruptedwhen a white
candleappears. Thisattracts the attentionofthe eye immediately.Thisissome
thing that would not occur when viewing conventional bar chans. The lines
extending from the body represent the extremes of the price movementduring
the day. These are known as the SHADOWS. The shadow above the body is
known as the upper shadow. In some Japanese analytical circles, the upper
shadow isalso described as the HAIR.. Theshadow belowthe bodyis known as
- ---
--- -
High Profit Candlestick Patterns
4
the lower shadow orthe TAIL. The length ofthe shadows has irnportam impli
cations to the strength of reversal moves.
The bodies with shadows look very much like candles, thus the name
'Candlesticks.' But don't let the unsophisticated name throw you. The infonna
tion provided by the formations puts the Candlestick analyst giant leaps ahead
of other technical analysts.
The colors of the boxes are not important. For visual darity, white and
black easily show contrast. Some computer software may have green for up
and red for down. The purpose of the chart is to provide a clear indication of
whatsignalsare beingfornled. Onceyou havebecomeaccustomed to thecandle
stick charts, the visual aspects to the candlestick charts will make all adler
charting techniques obsolete.
However, the important facts that should be considered about the history
of candlestick signals are first they made Japanese rice traders immensely
wealthy. Not just wealthy, but legendmily wealthy. Songs were written about
the wealth that the Homma family acquired through their rice trading exploits,
using candlestick signals. Second, the signals are still here after hundreds of
years of use. It can safely be assumed that if candlestick signals did not work
effectively, we would not be looking at them today.
Candlestick signals work! Not because a computer generates back-tested
facsim.ile showed hypothetical positive results, but results produced from ac
tual n'ading and real live profits. More so, real live f0l1W1es.
Assumption, if the signals are interpreted and used correctly, they can
produce inordinate rates of return for the investor. This is already proven by
the Homma trading family, making a huge fOlume from trading rice.
Taking that point of view, the purpose of this book is to cut to the crux of
using Candlesticks to maximize your profit potential! Background infonnation
about the history of candlestick investing in this book will be minimal. That
infOlmation is better found in excellent books that have been written about
Candlesticks. "Profitable Candlestick Trading" provides a more general over
view of how to use the signals profitably. Steve Nison is credited with introduc
ing Candlestick investing into the U.S. markets. Greg Morris also has written
excellent books describing the candlestick signals. The serious candlestick in
vestor should make obligatory reads of their books during the road to master
ing the signals.
Some of the information found in this book will also been seen in "Profit
able Candlestick Trading" Some duplication will be witnessed, but only for
preparing the further development ofinvestment strategies and pattern cmaly
sis of high profit trading patterns.
