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CANDLESTICK CHARTING EXPLAINED Timeless Techniques for Trading Stocks and Futures Third Edition

Preface for the Third Edition

The preface for the second edition still says most of the facts that need to be here, with only a few changes and additions given below. A number of new candle patterns have been developed since the first edition came out in 1992. Many of these were created to fill the holes in the original Japanese versions of the patterns. A large number of original Japanese patterns did not have a complement or counterpart; there was either a bullish version or a bearish version, but not both. Those holes have been filled, along with a handful of new patterns. When you study these patterns for all these years, one easily can start to see how new things can develop. Steve North of North Systems was the originator of many of these complementary and new patterns. If you see these patterns in other books or articles on candlesticks, be sure to ask the author where he/she obtained the information. So after 14 years, what has changed? Computers are readily available; certainly computing power growth has exceeded even Moore’s Law. Almost all data services offer stock data that has the open price available. In 1992 that was definitely not the case, as I addressed it in Chapter 6. The internet has offered charting services such as, that make the term software almost obsolete; all you need is a browser. Intraday data is certainly more readily available. I still have a problem in using candle pattern analysis on anything other than daily data. The Japanese believed strongly that the time between the close of one day and the open of the next day was important to investor psychology. The time between the end (close)

of a 10-minute candlestick and the beginning (open) of the next one, is just simply the next tick. Not a lot of time to develop a psychological outlook on the market, is it? So what has not changed? I still witness folks using candle pattern analysis that seem to forget its one primary and most basic premise; you must first identify the trend of the market before you can even begin to find candle patterns. How can you have a bullish reversal candle pattern if you not in a downtrend? You can’t. Remember, these short-term views of investor psychology are based upon the trend of the market. I still hear and witness analysts making much more out of candle pattern analysis than they should. It is not magical; it is not the key to instant profit; it is just simply another good short-term tool for market analysis and trading. Candle pattern analysis should always be supplemented with other analysis techniques. In this edition, I added considerably more information on the measures of success for candle patterns relative to many other technical indicators. I also enhanced the statistics that support the candle pattern filtering concept I introduced in the first edition. I have also shortened my view on the viability of using candle patterns. In the first edition I mentioned that they were fairly reliable up to about nine market days. Today, I strongly believe that anything over five days is coincidental and random. If a candle pattern calls the beginning of the biggest up move in history, it is not the candle pattern that causes it; the candle pattern only helps identify its beginning. Finally, Ryan Litchfield contributed a much-needed section on candlesticks for traders. If you are a trader you will love Chapter 10. If you are not a trader you will love Chapter 10.

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