SNEAK PEEK! - The following is an excerpt from Jea Yu's upcoming book Trading Full Circle. This book is the perfect tool for profiting in all financial markets! Don’t miss Yea Yu presenting at the 2010 Traders Library Trading Forum in Chicago!
From Chapter Five - Candlesticks: Price Tool
I still use candlesticks on my price charts. They are tried and true as long as you stick to the basic reversal patterns. I don't go much beyond hammers and stars. I like to keep it simple because I have found that the more complicated the candle formations, the more room for failures. A machine with a few parts is more reliable than one with a hundred moving parts, and easier to fix.
Don't Judge a Candle Before its Close
Don't make the mistake of judging a candle before it actually closes. Due to the common knowledge of candle formations, traders may often try to paint a hammer or star mid-candle close, only to step off right before the close. When I refer to close, that means the final formation of the candle based on the incremental time frame of the chart. For example, on a 5-minute chart, a candle finalizes its formation every 5 minutes from the top of the hour (10:00 a.m., 10:05 a.m., 10:10 a.m., etc.). A candle may look like a hammer at 9:57 a.m., but at 9:59:21, the buyers may pull their bids and panic out more sellers, only to close as a solid continuation red candle at the 10:00 a.m. candle close. This happens numerous times during the trading day with numerous stocks. They are as common as wiggles. Always wait for the candle close (which updates the moving averages too) before judging the candle. Don't be too anxious.
Shooting Stars
Shooting stars are exhaustion candles that form at the peak of uptrends. Usually, they form on the final climactic pop on volume as the last of the buyers panic into the stock in a frenzyonly to look down and realize that they chased too high. The panic selling triggers earlier buyers to start taking profits. The shorts smell this and start shorting the stock in anticipation of further selling. This is illustrated with a small candle body with a long tail or shadow at least twice the size of the body, as in Figure 5.1.