This is an excerpt from the Liberated Stock Trader Book and Training Course
As we are concerned with spotting changes in price moves we will focus on the Reversal Patterns. This section is the Bullish Reversal Pattern meaning when a price is moving down and you see this sign, the price may change direction and start moving up in the short term. These are the most common patterns, not an exhaustive list but it will give you an idea of what is common in all patterns.
The Hammer – this hammer can be either filled or hollow, the Japanese say the price is hammering out a bottom. What is important here is that at the end of a down move, the buyers and sellers test out an extreme low (the long shadow) however by the closing bell the price has returned higher.
The lows were tested but price found no comfort there, there were enough buyers at this level to move the price back up.
Inverted Hammer – this hammer shows that at the end of a downward move the stock gaps significantly down there is much movement throughout the day moving back to fill the gap but the price settles lower for the day. This shows significant price action and that buyers are showing strong interest in the stock at these levels.
Bullish Engulfing – here we have a negative spinning top or a short day during a downtrend, then followed by a long day of real power the long white body tells you something significant has changed and so has the sentiment, a clear trend reversal.
Bullish Harami – during a downtrend we experience a very negative “Long Day” followed by a short positive day. This indicates the market participants have found a level they are happy with. Candlesticks are most useful when predicting a change in trend, this might be from an “up” to a “down” trend or from a “down” trend to a “sideways” trend. In the case of this Harami, the change in trend may be from downwards to sideways.
Piercing Line – this shows a day of real strength following a very negative day. The White candle gaps down on open but the buyers show real demand throughout the day to retrace more than 50% of the previous day’s losses.
Each Candlestick pattern has a specific story to tell. If you can understand the story being told you do not need to memorize the name of each pattern and the textbook meaning. Re-read this article and try to imagine the story. Combining the action of multiple days will allow you to understand the current psychology of the market participants, therefore, giving you an insight into tomorrows price action.
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Other Chapters of the Liberated Stock Trader Book are listed below
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.
What are stock market cycles and the cycles of business and economies. Important information that you need to appreciate as part of your core analysis.
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Stock screening means using criteria to short list the kind of stock that you want to purchase. A vital part of any stock market training
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis helps with.
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Which indicators should you use, there are literally hundreds of stock chart indicators. Each have a specific use case and application, which should you use?
Volume is a vital indicator along with price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
How are the market participants feeling? Positive, Negative or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Lean how to use them to your advantage.
Understanding how you want to invest, how much time you have and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.