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Author: courteousTim Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6326  
Subject: Re: Candlestick Charting Date: 8/6/2009 9:50 PM
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Hiya Monty,

(All of this again makes me wonder if the greatest value of all these whizzy charts is in predicting the past.)

I thought it best to address this first. Hopefully Russ (RTTrader) will chime in on this issue as he's usually got pretty good words of wisdom. But I should forewarn you that Russ despises candles and won't hesitate to say so lol. Aside from that, what he has to say about the use of TA and more importantly trading is worth hearing.

Anyhow, here's my take on it. One of my favorite quotes (from an old StockCharts newsletter) is ... "Technical analysis is a windsock, not a crystal ball". What this means to me is that we can use TA to analyze what the markets have been doing, but we cannot predict the future. So yes, TA will tell us what has already happened. We can use that information to help us make decisions when we trade.

We should always remember that the markets can go up, down or sideways and there's no way to know ahead of time which way they'll go. But, based on what has already happened we can make an educated guess as to what direction we think it will go. More importantly, we can decided how much to put at risk on a trade based on how confident we are with our "prediction".

Some markets/stocks adhere fairly well to TA. Also, markets/stocks may adhere to TA sometimes ... and make no "TA sense" at other times. TA can help us understand psychology.

After a market decline you can expect that at some time the bargain hunters will jump in and start buying, causing a rise in the market. You can also expect that when this happens, folks that held through the decline will start selling when they get to break-even, causing the market to decline again. Knowing this, we can identify support/resistance (s/r) levels and figure out where it's likely the market will sell-off ... and use that as a target for our sell if we went long on the dip. We can also use the s/r levels to decide where we might make a new long entry. Furthermore, recognizing that our analysis/opinion of the market may be wrong ... we can decide at what point we'll recognize that things did not go as we had expected and use that as a point to bail out. But before we got in, we can use that bail-out point to help us decide how much $$$ to put on the trade. IOW if the entry and bail-out points are known and we now how much $$$ we're willing to put at risk on the trade we can calculate how many shares to buy. And if it ends up we WERE wrong, we will have at least known ahead of time how much $$$ we'll lose. Take the loss and then try to figure out if there's any way you could have done better ... and often times you have done your best and just have to take the hit and keep on chugging.

So in a nutshell, in response to the quoted comment above, it's a matter of what you expect to get out of TA imo. Don't expect that it'll tell you with great certainty which way the market will go because you'll most likely be disappointed.

Just a side note on candles ... they really just give you a condensed view. A daily candle makes it easier to see what happened during the day. A weekly candle makes it easier to see what happened during the week. Some people like them ... some despise them. To each his own.

Another side note on candles ... take their "predictive" value with a grain of salt. Bulkowski (author of "encyclopedia of Chart Patterns") did an extensive study of candlesticks and found that in many cases the candlestick book theory is wrong or at least not very reliable. In the following link, click on a candle pattern and there will be comments indicating how well reality and theory match up.

http://thepatternsite.com/CandleVisual.html


So Tim – when you have a moment, could you elaborate on what indicates an inverse h&s?

details on the chart ... LS = left shoulder, RS = right shoulder,

http://stockcharts.com/h-sc/ui?s=SPY&p=W&yr=3&mn...

I couldn’t figure out what “volume on the b/o” is.

b/o = breakout. Volume on the inverse head and shoulder neckline breakout was below average.


Later,

Tim
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