The author used definitions of candlestick signals without validating how correct these signals are. Just because candle signals are on a software package does not make them correct. For example, for a hammer, there are four rules:
1. The color of the real body can be black or white.
2. A bullish long lower shadow that is at least twice the height of the real body.
3. It should have no, or a very short, upper shadow.
4. The market must be in a downtrend
Rules 1 and 2 are easy to quantify. But how was rule 3 defined (i.e., what was the maximum length of the upper shadow for this to be defined as a hammer)? Or rule 4? How was a down trend defined? A candle signal needs two criteria. The first is the shape of the line, the second is the trend. Thus, if there is no down trend there is no hammer—even if the shape of the line looks like a hammer.
The most serious error was basing the success of a candle signal on what happened the next session. Whether one trades based on a candle signal should be fully dependent on the risk/ reward of the potential trade. This means that one should have a stop and a price target before placing a trade, and not just buying or selling because there is a candle signal. For instance, a stop should be placed under the low of a hammer line. Unless one has a target that is a multiple of this risk, a trade should not be initiated and the hammer should not be used to buy.
At my seminars I have a series of pivotal rules. One of the most important is, “Not every candle signal should be used to buy or sell—always first consider the risk/reward.” And this article doesn’t take this vital risk/reward aspect into account. As such there are many times when a candle signal should be ignored. This study was based on just blindly buying or selling on every candle signal. Using a candle signal to trade without considering the risk/reward is like, as the Japanese proverb states, “leaning a ladder against the clouds.” This is why we have our DVD workshop series which shows how to combine candle charts with Western tools and most importantly money management. Using candles in isolation is the major mistake most traders make and that is why we emphasize the importance of correct education.
Steve Nison, CMT
President- CANDLECHARTS.COM
1. The color of the real body can be black or white.
2. A bullish long lower shadow that is at least twice the height of the real body.
3. It should have no, or a very short, upper shadow.
4. The market must be in a downtrend
Rules 1 and 2 are easy to quantify. But how was rule 3 defined (i.e., what was the maximum length of the upper shadow for this to be defined as a hammer)? Or rule 4? How was a down trend defined? A candle signal needs two criteria. The first is the shape of the line, the second is the trend. Thus, if there is no down trend there is no hammer—even if the shape of the line looks like a hammer.
The most serious error was basing the success of a candle signal on what happened the next session. Whether one trades based on a candle signal should be fully dependent on the risk/ reward of the potential trade. This means that one should have a stop and a price target before placing a trade, and not just buying or selling because there is a candle signal. For instance, a stop should be placed under the low of a hammer line. Unless one has a target that is a multiple of this risk, a trade should not be initiated and the hammer should not be used to buy.
At my seminars I have a series of pivotal rules. One of the most important is, “Not every candle signal should be used to buy or sell—always first consider the risk/reward.” And this article doesn’t take this vital risk/reward aspect into account. As such there are many times when a candle signal should be ignored. This study was based on just blindly buying or selling on every candle signal. Using a candle signal to trade without considering the risk/reward is like, as the Japanese proverb states, “leaning a ladder against the clouds.” This is why we have our DVD workshop series which shows how to combine candle charts with Western tools and most importantly money management. Using candles in isolation is the major mistake most traders make and that is why we emphasize the importance of correct education.
Steve Nison, CMT
President- CANDLECHARTS.COM
