The Camel
Candlesticks do far more than tell you the open, high, low, and close for the day. They tell you a story and everyone loves a good story. A single Candle is more of a short story but when there are several (usually three) together they can turn into something more interesting than a John Clancy novel.
I’m going to be telling a lot of stories in this course with the hopes that you will not only like some of the analogies in them but understand why they are being used and that the analogies make the patterns easier to understand AND remember.
Below is an analogy that I use all the time in the Live Daily Trading Room. You can see where the price broke past prior resistance and then backed off.
Everyone knows it's just a false breakout (also called a Wycoff Spring), but I look at it differently. I think of it like a camel that stuck his nose under the tent, didn’t like what he saw, and left. I bet that you will think of this analogy the next time you see a false breakout on a chart. Why? Because it’s a story that created a mental picture! It’s a heck of a lot easier to get a mental image of the camel vs. a false breakout.
On the above chart (expand it) you can see that the price just went above past resistance and then came back down. There are many reasons why that might happen, like people running stops, taking profits, etc. Probably the best reason is that the Bulls were testing the water so to speak and there was no more interest from buyers at that price.
I just use the analogy that the camel stuck his nose under the tent, didn't like what he saw, and left. I can actually visualize that too! Don't think about a camel sticking a nose under a tent right now. I bet you did, everyone does.
If you think that I’m telling you that Candlesticks are the Holy Grail, I’m not. Just like technical indicators they have their limitations. Sometimes the storyteller gets off track, forgets the storyline, or something unexpected happens and the story doesn’t end like we thought it would. We need to be aware that this can happen.
Now here is the same chart again. Which one tells a better story?
Click To Enlarge The Chart
Candlesticks are best used to give us reversal signals. Read that again because reversal signals are the most important signal that a trader can get.
Bars alone just can’t do that as well but Candlesticks do such a wonderful job you will wonder why anyone would use bar charts. I said it before and I’ll say it again; bar charts look naked so you need to put some clothes on them. I bet you just got a mental picture of some little naked bars running around on your charts, didn’t you? Why? I made a story out of it and stories are easy to remember.
Candlesticks are great storytellers; but…..
Even though Candlesticks are great storytellers, they should never be used alone. Common sense should tell you to use many other things along with them. Look for support and resistance levels, Fibonacci replacements, Trend-lines, Volume, Moving Averages, etc. I am going to cover a lot of this later in the course so get ready to learn something new!
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