How Candlestick Patterns can reflect Investor Sentiment

The markets exist to facilitate trading and are driven by floor traders. These are the guys who work the pits every trading day regardless of whether the markets are volatile or not. Just like the circle of the economy, if there is no movement the markets will die and no money will be made.

Therefore, it is important to understand that the perception of what is happening in a market may sometimes have very little to do with actual influences of market news and world events.

In fact I would go further and say that too much fundamental analysis of individual stocks and commodities can often confuse the situation. That’s not to disrespect the work of trained fundamental analysts. I just don’t buy into it myself. I personally do not read any financial magazines or publications. I rely totally on the candlestick patterns to inform me of investor opinion at any given time.

That is the key to this technique; understanding what the majority of investors are feeling and knowing how that sentiment is driving the markets. It is the majority’s reaction to what takes place in the pit that drives an instrument up or down. It is investors perception, fear and greed that will give momentum to a given markets movement.

That is not to say that world events have no impact at all. Take the discovery of BSE in one animal in Washington State, a year or so back, for example. The effect on Live Cattle and Feeder Cattle prices was overwhelming. But this sudden collapse of the market did not take place for almost 24 hours after the news broke! The wise had already closed long positions and immediately gone short. Many fortunes were made over those few days of trading. But, many more fortunes were lost.

A good working knowledge of Candlestick analysis would have warned you of the sudden selling activity and ensured you were correctly positioned for that rare opportunity.

The candlestick patterns will, at the very least tell you it’s time to get out of a trade. If it’s a false alarm then you can always get back in with the loss of a few points instead of the loss of your shirt!

A glance with a trained eye at a candlestick chart can immediately alert you to sudden changes in investor opinions. The very anatomy of a candlestick shouts bull or bear. By familiarising yourself with a handful of reversal patterns you can see and predict the actions of the majority of investors. You won’t always get it right, but as long as your exceeding 75% accuracy then you will be making very decent profits.