8/3/07

Candlesticks And Oscillators For Successful Swing Trades

Finding Potential

The first step is to find the right conditions for a reversal. which can be done with either candlesticks or oscillators. Candlestick reversal indicators are characterized by indecision candles, while oscillator reversal indicators are characterized by divergence and convergence. Let’s take a more in-depth look into these methods:

Indecision Candles

Candlestick charts are designed to enable traders to quickly and accurately interpret a stock’s price movements. As we know, the body of the candle indicates the open and close, while the tails on either end represent the day’s price movements. We also know that we can characterize indecision as volatility without movement — or long tails with a short body. Typically, indecision candles are seen as a time when the trend is about to change. (For related reading, check out The Art Of Candlestick Charting — Part 1 . Part 2 . Part 3 and Part 4 .)

Convergence and Divergence

Convergence and divergence are simply times when a stock’s price movement differs from momentum indicators. Think of it in physics terms — if you throw a ball up in the air, it loses momentum before it reverses direction. The same is true for stock prices: momentum slows before stock prices reverse. Convergence and divergence can show you when the momentum is slowing and a potential reversal is forthcoming. (To read more on this, see Introduction To Types Of Traders: Momentum Traders and Momentum Trading With Discipline .)

Pinpointing a Reversal

The next step is to define an exact (or as close a possible) point of reversal. This task is best accomplished using specific candlestick patterns. Although there are well over 60 different candlestick patterns, there are only a select few that give consistent points of reversal.

Bullish/Bearish Engulfings

Bullish and bearish engulfings are some of the most popular candlestick patterns — and for a good reason! When properly identified, these candlestick patterns are among the most reliable. The key is in the length of the candlesticks. Ideally, the first candle should be short on low volume and the second one should be long on high volume. This indicates indecision in the last portion of a trend and then a decisive reversal in a different direction.