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When traders first hear that candlesticks can help predict stock direction, most roll their eyes to the back of their head. But truth be told, candlesticks are a great way to gain insight into the very market psychology that drives all stocks and indices.
In fact, three of my favorites are doji crosses, the three black crows, and the hanging man.
I love when traders tell me technical analysis doesn’t work.
While they’re entitled to be wrong, the fact remains that technical analysis does work, sometimes by up to 80% of the time. Granted, there is no Holy Grail, but if we use the right indicators, we increase our odds of success. Especially if we apply those indicators to well known stocks that may only be down temporarily.
Let’s look at Raytheon (RTN) for example.
When it comes to trading, one of the best ways to tell what’s happening is by paying attention to the flow of money in and out of a stock.
Surely, none of us want to buy a stock if money is flowing out, right?
Instead, we want to buy if we’re seeing money flow in, or short if we begin to see signs that money is about to start flowing out of a stock.
Volatility was alive and well in early 2018.
After a stellar, explosive run to 26,500 in early 2018, we sank nearly 3,000 points to challenge the psychological line in the sand at the 50-day moving average when all was said and done.
Granted, the Dow could always catch triple bottom support and turn higher.
We’re often told that technical analysis is worthless, or that it’s just a guessing game.
It’s the same argument over and over again.
But as proven time and time again, technical analysis with pattern recognition can lead to some amazing returns. In fact, simply using a combination of Bollinger Bands (2,20), moving average convergence divergence (MACD), relative strength (RSI), and Williams’ %R (W%R) can pinpoint reversals after bouts of excessive fear and greed 80% of the time.
Even simply double tops and bottoms can pinpoint exact points of entry.