[B]And now, for that post that I said was all important. ([U]long post[/U])
If you understand this, you will understand and master candlesticks.[/B]
[B]Why exactly is it that the candlestick method is so powerful?
Why can we get trades going when indicators do not show to even enter?[/B]
Well, here I am going to [U]try [/U]to answer this question. I will use an example from physics as an aid.
You all know what a magnet is. It is made of iron or an iron alloy and attracts anything made of iron, nickel or cobalt.
Place a handful of nails on a table and the quickest way to pick them up is to grab them all with a magnet. Then you can lower them back into a container.
A small bar magnet will pick up any small iron object, be it nails, screws, a knife or anything else. Indeed magnetic screwdrivers are the property of electricans and you can buy magnetic screwdrivers at a hardware store.
They make life easier when a screw drops into some inaccessible place.
Now the magnet has what is called a “magnetic field” around it. Any small iron object within this field can be attracted. But not so outside this field. The magnetic field gets weaker further away from the magnet.
Even so, this magnetic field is invisible. You know it is around the magnet because of the influence the magnet has. That is, you can see the effect of the magnet. But the field itself you cannot see.
Now look at the diagram below >>>
By tymen1 at 2008-04-08
However, suppose we put a bar magnet on a table and then put a glass plate over the magnet.
We then pour iron filings from a container onto the plate and rap the plate with our fingers.
The iron filings will take on a pattern something like in the diagram above.
Here we now have [U]visual evidence [/U]of the existance of this magnetic field. We can now, if you like “see” the magnetic field that previously was so mysterious.
Now we know that in all trading, including forex trading emotions are at work.
These we all know as being fear, greed, anticipation, indecision …and any others you think should be included.
But you cannot see these emotions. You cannot collect a container of liquid fear. Nor can you get a kilogram of greed.
These emotions are at work in the trading business but they are at work invisibly behind the scenes.
Because they are invisible, you can only see their effect when they occur.
price races down - fear is present…price goes up - greed at work.
But you [U]can [/U]see all these emotions!
Not with a glass plate and iron filings but with …yep…[B]a candlestick [/B][B]chart![/B]
Every time you see a candlestick pattern you see a “magnetic field”. That is, you see a recognized and well proven pattern of emotions at work. The candlestick chart is then, an [U]emotions chart,[/U] and you can see when the emotions are at work.
You can see which emotions are at work as well as discerning the intensity of those emotions.
Since emotions are a [U]main driver [/U]of the market, you now have the clearest view of what is happening. Therefore, you can enter and exit the market based on these emotions and be done with your trade long before the indicator devotee gets his signals.
Assuming that we have an emotions chart, we also know that these emotions are very predictable. We know what will happen next.
We, therefore, need to know our emotion (candlestick) patterns [U]accurately [/U]because a slight change in the pattern means a change in the emotions.
With indicators, [U]no such understanding is possible[/U].
The MACD, for example, is a mathematical manipulation of a series of closes. The MACD knows nothing of what happened between any two closes.
Was there a very high high? Did the price dip to a great low? Who knows? None of this information is revealed in an indicator. Yet it is this very information that gives away the emotions at work.
And it is the shape and pattern of the candle that reveals all this information, in the same way as iron filings on a glass plate reveal the activity of a magnetic field.
