How to Make Money Trading with Candlestick Charts

Bullish Harami in Hindustan
Motors starts its up trend
Notice how the price gapped up the day after
the Harami signal formed. What does this tell
you as a candlestick trader? It tells you that
other investors want to get into this stock in a
hurry. After the downtrend, something has
changed the perception towards the stock.

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Maybe it was a good earnings report or a
huge contract gain. As a trader, it is
immaterial to find out what the news was that
changed the perception. It is always helpful
to know, but not necessary. As a trader, you
are more concerned about the strength of the
new upturn. Seeing the gap up should give
you the required confidence that there is a
strong force behind the up move. Time to
jump in!
Figure 8.4
 shows the chart of IPCL.

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Figure 8.4:
Confirmed Bullish Harami
reverses downtrend in IPCL
Notice the two arrows marked in the
downtrend. Both are pointing to Harami
formations. You can see that the selling
continued after the first Harami had formed.
The second Harami stopped the selling and a
new upturn was initiated. The question to ask

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yourself is — should you have considered
buying after the first Harami? I would not.
Why? Because there was no confirmation
buying the day after the signal was formed. In
fact prices gapped down after this Harami.
This is not what you would expect after a
candlestick buy signal. Stochastics were still
heading down, too. How about the second
Harami? Prices gapped up after this Harami
and closed higher. Stochastics were oversold
by this time, thus creating a high probability
reversal situation.
This is not to say that all signals that get
confirmed will result in a profitable trade.
We will get into the signal failure scenarios
in 
Chapter 11
. This example was just to
show you that analyzing the signals and

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understanding the nuances can avoid a lot of
bad trades. This does two things, it helps
preserve your capital and, more importantly,
it helps keep your trading confidence high.
The chart of the Nifty index is shown in
Figure 8.5
.

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Figure 8.5: