How to Make Money Trading with Candlestick Charts

Fundamentals of a company do not cause
prices to move. It is the reaction of the
people trading that stock that whipsaws
the price.
If prices were to move based only
on the fundamentals of a company, then the
stock market would be a discrete market
where the price jumps from one point to the
next only after some news hits the wires. The
rest of the time it would be at a constant,
fixed price. We all know that does not
happen. Prices change everyday. They
change because somebody has a change in
perception for that stock. Technical analysis

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is the study of that perception change as seen
in a chart. What better way to see this change
of perception than using a candlestick chart.
Figure 10.1
shows a stock vacillating back
and forth between two price levels in a
sideways market.
Figure 10.1:
Support and Resistance

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Whenever the stock approaches the top price
level, it sells off. The supply side of
equation becomes greater than the demand
side. 
This price level, where there is
seemingly more supply than demand, is
defined as a 
resistance
 level.
The stock is
now under pressure. The bears continue to
dominate and take it down towards another
price level, where the perception towards
that stock changes 180 degrees. The demand
side of equation now becomes greater than
its supply side. 
This price level where
there is more demand than supply is
termed as a 
support
 level.
Note:
You can print out a chart and draw these
support/resistance lines yourself. You can also
use a Java charting application from websites

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such as Icharts.in, which will allow you to
draw these lines online.
So why does the stock keep doing what it
does, i.e. go back and forth? The answer lies
within us. We humans tend to remember
things. Consider a stock which you wanted to
buy but missed because of any number of
reasons. What will happen when the stock
pulls back to your original buy point?
Naturally, you will jump in. Now consider
thousands of traders doing that same thing. If
the stock turns and starts heading back up,
take a guess where you will start to feel
panicky. It would be right about the same
place where it started coming down from the
last time. This process gets repeated until
either the stock breaks the resistance level

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and heads higher or else breaks the support
and tumbles down.
Figure 10.2
shows support and resistance
lines for an up-trending and a down-trending
stock. The logic behind the support /
resistance lines, also referred to as trend-
lines, is exactly the same as described
above.
Figure 10.2:
Trend channels

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Let me emphasize this point again. You are
trading human emotions in the market, not the
actual stock. The faster you accept this
mantra, the clearer you will hear the market
signals.
A few points about these trend lines:
Trend-lines can be horizontal or sloping.
The more number of times the price tests
the trend line, the stronger the support or
resistance.