How to Make Money Trading with Candlestick Charts

particular moving averages.
As an example, 
Figure 10.8
shows you the
chart of Grasim Industries.

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Figure 10.8:
Grasim following its moving
averages
You can notice in the figure that in July 2006
a Morning Star signal formed right on the 50-
day simple moving average (SMA). From
that point on, the stock price used the 20
SMA as support till December, when it

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finally broke down below both the 50 SMA
and 20 SMA.
The moving averages act like magnets for the
price. The concept of moving averages is
similar to the concept of trend lines which
we discussed earlier. 
Moving averages are
dynamic trend lines.
Figure 10.9
 shows a chart of Sujana Metal.

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Figure 10.9:
Sujana Metal using the 50
SMA as support
Traders would have had a fun time trading
this chart. The 50 day SMA is a powerful
force for this stock. Notice the following
signals:

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Point 1:
Bullish Harami.
Point 2:
Doji with a gap up next day.
Remember, this is a powerful signal.
The Doji showed the indecision on
the part of bulls and bears and the
gap up the next day, showed the
decision being made in favour of the
bulls.
Point 3:
Morning Star signal.
Point 4:
Bullish Harami.
In concluding this chapter, it would be
appropriate to emphasize that a trader needs
to have as much probability in his or her
favour as possible. A combination of
candlestick charts with technical analysis is

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an excellent system to achieve this.

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11
Trading Setup
Thus far we have learnt the major
candlestick signals and how to use them with
common western technical analysis. You
have witnessed the high degree of accuracy
of these signals in predicting reversals. The
probability of the reversal is greatly
enhanced when two or more signals confirm
it. I have always put more weight on the
Morning Star and Evening Star signals if the
middle day is a one-day candlestick reversal
signal, such as a Hammer or Hanging Man. If
a bullish engulfing signal is forming at the

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exact support level from where the stock
bounced up the previous time, it brings that
much more credibility to the reversal.
This knowledge should put you way ahead of
your competitors. The next time when you
see a stock fall 10 percent, you will not rush
to buy it because it looks cheap. You have
probably heard of the saying, “Don’t try to
catch a falling knife”. That is very true. That
stock which is down 10 percent can further
go down another 20 percent. On the other
hand, it could very well reverse and start a
new leg up from here. You do not know
which of the two might happen. All you
know is the candle formation. Rely on the
signals. Do you see a buy signal form? Are
the stochastics in the right place? Is there

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confirmation buying? These are the points
you will be looking at.