Using Technical Indicators to Complement Your Candlestick Charts

In This Chapter

^ Taking advantage of trendlines ^ Using moving averages to inform your decisions ^ Appreciating the relative strength index ^ Adding stochastics to your bag of tricks ^ Jumping on the Bollinger band bandwagon

■# ou can use nothing but candlestick patterns when trading, and some traders have proven that to be a profitable route. But that shouldn't make you think twice about combining candlesticks with other technical indicators. You can take advantage of a wide range of indicators to confirm the conclusions you draw from your candlestick charts, and your results are often more reliable and profitable. You may very well find that you can't live by candlesticks alone!

Many candlestick patterns — from single sticks to complex multiple-stick formations — depend on the market context in which they appear. For example, a bullish signal in a bearish market sparks skepticism and may even be ignored. But what constitutes a bull or bear market? (As I write this, I have a financial TV show on in the background and two market professionals are vigorously debating whether we're in a bull or bear market. If these market pros can't agree on the nature of the market, how are individuals supposed to figure it out?) It's simple: use technical analysis! More specifically, use indicators that attempt to define the market trend.

Traders use many different types of technical indicators to enhance and complement their trading styles. Traders are always trying to come up with the perfect combination of indicators and signals. (I confess to walking around with old business cards and a pen so I can jot down trading ideas when they pop in my head.) You never know when inspiration will strike! That brilliant new way to incorporate candlestick charting in a new trading scheme may reveal itself at any moment.

Technical indicators share one of a couple of goals. The first is to define the current trend, whether up, down, or even sideways (more on that later). To quote a popular trading saying, "The trend is your friend." The other indicators try to identify market extremes or reversals. That information allows a trader to "fade the market," or go against the trend in hopes that the trend will soon fade out and reverse. There are heated arguments over whether trading with the trend or trying to profit from reversals is the key to successful trading, and as long as traders are still making a living (and losing their shirts) using both styles, the debate will continue.

There are more complex indicators than you can shake a (candle)stick at. (In fact, Technical Analysis For Dummies, by Barbara Rockefeller [Wiley] covers them extensively.) In this chapter, I clue you in on a few tried-and-true indicators that you can use to determine the trend of the market and make your candlestick-based decisions even more reliable. These indicators include trendlines, moving averages, relative strength index (RSI), stochastics, and Bollinger bands.

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