The issue of trade signal reliability is debated by economists, supported by those who make their living doing technical analysis, and debunked by those who only believe in fundamental analysis tools such as the price to earnings ratio, price to sales ratio, and indicators of intrinsic stock value. Despite the doubts of some, traders have trusted for centuries in trade signal reliability and their ability to use trading tools such as Candlestick analysis to garner profits in trading and in entering and leaving investments most profitably. In this article we talk about trade signal reliability from the viewpoint of a short term investor or even a day trader but the lessons learned apply to anyone who wants to most profitably enter and exit stock positions. Using Candlestick charting techniques and plotting Candlestick pattern formations traders have accurately predicted price movement in commodities trading, stock trading, futures trading, and options trading. Some of the issue of trade signal reliability lies in the skill of a short term investor, swing trader or day trader in reading trading signals. A wise trader will routinely audit his or her trading results. To the degree that trading certain signals works better for a given trader he or she will be well advised to use what works in their hands.
Theory versus Practice
Traders believe in trade signal reliability because it works in their hands. Economists who write papers about trade signal reliability and technical trading in general will question if these concepts work in practice. The experts, however, have the capacity to study any problem to death. The practical aspect of trading is to take what looks promising and try it. Keep what works and don’t use what does not work. Traders going back to the days of the Samurai in Japan recognized patterns in trading rice. Those who bought and sold after recognizing certain patterns in price prospered. If someone had asked one of these successful traders about trade signal reliability they might have indicated signs of their wealth as proof that using Candlestick basics combined with Candlestick trading tactics worked for them. As far as long term investors are concerned they typically do not use technical trading techniques for short term investment and trading. They may be experts in what they do but they are not experts in short term investing and trading.
Forest, Trees and Trading Patterns
As a practical matter trading signals can, at times, be hard to read. Is there really a pattern developing? This can happen with online trading software and with Candlestick chart formations. The practical response is that if the pattern is too hard to read maybe it is not the pattern you think it might be. The famous baseball pitcher, Satchel Page, once joked that the reason he sometimes took what seemed to be a long time before he threw a pitch was that when the ball was in his glove the batter could not hit it! Likewise, you will do not lose money on trades and investments that you do not make. When investing with candlesticks, if the pattern is unclear don’t trade it! Some signals work better for some traders than for others. This is part of why doing routine audits of trading results is so important. No one needs to buy, sell or trade all equities in every market in all market sectors and in every market condition. It is a wise person who knows his strengths and trades with them, who knows his weaknesses and avoids making the same mistakes repeatedly.