Bigger Profits with Candlestick Signals and Market Patterns.

Stephen W. Bigalow
www.candlestickforum.com

The Fry Pan Bottom

Candlestick analysis is not rocket science. It is simple investment sentiment put into a visual graphic. The 400 years of actual investment results from Japanese rice traders have provided high probability signal results. The candlestick signals illustrate the investor sentiment mostly defined as fear and greed. Human emotion, when it comes to investing funds, will always have the same ingredients. The candlestick signals are simply the graphic depiction of investor sentiment. Candlestick signals were not discovered and tested by computer back testing simulations. Candlestick signals are the result of centuries of analyzing how human emotions effect a price trend. The signals, occurring over and over at specific points in a trend-reversal, provide a statistically proven trading platform. If you understand how they are formed, you’ll understand what makes prices move.

When signals are used in conjunction with recognized high profit pattern potentials, the probabilities of participating in lucrative trades is greatly enhanced. One of the most easy to recognize trading patterns is the Fry pan bottom. The Fry pan bottom pattern is aptly named. This pattern gets it’s name because it looks like a fry pan bottom. It does not take a high degree of technical analysis to figure out the investor sentiment that forms a Fry pan bottom. The pattern is a slow curving pattern to the downside, flattening out at the bottom, and then it slowly comes up out of the other side of the pattern. The analysis for the investor sentiment that forms this pattern is very easy to understand. Initially after a downtrend, the selling sentiment starts to wane, making the trajectory of the downtrend a slow inactive bottoming trading pattern.

After a lengthy period of time, the sentiment almost becomes neutral, forming a flat area. This lack of interest, one way or the other, eventually starts to incorporate a very slow change of investor sentiment to the plus side. The new positive outlook shows the same lack of enthusiasm on the buy side as it did on the sell side. However, the difference now becomes that the selling interest has disappeared and the buying interest is slowly coming back into the price. This pattern, unlike other patterns that become effective when stochastics indicate an oversold condition, utilizes the condition of the stochastics in an opposite manner. It is usually when stochastics are approaching the overbought conditions that the investor sentiment can be gauged.

Fry Pan Bottom

The alert for this pattern is activated when stochastics get up in the overbought area. The price now shows that confidence has built back up into the price, in the form of a large bullish candle or a gap up coming out of the positive side of the Fry pan bottom pattern. This buying indicates that investor sentiment has now produced confidence for being back in the position. A “gap up” or a large bullish candle becomes a signal to buy even though the stochastics are approaching the overbought area. That enthusiasm, coming out of a long bottoming action, will usually create a strong buy trend.

In the Isonics Corp. chart, notice the long period of time, a four month period, that the investor confidence shifted. The telling factor for the potential break out was being able to view the subtle fry pan bottom formation. A couple simple elements can be added to fry pan bottom analysis. The first being that the very bottom of the fry pan is approximately one half the distance from the time the fry pan bottom started, to when it will break out. This is not anything that is set in stone. A simple observation is that the very bottom occurs in the middle of the fry pan bottom. Having this knowledge allows the investor to estimate when the breakout might occur.

This calculation does not need to be exact. Visually the buying can be seen as the confidence starts building back up. When that buying level starts approaching the same level as when the pattern started to develop, that is when to start taking action. The Isonics Corp. chart in early October started revealing some bullish candlestick formations. Volume started expanding. This now becomes evidence that the buyers confidence could create a breakout situation.

Isonics Corp.

The confirmation of the breakout move after a fry pan bottom becomes a large bullish candle or a gap up. This will usually occur near the high point of the beginning of the fry pan bottom formation. Whether you decided to buy this stock in the first few days of October or after the breakout occurred does not really matter. After the extended period of time that it takes to form this pattern, buyer confidence has built up a lot of steam. The percentage move out of a fry pan bottom pattern should be very large.

These patterns do not occur very often. Fortunately when they do occur, they can be found and followed without much difficulty. That allows an investor to become well-prepared for taking advantage of the potential results.

The W. R. Grace & Co. chart illustrates a very slow decline, followed by a dimple in selling, and buying at the very bottom of the pattern. Once it was interpreted that the buy signal was not creating the immediate buying one would hope for, the slow build-up of confidence could be seen. This creates a different analysis versus a stock price that is starting to get to the overbought area finally seeing some exuberant buying. The breakout occurring after a fry pan bottom formation reveals a completely different scenario.

W. R. Grace & Co.

Training the eye to recognize how a pattern is setting up, creates the opportunity to participate in a big profit move. The slow downtrend, followed by a slow uptrend, will have different results. When the trading gets close to completing the fry pan formation, funds can start to be committed.

Because of the length the time that a Fry pan bottom takes to develop, they should not be a primary source for a trading strategy. However, they can be used when the timing becomes apparent. Although they do not occur with great frequency, the percent of return produced makes them well worth learning. Being able to correctly analyze candlestick formations allows an investor better accuracy for recognizing when high profit moves are ready to occur.

Candlestick signals are utilized today because they have proven themselves very accurate over the past few centuries. The basic assumption is that we would not be looking at candlestick signals today if they did not work. Candlestick analysis allows investors to project trend reversals with a relatively high degree of accuracy. One misconception about candlesticks signals is that there are too many of them to learn. Of the 50 or 60 candlestick signals, there are only about 12 signals that will occur a vast majority of the time: The Doji, the Bullish and Bearish Engulfing signal, the Hanging Man, Shooting Star, Hammer, the Inverted Hammer, the Bullish and Bearish Harami, the Dark Cloud, the Piercing pattern, The Morning and Evening Star signals and the Kicker signal. Knowing these signals alone will dramatically improve your analysis of trend reversals and make learning Candlestick analysis much easier. Having this analysis capability in your mental arsenal allows the candlestick investor to have their portfolio positioned in the correct direction when a move occurs. Understanding the psychology of how the signals are formed provides investors with better foresight in where to have positions placed.

Stephen W. Bigalow is author of “Profitable Candlestick Trading, Pinpointing Market Opportunities to Maximize Profits” and High Profit Candlestick Patterns”. He is principal of the www.candlestickforum.com, the leading website on the Internet for providing information and educational material about Japanese Candlestick investing. Over fifteen years of extensive study and utilization of candlestick analysis has produced an array of easy-to-learn educational material about Candlesticks. As one of the leading Candlestick experts in the nation, Mr. Bigalow, through his consulting with major trading firms, has developed multiple successful trading programs for the day-trader to the long-term investor.