Candlesticks with Commodity Channel Index (CCI)
Candlesticks can be used with whichever technical oscillators or indicators one is familiar with. We have used Stochastics throughout this website, as that is what we have used in our own trading system. However, the key point to remember is that, the oscillators and indicators are secondary factors. The main decision making factor is still the candlestick signal. The oscillators act as confirmations, nothing more. They give the traders an idea of where the stock is in its current trading range or trend.
Candlestick signals are real-time in nature. They accurately depict the investor sentiment at any given point in time. Whether it be daily, weekly, monthly or even intraday charts. They show the information traders need in that given time frame. Oscillators help in finding high probability profit situations. A candlestick buy signal in an oversold condition has a much greater implication than a candlestick buy signal when oscillators are in the middle range, especially for non trending stocks. For up-trending stocks, the oscillators might never reach oversold conditions. For down-trending stocks, oscillators might never reach overbought conditions. This is where, traders need to be familiar with candlestick patterns. Oscillators are essentially of no use in these cases and the pattern psychology takes over.
The chart below for Bon-Ton Stores, Inc. shows a Bullish Engulfing signal right on the 50 sma. We have used the CCI indicator instead of our Stochastics. The result is the same. An oversold condition indicated by the CCI and a candlestick buy signal on the 50 sma create a high probability profit scenario. For a trader entering the market on confirmation of the Bullish Engulfing signal, the exit could have been on the gap down confirmation of the Doji in an overbought condition. This investment would have yielded almost 30% return in 18 days.
Chart courtesy stockcharts.com