Bigalow, Profitable Candlestick Trading, 2d ed.

Ten years after the first edition of the highly acclaimed Profitable Candlestick Trading: Pinpointing Market Opportunities to Maximize Profits appeared, Stephen W. Bigalow is back with a “new and improved” second edition. It is a thorough, clear presentation of reversal and continuation patterns, some familiar to those who have read Steve Nison’s work, others less well known.

As a catalogue the book excels. But it is far more than a catalogue. Combining candlesticks with stochastics and volume (and occasionally other technical “tells” such as trend lines and moving averages), the author takes the reader through some profitable trades and explains how many false signals can be eliminated. He outlines trading programs and describes the ways in which candlesticks can be used to improve Elliott Wave analysis.

What are some of the patterns that have performed particularly well in the last ten years? Bigalow singles out two for special mention.

First, the left/right combo, which triggers a long entry when a doji (or series of dojis) in the oversold condition is followed by a bullish engulfing signal. To the downside a doji (or series of dojis) followed by a bearish engulfing bar is expected to produce a very strong price movement.

The second pattern is the belt hold. Let me quote Bigalow’s description. “The Bullish Belt Hold is a long white candle that has gapped down in a downtrend. From its opening point, it moved higher for the rest of the day. … The Bearish Belt Hold is just the opposite. It is formed with a severe gap away from the existing uptrend. It opens at its high and immediately backs off for the rest of the day. … The longer the body of the Belt Hold, the more significant the reversal.” (p. 78)

Bigalow also ventures beyond candlesticks with the T-line (where “T” stands for “trigger”), a not so fancy name for the 8-period exponential moving average. One of Bigalow’s earliest private students devised buy and sell rules using candlesticks, stochastics, and this moving average. “His research indicated that a Candlestick buy signal in the oversold condition, followed by a close above the T-line, produced an extremely high-probability result. The uptrend would remain in progress until the appearance of a Candlestick sell signal and a close below the T-line.” (p. 320)

Bigalow makes no attempt to systematize candlestick trading, so the reader who wants to have an idea of the kinds of results that can be achieved has to do his own backtesting. With most software packages that’s easy enough.

Overall, traders and investors who are interested in incorporating candlestick analysis into their playbooks have a first-class guide in Profitable Candlestick Trading. Will you end up like the man in one of Bigalow’s epigraphs, a Yiddish proverb? “With money in your pocket, you are wise and you are handsome and you sing well too.” Not simply by reading this book. Alas, as always, the real work begins when you have finished it.