Suppose you are a trader observing the bullish rally of Stock XYZ at the beginning of the 3rd bullish green candlestick, and considering an entry.

You have witnessed the stock rally huge for two days and know that each trader who entered on the first two days is now a big winner.

Based on the emotion of greed you decide to enter at that beginning of the 3 day, and mentally count your profits as the price rallies to a new high.

After the stock closes, you brag to your friends at the golf course regarding the great trade that you made that day.

You go home from the golf course and celebrate the victory with your spouse and maybe even discuss how you will use the extra money that you have earned through the trade.

Now keep in mind that the profit is only on paper and not one penny has been earned yet.

The next morning you check the price of your position, with expectations that your bullish stock will rocket to the moon! Now imagine the emotion that goes through your mind when your position not only fails to go higher, but also opens below your entry price.

What is the emotion that flows through your body as you not only see your profits erode before your eyes, but now rob your account of precious capital?

The emotion that you will experience is undoubtedly fear and will prompt you to scramble to liquidate your position as soon as possible to minimize your losses.

Now consider that there were also 2 or 3 thousand additional traders who entered the same stock at around the same price with the hopes of the gaining the same profit.

All of these traders will be tripping over themselves trying to get out of the stock.

As was illustrated in the previous section, this increase in fear results in an increase in supply of the stock relative to the increase in demand, and triggers the sharp decline in the price.

The deeper the red candlestick cuts into the bullish green candlesticks, the more traders are thrown into loosing positions, and thus the further the price decline.

Perhaps you are beginning to realize the power of emotions in price movements of a stock.

The technical analyst through candlestick reading is trained to read this greed and fear emotions in the market and capitalize on them.

From the previous section, we determined that price movements result from massive emotions of fear and greed regarding trader's position in the market with a given stock.

Recognizing the footprints of greed and fear is not difficult. Recognizing the signs that the rally or decline before it happens is the difficult part of trading. How many times has this situation happened to you: You enter a trade based on a bullish reversal signal, but then exit on a slight pull back only too see the stock rally to a new high after you exit.

Or how often have you held on to a stock that experiences a bearish pull back in hopes that it will turn around, only to see the stock plummet to new lows before you finally concede to defeat and exit.

Unfortunately, there is no system that can predict with 100% accuracy exactly where a greed rally or fear sell off begins. There are; however, techniques based on candlestick patterns that help us locate probable areas for these turning points. The rest of this section will explore the techniques in identifying those probable areas that properly managed will result in profits for the trader in the long run.

Throw a baseball straight up into air. As the ball approaches the top of its projectile path it will decelerate to a speed of zero, and then reverse downward picking up speed as it approaches the ground.

Now imagine yourself drilling into a piece of wood. You suddenly hit a hard spot in the wood at which time bear down with all of your might to overcome the temporary resistance created by the knot in the wood.

When you penetrate the knot you surge forward and quickly poke through to the other side. These are two analogies to help explain the patterns of stocks as they transition between one move and the next move.

When a stock is completing a move, it experiences a period of deceleration, which is referred to by chartist as price consolidation.

Consolidation is one of the most important signals that a stock is about to begin a new move.

The move can be a continuation in the same direction, or it can be a reversal in the opposite direction.

The area of consolidation represents a battle zone where the bears are at war with the bulls.

The outcome of the battle often defines the direction of the next move.

As short-term traders, it is important to identify these areas of consolidation and enter a trade just as the new move is beginning.

During the consolidation period or 'battle zone', traders, both long and short are patiently waiting on the sidelines watching to learn the outcome of the battle.

As these winners emerge, there is often a scramble of traders jumping in with the winning team.

The candlestick patterns gives the trader excellent clues on when this move is about to take place, and helps the trader time his entry so that he can get in at the very beginning.

Several strong bearish candlesticks precede the Bullish Reversal Continuation pattern where the bears are clearly in control (Figure 13).

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line against upward resistance indicating that the bulls are winning territory from the bears.

The bears finally weaken and allow the bulls to penetrate the line of resistance, at which time the bulls quickly conquer new territory by taking the stock to higher prices.

By recognizing the consolidation pattern the trader is able to buy the stock just after the stock breaks the line of resistance, and profit from the sharp move upward.

The cause of the rally is fueled by the emotions of the traders watching for the outcome of the battle.

Additional traders who jump in to buy the stock now that its strength has been confirmed fuel the sharp upward move.

Traders who are currently short the stock in the area of consolidation waiting in hope of a breakdown, are now scrambling to cover their short positions.

This buying action also fuels the fire pushing the stock to higher prices.

Several strong bullish candlesticks precede the Bearish Reversal Continuation pattern where the bulls are clearly in control (Figure 14).

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of support indicates that the bears are winning the battle.

The bulls finally weaken and allow the bears to penetrate through the line of support, at which time the bears quickly conquer new territory by taking the stock to lower prices.

By recognizing the consolidation pattern the trader is able to sell short the stock just after the stock breaks the line of support, and profit from the sharp spike downward.

Additional traders who jump in to short the stock now that its weakness has been confirmed fuel the sharp sell off.

Traders, who are currently long the stock in the area of consolidation waiting in hope of a breakdown, are now scrambling to sell their long positions.

This selling action also fuels the fire pushing the stock to lower prices.

Several strong bullish candlesticks precede the Bullish Continuation Consolidation Pattern where the bulls are clearly in control (Figure 15).

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of resistance indicates that the bulls are winning the battle.

The bears finally weaken and allow the bulls to penetrate the line of resistance, at which time the bulls quickly conquer new territory by taking the stock to higher prices.

By recognizing the consolidation pattern the trader is able to buy the stock just after the stock breaks the line of resistance, and profit from the sharp move upward.

The cause of the sharp sell off is fueled by the emotions of the traders watching for the outcome of the battle.

Traders, who shorted the stock in the area of consolidation in hope of a sell off in the area of consolidation, are now scrambling to exit their losing positions.

Traders who are long from the period before the area of consolidation are realizing that their original entries were correct and are adding to their winning positions.