One very popular technical tool that we don't discuss much is the usage of Japanese candlesticks. They look quite a bit different than the regular OHLC bars and display unique market patterns in slightly different ways. One primary reason why the Japanese like candlesticks is that the candlesticks focus on intraday activity. The Japanese tend to focus more on intraday activity than overnight changes. Today, we will define and discuss the basics of candlesticks and then move on to using them to churn out extra profits.

First of all, candlesticks are easy to read because with a very quick glance you can immediately tell whether a stock has closed up for a day or down. Candlesticks have a hollow body when the stock has closed up for the day (when compared to close of the last day). Up days are typically colored green in America. Candlesticks have a filled in body (usually red in America) when the stock has closed down for the day. On each end of the body, the each candlestick has a line which looks like the wick of a candle on each end. These "wicks" represent the high and the low. Much visual focus is given to the difference between the open and the close.

Techniques. One type of formation to look for is a large green bar at a low price. Often, times, a stock will decline strongly and then show a candlestick with a long green body right at a major market bottom. It's even better when the close is right near the high for the day and the body is extra long. Here is an example of this type of candlestick in mid June in Cemex (CX) stock. We bought this stock on our Atlas International Options service. What the long green body is telling us is that during the trading day, the bulls had control and had enough power to push the stock up. Often times, the stock goes even higher after the first candlestick. You should also look for long, red bodies, at high stock prices and the opposite effect is tradable for short trades.

Another highly effective candle formation to look for is the "Doji" candles. Doji candles have little or no bodies at all and the candle stick looks like horizontal line. It's because the open and close price are the same or very close to being the same. You can see a great example of a Doji in Google back in early July. The stock had been accumulating strongly until the candlestick formed a Doji and then fell very strongly from there. Doji's have the most strength if they are in the midst of an intermediate or long term trend. This means that the stock (or market) has as high chance of reversing the past trend right after the Doji candlestick. Watch for this formation in your trading as well. It's easy to recognize the formations when looking at candlestick charts.

Price Headley is the founder and chief analyst of BigTrends.com.