Candlesticks By Themselves Are Demonstrably Only Half Of The Big Picture
Old tools come back to life in modern times. Whereas the “Japanese Candlestick” method of agricultural value recordation was devised for private use by an innovative Japanese trader hundreds of years ago specifically for use in the rice trading business, the Candlestick method of price display has, within the past several decades, propelled to a new recognition of its value across every sector in the Western financial world. The reasons for this acceptance are basically these: it draws back the curtain to reveal the theretofore hidden psychology of the investors and traders in the financial markets to a degree which is unattainable by the use of bar charting; and it is exceptionally adept at highlighting trend reversals when they are brand-new or when they are ready to come to fruition.
The conventional bar chart displays the price movement of a stock, for example, during any particular time period, in the form of a straight vertical bar, or line. The very top of the bar represents the highest price recorded during the session; the bottom of the bar is the low price attained during the session. The price at opening is shown as a tiny tick on the left side of the bar, while the closing price is recorded as a small tick on the right-hand side of the bar. This can be convenient for drawing a chart which connects the closing prices of a group of sessions, but it can appear to be rather mechanical and sterile. The viewer’s eye must analyze it very closely in order to discern the meaning of it all.
The Candlesticks improve upon the bar chart’s method of display, by showing the charted difference between the opening price and the closing price as a cylinder. The bar line is “widened out.” Price travel above and below the opening and closing prices are displayed as “wicks,” also called “shadows” or “tails.” In Candlestick vocabulary, the most important portion of any session is shown as the cylinder – which is the distance, or price spread, between the opening price and the closing price. If the closing price of a security during any particular session is lower than the opening price, then the cylinder is filled in, or blackened out. If the closing price is higher than the opening price, then the cylinder is left blank, or “white.” The cylinder – being the distance between the opening price and the closing price – whether white or black – is identified as the “real body” or “body.”
This results in a picture, which the eye recognizes instantly and the brain processes. The picture reveals the underlying psychology of the traders in a way which the bar chart cannot approach, mimic, or replicate. It can betruly fascinating to watch the movement of a currency’s price development using “streaming data,” in real time, and thereby see with your own eyes the ebb and flow of bullish and bearish sentiment as it springs to life on the computer screen. The bar chart’s exact same information is being shown to you; it is simply presented differently and much more intuitively by the Candlesticks.
Candlestick language and “Western” language differ in their respective definitions of an “outside day:” Whereas an “outside day” in Western terminology would mean that the entire price range of one day was totally eclipsed by the price range of the following day, in Candle terminology an “outside day” occurs when the real body of a particular session is eclipsed by the real body of the following session. The inverse is true with respect to an “inside day.” In both cases, Candlesticks pay no attention to the “tails, “wicks,” or “shadows.”
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The Candlestick bars also create patterns, whether singly or in combinations of two or of three bars, which have come to be recognized as forecasters of reversals of trend. One of the more commonly seen single-bar patterns is the “Shooting Star,” which occurs at the end of a long rise in prices, characteristically having gapped above the most recent price range. The Shooting Star features a small real body located at the very low end of the total price range of the particular trading session, and by a long upper shadow. The Shooting Star has bearish implications. Another frequently-seen pattern, this one of three waves, involves a tall white candle at the end of a long advance in prices, followed by a candle bar featuring a small real body (itself sometimes a Shooting Star) at or above the price level of the real body of the first bar, which in turn is followed by a candle bar which features a tall black real body. This three-bar pattern is called the “Evening Star,” and has bearish implications. Its inverse is the Morning Star, which appears at the ending point of a long decline in prices.
Candlestick analysis recognizes and uses all of the “Western” formations, such as the Triangle, the Island Top, the Gap, the Double and Triple Bottom, and the Head & Shoulders Top.
The Candlesticks, by themselves, are remarkably accurate predictors of a trend change; but it is not claimed that they can predict the extent of the price move which follows the change. Good as they are, they are not perfect. They are just one element of a complete tool kit. There is still something missing. There remains a subconscious longing for fulfillment. The Candlesticks can be brought closer to perfection and to greater utility by using them as the starting point of the analysis and then adding thereto a selection of Indicators which can help to confirm or negate the “raw” interpretation of the candles from the standpoint of the fundamental psychology of the market. Some practitioners rely on the candles alone to tell the story. Others do not use candles, but do rely upon Indicators. Still others use the candles as the starting point, and then build upon that base by interpreting the meaning of the Indicators, alone or in combination; and some very few reviewers carry the analysis to its ultimate by observing not only the psychological and predictive content of the candlestick patterns themselves, but also of the waves of the Indicators and particularly of the relationships between the waves of the Indicators as they are depicted on the charts.
This is the point at which technical analysis comes into its own. The perceived gap is filled; the longing for completion is satisfied. The entire system becomes able to help the operator to forecast the future direction of prices even more accurately than by using Candlesticks alone or Indicators alone, or even than by using the Candlesticks and Indicators together but still without analyzing the relationships between the waves of the Indicators. It is that last part that makes the difference. The old adage “two eyes are better than one” is alive and well. The more analytical tools which are brought to bear upon the interpretation of price charts, the more accurate the result is likely to be. We work with these tools every day at http://www.candlewave.com
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