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Some devices which were useful in olden times can find new lives today. While the “Japanese Candlestick” system of negotiated price presentation was first used by a successful trader hundreds of years ago specifically for use in the business of trading rice, the Candlestick method has, within the past several decades, brought to a new appreciation of its value in every sector in the Western financial world, including stocks, foreign exchange, and commodities.  The reasons are primarily these: it reveals the fundamental psychology of the participants in the financial market to a degree which is unattainable by bar charting; and it is uniquely adept at shining a bright light on reversals of trend as they are in the process of formation or when they are preparing to emerge.

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The “old-style” bar chart shows the price movement of a stock, for example, during any given time period, as a vertical straight bar, or line.  The very top of the bar depicts the high price recorded during that particular session; the bottom of the bar depicts the lowest price attained during the session.  The opening price is displayed as a tiny tick on the left-hand side of the bar, while the closing price is shown as a small tick on the right-hand side of the bar.  This is useful when drawing a chart which connects the closing prices of a multitude of sessions, but it can appear quite sterile and mechanical.  The viewer’s eyes must analyze it closely in order to know what it means.

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The Candlesticks improve upon the bar chart’s style of display, by showing the charted physical distance 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 “shadows,” also called “tails” or “wicks.”  In Candlestick vocabulary, the critical portion of any session is shown as the cylinder – the distance, or price spread, between the opening price and the closing price.  If the closing price of a security during a particular session is lower than the opening price, then the cylinder is filled in, or rendered “black.”  If the closing price is higher than the opening price, then the cylinder is left blank, or “white.”  The the cylinder itself – being the distance between the opening price and the closing price – regardless of whether it is black or white - is identified as the “real body” or “body.”

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This process results in a picture, which the eye instantly recognizes and the brain processes.  The picture lays bare the underlying psychology of the traders to a degree which the bar chart cannot approach, mimic, or replicate.  It isutterly fascinating to watch the movement of a commodity’s price development in real time, using “streaming data,” and thereby see at first hand the tidal ebb and flow of bullish and bearish sentiment as it comes to life on the computer screen.  The bar chart’s exact same information is being presented to you; it is simply presented differently and much more intuitively by the Candlesticks.

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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’s trading session was totally engulfed by the price range of the following day’s trading, in Candle terminology an “outside day” occurs when the real body of a particular session is engulfed by the real body of the following session.  The inverse is true with respect to an “inside day.”  In both cases, Candlesticks disregard the “shadows,” “wicks,” or “tails.”

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{The Candlestick bars also create patterns, whether singly or in combinations of two or of three bars, which are recognized as predictors of trend reversals.  One of the more frequently seen single-bar patterns is the “Shooting Star,” which occurs at the end of a long climb in prices, characteristically having [gapped above] [gapped up to a point above] the most recent price range.  The Shooting Star is marked by a small real body at the low end of the total price range of that particular trading session, and by a long upper shadow.  This pattern has bearish implications.  Another pattern which is often seen, this one consisting of three waves, involves a tall white candle at the end of a long rise in prices, followed by a candle bar with a small real body (sometimes itself a Shooting Star) located at or above the price level of the real body of the first bar, which in its turn is followed by a candle bar featuring a tall black real body.  This three-bar formation is named the “Evening Star,” and foretells a decline in prices.  Its inverse is the Morning Star, which appears at the bottom of a long decline in prices.

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Candlestick analysis uses, incorporates, and values all of the “Western” patterns, such as the Triangle, the Island Top, the Gap, the Double and Triple Bottom, and the Head & Shoulders Top.

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The Candlesticks, by themselves, are usually very accurate forecasters of a change of trend; but it is not claimed that they predict the extent of a price move which follows the change.  Good as they are, they are not perfect.  They are only one element of a complete tool kit.  There is still something missing. There remains a subconscious longing for completion. The Candlestick analysis can be driven closer to perfection and to greater utility by using them as the starting point of the analysis and then adding thereto a group of Indicators which can help in assisting or negating the “raw” interpretation of the candles from the standpoint of the underlying psychology of the market.  Some teachers 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 displayed on the charts.

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This is the point at which technical analysis comes into its own.  The gap is filled; the longing for completion is satisfied.  The entire system becomes able to help the viewer 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 still relevant.  The more tools which are brought to bear upon the interpretation of financial 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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