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By
Tom Girard
US traders who interpret Japanese
candlestick price charts say the ancient method is more visual
and faster at portraying market turns than familiar Western
techniques.
No emotion brings true signal," declares New
York futures trader Oscar Carboni. This aphorism echoes wisdom
worthy of
a Zen master. However, the subject here is not searching for
enlightenment, but reading an Asian style of price chart that
traces back to 1700s trading at the Dojima Rice Exchange in
Osaka, Japan. More than two centuries later, Japanese Candlestick charting
finally has made the Pan-Pacific Journey onto the computer
screens of Western traders. Few here had even heard of candles
before the 1990s, but now they're available on most computer
programs, with books and
specialized software guiding devotees through a maze of patterns.
The candles
offer an alternative to traditional bar charts simply by linking each period's
open and close to form what is known as a "real body." High and low
ranges
can extend beyond the body but are considered just "shadows" of the
more important open-to-close journeys. Price moves up and down are depicted by
white versus black bodies, with some traders substituting red and green.
Checking candles at 15-minute
periods works well for contracts such as bonds, with five- minute candles for
very active times, according to Jonathan Lin at Smith Barney in New York.
Vivid Portraits of Market Activity
Candlesticks render vivid portraits of what transpired
during one period while a distinctive lexicon characterizes market behavior.
A Rickshaw Man, Inverted Hammer, Spinning Top and Star are among the dozens of
terms for individual candles. And then there are hundreds of patterns. VIEW EXAMPLES
A Morning
Star, for instance, is a major bottom reversal formed by three candlesticks.
Some candles and patterns have Japanese names. A Long Opening Bozu Black Line
occurs when the market makes its high on the open and closes much lower. It is
also called
a Yorikiri — a Sumo wrestling term describing how an opponent is pushed
out of the ring while his belt is held.
Steve Nison is probably most responsible for bringing this
intriguing
approach to the West. His books, "Japanese Candlestick Charting Techniques" and "Beyond
Candlesticks," are
de rigueur reads for the initiate.
"
I think we're going to do away with
bar charts," he boldly predicted recently, but Nison would not go so far
as to say when such a stunning prophesy might come true. As if to hasten that
day, he frequently proselytizes. This fall, he is conducting seminars at the
International Federation of Technical Analysts in San Francisco; the Milan, Italy,
Technical Analysts Society; and at the Chicago Board of Trade.
And he also showcases
candles for the general public through appearances on CNBC. At the end of July,
he went on camera to review that month's
six point plunge in the T- Bond futures — showing TV viewers "the
eight lower lows" that took the market from a Life of Contract High of 116-06
to 109-27.
Tipped Off July Break
Nison's friend Bruce Kamich, who trades bond
futures as senior vice president of New York-based MoneyWatch, told FT that
the Japanese charts
tipped off the July break with a "high-wave candle," which has long
shadows but a small real body.
That July 7 candle
showed
trading across three handles, with the high printed at 116-06 and a low at 114-09.
The real body was formed between the open of 115-16 and the lower close at 115-10.
Shadows extend above for 22 ticks and below for 33 ticks.
Kamich says that candles
often illustrate market turns "faster than Western techniques" but
this Chartered Market Technician still uses familiar technical gauges. He does
watch candles intraday but not for periods shorter than 15 minutes, with 30 and
60 minutes preferable so the unique patterns "have a lot more time to develop." He
notes that five- minute candles frequently have a lot of Dojis — where
the open and close are identical or nearly
so — that aren't necessarily significant.
"Candlesticks can give you the turn before other technical analysis. Sometimes you can get in Corporation.
Jonathan Lin, a Smith Barney Research Associate in New York, finds that 15-minute
periods work well for such contracts as bonds, with five-minute candles suitable
for very active periods. "It all depends on the instrument and the volatility," he
concludes. Veteran T-Bond local Gino DiNuzzo now DiJNuzzo now utilizes candles
in "his
search for a methodology to to get off the floor" where he's been since
1980.
He'll study candles — in periods as short five minutes — on the CBOT
library computers and then slip out to place orders.
"For me it's so much more visual. It hits you right
away," he says. "If you make higher highs but on down days (a real
body showing the close below the open) you would see that instantly with candles,
but on a bar chart that would not be as obvious." DiNuzzo combines candles
with such other indicators as stochastics and the Commodity Channel Index.
Drawing
on Artificial Intelligence
To assist traders in accurately identifying candle formations. Pacific International
Trading Company of San Clemente, Calif., developed "The
Candlestick Forecaster" computer program. It draws upon artificial intelligence
to meld pattern recognition with such well-known technical indicators as stochastics
and Williams %R. The program not only signals trades but tutors its users in
candlestick terminology. Company co-founder Brad Matheny, who wrote the software,
also incorporated
analysis by Nison.
Bear Steams retail broker David Adier, a 30-year veteran of the futures and equity
markets, has been routinely taking Forecaster signals for nearly two years. Describing
himself primarily as a trend follower, Adier keys in a daily search of all futures
markets for buy and sell recommendations. He then determines his own precise
entry and stop loss points. The Chicago-based trader likes the software a lot
but doesn't study the esoterica of candles.
"I'm
not in the business of understanding all the patterns. The words and
names don't mean diddly to me. But when to buy or sell — that's all I
care about ... "
" I'm
not in the business of understanding all the patterns. The words and
names don't mean diddly to me. But when to buy or sell — that's all I
care about," he says.
Down the
street at First American managed futures division,
CTA Tim Will Bengson started using
candles solely on an end-of-day basis but now does real-time
for his S&P 500 trading. He relies on Trade Station from Omega Research,
with candles set to such time periods as four, 13, 14 or 17 minutes. To him candles
can present "a good solid confirmation" of what he sees on bar charts and
they "are a little quicker to show a top or bottom."
Although he is
quite comfortable with the candlecharts, Bengson thinks they "can look
intimidating" to many, especially his retail customers. "You have to
take your time" getting familiar with them.
The Chicago Mercantile Exchange assists
professional traders in that process by sponsoring seminars. Daniel Gramza conducts
the two-day sessions devoted exclusively to candlesticks. He has taught the subject
to 700 "students" over five years, with classes held in Europe as well
as Chicago.
This trader-teacher became interested in candles in the mid-SOs
during a trip to Japan. Upon his return, the only printed material he could locate
was "The Japanese Chart of Charts" by Seiki Shimizu, which had been
translated into English in 1986. It wasn't until 1988 that Gramza met another
person back home with an eye on the candles Nison, who was
attending a class Gramza taught on the
Market Profile trading style.
In the few years since then, interest
has soared largely due to Nison's
writings and the option of using candlesticks within computerized charting
programs.
In Toronto, Nison's 1991 charting
techniques book prompted Jeffrey
Ralph to become a candlestick aficionado. Now a bullion dealer for the
Royal Bank, Ralph finds 30-minute
candles "most reliable" in conjunction
with pattern recognition, the channel
index and stochastics.
Right in Front of Your Face
"Sometimes if you just talk through
each candle you'll see that it puts the
message right in front of your face. We
opened here and moved here and
closed higher and I see a bullish
engulfing pattern," Ralph explains.
Such a pattern a large upward real
body that is larger than the immediately preceding down body is considered an
important sign of a bottom
reversal.
For Ralph, interacting with the candles in this way "clears up a lot of emotion
you're getting from your greed and
fear." Testimonials such as this are
becoming more widespread as this
East-meets-V/est trading dialogue
forms deeper roots.
Superior to Bar Charts in Every Way
"Once you learn candlesticks, you
find they're superior to bar charts in
every way," says Steve Spector, a broker and day trader at Alaron Trading in
Deerfield Beach, Florida. "You usually
see a key pattern at a turning point."
Steve Langan, who trades out of the
Oakford Corporation in lower
Manhattan, declares: "Candlesticks
give you the turn before other technical analysis. Sometimes you can get in
and out of a move before a regular
technician will pick it up." However, he
quickly adds: "You can never use just
one thing" to size up a market.
Across town, CTA Oscar Carboni,
president of Futures Analysts and
Traders Inc., views candles as "another
tool in my toolbox helping me decide
whether to buy or sell a commodity."
This former New York Mere floor trader has used the Master version of
Pacific International's "Candlestick
Forecaster" for five years.
"I don't have to study and remember
all the patterns. The computer does it.
And the computer has no emotion. It
has no bias toward a position. No emotion brings true signal," Carboni says.
However enthusiastic these traders
may be about chart guidance from the
Far East, there's no indication that
they have adopted the traditional
greeting that Nison says is still popular
in Osaka.
"Mokarimakka?"
"Are you making a profit?"
from Financial Trader
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RICKSHAW
MAN
SPINNING
TOPS
STARS
INVERTED
HAMMER
