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By Simon Denyer
The west
has never been quick to unravel the mysteries of the Orient.
Yet, after more than a century, the investment community is finally learning
to watch markets by Japanese candlelight.
They are using candlestick charts,
a method which predates all occidental charting techniques. Some candlestick
enthusiasts say that one day they could
even supercede bar charts.
Candlestick trading techniques have become one of the
most discussed
forms of technical analysis in the trading community ...
Soon many more westerners will learn to recognise
'evening stars' even after Christmas, or take note of other exotically named
formations like 'three-winged
crows' and 'hanging men'.
Steve Nison, the west's leading exponent of the method, says there
has been an explosion of interest in North America and Europe in the past two
years.
"Candlestick trading techniques have become one of the most discussed
forms of technical analysis in the trading community, both (in the U.S.) and
abroad," he says.
"They're definitely used more and more in England," says
Bronwyn Wood, education director for the Society of Technical Analysts in London. "I
think they are going to eventually eliminate bar charts for most people."
The
principles of the technique are simple. A candlestick chart uses the same open/high/low/close
data as a conventional bar chart, yet in a way which reveals more to the eye.
The broad 'body' of the candlestick is drawn between the market's opening and
closing prices, like the line on a bar chart only thicker. Thin 'shadows', or
lines, at either end extend to the session's highs and lows.
The body is then
coloured to show market direction - black if the close is below the open, white
(or red) if prices close above the opening level.
Their similarity to conventional
bar charts makes candlesticks compatible with traditional western technical analyses.
Anything from simple moving averages
to Elliott Wave can be incorporated.
"
You do get an extra dimension ... but
you have to put them together with trendlines, other indicators and moving averages," says
the STA's Wood.
Nison agrees, descibing candlesticks as a tool rather than a
system in themselves. Yet their advantage, and their complexity, lies in the
patterns which these charts throw up - an array of poetically named formations
which make head-and-shoulders
tops and saucer bottoms sound positively mundane.
... their staying power reflects the value
they offer in analysing the markets ...
"
Part of the reason it
caught on so quickly (in the past few years) is that the terminology catches
your attention," says Nison. "But their staying power reflects the value
they offer in analysing the markets," he adds.
The formations can be split into
those which suggest a reversal in market direction, and those which suggest a
continuation of the trend.
A 'three-winged crow', consisting of three consecutive
daily declines drawn as black candles, is a typical bearish continuation pattern.
'Evening stars'
and 'hanging men' are bearish reversal patterns.
"They do tell you much
more than average bar charts," says Amir Anvarzadeh, technical analyst at
Towa International in London. Perhaps the most significant single-day reversal
pattern of all is the 'doji' (pronounced doh-gee), a candle with no body. where
the market opens and closes at the same price.
Anvarzadeh says he spotted one
on December 6 when the dollar closed in Tokyo at its opening price of 124.90
yen, suggesting an end to dollar strength when conventional bar charts gave no
clue. This was followed the next day by a one-yen fall, mapping out a 'bearish
engulfment' pattern to confirm a change in trend. Candles give you an early warning system At 1526 GMT Monday the dollar
stood at 123.03/08, roughly
two yen below its
'doji' top.
"Candles give you an early warning system," says Refco's
Nison. "Whereas bar charts can take weeks to break a trend, candles can
give you a reversal
pattern in just a couple of days "
from Reuters
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