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"A prudent man has more than one string to his bow." — Japanese
proverb
Japanese candle chart analysis, so-called because
the lines resemble candles, has been refined by generations
of use in East Asia. Such charts have been used longer than
bar charts and point-and-figure charts but were unknown to the
Western world until I introduced them in 1990. These charting
techniques are now used internationally by traders, investors,
and premier financial institutions here and abroad. Most technical
analysis Web sites, real-time trading systems, and technical
analysis software have candle charts, attesting to their popularity
and usefulness. These charting
techniques are now used internationally
by traders, investors,
and premier financial institutions here and abroad.
Some of the reasons for the explosive interest
in these heretofore
secret
techniques are:
•Candle chart techniques are easy to understand. Anyone,
from the first-time chartist to the seasoned professional, can easily harness
the power of candle charts. This is because, as will be shown later, the data
required
to draw the candlestick chart is the same needed to draw the bar
chart (the high, low, open, and close).
•Candle charts provide earlier
indications of market turns. Candle charts can send out reversal signals in
a few sessions rather than the weeks often needed for a bar chart reversal signal.
Thus, market turns ascertained with the aid of candle charts will frequently
be in advance of traditional indicators. This should help you enter and exit
the market with better timing.
•Candle-charting signals furnish unique
market insights. Candle charts not only show the trend of the move, as does a
bar chart, but, unlike bar charts, candle charts also show the force underpinning
the move.
•Candle-charting tools enhance Western charting analysis.
As noted earlier, candle charts use the same data as bar charts: open, high,
low, and close. This means that any Western technical tools you now use can also
be used on a candle chart. However, candle charts can also give you timing and
trading benefits not available with bar charts.
Candle-charting strategies are
a tool, not a system, and they are best used in conjunction with those Western
technical techniques you are most comfortable
with.
As the Oriental proverb states, "A journey of a thousand miles begins
with the first step." This chapter is a first step, albeit an important
one, on the road to candle chart analysis. You will see how the candles can help
make your market analysis more efficient, improve entry and exit timing, and
open new, effective, and unique avenues of analysis.
Charts 1 and 2 show samples of candle lines. The broad part of the candle line,
called the real body, is the range between the session's open and close. If the
close is higher than that session's open, the real body is empty (see a in chart
1). A black real body (see b in chart 1) occurs when the close is lower than
the open.
The thin lines over and under the real bodies are, respectively, the
upper and lower shadows. The top of the upper shadow is the high of the session;
the bottom of the lower shadow is the session's low.
FIGURE 2
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Notice how the candle lines
in chart 2 do not have a real body. Instead, they have a horizontal line. These
lines that look like crosses are called doji. A doji indicates that the open
and close are the same (or almost the same). The doji signifies that the market
is in balance between the forces of supply and demand. The emergence of a doji
in a trending market could be an indication that it is losing its momentum. Doji
are discussed in more depth later.
FIGURE 3 |
Step 1: Type INDU <Index> GPC <Go)>.
Step 2: Tab in to the RANGE fields, and enter 04/14/99 and 07/30/99 as
the start and end dates, respectively, for the analysis. Press <Go>.
Note the doji on July 6.
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Candle-charting techniques can be applied
to whatever time frame you now use, from intraday to weekly. Thus, on a 60-minute
chart, the real body is the
range of
the open and close of that 60-minute Japanese, such a session — especially
after
a sharp advance — indicates that the stock is, as the Japanese ay, "separating
from its trend."
As previously mentioned, candle charts can be used in any time frame, including
small intraday segments. For example,
type
NDX <Index> IGPC1
5 <Go> for
a chart of the Nasdaq 100 Stock Index in which each candle line represents the
open, high, low, and close of a five-minute period.
Whether intraday or over
several days, the presence of a doji after a forceful rally should hoist a warning
flag. The doji can be a valuable warning that as an index or security reaches
a peak, it meets enough supply to checkmate all of the demand. If there is a
doji after a long white candle, you can use the highest high of the tall white
candle or the doji — including
their shadows — as signals of resistance.
An example of this technique can
be seen in figure 3. Observe how the high of the doji became resistance. This
chart shows how resistance can be penetrated intraday, as it was on July 17.
But if the bulls cannot maintain enough force to hold the market above resistance
into the close, then the resistance area is still valid. A close over that resistance
level would mean a bullish breakout. Just as the market is "tired" with
a doji after a tall white candle, so it is said to be "refreshed" with
a close over the resistance area.
A Japanese proverb states, "His potential
is that of the fully drawn bow; his timing is the release of the trigger." The
timing of the "release of the trigger" depends on many things beyond
those addressed here. For example, there are times when candle signals should
be ignored. This is when experience with candle charts comes in. Candlecharts.com
analyzes and evaluates candle-charting signals with many other considerations,
including the risk/reward of potential trades, candle patterns in relation to
current market conditions, and a market's action after a trade is initiated.
These and other trading aspects allow for the most fully enhanced power of the
candles, and such an integrated approach is recommended for their use. May
the candles help enlighten
your trading.
from Bloomberg Markets
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