Benefits of Candlestick System

INTRODUCTION

“The learning of books, that you do not make your own wisdom, is money in the hands of another in time of need.”

Japanese Candlestick analysis is a highly effective, but under-used investment decision-making technique. Most people in the United States' investment community are aware of Candlestick analysis, but few understand how or why it actually works. Candlestick charts reveal many insights using well- recognized Japanese candlestick formations, yet few people understand the ramifications or significance of the signals that are clearly and reliably displayed.

This book was written to educate investors on how to use the Japanese Candlestick technique profitably. The easy-to-follow procedures detailed in this book provide the reader with profit-making techniques that can be learned quickly. More importantly, learning the principles of market psychology underlying the Candlestick methodology will revolutionize the reader's overall investment psyche forever. While this may sound bold and far-fetched, fortunes have been made using the Japanese Candlestick techniques. Knowing how to use the candlesticks and why they work will immediately improve the reader's investment profitability and permanently alter overall investment perceptions. This newly acquired perception will produce consistent profits along with an associated mental re-programming designed to maximize investment returns. Once an investor becomes convinced of the reliability of the Candlestick methodology, that investor also acquires a pre-programmed investment discipline. As a result, Candlesticks add a whole new dimension to enhancing the investor's profit-making abilities.

Most readers will be surprised at how the knowledge gained from a close reading of this book dramatically enhances investment abilities across all investment vehicles and over all trading timeframes. More than 400 years of refined reversal-identification and trend continuity projection is now at the reader's disposal. Mastering the candlestick methodology will be the next major step for maximizing investment returns.

Why aren't the Candlestick signals used more? Why, if the signals demonstrate such a high degree of accuracy, are there not many more investors, whether institutional or individual, using these signals? The answer is that the Candlestick technique in the past has been too labor intensive and required a long and steep learning curve before the investor gained proficiency. This book was written to provide the reader with an easy and fast training program to circumvent those obstacles.

The Benefits from the Candlestick System

Japanese Candlestick signals possess one major attribute that is not present in other technical systems: The signals are created by the change in investor sentiment. This point is the crux of the success of Candlestick analysis. Again, to emphasize the importance of what you have just read: The signals are created by the change in investor sentiment. Understanding this truism will make it easier to acclimate your investment psychology to this successful trading discipline.

The secrets of the effectiveness of the signals can be learned in a fast and easy process. An investor does not need to be knowledgeable about technical charting to take immediate advantage of the signals. The graphical formation of a signal makes reversals immediately visible. A Candlestick formation provides a visual graphic of investor psychology during a specific time period. For the purpose of illustration in this book, the standard timeframe is one day, and the trading entity is stock-equity as opposed to commodity. Investment strategies can be structured, of course, for whatever time period is suited for your trading style: minute-to-minute or monthly. Applicable trading instruments include any vehicle that has the key elements of investor fear and greed.

The graphics of a Candlestick chart have greater appeal than Western charts (commonly known as bar charts). The amount of data displayed is exactly the same, but the ease of visual interpretation is dramatically different. The immediate representative depiction of price movement as the result of investor sentiment is visually in front of you. Recognizing the change in investor sentiment is made easier when the graphics are clear and easy to understand.

Once you become accustomed to the Candlestick charts, all other charting will seem diminished in terms of effectiveness. That is not to say that other charting techniques cannot be used as "alert" functions. Candlestick signals, incorporated with other types of charts, fine-tune the reversal identification process. Watch your profits soar by simply combining Candlesticks with basic technical charting methods.

Candlestick Charts Versus Bar Charts

After using the Candlestick charts, you will find that bar charts do not provide the same clarity. Despite the fact that the exact same information is being conveyed, the Candlestick charts, through greater visual appeal, provide information that is more communicative than bar charts. Candlestick patterns allow the investor to identify pertinent information in a relatively fast and unencumbered manner.

Bar Charts

A vertical line, seen here in Figure 1.1, represents the daily price movement on a bar chart. The top of the line is the high of the daily trading range; the bottom is the low of the day. A notch to the right side of the line represents the closing price. In more recent years, a notch has been added to the left side of the line to designate the opening price. Opening prices have not been as readily available in stock transactions until a few years back. Futures and commodity charts have had access to this information for a longer period of time. 

Internet charting services and software vendors provide a large number of additional technical indicators along with the charts. Fortunately, we are living in a time when software packages are constantly being developed to provide more and more technical information. This is mentioned to illustrate the benefits of technology that can be applied to better enhance the investor's evaluations. Upon becoming accustomed to the Candlestick charts, an individual can fine-tune the probabilities of successful trades many times greater than what the capabilities would have been just a few short years ago.

Candlestick Charts

Using the same information provided in a bar chart, Japanese Candlestick charts provide immensely more illustrative graphics. As in bar charts, the open, close, high, and low are all that is required. Yet, the manner in which they are depicted provides a great amount of information to the Candlestick analyst.

Forming the Candlesticks

Horizontal lines represent the open and the close. (See Figure 1.2.) Once both lines are added to the chart, they are boxed. This box is called the BODY. If the close is higher than the open, the body is white or empty. If the close is lower than the open, the body is black or filled. Keep in mind, this does not necessarily mean that a white body represents that the price was up for the day or that a black body represents that the price was down for the day. The body color only illustrates where the close was compared to the open.

The contrasting colors of the bodies provide for rapid visual interpretations. A declining column of dark candles interrupted by the appearance of a white candle attracts the attention of the eye immediately. This is something that would not occur when viewing conventional bar charts.

The lines extending from the body represent the extremes of the price movement during the day. These are known as the shadows. The shadow above the body is known as the upper shadow. In some Japanese analytical circles, the upper shadow is also described as the hair. The shadow below the body is known as the lower shadow or the tail. The length of the shadows has important implications to the strength of reversal moves.

The bodies with shadows look much like candles—thus the name Candlesticks. But don't let the unsophisticated name throw you. The information provided by the formations puts the Candlestick analyst giant leaps ahead of other technical analysts.

The colors of the boxes are not important. For visual clarity, white and black easily show contrast. Some computer software uses green for up and red for down. The purpose of the chart is to provide a clear indication of what signals are being formed.

Figures 1.3 and 1.4 are included for comparison purposes. Once you have become accustomed to the candlestick charts, the visual aspects of the candlestick charts will make all other charting techniques seem obsolete.

Contrasts between the information conveyed by Figure 1.4 and that conveyed by Figure 1.3 will become dramatically apparent by the time you finish studying this book.