“A picture is worth a thousand words.” How many times have we heard that? Since ancient times, humans have made images of things and events around them, both because visual representations give pleasure and because they create a record. The invention of the motion picture camera and its derivatives in the digital age have taken record-keeping one step further, by creating a record of events as they occur in real time.
When a Japanese rice merchant invented what is now known as a “Japanese candlestick” sales and purchase record, we do not know if he kept a written checking account of the day’s events. We know that you recorded the trading process of the day after the end of the day.
Candlesticks are becoming more and more accepted in Western financial markets as time goes on. Certainly some of the most successful traders in all markets, from stocks to commodities to currencies, use them as a matter of course.
One of the main advantages of candlesticks is that they respond to the human condition, in the sense that they are a pictorial representation of price action in a particular period of time; that is, they show what needs to be seen in a way that is instantly recognized by the eye and translated by the brain as a representation of the psychology of the market at a given time. The eye loves images. Whatever the name (chart, pattern, image or formation), investors have come to rely on them in their investments and trades as a form of technical analysis that is of exceptional value in determining the likely next price direction. Professional writers have built entire businesses around providing Candlestick training and feedback. Several prominent professionals prefer to offer the “forum” or “seminar” style of instruction on a regular basis, while others publish a market letter or investment newsletter with their own signature. There are several combinations of services available.
In addition to revealing the underlying mood or psychology of market investors and traders, Japanese candles, when interpreted correctly, have an amazing ability to predict major trend reversals. There are only about twelve major reversal patterns, which are easy to memorize and a joy to find when they occur. Some of the patterns consist of a bar that shows the price events of a particular time period. Others are a combination of two bars or three.
Candlesticks are fully compatible with “western” indicators. The process is clearly additive, not subtractive or substitute. It is a question of synergy, or improvement, so the power of the Candles tends to be perfected by incorporating the particular revelations of the “Westerns” throughout the analytical process.