Candlestick Patterns Can Put Money in Your Pocket
It is said that a picture is worth a thousand words. That may be understating the case. Political cartoonists continually have a field day with ever-changing subjects – persons seeking political office, the state of the economy, the debacle in the housing market, unpopular wars, invasions of weak countries by powerful neighbors champing at the bit to exert brute power that had been lost but which is now in full flower again.
Other pictures are more benign and less personal in their impact, but which nevertheless have the inherent power to impel the viewer to strong thoughts and incitements to action – but of a financial nature, free of personal dislikes and of bombs and artillery in action. I’m speaking now of Candlestick patterns in stock and commodity price reporting, a Japanese invention of many centuries ago which was used initially in the rice trade. This system of price display has come into increased use in this country over the past 20 years or so, and with good reason: when correctly understood, they can put money in your pocket.
Why is this so? The Candles begin with the old “bar chart” form of price reporting and add to it. Nothing is lost or cast aside; the net result is an improvement upon an old system. Specifically, what the Candles do is show the underlying psychology of the market traders, in a way that the eye instantly recognizes and the brain computes.
The Candles “inflate” or “fatten out” the old bar chart formation by creating a cylinder out of a bar line, whereby that part of the total price action of the day (or week, or month, or minute) which lies between the opening price and the closing price is shown as a cylinder. If the closing price is higher than the opening price, then the closing price will be at the top of the cylinder and the opening price will be at the bottom of the cylinder; and the cylinder will be left uncolored, or “white.” Conversely, if the closing price is lower than the opening price, the cylinder which comprises the space between them will be colored black. Simple! And those parts of the total price action for that particular time period which lie above and below the cylinders are shown as “tails,” or “shadows,” or “wicks.”
This produces a picture which is easier to understand, and reveals in a flash the traders’ intention and mood during that time period. It is fascinating to watch the picture move and evolve when the data feed is provided in real time, in “streaming” fashion.
The real value of the Candles lies in their ability to spot reversals of trend. There are only about a dozen major patterns which need to be remembered. Some of them have been given titles which quite clearly reflect their namesakes – such as the “Shooting Star,” the “Evening Star,” the “Spinning Top,” and the “Dark Cloud Cover.” Even the “Hammer” – which takes a little imagination to see – reflects that the bears attempted to “hammer” prices lower, but failed. All of these, and more, are warnings of the possibility of a trend change in the making.
The proof is in the pudding. These reversal patterns do have predictive power. They have been extremely valuable to me in my investing and trading over the years. I would never go back to the “old way.” In my estimation, everyone who is active in the financial markets owes it to himself or herself to become knowledgeable about the Candlesticks, because in so doing you will come to a more complete understanding of the human emotional forces which drive prices one way or the other. http://www.candlewave.com
