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Japanese Candlestick Charting
Introduction
Today there are more people investing in the markets, whether it is stocks, commodities, equities, treasuries, etc., than at any time
in history. However, most people still blindly follow the old buy and hold way of investing, which can be dangerous because not only
do markets go up, they also drop about half the time. The people who will survive and prosper in the long term will be those who
practice sound money management, and apply some sort of technical analysis to their trading. |
| Technical Analysis is basically the study of prices as they are reflected on a chart. The technical trader,
or technician, believes that all the known information about a certain market is present on the price chart. Not only do prices
represent facts like supply and demand, but also the mass psychology as well. Fear, greed, hysteria, and hope are just a few human
emotions that affect prices from moment to moment. It is through technical analysis that traders try to remove emotion from trading by
making their decisions based on recurring chart patterns. There are many different charts being used to view prices, and with the power
of computers today, many charting software packages come complete with an array of different tools for analyzing the markets. |
| Bar Charts are probably the most widely used charts to view market prices. One bar consists of the
Open, High, Low, and Closing price of a specified time period. Some traders feel that the Close is the most important so they may look
at charts with only the HLC or just the Closing price. Let's look at a few examples: |
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| OHLC Bar Chart |
HLC Bar Chart |
Close Only Chart |
| Point and Figure is another type of chart that has been around since A.W. Cohen published his book
on the subject in 1948. Unlike bar charts, with price shown on the vertical axis and time on the horizontal axis, point and figure charts
are only concerned with price. An X is plotted when the price rises a certain amount say $2, and an O is plotted only after the price
has reversed and dropped by three times as much, or in this case $6. The size of the price increment, or box as it is called, will vary
from market to market. Here is an example of a Point and Figure Chart: |
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| There are many good books on point and figure charting that can be found in the TTC Bookstore. One I highly recommend is by Thomas J. Dorsey. |
| Candlestick Charts, also known as Sakata Charts or Sakata Methods, are a popular way to look at price charts.
Originating in Japan, they have been around for about as long as people have been trading. After going through many stages of development, they have
survived the test of time to become a powerful tool of technical analysis. Though they are the oldest form of charting, dating back to the 1700's, they have
only just recently become known to the West. Due to the differences in language, they remained one of Japan's best-kept secrets. However, because of their
proven effectiveness Candlestick charts have rapidly gained in popularity among western traders, and there are now a variety of good candlestick charting books translated into English.
Candlestick charts are created using the same OHLC data as bar charts, but are by far more visually appealing and price relationships can be seen much easier. Also, they provide
a clear view into the current trading psychology of a particular market not readily available with other types of charts. Since they use the same OHLC data, they can be applied to
stocks and commodities just as easily. Like traders seeking recurring chart formations in bar charts, candlesticks also create patterns, and with names like "Hanging Man" and "Morning Star"
how could you not want to learn them. Of course, if you are fortunate enough to read Japanese, there is a vast number of books which can be found in Tokyo, and a few of them can be found right here in the Tokyo Traders Club Library.
First, let's take a look at a standard candlestick. Incorporating the same OHLC data, a white (bullish) candlestick appears when the closing price is higher than the open, and a black (bearish) candlestick is shown
when the price closes lower for a given time period: |
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| Bullish Candlestick |
Bearish Candlestick |
- Real Body - The body of a candlestick represents the price range between the opening and closing prices.
- White Real Body - When the real body is open or white, the price closed above the open and is normally seen as bullish.
- Black Real Body - A black or filled in real body appears when the close is lower than the open, and is considered bearish.
- Upper/Lower Shadows - The thin vertical lines above and/or below the real body are called the upper/lower shadows. They represent the high/low price extremes of a given time period.
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| Bar Chart |
Candlestick Chart |
| As you can see the battle between the bulls and the bears becomes quite apparent on the candlestick chart. Once you start looking at
charts with candlesticks, you will be hooked! To learn this ancient form of analysis and add another dimension to your trading, become a Tokyo Traders Club student and take the Japanese Candlestick Course.
All the charts used in the course were created using Track N Trade Pro by Gecko Software. This software has a built in simulator
that is great for papertrading, and as many members are also using this software, exchanging files is very easy. More information can be found in the resources area of the web site. Happy trading! |
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