Author (as CandleWave, LLC) publishes investment advisory newsletter at http://www.candlewave.com/ Passed NASD Series 65 Investment Adviser exam. Creator of "Candelaabra" technical analysis system. Ret. atty and corporate EVP.
Like traders everywhere, one particular rice trader in Japan centuries ago was always searching for an "edge" in his analysis of the market. He developed a system of price recordation which, in his view, captured the essence of the psychology of the traders with whom he was doing business. Rather than recording prices in a simple manner which only revealed the opening price, the closing price, the high, and the low of rice prices during a particular trading session, his system showed all of that, to be sure, and more. Specifically, rather than using a simple line drawing, he "fattened out" the line into a cylinder, which he either colored in, or not, depending on the movement of prices during that session. Simply put, if he left the cylinder unfilled, that meant that prices ended up higher that day; if he filled in the cylinder, that inferred that prices declined. He felt that by this device he could tell, and could record, the overall psychology of the market.
In the United States, and elsewhere in the West, this system of price recordation has become known - not surprisingly - as "Japanese Candlesticks." Their use here began about 25 years ago, and is now spreading widely. The system is simple and quick to learn. It's necessary to memorize only about a dozen of the major candle patterns. Investors who have taken the time and trouble to learn the candles aver that they would never go back to the old system, because in fact the candle patterns do reveal so much of the psychology of the market participants. The beauty of the candles is that they can be used with equal result in any financial market and in all time frames. They are especially adept at foretelling reversals of trend. They accurately predicted the top of the market in year 2000 and the beginning of the recovery in 2002-2003. Further, they spotted the top of the market in October 2007, which appears now to have been a major turning point, following which we can expect a long decline which will retrace all of the market gains since 1995.
Purely as a defensive measure if nothing else, every investor should take the time and the minimal effort which is required to learn the basics of Japanese Candlesticks price presentation. Informational materials are widely available, both in printed form and in DVD form. Skilled practitioners also make a business of conducting seminars on the subject, both in person and via the Web.
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