Japanese Candle Charting Opens Doors of Understanding

“Everything old is new again.”  It might be better to say that some things never do grow old in the first place.  In the case of Japanese Candlestick financial price presentation, this technique was developed hundreds of years ago in the Japanese rice trade by an enterprising practitioner who wanted to develop a system which would give him an advantage over his fellow traders.  The method which he created did, indeed, reveal the underlying psychology of his competitors and enabled him to succeed.

His technique was never lost; it just slept for a while.  Within the past twenty years or so it has been revived, principally first in the United States by a degreed financial advisor who spent a great amount of time and money researching the field and obtaining translations into English of the old texts.

Japanese Candle Charting has not yet become the standard, but it is well on its way.  More and more financial writers use it in their own products, and traders continually gravitate toward the Candles because, by reputation, their worth has spread by word of mouth and by the written testimony of credible investors who successfully use it every day.

It’s not complicated.  Essentially, all that the Candles do is to fatten out, on a financial chart, the physical distance between the opening price and the closing price.  This area is then known as the “real body,” and acquires special significance in several ways, not the least of which is in the definition of an “outside day” and an “inside day.”  The difference can be significant in price-predictive work.

The “fattened-out” area on the chart is left blank, or white, if the closing price of the period is higher than the opening price.  If the closing price is less than the opening price, then that area is filled in “black.”

This very simple device makes it easy to discern the underlying psychology of traders, especially when viewed in “real time” display with short-minute streaming data.

The difference in the viewer’s perception is so striking that it is hard to understand why anyone would retreat to the old “bar chart” method, which lacks so much content by comparison. 

Every investor and trader should take the minimum time and trouble to at least learn the basics of Japanese Candle Charting.  This is “Pattern Recognition 101.”  Learning time is quick, it is fun, and it is good for a lifetime.

William Kurtz

July 10, 2009