Japanese Candlestick Analysis and the Human Brain

Mechanical technical analytical systems are a product of the human desire for certainty.  They are attempts to reduce to physical certainty processes which are emotional, not physical.  They try to jam the facts of one world, the world of emotion, which we cannot see, into another world – the physical world which surrounds us.  The two are incompatible, which is why mechanical trading systems eventually fail, in spite of the most advanced computers available.  They work in a parallel universe, and the two do not meet.

Japanese Candlestick technical analysis does not suffer from the fundamental defects of a mechanical system.  Nevertheless, it does not operate in a vacuum.  Its starting point is the physical universe – the movements of stock prices and, in particular, the patterns which are left behind by price action.  It then transfers that knowledge, through the eye, to the most exquisite computer ever devised – the human brain – which interprets the emotional, psychological underpinnings of stock price movements and produces estimates of the next direction of prices.

There comes to mind the Crash of 1987, which was “unexpected” and “came out of the blue.”  It was no such thing.  Had Japanese Candlestick analysis been in general use in those days, skilled observers would have seen evidence of the psychology of the market and could have taken action to escape the worst of the decline.  Yet, to this very day, experts who should know better are still trying to find physical “reasons” for the Crash, but have found none – because there are none.

Whereas mechanical systems denigrate the analytical capabilities of the human brain by excluding it from the analytical process, Candlestick analysis, on the other hand, celebrates it.

The eye, of course, is an extension of the brain.  The real beauty of Candlestick analysis is that it empowers the brain to interpret the patterns which are presented to it, recognizing that price action in the stock market reveals the emotions and psychology of the traders who are participating at the time.  It is nothing less than a deconstruction of the traders’ mood, from which reasonable conclusions can be drawn about their next move.

The Candlesticks live for reversals of trend.  They are champs at spotting reversals which are in the process of happening, or are about to happen.  Some Candlestick pictures are clear as crystal.  Others are less clear, but nevertheless throw off clues.  Much of the time, no clear reversal pattern is evident.

It really gets interesting – and fun – when a less-than-perfect reversal pattern emerges, or when the clues are nevertheless somewhat tilted to the bullish side or to the bearish side.  This, I think, is where some Candlestick proponents do their clients a disservice, in searching always for perfection or near-perfection in pattern formation.  Certainly it is essential to know and to be able to recognize the major patterns in their pure form.  However, in my experience volumes of valuable and predictive information are presented by unorthodox patterns which are not shown in the standard textbooks but which, nevertheless, reveal mountains of data regarding the underlying psychology of the market and the next direction of trend.

So, why is it that proponents of mechanical trading systems remove from the analytical equation the finest computer ever devised?  It’s a mystery to me.  There is nothing that can, or ever will, approach the human brain in its ability to analyze the psychology of the market as revealed instantly in pictures - the Candlestick patterns.  After all, the human brain is working in its own world here – the world of human emotion – which is a parallel universe to which mechanical systems and observers who always search for physical, external “reasons” for market action have no entry door.

This is a world with respect to which the talking heads on CNBC have no clue.  But it’s there, it’s real, and I use it every day.  You can, too.  This is not rocket science, or anywhere nearly as intricate as putting a lander on Mars.  And it’s so much fun to decipher the psychology of the market, and then to base your own trading decisions on that knowledge.

Don’t simply try to rely on the numbers.  Rely on your own eye and on your own brain!  You have in your head the greatest computer of all.  You can do this.  The Candles are easy to learn and a joy to use.  A whole new world will open up for you, and you may never knew it exists!