Japanese Candlestick Technical Analysis is a Breeze

Do you marvel, as I do, at the ingenuity and complexity which is involved in delivering a landing vehicle from Earth onto the surface of Mars after a trip of millions of miles and of many months’ duration?  Do you now take for granted, as I do, our ability to send documents in color from one point on Earth to almost any other point on Earth -instantaneously?  The human intelligence and dedication which is required in order to accomplish these seeming miracles is almost beyond comprehension.

In the field of Finance, many people are turned away too soon – or give up too soon – when they hear the term “Japanese Candlestick technical analysis.”  Perhaps one reason is that it sounds “foreign,” or that “technical analysis” implies a substantial amount of hard work and expenditure of time even to begin to understand what it is all about.  This is unfortunate, because this is nothing when compared to landing a vehicle on Mars or sending documents around the world in a flash.

The fact of the matter is that Japanese Candlestick technical analysis is a breeze to learn, and takes very little time at all.

What’s it all about?  Let’s start with an understanding of the usual method of price display of a certain stock.  The price action of the trading day is shown as a vertical line, or bar, which is associated with a price scale (in dollars) at the edge of the page.  The top of the bar is the highest price of the day; the bottom of the bar is the lowest price of the day; the little wing on the left is the opening price of the day; and the little wing on the right is the closing price of the day.  Simplicity itself.

The difficulty is that the display is inert; lifeless.   It doesn’t readily disclose what went on during the day, or much of anything about the psychology of the buyers and sellers which drove prices during the day.  The Candlesticks cure that defect.  Rather than simply showing price action as a narrow vertical line or bar, the line is “fattened out” into a cylinder.  If the result of trading during the day is that prices closed higher than the opening price, then the cylinder is left hollow, or “white;” if prices closed lower than the opening price, then the cylinder is filled in, and is shown as “black.”  Ah!  Now we see, at a glance, that the mood of the day, overall, was Down.  The Candlestick really comes into its own when streaming data are shown on the screen, so that the viewer can see the changes in mood as the day progresses.  It’s like a movie in progress.

The second major advantage of Candlestick presentation lies in the interpretation of the patterns which the candles produce over various units of time.  Some of the patterns are one-day affairs; others have meaning when they develop over a course of several days or other time frames.  The operator quickly learns to recognize them on sight.  For example, if – after a long rise in prices – a daily pattern appears, well above prices to date, which involves a substantial range between the upper and lower prices of the day but only a narrow range between the opening and closing prices – and if that happens at the low end of the total range, that is called a “Shooting Star,” because that’s exactly what it looks like, and it has bearish implications.

Another favorite of mine is the “Evening Star,” which is a combination of the candle bars over (say) a three-day period.  It occurs at the top of a long rise in prices.  If the first candle is a long white candle, the middle candle is a little higher, but smaller, and the third bar is a long black candle which is lower than the middle candle, that’s an “Evening Star” and is very bearish.

This is not rocket science or putting a lander on Mars!  There are only about a dozen Candlestick patterns which need to be memorized at the outset.  It’s really fun to learn them, and to put them into practice.  The beauty of the patterns is that they are so instantly recognized by the eye, and disclose at a glance the underlying psychology of the participants in the market on that particular day.

They are an enormously valuable trading and investing tool.  Once you learn them, you will never go back to the “old way.”