“A picture is worth a thousand words.” How many times have we heard that? Since early times, humans have made pictures of things and events around them, both because visual representations give pleasure and because they create a record. The invention of the motion picture camera and of its derivatives in the digital age have carried record-keeping one step further, by creating a record of events as they are happening in real time.
When a Japanese rice trader invented what is now known as “Japanese Candlestick” recordation of sales and purchases, we do not know whether he kept a running account in writing of the day’s events. We do know that he recorded the trading process of the day after the day was done.
The Candlesticks are becoming more widely accepted in Western financial markets as time passes. Certainly some of the more successful traders in every market, from stocks to commodities to foreign exchange, use them as a matter of course.
One major advantage of the Candlesticks is that they respond to the human condition, in that they are a pictorial representation of price action in a particular time period; that is, they display that which needs to be seen in a form which is instantly recognized by the eye and translated by the brain as depicting the psychology of the market at a point in time. The eye loves pictures. By whatever name – picture, pattern, image, or formation – investors have come to rely upon them in their investing and trading as a form of technical analysis which has exceptional value in determining the probable next direction of prices. Professional writers have built entire businesses around providing training and commentary about the Candlesticks. Several prominent practitioners prefer to offer the “forum” or “seminar” style of instruction on a regular basis, while others issue a market letter or investment newsletter over their own signature. Several combinations of services are available.
Apart from revealing the underlying mood or psychology of market traders and investors, Japanese Candlesticks, when properly interpreted, have an uncanny ability to foretell major reversals of trend. There are only about twelve major reversal patterns, which are easy to memorize and a pleasure to find when they occur. Some of the patterns consist of a bar showing the price events of a particular time period. Others are a combination of two bars, or three.
The Candlesticks are fully compatible with “Western” indicators. The process is clearly additive, not subtractive or substitutional. It is a matter of synergism, or enhancement, whereby the power of the Candles tends to be perfected by incorporating the particular revelations of the “Westerns” into the entire analytical process.