Question: Hey Jeff,  Can you explain the basics of Japanese Candlesticks?  Thanks - Steven,  Ireland

Answer:  Steven, yes I can and I will break it into a few parts for you.  I have spent over 12 years using and studying Japanese Candlesticks but, rather than me reinventing the wheel and taking a long time to do the research and writing the article I have used my fingers to do a Google search.  I have come with an excellent primer on Japanese candlesticks at http://candlestickgenius.com   I would give the author full credit, but don't see his name anywhere.

Please understand that just learning what the candlestick patterns is not enough in itself.  They need to be applied in a very systematic way within the current market conditions otherwise they can be quite misleading.

Think of each Japanese candlestick pattern as one golf club within your golf bag.  Just like you need to know what circumstances require a 5 iron, you need to know when and how you can use a candlestick pattern like a "doji".   In golf using the wrong club at the wrong time can cause you to hit your ball into the woods and cost you a lot of extra strokes.  In trading not understanding the proper use of the candlestick pattern can cause some painful losses.

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 Philosophy of the Japanese Candlestick trading system:

Even though tons of sophisticated studies and software are used to conjure up an objective way to predict price movements, the theory of Candlesticks is simple and true. It’s core belief is the following: Changes in price movement are decided by the human emotions of fear and greed and these emotions can be clearly captured and used to create wealth through understanding the patterns of price movement over any certain period of time.

 How does a "candlestick chart" work?

Japanese Candlesticks reflect a change in investor sentiment which will soon translate into a change of price direction within a certain time period.
Even when the trend is in one direction, there are always changes within the trend and as a trader is focused on short-term movements, the concept of “don’t go against the trend” is a matter of relative time period.

A trader looks for an equity, option or commodity with movement (volatility). Even though the long term trend might be in one direction, there are many directional changes as price snakes along its path. Traders make money on these mini changes within the trend.

 Construction of a “Candle”

First of all, horizontal lines mark the opening and closing prices. A box is made of these end points and the extreme high and low prices are noted as vertical lines extending from the box. These are known as “Shadows”. If the closing price was higher than the opening price, the box is left blank. If the closing price is lower than the opening price, the box is colored red or black (or filled in).

Candlesticks provide unique visual cues that make reading price action easier. Trading with Japanese Candle Charts allow speculators to better comprehend market sentiment and offer a greater depth of information than traditional bar charts - where the high and low are emphasized. Candlesticks give emphasis to the relationship between close price and open price. Traders who use candlesticks may more quickly identify different types of price action that tend to predict reversals or continuations in trends - one of the most difficult aspects of trading.
 
Candlestick traders have a saying; the real body is the essence of price movement.

Because candlesticks give insight into what the market is thinking, one of the most useful aspects of candlestick analysis is its ability to suggest changes in the sentiment of the market. We call these candle formations Reversal Patterns. Note how the black (close up) is different from the red (close down). If the volume also increases as we go from black to red, we see that the bears have taken over from the bulls. Normally, its prudent to wait for at least two or three days to confirm the change in the trend (sentiment).
 
Candlesticks are superior to traditional bar charts in virtually every conceivable way. Candles will spot reversals before bar charts do. The very nature of the Candles is that it will warn you of impending reversals before the reversal has even taken place.

While the candlestick line uses the same data as a bar chart, the color of the candlestick’s real body and the length of the shadows convey an instant x-ray into whose winning the battle between the bulls and the bears. For instance, when the body of the candle is black, that means the stock closed above its opening price. 

This gives you an instant picture of a positive or negative close.  Those of us who stare at charts for hours at a time find, candlesticks are not only easy on the eyes, they convey strong visual signals sometimes missed on bar charts.

Part 2 of Japanese Candlesticks is coming soon…

Peace & Prosperity