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Candlestick history goes back much further than standard price bars. Japanese traders used them in
the 18th century to forecast rice prices. According to legend, one local speculator executed over 100
consecutive winning positions by applying this simple tool. The military names for many
candlestick formations arise from that era’s feudal system. The pattern names that compare trading
sessions to battles and blood remain valid 300 years later.
Candlestick charts condense far more information than standard bar plots. They separate price range
extremes within a chosen period from the central opening and closing values. The candlestick real
body represents the core price action, measured from open to close. Upper and lower shadows mark
the range outside this boundary. Candlesticks illustrate intrabar conflict between bulls and bears.
They reveal price action in the time frame below the one measured by the chart.
Color-coding of intrabar price movement adds another dimension to candle study. When the open
prints above the close, the real body will usually appear hollow and designate upward change.
Alternatively, the body will fill with black, red, or any other color when the open lies below the
close. The interplay of hollow and filled candles reveals very short-term swing conditions as well as
surges in volatility. It also uncovers hidden gaps that fill by the bar’s close. While most Western
charting ignores these important failures, swing traders can examine many hidden levels with
candlesticks and locate significant S/R.
Candles print numerous predictive patterns with only one to four bars of data, making them an
outstanding tool for short-term trading. Candle prediction depends on the location of the pattern
within the charting landscape. Two identical formations at different S/R boundaries will generate
unique outcomes. Consider abandoning plain vanilla price bars and trading with candles
exclusively.
Use candlesticks for all charts in all time frames, but exercise caution on very short-term views.
Extremes of intraday candles (shadow zones) generate inaccurate information created by bad ticks.
Mentally filter price extremes to avoid executing positions based on faulty data. Act only on candles
that print with length and volume both well above the average of the previous bars and those
precisely located at major S/R pivots. Avoid all signals based on patterns in low-priced or thin
issues.
Candlesticks illustrate reversal patterns better than any other technical tool. Many changes in trend
originate within the time frame below the primary view of the swing trader. Common formations
such as shooting stars, hammers, dojis, and haramis provide early warning to prepare strategies
against the crowd. But all signals must work within the context that the candles print.
FIGURE :
Candlesticks work well in conjunction with Bollinger Bands and other central tendency tools. Look for reversal patterns
when price pushes outside of the top or bottom band. Candle action at Apple’s central band signals several intermediate
swings that precede sharp thrusts back toward the band extremes. Notice that many of these reversal patterns also
correspond with key highs and lows as well as pullbacks to support after breakout movemen
Locate S/R convergence through cross-verification before relying on any interesting pattern.
Japanese candlesticks work very well in conjunction with classic Western technical analysis. Watch
for their appearance along moving average barriers in trending markets. Look for high-volume
reversal candles at tests of tops and bottoms, major zones of S/R, and standard Fibonacci
retracements.
Stop loss raids cripple trendlines drawn from standard price bars, but candle charts survive these
short-term violations of known S/R. While the bar chartist concludes that support has broken and
moves on to the next opportunity, the candle chartist knows that the same level still remains
intact. Candle construction permits trendlines both at the shadow extreme and the real body’s edge.
This allows a powerful contrary view in an environment where everyone knows the basics of
technical analysis.
Manipulation at major S/R generates frequent price violations and increased risk. Candles provide a
perfect tool to adapt in this noisy environment. Doji and hammer reversal patterns reach across
many S/R barriers, only to close back within support. Both their location and appearance signal that
the boundary’s support remains well intact. These important levels generate interesting contrary
strategies and improve timing. (See Chapter 10).
Forget most standard candle pattern definitions found in modern financial books. Concentrate on
the few major formations that consistently point to crowd conflict and resolution. Every setup acts
differently, depending on location, volume, and trend. See the truth whether it confirms or disputes
popular opinion. Undocumented patterns with strong predictive power appear every day. Learn to
read the message of the candles even if they don’t carry a warrior identity. Most hidden archetypes
of crowd excitement, panic, and reversal arise in the unconscious mind and can be understood
through trader intuition as well as analysis.
