Centuries ago, a rice trader in Japan devised a simple method of recording the ups and downs of bid and asked prices for quantities of rice as they were traded daily in the open market. He had searched for a simple way to depict the ebbs and flows of prices in a way which would reveal the underlying psychology of the traders with whom he was competing, and he found it. Instead of simply showing the price record of a day’s trading by a simple vertical line showing the opening price, the closing price, and the upper and lower extremes of prices for a given trading day, he expanded the line into a cylinder – he simply “fattened it out” – and he would fill the open space within the cylinder with information. Quickly stated, if the closing price was higher than the opening price, he would mark those prices and then leave the space between the opening price and the closing price vacant, or “white.” Conversely, if the closing price was lower than the opening price, he would fill in the space between opening and closing – he would “black it out.” This made it easy to see at a glance what had happened to prices that day; and of course the ominous nature of the black fill-in told in an instant that the overall mood of traders was to “sell” on that day.
This method of price presentation has become known generally as “Japanese Candlesticks.” It was brought to this country and to other financial centers a few short decades ago, and is rapidly gaining acceptance because of its very simplicity and, at least as importantly, because of its ability to depict the psychology which underlies the markets as well as its quite uncanny predisposition to predict changes of price trend.
One of the beautiful aspects of the Candlesticks is their total adaptability to all financial markets – stocks, bonds, indexes, commodities, and foreign exchange. Further, they do not conflict in any way with so-called “Western” indicators such as the RSI, the Stochastics, Momentum, Bollinger Bands, or MACD. Rather, they are mutually reinforcing.
Many short- and long-term investors successfully use the Candlesticks every day in their trading; and once having adapted to them, would never give them up because they so powerfully enhance their own approach to the markets and increase their trading profits.