subject: Annoying Candlestick Picks [print this page] Japanese candlestick charting is a hundreds of years old trading technique that's been employed in the Far East for over 400 hundred years. The method was developed in the early 1700s at the Dojima Rice Exchange in Osaka, Japan for the trading of rice futures coupons.
The rules of the technique were formalized by Japanese businessman Munehisa Homma. Mr. Humma retained thorough historical price records and findings of trader mindset. Mr. Homma was rumored to have accumulated a considerable fortune. No person knows definitely and he may have died a poor trader. Put another way, so far as we all know, the creation of candlesticks could have been one vain attempt by a mad man to make money who in the end failed. Needless to say people that sell candlestick trading books and software are more than ready to propagate the rumor that Mr. Humma became rich but no one has produced credible information confirming this rumor.
Candlestick charting was unveiled in the West by Steve Nison, with the publication of his book Japanese Candlestick Charting Techniques in 1991. Since that time, candlestick charting has turned into a widely accepted trading tool. Nearly all significant stock market charts have incorporated candlestick charts as an option.
So what you just read about candlestick charting sounds good. What a excellent tale. But how about making money with candlesticks? Don't waste your time.
When I first began investing, I lost lots of money using candlestick patterns.
Fundamentally, candlesticks aren't any better than any one technical analysis tool. Some would say they are actually a whole lot worse.
The drawback with candlesticks is they are one day patterns. Some candlestick patterns are 2 days. Less are 3 days. You can even find some 4 day candlestick patterns.
Here's the question to ask yourself. Can you really predict the future price direction of a stock or market by looking at only 1, 2, or 3 trading days? If you said yes you are loony. You don't know what you're speaking about.
Longer term chart patterns trump smaller ones. Technical analysis tools like moving averages, MACD, stochastics, volume, and even most chart patterns take weeks to months to form. Even with using just 50 and 200 day moving averages, you are looking at 50 or 200 days worth of trading activity in order to predict future price direction. That works. This really is establishing a trend over many weeks, months, and even years in order to predict investor psychology in the present market environment. The longer term technical analysis tools beat candlesticks given that they form over much greater durations and larger pattern formations always trump shorter ones. This isn't a subjective opinion, it's objective fact. Anyone who thinks that 1 to 4 days of price movement enables you to predict good size moves in stocks is somebody who has never tried.
This isn't to say that candlestick patterns are worthless. But here's how I would position them when it comes to importance:
1. Support and resistance levels, Downtrend channels, Head and Shoulders, and many other chart patterns.
2. Volume
3. Moving averages
4. MACD
5. Stochastics
6. Donchian Channel / Sar
7. 52 week high, 52 week low, 3 month high and low
8. Seasonality
9. Candlestick patterns
10. Astrology trading
Do not misunderstand me. All my stock charts are drawn with candlesticks because I can visualize them easier than High / Low bars. But using candlesticks to visualize a day's price movement and utilizing candlesticks to predict future price direction are two contrasting matters.
There's a reason that candlesticks were used 400 years ago and in the end they died out.
The thought of excavating something out of a 400 year old trash can and then romanticizing it as if the Japanese 400 years ago were wiser and better traders than we are nowadays is rubbish. But I do admit, it's good marketing: "400 Year Old Secret Uncovered Within the Dead Sea Scrolls - Took 5 Linguistic Experts 10 Years To Translate!" or something spectacular like that. Great tale that really sells, but as a price prediction standalone instrument it's rather horrible.
If all the tools we now have nowadays which includes computers, these Japanese had 400 years ago, I'm certain that even they would not be utilizing their own candlesticks.
Candlesticks were created as a by-product of their time. The folks who created them couldn't even make a computer, an automobile, or other industrial feats which call for mathematics. In fact, most people 400 hundred years ago in Japan thought that their emperor was a god and only the ruling class was educated and even that was pathetic compared to Western civilization.
Envision if a worm hole took a candlestick trader from 400 years ago, and planted him in a modern day trading room in the present. You'd have a guy in a robe scratching candlesticks on parchment and charting maybe 20 stocks and markets in a day. Compare that to a guy sitting in front of a computer scanning over 20,000 charts in real time looking at 8 other technical analysis tools (everything I listed above) beyond just candlesticks, and utilizing sector rotation and inter-market analysis to generate a prediction on which way a market was headed, and doing it all before the guy with the parchment was done scribbling his first candlestick. Now tell me the 400 year old Japanese candlestick trader wouldn't happily use his parchment as toilet paper after looking at what a present day stock trader is able to do.
