The Hindu Business Line : Light on candlesticks

How many miles is it to Babylon? `Threescore miles and ten,' answers a nursery rhyme. But another question chimes in: "Can I get there by candle-light?" And the answer is fast: "Yes, and back again. If your heels are nimble and light, you may get there by candle-light."

You can catch up with candle flickers in market news. For instance, a September 18 report on http://biz.thestar.com.my speaks of `three black candles in the last three weeks' and says, "the downward momentum indicates that the near-term sentiment of the market will stay negative."

And Chris Tyler's September 1 analysis on www.insidefutures.com opens thus: "A modest thrust through resistance in the S&P500 followed by two eerily similar topping candles from troubling times gone by has this market observer appreciating the long holiday weekend without any bovine and bullish ambitions."

The art

Want to be nimble in the markets? If yes, here is light that Martin J. Pring offers in Candlesticks Explained, from Tata McGraw-Hill (www.tatamcgrawhill.com). Candlesticks are one of the pieces of evidence in the technical analysis jigsaw, apart from `trendlines, oscillators, moving averages, and so on,' he writes. Technical analysis, for starters, is "the art of identifying a trend reversal at a relatively early stage and riding on that trend until the weight of the evidence shows or proves that the trend has reversed."

Portia wonders in The Merchant of Venice, "How far that little candle throws his beams! So shines a good deed in a naughty world." Quite far, you can also say of candlesticks as charting technique for price prediction. For, their source is Japan; it was in the 1700s, that `the earliest forms of candlestick charts were originally used to predict rice price,' as chapter 1 unravels. "In 1750, a wealthy Japanese merchant, Munehisa Homma, began trading at his local rice exchange in Sakata using his own personal candlestick analysis."

Four common elements

A good beginning is the most important of things, counsels a Japanese proverb. Begin, therefore with the `basics of candle construction', by studying the similarities between candlesticks and the standard bar charts. "Each method contains four common elements for construction. These are the open, high, low, and closing price for a given time period," explains Pring. "It is the way candlesticks are displayed (i.e. their shapes) that makes them unique and gives them special interpretive powers."

In simple, candlesticks look just that, like upright candles, or more exactly long rectangles, with vertical lines above and below, akin to wicks. "The rectangle portion of the line, called a `real body,' represents the opening and closing price," writes Pring. "The top of the rectangle represents the higher of the two prices, and the bottom the lower. For example, if the close was $10 and the opening was $9.50, the top part of the rectangle would be plotted at $10 and the lower part at $9.50."

To know which is the opening, you need to see the colour of the rectangle. If it is empty or white, the lower part of the rectangle is the opening price, and the top part represents the closing price, as happens in a bull phase. "If the rectangle is black, or filled-in, the opening price is at the top and the closing price at the bottom." Please note that a black candle can close above the previous day's close or even the high. "Thin lines that appear above and below the real body represent the high and low and are known as shadows."

A `shaven head' has no upper shadow; and a `shaven bottom', no lower wick. `Spinning tops' come with small real bodies; and `doji' is "a trading session where the opening and closing prices are the same." You can spot `umbrella lines' when "opening and closing prices develop close to the high of the day."

Many terms used in candlestick method are battle oriented, "partially due to the military environment of the Japanese feudal system," which prevailed then. Examples of such martial jargon are `counterattack lines' and `three advancing white soldiers.' There are also `everyday objects and occurrences' such as `hammer, shooting star, or hanging man.' A `dark cloud cover' indicates a coming storm, and its opposite is the `piercing line.'

Part II of the book integrates candlesticks with Western charting. "Support and resistance are basic building blocks of Western technical analysis, and their use can greatly enhance the interpretation of Japanese candlesticks," advises Pring. He devotes a whole section to other Japanese charting techniques such as three-line break, Renko charts, and Kagi charts. A four-hour multimedia CD-ROM tutorial accompanies the book.

A book on candlesticks that's worth burning the midnight oil for.

http://BookPeek.blogspot.com

More Stories on : Books | Book Value | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page