FORMATION OF CANDLESTICKS
''Without Oars You Cannot Cross in a Boat"(here i want to share some lessons from Steve Nison's famous book "Japanese Candlestick Charting Techniques" with u)
A comparison between the visual differences of a bar chart and a can- dlestick chart is easy to illustrate. Exhibit 3.1 is the familiar Western bar chart. Exhibit 3.2 is a candlestick chart of the same price information as that in the bar chart. On the candlestick chart, prices seem to jump off the page presenting a stereoscopic view of the market as it pushes the flat, two-dimensional bar chart into three dimensions. In this respect, candlecharts are visually exciting.
DRAWING THE CANDLESTICK LINES
Since candlestick charts are new to most Western technicians, the most common Western chart, the bar chart, is used throughout this chapter as an instructional tool for learning how to draw the candlestick lines. Drawing the daily bar chart line requires open, high, low, and close. The vertical line on a bar chart depicts the high and low of the session. The horizontal line to the left of the vertical line is the opening price. The horizontal line to the right of the vertical line is the close. Exhibit 3.3 shows how the same data would be used to construct a bar chart and a candlestick chart. Although the daily bar chart lines and candlestick chart lines use the same data, it is easy to see that they are drawn differently. The thick part of the candlestick line is called the real body.
It represents the range between that session's opening and closing.When the real body is black (i.e., filled in) it means the close of the ses-sion was lower than the open. If the real body is white (i.e., empty), it means the close was higher than the open. The thin lines above and below the real body are the shadows. These shadows represent the session's price extremes. The shadow above the real body is called the upper shadow and the shadow under the real body is known as the lower shadow. Accordingly, the peak of the upper shadow is the high of the session and the bottom of the lower shadow is the low of the session. It is easy to see why these are named candlestick charts since the individual lines often look like candles and their wicks. If a candlestick line has no upper shadow it is said to have a shaven head. A candlestick line with no lower shadow has a shaven bottom. To the Japa- nese, the real body is the essential price movement. The shadows are usually considered as extraneous price fluctuations. Exhibits 3.4 through 3.7 demonstrate some common candlestick lines.
Exhibit 3.4 reveals a long black candlestick reflecting a bearish period in which the market opened near its high and closed near its low. Exhibit 3.5 shows the opposite of a long black body and, thus, represents a bull-ish period. Prices had a wide range and the market opened near the low and closed near the high of the session. Exhibit 3.6 shows candlesticks having small real bodies and, as such, they represent a tug of war between the bulls and the bears. They are called spinning tops and are neutral in lateral trading bands. As shown later in this book (in the sections on stars and harami patterns), these spinning tops do become important when part of certain formations. The spinning top can be either white or black. The lines illustrated in Exhibit 3.6 have small upper and lower shadows, but the size of the shadows are not important. It is the diminutive size of the real body that makes this a spinning top. Exhibit 3.7 reveals no real bodies. Instead, they have horizontal lines. These are examples of what are termed doji lines. A doji occurs when the open and close for that session are the same or very close to being the same The lengths of the shadows can
vary. Doji are so important that an entire chapter is devoted to them Candlestick charts can also be drawn more colorfully by using the classical Japanese candlestick chart colors of red and black. Red can be used instead of the white candlestick. (This could be especially useful for computer displays of the candlestick charts.) The obvious problem withthis color scheme is that photo copies and most computer printouts will not be useful since all the real bodies would come out as black. Some readers may have heard the expression yin and yang lines.These are the Chinese terms for the candlestick lines. The yin line is another name for the black candlestick and the yang line is equivalent to the white candlestick. In Japan, a black candlestick is called in-sen (black line) and the white candlestick is called yo-sen (white line).The Japanese place great emphasis on the relationship between the open and close because they are the two most emotionally chargedConstructing the Candlesticks 25 points of the trading day. The Japanese have a proverb that says, "the first hour of the morning is the ructder of the day." So is the opening the rudder for the trading session. It furnishes the first clue about that day's direction. It is a time when all the news and rumors from overnight are filtered and then joined into one point in time. The more anxious the trader, the earlier he wants to trade. Therefore, on the open, shorts may be scrambling for cover, potential longs may want to emphatically buy, hedgers may need to take a new or get out of an old position, and so forth. After the flurry of activity on the open, potential buyers and sellers have a benchmark from which they can expect buying and selling. There are frequent analogies to trading the market and fighting a battle. In this sense, the open provides an early view of the battlefield and a provisional indication of friendly and opposing troops. At times, large traders may try to move the market on the open by executing a large buy or sell order. Japanese call this a morning attack. Notice that this is another military analogy.
vary. Doji are so important that an entire chapter is devoted to them Candlestick charts can also be drawn more colorfully by using the classical Japanese candlestick chart colors of red and black. Red can be used instead of the white candlestick. (This could be especially useful for computer displays of the candlestick charts.) The obvious problem withthis color scheme is that photo copies and most computer printouts will not be useful since all the real bodies would come out as black. Some readers may have heard the expression yin and yang lines.These are the Chinese terms for the candlestick lines. The yin line is another name for the black candlestick and the yang line is equivalent to the white candlestick. In Japan, a black candlestick is called in-sen (black line) and the white candlestick is called yo-sen (white line).The Japanese place great emphasis on the relationship between the open and close because they are the two most emotionally chargedConstructing the Candlesticks 25 points of the trading day. The Japanese have a proverb that says, "the first hour of the morning is the ructder of the day." So is the opening the rudder for the trading session. It furnishes the first clue about that day's direction. It is a time when all the news and rumors from overnight are filtered and then joined into one point in time. The more anxious the trader, the earlier he wants to trade. Therefore, on the open, shorts may be scrambling for cover, potential longs may want to emphatically buy, hedgers may need to take a new or get out of an old position, and so forth. After the flurry of activity on the open, potential buyers and sellers have a benchmark from which they can expect buying and selling. There are frequent analogies to trading the market and fighting a battle. In this sense, the open provides an early view of the battlefield and a provisional indication of friendly and opposing troops. At times, large traders may try to move the market on the open by executing a large buy or sell order. Japanese call this a morning attack. Notice that this is another military analogy.
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