SN: The Eastern philosophy of Yin and Yang is at the very base of Japanese Candlestick charting. Yang is bullish and Yin is bearish. The Japanese have a saying that states that when Yang reaches an extreme, we have stillness. The stillness gives rise to Yin.
This has given rise to a candle pattern called an Evening Star. The Japanese have used their understanding of psychology in the candle patterns. The Evening Star is a bullish candle, which is represented by the tall white candle. The next candle is a small real body, which shows that the market has movingmomentum or shows stillness, which is then followed by the tall black candle, which is the reversal or the Yin.
Many Japanese Candlestick patterns have their origin in the Japanese warrior society and use military analogies, such as 3 White Soldiers. So although the interpretation of the price action in the market is an art of it own, the Japanese Candlesticks have deep roots in the philosophy of the East.
Back in the 1920's technical analysts in the US began writing about the chart pattern we now know as the Head and Shoulder pattern. This particular pattern consists of 3 rallies of which the middle rally is the longest. However, the same pattern is discussed in material dating back much earlier, but it was called the 3 Buddhas pattern. You will often find 3 statues sitting next to each other in the East. The middle Buddha is the biggest and next to it on either side are two small Buddhas.
TH: Can Candle charts be applied to any market in any time-frame?
SN: The Japanese have a saying, which answers that question: The song of a bird is the same everywhere.
Candles can be used on all time frames. 90% of people who attend my seminars are swing traders. I define a swing trader as someone whose trading time-frame ranges from intra-day to up to 3 weeks. Therefore we focus the seminar work on the hourly and the daily chart.
Our institutional clients often want us to focus on the longer-term charts and we use the weekly candle charts for this purpose. Candlestick analysis is a tool more than a method. I teach traders in the big banks around the world how to read the charts using candles and the use of proper risk management through the use of the candle formations.
All of the candle formations have got an inbuilt money management parameter, in that if a certain pattern is forming in the market, the trader will know what will invalidate this particular pattern. He or she can then put his stop loss at this particular exit point.
TH: What are the advantages of candles over bar charts and line charts?
SN: Candlesticks are superior to bar charts in virtually every conceivable way. Candles will spot reversals before bar charts do. The very nature of the candles is that it will warn you of impending reversals before the reversal has even taken place.
Candles offer razor sharp entry to the market and if you use candles with traditional Western technical analysis you gain a real edge. I call it confluence of technical indicators and I teach this extensively in my seminars. If you for example combine candle pattern with, for example, volume thrusts you get a much better signal than if you use volume alone.
An example of this could be the bullish engulfing pattern, where you have a black candle followed by a white candle. This is a reversal pattern, and I will become bullish if the volume is declining on the black candle and increases on the white candle. This shows me the bulls are in control and I can initiate long positions accordingly.
Another added advantage of candle charts is the colours of the actual candle bars. Visually the candle charts will give the trader an instant indication of the bullish or bearish forces at play. Bar charts will not readily give you this.
At the end of my seminars I always ask the delegates if they will ever go back and look at bar charts. So far I have never had anyone raise his or her hands.
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