subject: Japanese Candlestick Charting Techniques - Candlestick Trading [print this page] Japanese candlestick charting techniques have been around for almost as long as candlestick charts themselves. This method of tracking price movements was invented by a Japanese commodity trader named Homma Munehisa who was also known as Sokyu Homma and Sokyu Honma and traded rice in 18th century Japan. He needed a way of marking not just price but open, close, high and low prices over a time period that was easy to read at a glance and the first candlestick trading technique was born.
It was quickly found that this method of recording price values could also give rise to various techniques for predicting future demand, that is, whether the price is going to rise or fall in the near future. Clearly, this intelligence is very valuable for commodity traders , as well as traders in stocks and foreign currency traders. Seeing the potential, Charles Dow of the Dow Jones company picked up the method around 1900 and introduced it to the American stock market.
A very important and popular Japanese candlestick charting technique uses what is known as support and resistance lines. These lines are of most use when the price is fluctuating in steady waves.
So at a time when there is no real upward or downward trend, but the price is moving between certain parameters, you can draw a line through the top point of the highest candlesticks on the one hand, and through the bottom point of the lowest candlesticks on the other. In this situation these two lines will be more or less horizontal and parallel.
You can then expect that for as long as current market conditions continue, the price will remain within these boundaries. Therefore you can trade on this basis.
Candlestick Trading
In a different situation where there is a steady trend, you may still be able to use support and resistance lines to gauge the fluctuations within the trend. Even in the steadiest of upward trends there will be moments when the price falls a little, and vice versa. In this situation the support and resistance lines will be sloping, but provided they are more or less parallel, they can be used in the same way as if they were horizontal.
In candlestick trading where support and resistance lines are converging which means they are not parallel but are closing together as if to join at a point, then this indicates that a breakout is potentially about to happen. In this scenario you should not trade on the premise that the price will always form a retracement back from the resistance and support lines. It is normally better to wait for a breakout and go with the new emergent trend that it indicates.
On the other hand if the lines diverge, this suggests a market that is becoming more unstable. It may be better to stay out of this market for a while.
Support and resistance indicators will be very useful to you but they should not be your only indicator. Be sure to consult other signals before opening a trade, and try out your system in demonstration mode for a reasonable amount of time before going live. Remember that prices can sometimes behave unpredictably and that can upset even the best Japanese candlestick charting techniques.
by: James Roshwood
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