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Steve Nison (Candlestick Courses, Japanese Candlestick Charting, Beyond Candlesticks) brought a 300-year-old Japanese cand lestick trading system to the West in 1989 (Futures Magazine) and changed how people tradel.
HISTORY OF CANDLESTICKS
After the Shogun conquered all of Japan in the 17th century, he had all the feudal lords come live with him in Osaka. When the feudal lords returned to their fiefdoms, the Shogun kept their families in Osaka so that if one of the lords revolted, his family could be put to death.
The lords spent so much on their homes that they began to run out of money (nothing has changed in hundreds of years). Someone suggested selling the next rice crop and the rice crop after that. And thus the first futures market was born.
The only writing materials they had were rice paper, paint brushes and black ink. So, if the market opened and closed higher, a hollow candle was drawn, letting the white rice paper show through. If the market opened and closed lower, the candle was painted black. With computer-generated charts, most of the white (higher) open and close candlesticks are either green or blue, while the “black” (lower) open and close candlesticks are usually red but sometimes black.
ADVANTAGE OF CANDLESTICKS
The advantage of candlesticks over bar charts is that the traders can clearly see whether the market is moving up or down. How does this help us?
USING CANDLESTICKS TO ENTER AND EXIT
The definition of an uptrend (bullish) is higher highs and higher lows, while a downtrend (bearish) is lower highs and lower lows. We can clearly see whether the market is trending or not. Most traders don’t find it hard to enter the market but have difficulty exiting. In a bullish swing-trading situation, the trend is to higher highs and higher lows; as soon as you see lower highs and lower lows, you should be alerted that the market is no longer in synch with the definition of a bullish trend. When you have a number of white candlesticks (higher open and close) and see a black candlestick (lower open and close), that is an alert that the trend may be over. When you have two black candlesticks in a row, you should exit. The bigger the black candlesticks, the more pressure you should feel to exit.
In a bearish situation, the reverse is true. When you have a number of black candlesticks and a white candlestick appears, you should be alerted to exit.
HAMMERING OUT A BOTTOM
When looking at candlesticks it is important to determine whether the market is at the bottom or top of a move. In the example to the right, the market has moved down with mostly black candlesticks (lower open and close). A hammer is a candlestick with a small black body and a long lower shadow. If the shadow is on the top with no shadow on the bottom, it is an inverted hammer with the same implication. The longer the shadow the greater the likelihood of a reversal. If the shadow is two and a half to three times longer than the body, the likelihood of reversal is great. If shadow is shorter than that, the likelihood of reversal is moderate.
HANGING MAN OR SHOOTING STAR
In the example, the market has moved up with a number of white candles (higher open and close) and a hanging man (a.k.a. hangman) has formed. It looks the same as the hammer but is at the top of a market move. Again, if the shadow is two and half times to three times as long or longer, the likelihood of reversal is high. When the long shadow is on top and there is no bottom shadow, we have an inverted hanging man or a shooting star but with the same implication.
EXAMPLES OF LONG TAILS (SHADOWS) MARKING A REVERSAL
In the example to the right, a hammer has formed and is a bullish indicator of a reversal. Steve Nison says that rather then wait for another white candle for confirmation, if the shadow is long enough, traders should exit their short positions and go long.
In the other example, we see an inverted hanging man or a shooting star indicating a reversal and the market then moving down. A hanging man with a small body and long bottom shadow would have had the same implication.
ON-LINE COURSES
Traders should look for high profit potential with low predetermined risk. Before trading with real money and risking their hard-earned cash, traders should “paper trade” (not using real money). It is recommended that traders educate themselves before investing in the market by taking classes; otherwise they may find themselves paying a much higher tuition in the form of losses.
Candlesticks alert you to reversals.
Long-shadow (tail) candlesticks.
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