One of the main differences between the Western Line and the
Japanese Candlestick line is the relationship between open and closing
prices. The Westerner places the greatest importance on the closing
price of a stock in relation to the prior periods close. The Japanese
place the highest importance on the close as it relates to the open of
the same day. You can see why the Candlestick Line and its highly
graphical representation of the open to close relationship is such an
indispensable tool for the Japanese trader. To illustrate the
difference, compare the daily chart plotted with Western Lines (Figure
3) with the exact same chart plotted with Japanese Candlestick lines
(Figure 4). In the Western bar chart as with the Japanese Candlestick
chart, it is easy to interpret the overall trend of the stock, but note
how much easier it is to interpret change in sentiment on a day to day
basis by viewing the change in real body color in the Japanese
Candlestick chart.
Japanese Candlestick line is the relationship between open and closing
prices. The Westerner places the greatest importance on the closing
price of a stock in relation to the prior periods close. The Japanese
place the highest importance on the close as it relates to the open of
the same day. You can see why the Candlestick Line and its highly
graphical representation of the open to close relationship is such an
indispensable tool for the Japanese trader. To illustrate the
difference, compare the daily chart plotted with Western Lines (Figure
3) with the exact same chart plotted with Japanese Candlestick lines
(Figure 4). In the Western bar chart as with the Japanese Candlestick
chart, it is easy to interpret the overall trend of the stock, but note
how much easier it is to interpret change in sentiment on a day to day
basis by viewing the change in real body color in the Japanese
Candlestick chart.
Figure 3
Figure 4Trader's sentiment
One of the greatest values of the candlestick chart is the ability to read
market sentiment regarding a stock. To illustrate consider the
following example of a stock traded from the eyes of a Western chart
trader and then from the eyes of a candlestick chart trader.
Western Chart Trader
At the close of the day's session you observe that the stock closed well above your entry price (2), which
leaves you very content with your trade.
After the close of day 2, you open the financial section of the paper and check the closing price of the
stock and observe that not only is your stock well above your entry price, but also has gained slightly (it is
worth mentioning
that most western papers only publish closing prices while Japanese papers publish both opening and
closing prices).
On day 3 you open and the newspaper to check the close and notice a slight dip in your stocks price but
you do not panic, because you are still well in the money.
You convince yourself that the stock has only dipped slightly relative to the entry day close (day 1), and
should resume its up trend on the next day.
On day 4, you check the close and notice that the stock has fallen significantly relative to the prior days
close.
You are now concerned about protecting the profits that you had previously bragged about just days
before.
On the beginning of day 6, you call your broker (or logon to your online trading account) and place a
market order to sell at the first opportunity.
At the day 5 markets open, the stock opens sharply lower and continues to fall.
Your order is executed at a price several points below where you entered.
You then shrug off the trade as an unpredictable misfortune, and move on to the next trade.
Figure 5
Candlestick Chart Trader
Now suppose you are a candlestick chart trader trading the same stockleaves you very content with your trade.
After the close of day 2, you open the financial section of the paper and check the closing price of the
stock and observe that not only is your stock well above your entry price, but also has gained slightly (it is
worth mentioning
that most western papers only publish closing prices while Japanese papers publish both opening and
closing prices).
On day 3 you open and the newspaper to check the close and notice a slight dip in your stocks price but
you do not panic, because you are still well in the money.
You convince yourself that the stock has only dipped slightly relative to the entry day close (day 1), and
should resume its up trend on the next day.
On day 4, you check the close and notice that the stock has fallen significantly relative to the prior days
close.
You are now concerned about protecting the profits that you had previously bragged about just days
before.
On the beginning of day 6, you call your broker (or logon to your online trading account) and place a
market order to sell at the first opportunity.
At the day 5 markets open, the stock opens sharply lower and continues to fall.
Your order is executed at a price several points below where you entered.
You then shrug off the trade as an unpredictable misfortune, and move on to the next trade.
Figure 5Candlestick Chart Trader
using a candlestick chart (Figure 6).
At the beginning of Day 1 you enter the stock based on a candlestick
pattern entry signal (we will discuss proper entries in detail latter in
this unit).
At the close of the day's session you observe that the stock closed well
above your entry price (2) which leaves you very content with your
trade, but also moves you into a state of caution for signs of a change
in trend or reversal.
After the close of day 2, you observe the candlestick formed for the
day and notice that the real body is small indicating that there was a
tug of war between the bears and the bulls.
You also observe that the real body is read in color indicating that the
stock closed lower than the open indicating that the bulls actually lost
the tug of war to the bears.
Based on these observations you conclude that the bullish rally in the
stock has ceased, and the bullish sentiment of the market regarding
the stock is changing.
You decided to sell your position at the days close, or at the market
open on the next day to lock in your profit.
If this were a stock in the midst of an overall downtrend, you may
decide to short the stock under the low of the day 2 bearish
candlestick.
As you can see the candlestick chart trader has the advantage over
the western chart trader in that he can use the signals generated in
each candlestick to help foretell the changing sentiments of the market
regarding a stock.
The open to close relationship revealed in the candlestick is more
effective than the close-to-close relationship commonly used by
western traders.
Figure 6
