Candlestick Pattern Recognition and Candlestick Indicators - What’s the Verdict?
December 25th, 2007 |Candlestick indicators are a very old Japanese system of price divination. Candlestick charts can be traced back 500 years to the rice trade in Japan. Farmers used candlestick pattern recognition to try and identify when the best time it was to put their stored rice up for sale.
It is a widely popular system in use today. As a trader, I am very technical and lean towards science and empirical evidence. However, I must admit, that a successful trading system need not be perfect to be profitable. By using simple money management, even a 4 out of 10 system can be profitable if your losses are small and your wins are large.
The essence of candlestick chart recognition can be seen as a kind of study of price behavior using pivot points. The idea is that a price fluctuation chart will behave in a similar and predictable way when a small or large change in direction is about to happen.
Candlestick charting heavily relies on the principle of buyer or seller exhaustion. When for example, a price is rising within a small cycle, lets say daily, the idea is that there will always only be a limited amount of current available buyers at that price level. When these buyers dry up, the price does something predictable. Typically it opens high and closes low creating a long full red bar. This is logical, because as the exhaustion approaches, the enthusiasm for buying is still there, however as the long bar develops, it closes much lower. This can typically predict a price reversal.
Candlestick charting is not accurate like a computer. It will not be right 10 times out of 10. However, it will be right quite often and that is all a good trader needs to profit regularly.
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