As I have mentioned before in this column, the Japanese are true pioneers of technical analysis of the markets. Their techniques have evolved from fairly simple beginnings, trading forward rice contracts (futures) in the 17th century, to now include many sophisticated ways to analyze the markets, including the amazingly powerful modern-day charting method called the candlestick.
Virtually all modern-day technical analysis used in conjunction with bar charting (trendline analysis, pattern recognition, et cetera) can be applied in the exact same way using candlesticks, with the following additional benefits.
- Candlestick charts allow the viewer at a casual glance to spot technical strength and or weakness by highlighting the relationship between the open and the close for each line (candle).
- The candlestick method gives you deeper insight by utilizing numerous interpretations for intra-line activity. Hence, the user has a timely advantage in spotting key market turning points for all time frames.
- Candlesticks are a useful stand-alone tool or can be united with other technical tools (stochastics, RSI, et cetera), creating a vast array of techniques and possibilities.
While candlestick charts use the exact same data as traditional bar charts, (open, high, low, close) they can present a powerful picture of market activity to even an untrained eye.
Candlestick charting provides an insight into market activity that is not readily apparent with the conventional bar-type charts. When you see a black bar in a candlestick chart you know the sentiment is bearish, and when the bar is white it’s bullish. These patterns provide a very useful tool in predicting market changes and direction.
By using these methods, the masterminds of the Orient have attained wealth in their markets and in ours.
Basic construction of a candlestick line
The daily line shows the open, high, low and close. The thick part or candle is called the real body. It highlights the range between the open and close. If the close is above the open, then the body will be white. When the real body is black, this simply means the close was below the open.
The lines above and below the real body represent the high and low ranges for the period and are called shadows.
A long black body illustrates a bearish period in the market with an opening near the day’s high and close near the day’s low.
A long white body is the opposite of a long black body and shows technical strength with an opening near the low and a close near the high in a wide range period.
The harami is similar to an inside day used in bar chart analysis. These patterns indicate the market has entered a point of indecision and a trend change is possible. As illustrated in the accompanying insert, the small black body of this harami had to be contained by the long white body preceding it.
Harami in Japanese means “pregnant” and suggests a waning in momentum and a possible change in trend. Adding to the pattern’s validity is the fact the harami developed not only in the daily MGEX spring wheat charts, but it was also evident in the daily Chicago and Kansas wheat charts.
Candlestick charting offers farmers a reliable forecasting tool for knowing when to sell their grain.
Farmers who recognized the harami on June 2, 2009 had an opportunity to hedge their wheat. Farmers with a CWB July 2009 wheat basis contract could have priced their contracts up until 9 p.m. that night. Wheat prices traded down the 60-cent limit the following day.
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— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online for more grain marketing ideas and educational tools, or call us toll-free at 1-888-274-3138 for a free consultation.