How Candlestick Picks Are Really Horrifying

By Joann Parker

Japanese candlestick charting is a centuries old trading methodology that was used in the Far East for over 400 hundred years. The methodology was used in the early 1700s in the Dojima Rice Exchange in Osaka, Japan for the trading of rice futures vouchers.

The concepts of the strategy were formalized by Japanese businessman Munehisa Homma. Mr. Humma kept in depth historical price records and findings of trader mindset. Mr. Homma was rumored to have accumulated a considerable bundle of money. No person knows for sure and he could have died a broke trader. In otherwords, so far as we know, the creation of candlesticks might have been one vain endeavor by a insane man to make money who eventually failed. However folks who sell candlestick trading books and software are more than prepared to spread the rumor that Mr. Humma became rich but nobody has produced reputable information verifying this rumor.

Candlestick charting was brought to the West by Steve Nison, with the publication of his book Japanese Candlestick Charting Techniques in 1991. Since that time, candlestick charting has turned into a commonly accepted trading tool. The majority of significant stock market charts have included candlestick charts as an option.

What you just read about candlestick charting sounds cool. Thats a awesome narrative. But exactly how about making cash with candlesticks? Don't throw away your time.

When I first started investing, I lost thousands of dollars utilizing candlestick patterns.

Fundamentally, candlesticks are not any better than any one technical analysis tool. Some would say they are actually worse.

The issue with candlesticks is they are one day patterns. Some candlestick patterns are 2 days. Less are 3 days. You can even find a few 4 day candlestick patterns.

This is the question to ask yourself. Can you really predict the future price direction of a stock or market by looking at only 1, 2, or 3 trading days? In the event you said yes you are ridiculous. You don't know what you are talking about.

Longer term chart patterns trump smaller ones. Technical analysis tools like moving averages, MACD, stochastics, volume, and even most chart patterns take weeks to months to form. Even with using just 50 and 200 day moving averages, you are looking at 50 or 200 days worth of trading activity so that you can predict future price direction. That works. This really is establishing a trend over several weeks, months, and even years so as to predict investor psychology in the current market environment. The longer term technical analysis tools trump candlesticks because they form over much greater amounts of time and larger pattern formations always trump shorter ones. It's not a subjective opinion, it's objective fact. Anyone who thinks that 1 to 4 days of price movement may be used to predict good size moves in stocks is somebody who has never tried.

This is not to say that candlestick patterns are worthless. But here is how I would position them in terms of value:

1. Support and resistance levels, Downtrend channels, Head and Shoulders, and lots of other chart patterns.

2. Volume

3. Moving averages

4. MACD

5. Stochastics

6. Donchian Channel / Sar

7. 52 week high, 52 week low, 3 month high and low

8. Seasonality

9. Candlestick patterns

10. Astrology trading

Don't misunderstand me. All my stock charts are drawn with candlesticks because I'm able to visualize them easier than High / Low bars. But using candlesticks to visualize a day's price movement and utilizing candlesticks to predict future price direction are two contrasting issues.

There is a reason that candlesticks were put to use 400 years ago and in the end they died out.

The idea of excavating anything at all from a 400 year old trash can and then romanticizing it as if the Japanese 400 years ago were wiser and far better traders than we are nowadays is rubbish. But I do acknowledge, it's good promoting: "400 Year Old Magic Formula Discovered Inside The Dead Sea Scrolls - Took 5 Linguistic Professionals 10 Years To Translate!" or something stunning like that. Terrific story that basically sells, but as a price prediction stand alone instrument it's fairly pathetic.

If all the tools we now have nowadays including computers, these Japanese had 400 years ago, I'm certain that even they would not be employing their own candlesticks.

Candlesticks were created as a by-product of their time. The folks who created them could not even make a computer, an automobile, or other industrial achievements which call for mathematics. In reality, many people 400 hundred years ago in Japan believed that their emperor was a god and only the ruling class was knowledgeable and even that was horrible when compared to Western civilization.

Envision if a worm hole took a candlestick trader from 400 years ago, and planted him in a modern day trading room in the present. You would have a guy in a robe scratching candlesticks on parchment and charting maybe 20 stocks and markets in a day. Compare that to a guy sitting in front of a computer scanning over 20,000 charts in real time looking at 8 other technical analysis tools (everything I listed above) over and above just candlesticks, and taking advantage of sector rotation and inter-market analysis to make a prediction on which way a market was headed, and doing it all before the guy with the parchment was done scribbling his first candlestick. Now tell me the 400 year old Japanese candlestick trader wouldn't happily use his parchment as toilet paper after looking at what a modern day stock trader is able to do.

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