Observation is the best friend of the technical analyst. By watching the markets, I noticed something interesting about candlestick charts, which I use extensively. I realized the real bodies used in candlestick charting can be used to determine significant support and resistance points, a strategy I had never seen before. Take a look at how it can be done.
Although they have only recently become popular in the Western Hemisphere, Japanese traders have been using the candlestick charting technique for hundreds of years. Candlestick charts, much like the bar chart equivalent, utilize the open, high, low and close activity to plot a period (usually a day). In candlestick charting, unlike bar charting where the highs and lows tend to be the focus, the opens and closes are the most significant.
A candlestick is composed of two features, as shown in Figure 1. The real body is a rectangle encompassing the area between the open and close and is what gives candlestick graphs their distinctive appearance. The real bodies are blacked in if the open is above the close and white if the close is above the open. A session in which the open and close are the same is commonly referred to as a doji session and is represented by a single horizontal line at that price.
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| FIGURE 1: CANDLESTICKS. A candlestick is composed of two features. The first is the real body, which is the rectangle between the open and close and is what gives candlestick graphs their distinctive appearance; this area is blacked in if the open is above the close and white if the close is above the open. A session in which the open and close are the same is commonly referred to as a doji session and is represented by a single horizontal line at that price. The second distinctive feature is the shadows of a candle, which are drawn in the area above and below the real body and the extremes. It is possible to have one, two or no shadows. When a shadow is absent, the result is referred to as a shaved candle |
The shadows of a candle - which give the appearance of being wicks - are drawn in the area above and below the real body. The upper shadow is the area between the high and the top of the real body, while the lower shadow is the area between the bottom of the real body and the low. It is possible to have one, two or no shadows. When a shadow is absent, the result is often referred to as a shaved candle.
Much of candlestick analysis revolves around the search for, and identifying, reversal patterns. Many of the distinctive terms associated with candlestick charting come into use with reversal patterns. This is where the real difference between candlestick charting and bar charting comes into play. However, candlestick analysis can offer more than you think. Most technicians use highs and lows for support and resistance points as part of their basic charting techniques. But in keeping with the candlestick emphasis on opens and closes, let's change the way we look at the market. Instead of the usual highs and lows, let's use real-body highs and lows.
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