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By now, who hasn't heard of the Japanese form of charting called candlesticks? Until Steve Nison introduced candlestick charting to the West a few years ago, charting services or software programs that offered graphically displayed data in candlestick format were few and far between. Finding a guidebook or manual on interpretations of candlesticks and their patterns was almost unattainable unless one could read Japanese.

Since then, there has been a stampede for chart services to offer traders the ability to chart data in candlestick format. There has also been a groundswell of interest to learn about this form of technical analysis. But the question is obvious. Why has there been so much curiosity about candlesticks? Why are many Western technicians and professional traders incorporating candlesticks into their trading systems? How useful are candlesticks?

If candlestick charting and candlestick technical analysis are here in the West to stay and be incorporated into the traditions of Western technical analysis, as many believe, then how will we use them effectively when all the dust settles? How will candlesticks develop into future trading systems? Most important, why should we use candlesticks at all?

OF VENERABLE AGE

Perhaps the oldest form of technical analysis known to us is candlesticks. But it is not necessarily a complex one.

Plotting candlesticks is a simple thing. To create the candle, one simply needs the open, high, low and close. The thick part of the candlestick is known as the real body and represents the range between the open and close. The real body can be filled or empty. When the close is lower than the open the real body is filled in (dark). When the close is higher than the open, the real body is left empty (light).

(Traditionally, the Japanese used black and red ink to represent full and empty candles.) The thin lines above and below the real body are known as shadows and represent the high and low for that cycle (Figure 1). The names given to the candles in many cases are symbolic, describing the shape of the candle or the relationship between the candle's open, high, low and close. With names such as "hanging man," "belt hold line" and "shooting star," the Japanese have been able to devise a visual image or word picture to identify different candles. The names given to the candlestick patterns are also replete in vivid cultural imagery with descriptive titles such as "dark coloud cover,""three-Buddha tops," and "morning, evening and three river stars."