How Candlestick Techniques alone can beat other technical indicators

The primary reason for the widespread attention aroused by candlestick charts, is that Candlestick techniques tend to overpower other types of traditional technical indicators.

The reason for that is most of the technical indicators are more or less lagging indicators. The formula and calculations behind those indicators are based on past prices.

What that means is they can only tell you roughly what is happening in the market, whereas with the candlestick charting techniques, due to the uniqueness of each trading pattern and its unique visual cues that make reading price action easier, it can allow traders and speculators alike to better comprehend market sentiment, therefore it can pinpoint more accurately when you should enter a trade and most importantly when to exit the trade.

Technical analysis has come a long way, it is basically a form of analysis that uses many different indicators to test and see what the market is currently doing. What distinguishes candlestick techniques among other indicators is its ability to give insights into what the market sentiment is and how to interpret the current market signals.



To understand this further we need to see how candlestick techniques was developed.

Back in the 1700s a Japanese man named Homma, a trader in the futures market, discovered that, although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of the traders.



He understood that when emotions played into the equation a vast difference between the value and the price of rice occurred.



The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions towards a stock.

As we can see from this little passage, traders already knew centuries ago that market psychology plays a major role in determining the overall market direction and this is the other reason and also probably the most important reason why candlestick techniques beats other technical analysis indicators, is that it takes in to account of the market sentiments/emotions/psychology of the market.

As detailed in Steve Nison's famous book Candlestick Charting Techniques, the random walk theory says prices are random but it did not take into account the most important factor - people. People remember price actions/price movements, people react to news and technical analysis is the only way to gauge market emotions.

To further illustrate this point, here is an interesting story from the book The New G a t ~ b y s. It takes place at the Chicago Board of Trade.



Soybeans were sharply higher. There was a drought in the Illinois Soybean

Belt. And unless it ended soon, there would be a severe shortage of

beans. . . .

Suddenly a few drops of water slid down a window. "Look,"

someone shouted, "rain!". More than 500 pairs of eyes [the traders' editor's

note] shifted to the big windows. . . .

Then came a steady trickle which turned into a steady downpour.

It was raining in downtown Chicago.

Sell. Buy. Buy. Sell. The shouts cascaded from the traders' lips with a

roar that matched the thunder outside. And the price of soybeans began

to slowly move down. Then the price of soybeans broke like some tropic

fever.

It was pouring in Chicago all right, but no one grows soybeans in Chicago.

In the heart of the Soybean Belt, some 300 miles south of Chicago

the sky was blue, sunny and very dry.

But even if it wasn't raining on the soybean fields it was in the heads of the traders,

and that is all that counts [emphasis added].

To the market nothing matters unless the market

reacts to it. The game is played with the mind and the emotions [emphasis

added]

Not All Reversal Patterns Are Created Equally.  But learning the correct candlestick-reading techniques can help you to interpret the Latest market sentiments

One of the most significant goals of technical analysis is to identify changes in direction of price action.  Because candlesticks give insight into what the market is thinking, one of the most useful aspects of candlestick analysis is its ability to suggest changes in the sentiment of the market. We call these patterns - Reversal Patterns.

Learning candlestick patterns recognitions, especially reversal patterns is no easy task.  There are over dozens of candlestick trading patterns developed over the past centuries, and the real reason why most other traders failed along the way is because NOT all candlestick reversal patterns are created equally, some carry more weights than others.   

 

There are a number reversal patterns in the traditional technical analysis, such as Head & Shoulders and Double Tops. These patterns often don't give much meaningful insights into what is happening in the market, they simply represent regular patterns found in price action that precede a reversal. Reversal patterns in technical analysis often take many periods to form. On the other hand Candlestick patterns concentrate much more on the perception of market psychology than any other form of technical analysis.  And because the vast majority of Candlesticks formations take one to three time periods, they give traders more of a real time picture of market sentiment and hence why candlestick techniques are far more superior to most other technical indicators.

Another important point to note is with candlesticks, a reversal pattern does not always suggest a complete reversal in trend, it could merely mean a change or pause in direction, slowdown in trend, sideways trading after an established trend, or a full turnaround following a reversal candle pattern.

 

Candlestick techniques also tends to offer more in depth analysis than traditional bar chart - where it tends to give more weights on the highest high and the lowest of low of the day - candlestick gives more emphasis to the relationship between opening and closing price and how closely they are related to each other far more than bar charts. It is this visually easy-to-be-seen relationship that dictates the essence of market movement.

Bar charts on the other hand allow spikes to highs and lows to have significance when analysing the data, these highs and lows often represent market noises, less significant to good analysis. The difference with candlesticks is that traders can easily screen out all these noises and focus on what is happening in the market and what the market was telling them.  

 

Candlestick techniques serve as valuable insight into the market.  It is a versatile tool which can be applied across multiple markets, not just the stock market.  People use it for stocks, options, futures and commodities market.  Like what we said above, the reason why other technical indicators fail to help traders to gain an edge over the market is because they all tend to lag behind market prices. 

Candlesticks was invented even before bar charts and have been studied and refined for over few hundred years and it really is the only true indicator that shows how the market is moving "right now" and it is the most up-to-date price signals you can get in any markets, be it stock market, commodities or futures markets.