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Thread: *Japanese Candlestick Charting - a running exposition*

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    My intention with this thread is to investigate the predictive efficacy of Japanese candlestick charting. Many a practicioner swears by the forecasting ability of this Eastern method when employed in the hands of a skilled analyst. I make no claims at being such a skilled analyst therefore this thread will hopefully aid my development in this process as well as elucidate that it does not take a deft candlestick chartist to employ this technique.

    Below I have have included six month charts in daily timeframe of the DJIA and the yield on the 10-year Treasury Note under the assumption these two can be generally viewed as proxies for the equity and fixed-income markets respectively. Over time I hope to incorporate other markets as representative of various asset classes including the US Dollar for currencies and oil or gold for commodities.

  2. Default *Japanese Candlestick Charting - a running exposition*

    I aim to include a daily update should market activity warrant such frequency. I have included six months of price data below as a way to set the context rather than starting this project with no frame of reference.

    One thing to keep in mind is that while many view Japanese candlestick charts as being unrivaled in signaling reversals and continuations the formations I hope to highlight going forward do not lend themselves well to projections or price targets. Western techniques are better for such a task. I plan to focus on candlestick patterns and as a result this will be a very short-term trend identification project. On some occassions I may incorporate Western techniques should I view them as enhancing the candlestick methods however my goal is not to focus on long-term trends but rather the day-to-day manifestations of the Japanese candlestick methods.

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    1. Here we see a Rising Window (a gap) in the yields on the Ten Year Note. According to candlestick methodology the bottom of the window is the close of the candle beneath the gap therefore for window is not closed until a candle closes inside the real body of the candle before the gap. Candlestick charting says that windows, rising and falling, should be viewed as support and resistance. In this case the Rising Window was tested and acted as support for 7 daily sessions until a Falling Window turned the trend toward lower rates.
    2. The following three daily sessions met resistance at the Falling Window as prescribed by candlesticking.
    3. The Evening Doji Star at 3 is a reversal signal and quickly reversed the nascent increase in rates.
    4. A Falling Window formed with resistance at the lower end of the preceding candle (1.726%) which held until August 14th when a green (white) candle real body closed above the resistance level.
    5. A Rising Window formed between July 26th and July 27th suggesting support at the level of 1.428% (the July 26th closing high). Yields more or less fell in the days following but found support without closing the window adding further significance to this level.

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    Unfortunately for anyone reading this post looking for a grand revelation the following discussion is going to disappoint. Today's action in the markets we're following was mired in equilibrium with very little to add by way of changes in trend and it appears the markets are on pause ahead of ECB president Draghi's comments tomorrow. There were some subtle clues, however, which I'll discuss below.

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