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.
DETERMINING SUPPORT AND RESISTANCE
When a chartist looks at a bar graph, accumulations of highs and lows are often seen as key market levels. Breaking through these points signals important changes in the expected direction of prices. Candlestick real bodies, however,may turn out to be better for this task. Much like highs and lows are on bar charts, an accumulation of real-body highs or lows at a given level is significant.
TRADING APPLICATIONS
One of the first uses that many technicians see for this technique is in terms of breakouts, much like in using bars.The advantage in using real-body highs and lows for support and resistance is that ranges are tighter, allowing entry into a trading position earlier than might otherwise have been the case. Perhaps the most intriguing part of this new methodology, however, is its usefulness for day trading. Most technicians use candlesticks as a day-end indicator, but this technique gives us a greater degree of depth than is necessary for day trading. Real-body support and resistance allow us to take our analysis into the shorter time frames, which in turn allows us to get better entry points for our longer-term trades.
MINIMIZING THE RISKS
There is no way around the risks inherent in trading counter to the prevailing market action. All we can do is reduce the risks as much as possible by using the tools available
A REAL-LIFE EXAMPLE
Figure 3, which shows the sterling/Deutschemark cross-rate, contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action
and would have done well.
CONCLUSION
By using real-body support and resistance levels, we can try to improve our trading and analysis on several levels. In the short term, we can derive important counteraction trading points and improved longer-term entry levels. In the longer term, we can use real-body support and resistance to get a jump on market breakouts in a trend-trading strategy. Let me reiterate: Candlestick charting should not be used in a vacuum. That applies to the real-body support and resistance levels as well. You should, however, take the time to try out this methodology. I'm sure you'll find it worthwhile, and a beneficial addition to your technical toolbox. It just goes to show that by keeping our eyes open,we just might be able to discover new techniques
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