Use of Japanese candlesticks to determine support and resistance levels

Despite Japanese origin of the candlestick charting technique it is becoming an essential way of Western technical analysis.

Although it has gained popularity just recently, Japanese traders have been using the candlestick charting technique for many years. Candlestick charts utilizes open, high, low and close indicators. In candlestick charting the opens and closes are more significant than in bar charting.

A candlestick chart consists of two parts. The rectangular body encompassing the area between the open and close gives candlestick graphs their distinctive appearance. The bodies are black if the open is above the close and white if the close is above the open. The situation when the open and close are the same is commonly referred to as a doji and is represented by a single horizontal line at that level.

Accumulations of highs and lows are often seen as key market levels. Breaking through them signals important price changes. Candlestick bodies turn out to be useful for this task. Much like highs and lows are on bar charts, accumulation of highs or lows at a given level in candlestick charting is significant. The body high from the first day provides the initial resistance point. The second day's action takes prices above that resistance, even to a new high, but the market closes lower. The situation is similar after the fourth day. Twice the market breaks above the body resistance level, only to fall back. Body support levels work in a similar manner but in the opposite direction.

The last candlestick on the chart is what may be considered a breakout. For the purpose of being specific, a breakout of body support or resistance level is official only after the market close. Market changes are significant when there is a breakthrough of the support or resistance level.


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