Japanese Candlestick Charting Techniques: Support And Resistance

Japanese candlestick charting techniques have been around for almost as long as candlestick charts themselves. This method of tracking price movements was invented by a Japanese commodity trader named Homma who dealt in rice in the 18th century. He needed a way of marking not just price but open, close, high and low prices over a time period that was easy to read at a glance.

It was quickly found that this method of recording price values could also give rise to various techniques for predicting future demand, that is, whether the price is going to rise or fall in the near future. Clearly, this information is invaluable for a trader in any commodity, as well as for stocks and currency trading. Seeing the potential, Charles Dow of the Dow Jones company picked up the method around 1900 and introduced it to the American stock market.

One of the most popular Japanese candlestick charting techniques uses what are called support and resistance lines. These lines are most useful when the price is fluctuating in relatively steady waves.

So at a time when there is no real upward or downward trend, but the price is moving between certain parameters, you can draw a line through the top point of the highest candlesticks on the one hand, and through the bottom point of the lowest candlesticks on the other. In this situation these two lines will be more or less horizontal and parallel.

You can then expect that for as long as current market conditions continue, the price will remain within these boundaries. You can therefore trade on this basis.

In a different situation where there is a steady trend, you may still be able to use support and resistance lines to gauge the fluctuations within the trend. Even in the steadiest of upward trends there will be moments when the price falls a little, and vice versa. In this situation the support and resistance lines will be sloping, but provided they are more or less parallel, they can be used in the same way as if they were horizontal.

Where support and resistance lines are converging, that is, they are not parallel but are closing together as if to join at a point, then a breakout is indicated. In this situation you should not trade on the basis that the price will always bounce back from the lines. It is usually better to wait for the breakout and go with the emerging trend that it indicates.

On the other hand if the lines diverge, this suggests a market that is becoming more unstable. It may be better to stay out of this market for a while.

Support and resistance lines can be very useful but they should not be your only indicator. Be sure to consult other signals before opening a trade, and try out your system in demonstration mode for a reasonable amount of time before going live. Remember, prices can always behave in unpredictable ways that can unseat even the best Japanese candlestick charting techniques.