In 1996, Gunduz Caginalp and Henry Laurent, from the Mathematics Department of the University of Pittsburgh, published a brief paper, “The Predictive Power of Price Patterns,” based on samplings of candlestick patterns. They concluded, among other things, that “a trader who has the same information as others plus the knowledge of this method will have a competitive advantage.” It is said that the practice of candlestick charting was started in eighteenth-century Japan by a man named Munehisa Honma, who controlled a large family rice business. He used this technique to monitor the daily movements of the price of rice. Candlesticks charting has become increasingly popular since its introduction to the West in the 1970s by Steve Nison, who has published many great articles and books on the subject, including his earliest book, Japanese Candlestick Charting Techniques.

Over the years and with advanced software programs, candlestick analysis has developed into a more visual and descriptive study, and candlestick patterns can now be incorporated into any customized trading system. For instance, in a customized system, if all candles are plotted in red color in a downtrend, the software could further decipher and separate the patterns of the red candlesticks into bullish and bearish candles. A bullish candle will have a hollow red candle while a bearish candle will be a filled red candle. Very often in a downtrend, the appearance of a hollow red candle signifies a ...

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