What are candlestick charts and dojis?
Candlestick charting is a Japanese form of charting that we feel gives us more information in a glance than other chart styles. We feel it is a very accurate measure of a stock's momentum, especially when used in conjunction with price and volume. We especially like it with respect to helping determine when a stock may be turning up or down.
One symbol that we refer to quite often is a doji. A doji occurs when the open and close prices are close to one another. When they are the same, we have a perfect doji. The closer the open and close are to one another, the more powerful the indicator. A doji that occurs after a run up or a pullback is a signal that a possible change in direction is coming.
There are several forms of dojis. A 'star' occurs when the open and close are the same and they are in the middle of the stock's trading range for the day. A hanging man occurs at the top of a run when the open and close are close to the top of the daily range. A hammer is the reverse of a hanging man and occurs at the bottom of a pullback.
Again, the closer the open and close, the more powerful the signal. False signals can be generated, and some stocks are more inclined to show doji's that turn out to be nothing. Again, we find them most effective as another component of our price/volume analysis, the indicators that tell 90% of the story. If you are interested in further information on candlestick charting, the seminal work was done by Gregory L. Morris titled Candlestick Charting Explained which can be found on Page 5 of our Book Store. It is available at the bookstore on the Investmenthouse.com website.
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