Page 111 - THE MARKET WHISPERER

THE MARKET WHISPERER 10 9

an investor wanting to examine a stock’s long-term behavior will likely
choose bars showing daily or weekly periods.

Note the disparity between the open and closing prices on the AAPL bar
chart shown above. Note also that from one day to the next, the opening
price is different from the closing price of the previous day; for example,
on the day marked [1] you can see that the opening price is lower than the
closing price of the previous day.

How is that possible? We call this phenomenon the “price gap,” or more
commonly just “gap.” It is wellknown and important to traders, and will
be discussed further. Note that one of the disadvantages of the line chart,
unlike the bar chart, is that it does not contain this information!

Why don’t traders use the bar chart? On one hand, it is clear and
detailed; on the other hand, it is difficult to read. The small horizontals on
the left and right eventually drove me crazy, and I’m sure they speed up
that inevitable day when you’ll visit the optician for reading glasses (I’m
not there yet…). Bar charts are generally for older investors who are not
willing to learn “new tricks.” Bar charts just aren’t “cool” enough for young
folk like me.

Japanese Candlestick Chart

At last we reach our goal. Up until now, I fulfilled my professional obligation
and presented you with several methods aimed at the general public or
veteran investors. But they are unnecessary for our purposes, and now
we arrive on the shores of the Promised Land. Get ready for a surprise,

because it is precisely this Japanese candlestick method which is really
retro and amazing, and started in…the 18th century!

The method was developed by Munehisa Homma, a Japanese rice trader
(1724-1803) who was one of the first to make use of past rice prices to
predict future prices. And the method really worked! Munehisa became

very wealthy from the rice trade, and was bestowed the title of “Honorary

Samurai.” Someone calculated his annual trading profits in modern terms
and reached the figure of $10 billion, with a cumulative capital of $100
billion! The principles of this method were studied in the 1970s by several
technical analysts, and primarily by Steve Nison who also wrote a bestseller

on the method. The result is that the Japanese candlestick method now

serves us well.

Munehisa Homma’s method allows me to understand the changing