Candlesticks As A Leading Indicator by Gary S. Wagner and Bradley L. Matheny
Most technical indicators are coincident with the market - that is, the indicators do not forecast market turns but only turn if the market turns. Certain candlestick formations, on the other hand, can forecast market reversals. Consequently, combining candlestick formations with traditional technical indicators such as oscillators should lead to better trading performance.
Western technical analysis encompasses many different types of mathematical calculations, but many
can best be described as lagging indicators. A lagging indicator can predict market moves only after a
turning point, while a leading indicator can predict market moves before a turning point. Aside from
Fibonacci retracement theory and possibly the moving average convergence/divergence (MACD)
indicator, to our knowledge no other leading indicators exists besides candlestick technical analysis. This
is why traders and market technicians are so interested in candlesticks.
The Japanese candlestick technique interprets price movement by isolating patterns to predict future price
trends. It was developed nearly three centuries ago by a rice futures trader named Sokyu Honma. Using
the techniques that Honma developed can provide insight into markets. The trader combined many
factors to develop this trading technique. Over time, he developed an extensive group of patterns to
accurately identify potential tops, bottoms, reversals and buy and sell signals. Today, Honma's work is
being accepted as a technical tool for trading the markets and many traders are finding candlesticks to be a valid trading method. Here's how this type of market analysis can provide market investors with
insights available from candlestick charts.