Candlestick Charts and Life: A Simple Way to Read the World

Stephen Hawking wanted to find a concise formula that could explain everything in the universe. That is a height I would not dare to imagine; it is far beyond my reach. But as I have gained more life experience, I have found that the knowledge behind trading candlestick charts can give us a surprisingly clear and simple way to understand almost every kind of human behavior in society.

I once really wanted to write a novel. I worked hard at it for a long time, and I did finish one, but I eventually realized I was not made for that path. So I gave up the idea of continuing in that direction. The book I most want to write now is called Candlestick Charts and Life for the time being. Whether I can actually write it is another matter.

Candlestick charts, or K-line charts as they are often called in Chinese trading circles, were originally invented in Japan. Now I happen to be living in Japan, so in a way I have the right place and the right people; all that is missing is the right timing. Today I want to write a little about the basics of candlestick-chart analysis, and use it as a way to guide people toward seeing this tool not only as something for stock trading, but also as a lens for understanding the world.

The Shared Assumptions of Technical Analysis

People who trade stocks generally know that technical analysis is usually built on three basic assumptions. We can also understand them as shared premises. What are these three?

• The most fundamental point is that market action discounts and absorbs everything.
• The core idea is that prices evolve in trends. Trends can accelerate, and they also have inertia.
• History repeats itself. This is driven by human nature. If things can improve in an upward spiral, that is already a good outcome, but reality is often not that optimistic.

Dow Theory

People who trade often have heard of famous names such as Charles Henry Dow, William Gann, and Jesse Lauriston Livermore.

Below, I will give a simple reading of Dow Theory.

Dow Theory has several basic principles:

1. Averages discount and absorb all factors

   In daily life, take salary levels as an example. We often complain that we are being “averaged out.”

   But if we understand the average as the market’s average cost, things become much simpler: above it, you make money; below it, you lose money. First make money, then think about making more. If from the very beginning you insist on earning a certain large amount, your own average cost can easily drift away from the market’s average cost.

2. The market has three trends: primary trends, secondary trends, and short-term trends

   You must always know where you are positioned and which trend you are actually in.

   When an uptrend continues, it keeps creating Higher Highs and Higher Lows.

   When a downtrend continues, it keeps creating Lower Highs and Lower Lows.

3. A major trend usually has three stages

   First comes the accumulation stage, then a rapid upward stage, and finally the distribution stage.

   If we invest in a project, and if it is truly a good project, its early stage will often show the same characteristics as accumulation. This is also why truly good investors are rare. As the old saying goes, swift horses are common, but people who can recognize them are not. Most people cannot understand healthy sideways consolidation at the bottom, nor do they understand the saying that “the longer the base, the higher the rise.” The logic is actually simple: deep accumulation leads to a sudden breakthrough. Three minutes on stage, ten years of work offstage.

4. Different averages must confirm one another

   Put plainly, this means two things: learn logical analysis, and respect common sense. Do not get dizzy the moment you hear something pleasant.

   In everyday life, there are not that many low-probability events. In other words, there are not that many lottery jackpots waiting for us. Things that are basically reliable can usually be cross-checked. If you are an adult and have received twelve years of schooling, your past common sense should be enough to verify whether something is credible from the side. Unfortunately, most of the time, many people do not trust their own verification.

5. Volume must confirm the trend

   This point can be understood in one sentence: quantitative change leads to qualitative change. Without quantitative change, every “qualitative change” you imagine is just bait.

6. Only a clear and unmistakable reversal signal can tell us that an established trend has ended

   In other words, an uptrend shows Lower Highs and Lower Lows, or a downtrend shows Higher Lows and Higher Highs.

   In life, because of greed or because we think we are clever, we often refuse to do things with certainty. We always want to get ahead of others.

   But when certainty finally appears, we become timid again and no longer dare to take a meaningful position.

A Simple Example from Life

Today I saw a news item saying that hotels are prohibited from forcing travelers to complete face-scan verification. Then a prominent online commentator came out and said this was a major sign of progress. How should we understand this phenomenon? If we use trading knowledge, it becomes easy to see what is really going on.

Imagine a stock price falling 80% from 1 yuan to 0.2 yuan. It then rebounds 100%, but it is still only 0.4 yuan.

What kind of progress is that?

If you have been forced to use face recognition from the day you were born, then yes, this may feel like great progress to you.

It is like buying the bottom after a stock has fallen deeply. When it rebounds, you really do make money.

But for the general public, this is no different from being toyed with by the market maker. Everyone stares eagerly at the screen, hoping to break even, only to find that the other side is still flirting with them halfway down the mountain. What exactly is there to cheer for? What is there to get so excited about? Be careful not to lose your footing and fall from the mountaintop.

My View

I am one of those people who believe children should be taught trading from an early age. Trading knowledge and candlestick-chart knowledge really can cut straight into anything in life that involves human participation, whether the matter is large or small.

This has nothing to do with gambling. It would be a shame not to use a good tool.