Thomsett's  Instablog

But there is a potential blind spot.

This has to be with scale. Depending on whether your chart breaks down by quarter-points or five-point increments, it is easy to misread candlesticks and, possibly, to act on what you see by mistake. For example, one of the strongest signals is a one-session indicator, the long candlestick. By definition, this is merely a session with a large movement between opening and closing price. A bullish long candlestick opens at the bottom and closes at the top, creating a white session. A bearish long candlestick opens at the top and closes at the bottom, creating a black candlestick.

A variation of the long candlestick is the marubozu. This is a Japanese word meaning "with little hair," so called because it lacks shadows on the upper or lower side, or both.

Here's where the problem comes in. A chart based on small price increments might produce a far different picture than one based on larger price increments. The structure of a chart is determined automatically on the free online sites to make sure all of the sessions in the period fit in the rectangle. The problem is that you end up with dissimilar results.

For example, Microsoft (MSFT) currently is trading in the $24-25 range, so the chart for 30 days is most likely presented in one-quarter point increments. This causes many long candlesticks to appear on sessions that only move one or two points. However, IBM, which trades currently in the $165-170 price range, is probably presented in a 2.5-point or even a 5-point increment. You will find very few long candlesticks in comparison to MSFT.

In other words, important indicators like long candlesticks are relative to the size of sessions before and after. It is not a matter of actual point spread or even percentage of change. The appearance of the chart is going to vary based on the price increments. This makes sense if you want all of your charts to fit in the same box; but it is important to be aware of the discrepancy this creates. So when you see a chart with an unusually large number of long candlesticks, remember that the appearance is based on increments. To compare two different companies in charting terms, you may need to find charts with the same scale. If this sin to available, you then need to make the adjustment for yourself by comparing not only the volatility of price change, but how that is affected by the price scale.

You can find out much more about the effective use of candlesticks as a tool for chart analysis. This is not complicated; in fact, it is quick and easy with the right tools. For example, the Candlestick Forum provides a complimentary look at a few worthwhile methods for getting started. Check candlesticks

Michael C. Thomsett is an instructor with the New York Institute of Finance, where he teaches five courses. He is also an investing and options and technical analysis author. He wrote the best-selling Getting Starting in Options (Wiley, http://tinyurl.com/22nmkf2), now in its 8th edition. Thomsett's latest book is Trading with Candlesticks. (FT Press)