The Power of Japanese Candlestick Charts
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THE POWER OF JAPANESE
CANDLESTICK CHARTS
Advanced Filtering Techniques for Trading Stocks, Futures, and Forex
REVISED EDITION
Fred K. H. Tam
Cover image: © iStockphoto.com/P2007
Cover design: Wiley
Copyright © 2015 by John Wiley & Sons Singapore Pte. Ltd.
Published by John Wiley & Sons Singapore Pte. Ltd.
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All rights reserved.
First edition published by Pelanduk Publications in 2001.
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INDEX OF REVERSAL PATTERNS
Single Candlestick Patterns
Double Candlestick Patterns
Triple Candlestick Patterns
Multiple Candlestick Patterns
INDEX OF CONTINUATION PATTERNS
PREFACE
This book is about applying the popular time-tested Japanese candlestick technique to spot market turning points. After all, making money from the markets is all about predicting correctly when the market is about to turn, and the Japanese candlestick technique does this job superbly.
I find the candlestick technique very applicable for trading actively traded financial instruments such as stock indices, foreign exchange (forex), commodities futures, and stocks. This is because most, if not all, financial instruments tend to exhibit short-term rallies only to be followed by short-term corrections regardless of their time frames. Their trading cycle ranges from 5 to 15 candles (see Figure P.1 and Figure P.2).
Figure P.1 Gold 15-Minute (2014) – Trading cycles range from 5 to 15 candles
Figure P.2 Dow Jones Industrial Average Daily (2010) – Trading cycles range from 5 to 15 candles regardless of the periodicity of the chart
It is fun to be on the right side of the market, buying at or near market bottoms and selling at or near market tops. But the question is, “How do I know if today's market action constitutes a market bottom?” Conversely, after a sharp rally of a few sessions, what signals are there to tell you that your stocks have topped out and are due for a correction?
Questions like “Is this the right time to buy?” or “Is this the right time to sell?” have always been a talking point amongst traders and investors. The objective of this book is to provide an answer to these questions.
There are many techniques out there, mainly from the West, like the moving average, relative strength index, moving average convergence divergence (MACD), stochastic, momentum, Bollinger bands, Elliott waves, and so on, that can help you time your entry and exit. I strongly believe that these Western techniques should be part of a trader's arsenal.
But complementing Western techniques with that of Japanese candlesticks will give you that extra edge in getting a much better price – a lower price if you are buying and a higher price if you are selling. You will be convinced from the hundreds of charts illustrated in this book that Japanese candlestick signals lead the Western technical indicators in timing market entry and exit.
The candlestick technique is the most leading of all technical indicators that I have come across. The reason why the Japanese candlestick technique triggers buy or sell signals at least 2 periods and sometimes up to 10 periods earlier than Western indicators is that candlestick signals are based on an analysis of price itself.
When you are analysing the candle chart, you are in effect analysing the psychology of the market participants that is reflected in its price. No indicators can beat a technique that analyses price in itself.
This passage taken from the Sakata Goho sums up the candlesticks' raison d'être:
The psychology of the market participant, the supply and demand equation and the relative strength of the buyers and sellers are all reflected in the one candlestick or in a combination of candlesticks.