Figure P.3 Gold Daily (2013) – Western indicators (e.g., MACD) tend to lag behind candlesticks
This book is written for the beginner as well as for the advanced trader. Part I takes you through, from the technique's historical background, to the construction of the candle chart to defining and interpreting single to multiple candles. It not only explains the psychology behind each pattern, but also offers suggestions on the proper action to take as well as a stop-loss point to exit if the signal fails.
As the candlestick technique prides itself on spotting market U-turns, I have devoted many pages in this book to describe popular reversal patterns and how to apply them to enter and exit the markets. Continuation patterns are also covered to alert the trader when a trend is only pausing momentarily but will continue with its run after a rest.
Part II of this book covers the more advanced aspects of trading with candlesticks. It emphasizes the importance of using candlesticks together with Western technical indicators to improve the accuracy of candle signals. Several popular Western technical indicators are covered in this book with examples drawn from widely traded financial instruments like forex; U.S., European, Japanese, Singapore, and Malaysian stocks; and stock indices, as well as from the futures markets to illustrate that this technique works for all markets. This technique, however, will not work if the instrument traded is controlled by a small group of players in a thinly traded environment.
The Japanese candlestick technique is a very powerful short-term trading technique if it is used on 1-minute, 5-minute, 15-minute, or 1-hour charts, as markets exhibit rallies and declines between 5 and 15 cycles on every time frame. It is therefore very suitable for use by remisiers, stockists, scalpers, day traders, and short-term position traders.
This technique is equally useful for medium-term and long-term forecasting through the use of 4-hour, daily, weekly, and monthly candlestick charts in combination with longer-term Western technical indicators (see Figure P.4).
Figure P.4 Kuala Lumpur Composite Index Weekly (1999) – Weekly candle charts are best for long-term investors
Herein lies the adaptability of technical analysis in that it works irrespective of the time frame used. You can apply this technique for intra-day trading through the use of a 1-minute chart, a 5-minute chart, a 15-minute chart, a 30-minute chart, or an hourly chart.
For longer-term investors like fund managers who tend to hold stocks for a period of more than a month, I have found that the weekly candle charts provide the most consistent buy and sell signals.
Winning from the market requires two ingredients. The first is that you must have a proven trading technique. The second is that you must practice sound money management. This book will provide you with the first ingredient.
Knowing when to exit the market when you are wrong is part of money management. To that extent, this book will also cover the second ingredient.
Good luck and happy trading.
ACKNOWLEDGMENTS
Abook on Japanese candlesticks is not easy to write, mainly because of the lack of literature on the subject until 1991 when an American analyst by the name of Steve Nison revealed this ancient technique to the Western world through his classic book, Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East.
This book was my first contact with candlesticks. Nison's second, Beyond Candles, is another masterpiece. After putting his research into practice, I am convinced of the candlesticks' usefulness in forecasting market U-turns as well as trend continuations and am now a faithful disciple of this age-old technique. Nison has my utmost respect for introducing candlesticks to the Western world and to me. He is, to me, the “granddaddy” of candlesticks.
I would also like to thank Gary S. Wagner and Brad L. Matheny for furthering my knowledge on candles. We met when I attended a U.S. International Trading and Markets Conference called “Futures West '94” in Los Angeles. Wagner and Matheny's book, Trading Applications of Japanese Candlestick Charting, taught me, besides additional candlestick techniques, the importance of computerization of candle patterns.
Though I have never had a chance to meet Greg Morris, I give him credit for his well-formatted book, Candlepower. He had obviously done extensive research to produce this book, including painstakingly giving each pattern a Japanese name. His interview with renowned Japanese technician Takehiro Hikita is recommended reading.
Last but not least, I want to acknowledge the guidance, support, and patience of the editors and management team at John Wiley & Sons Singapore Pte. Ltd., namely, Nick Wallwork, Chris Gage, Emilie Herman, Jeremy Chia, and Gladys Ganaden, who patiently helped me bring this book to fruition.
PART I
BASIC CANDLESTICK TECHNIQUES
CHAPTER 1
Introduction
The Japanese candlestick charting technique dates back to the 1700s when bar charting and point-and-figure charting were not even discovered. Japanese traders, on the other hand, were already using this technique to trade their rice markets. Yet this technique of charting was confined strictly to Japan until the Americans discovered this technique from Japanese traders who traded the U.S. financial markets in the 1980s.
What fascinated the U.S. traders in the late 1980s was its uncanny trading accuracy in the purchase and sale of stocks, stock index and commodity futures, currency and treasury bonds on the New York and Chicago exchanges. Yet, the Americans were unaware of the techniques used by the Japanese. Strong interest emerged amongst the U.S. traders as to how the Japanese arrived at their buy and sell decisions.
They reasoned that if they were going to beat the Japanese at their game, the American traders would have to fully understand how the Japanese traders’ minds worked. That entails knowing their charting technique. Understanding how Japanese traders use their charts would help the American traders answer the question “What are the Japanese going to do next?” This accounts for the resurgence of interest in the West into this previously obscure technique of technical analysis.
More information is now available on candlestick charting after extensive research by an American analyst, Steve Nison. His two books, Japanese Candlestick Charting Techniques and Beyond Candles, offered the outside world a first glimpse into this ancient methodology of the Japanese traders.
As Nison’s research into this mystically obscure charting technique became available through his two books, traders in the United States and the rest of the world began to realise its forecasting value. When combined with Western technical concepts, forecasting and trading the markets can be – in the words of Steve Nison – exciting, powerful, fun, and much more rewarding.
Even as recently as the late 1980s, real-time quote and chart services offered to investors in the United States, Europe, and the rest of the world did not feature candlestick charts – only bar charts. Yet within two years after Nison’s first book, published in 1991, almost every real-time technical service and end-of-day technical analysis software package offered candlestick charts to their clients. In Malaysia, every major real-time technical chart service provider such as Thomson-Reuters, Bloomberg, Updata, Meta-Trader, and Bursa Station supports real-time candlestick