He has presented his trading strategies to traders from almost every investment firm on how to apply — and profit from — these methods. He has also lectured at numerous universities and, by request, at the World Bank and the Federal Reserve. You have candles on every platform. You may be new to candles- or even using them now. Either way it is vital to your trading success that you learn how to use them correctly.
That is why Mr. Nison is dedicated to giving traders and investors the correct candlestick education with Nison Candlesticks- Candlestick training the right way.
Finally, I must give proper and legal acknowledgements to many of the services I relied upon during my writing and research. Graphics reproduced herein under the permis- sion of the Chicago Board of Trade. The views expressed in this publication are solely those of the author and are not to be construed as the views of the Chicago Board of Trade nor is the Chicago Board of Trade in any way responsible for the contents thereof. A system so versatile that it can be fused with any Western technical tool?
A system as pleasurable to use as it is powerful? If so, this book on Japanese candlestick charting techniques is for you. You should find it valuable no matter what your background in technical analysis. Japanese candlestick charts are older than bar charts and point and figure charts. Candlesticks are exciting, powerful, and fun. Using can- dlesticks will help improve your market analysis.
My focus will be mainly on the U. Candlestick techniques can be used for speculation and hedging. They can be used for futures, equities, options, or anywhere technical analysis is applied. By reading this book you will discover how candle- sticks will add another dimension of analysis. Do not worry if you have never seen a candlestick chart.
The assump- tion of this book is that they are new to you. Indeed, they are new to the vast majority of the American and European trading and investing com- munity. If you are a seasoned technician, you will discover how joining Japa- nese candlesticks with your other technical tools can create a powerful synergy of techniques. The chapters on joining Japanese candlestick techniques with Western technical tools will be of strong interest to you. If you are an amateur technician, you will find how effective candle- stick charts are as a stand alone charting method.
The Japanese technicals are honed by hundreds of years of evolution. Yet, amazingly, we do not know how the Japanese analyze our markets with their traditional technical tool called candlesticks.
This is disconcert- ing if you consider that they are among the biggest players in the finan- cial markets. The Japanese are big technical traders. Knowing how the Japanese use candlestick charts to analyze both our markets and theirs may help you answer the question "What are the Japanese going to do? Why shouldn't we do the same? If you do not learn about Japanese candlestick charts, your competition will!
If you like reading about colorful terminology like "hanging-man lines," "dark-cloud covers," and "evening stars" then this book is for you. If you subscribe to one of the multitude of services now providing candlestick charts and would like to learn how to use these charts, then this book is for you. In the first part of the book, you learn how to draw and interpret over 50 candlestick lines and formations.
This will slowly and clearly lay a solid foundation for the second part where you will learn to use candle- sticks in combination with Western technical techniques. This book will not give you market omniscience. It will, however, open new avenues of analysis and will show how Japanese candlesticks can "enlighten" your trading. Probably, many more of you have not. In December , I wrote an introductory article on candlesticks that precipitated an immediate groundswell of interest.
It turned out that I was one of the few Americans familiar with this centuries-old Japanese technique. I wrote follow-up articles, gave numerous presentations, taught classes, and was interviewed on televi- sion and by newspapers across the country.
In early , I wrote a short reference piece for my Chartered Market Technician thesis about candle- stick charts. It contained very basic introductory material, but it was the only readily available information on candlestick charts in the United States. This handout became very popular. Within a few months, Merrill Lynch, the publisher of the booklet, received over 10, requests. Was it the lack of information in the United States?
I don't know the answer, but it has taken years of research to fit all the pieces together. I was fortunate in several ways. Introduction Perhaps my perseverance and serendipity were the unique combination needed that others did not have. In , I became acquainted with a Japanese broker. One day, while I was with her in her office, she was looking at one of her Japanese stock chart books Japanese chart books are in candlestick form.
She exclaimed, "look, a window. She told me a window was the same as a gap in Western technicals. She went on to explain that while Western technicians use the expression "filling in the gap" the Japanese would say "closing the window. I spent the next few years exploring, researching, and analyz- ing anything I could about candlestick charts. It was not easy. There are scant English publications on the subject.
My initial education was with the help of a Japanese broker and through drawing and analyzing candlestick charts on my own. It was a Japanese booklet which had been translated into English. Unfortunately, there were just ten pages on interpreting candlestick charts. Nonetheless, I finally had some English candlestick material. A few months later, I borrowed a book that has had a major influence on my professional life. It contains about 70 pages on candle- stick charts and is written in English.
Reading it was like finding an oasis in a desert. As I discovered, while the book yielded a harvest of information, it took some effort and time to get comfortable with its concepts. They were all so new. I also had to become comfortable with the Japanese ter- minology. The writing style was sometimes obscure. Part of this might have resulted from the translation. The book was originally written in Japanese about 25 years ago for a Japanese audience. I also found out, when I had my own material translated, that it is dreadfully difficult to translate such a specialized subject from Japanese to English.
Nonethe- less, I had some written reference material. This book became my "Rosetta Stone. I chewed and grinded away at the new ideas and terminology.
I was fortunate in another sense. Although Mr. Shimizu does not speak English, the translator of the book, Greg Nicholson, graciously acted as our intermediary via fax messages. The Japanese Chart of Charts provided the foundation for the rest of my inves- tigation into candlesticks. Without that book, this book would not have been possible. In order to continually develop my abilities in candlestick charting techniques, I sought out Japanese candlestick practitioners who would have the time and inclination to speak with me about the subject.
I met a Japanese trader, Morihiko who had been using candlestick charts and who was willing to share his valuable time and insights. This was exciting enough! Then he told me that his family had been using candle- stick charts for generations! We spent many hours discussing the history and the uses of candlestick charts.
He was an invaluable storehouse of knowledge. I also had an extensive amount of Japanese candlestick literature translated. Obtaining the original Japanese candlestick information was one problem. Getting it translated was another. Based on one estimate there are probably fewer than full-time Japanese-to-English transla- tors in America this includes part-time translators ' I had to find a trans- lator who could not only translate routine material, but also the highly specialized subject of technical analysis.
The direc- tor, Richard provided indispensable help to this project. He was a rarity. He was an American fluent in Japanese who understood, and used, technical analysis. Not only did Richard do a wonderful job of translating, but he helped me hunt down and obtain Japanese candle- stick literature. Thanks to his help I might have the largest collection of Japanese books on candlesticks in the country. Without Richard this book would have been much less extensive.
Before my introductory article on candlestick charts appeared in late , there were few services offering candlestick charts in the United States. Now a plethora of services offer these charts. These include: Bloomberg L. Their popularity grows stronger every day.
The profusion of services offering the candlestick charts attests to both their popularity and their usefulness.
I have had calls and faxs from around the world requesting more infor- mation about candlestick techniques. Why the extensive interest? There are many reasons and a few are: 1. Candlestick charts are flexible. Users run the spectrum from first-time chartists to seasoned professionals.
This is because candlestick charts can be used alone or in combination with other technical analysis techniques. A significant advantage attributed to candlestick charting techniques is that these techniques can be used in addition to, not instead of, other technical tools. I am not trying to convince veteran technicians that this system is superior to whatever else they may be using. That is not my claim. My claim is that candlestick charting techniques provide an extra dimension of analysis.
Candlestick charting techniques are for the most part unused in the United States. Yet, this technical approach enjoys a centuries-old tra- dition in the Far East, a tradition which has evolved from centuries of trial and error. Then there are the picturesque terms used to describe the patterns. Would the expression "hanging-man line" spark your interest? This is only one example of how Japanese terminology gives candlesticks a flavor all their own and, once you get a taste, you will not be able to do without them.
The Japanese probably know all the Western methods of technical analysis, yet we know almost nothing about theirs. Now it is our turn to benefit from their knowledge. The Japanese use a combination of candlestick charting techniques along with Western technical tools. The primary reason for the widespread attention aroused by candle- stick charts is that using them instead of, or in addition to, bar charts is a win-win situation.
Introduction 5 As we will see in Chapter 3 on drawing candlestick lines, the same data is required in order to draw the candlestick charts as that which is needed for our bar charts that is, the open, high, low, and close. This is very significant since it means that any of the technical analysis used with bar charting such as moving averages, trendlines, Elliott Wave, retracements, and so on can be employed with candlestick charts.
But, and this is the key point, candlestick charts can send signals not avail- able from bar charts.
In addition, there are some patterns that may allow you to get the jump on those who use traditional Western charting tech- niques. By employing candlestick charting instead of bar charting you have the ability to use all the same analyses as you would with bar charting. But candlestick charts provide a unique avenue of analysis not available anywhere else. Part I of the book reveals the basics on constructing, reading, and inter- preting over 50 candlestick chart lines and patterns. Part explains how to meld candlestick charts with Western technical analysis techniques.
This is where the true power of candlecharts is manifested. This is how I use them. I have drawn illustrations of candlestick patterns to assist in the edu- cational process. These illustrations are representative examples only. The drawn exhibits should be viewed in the context that they show cer- tain guidelines and principles.
The actual patterns do not have to look exactly as they do in the exhibits in order to provide the reader with a valid signal. This is emphasized throughout the book in the many chart examples. You will see how variations of the patterns can still provide 'mportant clues about the state of the markets. Thus, there is some subjectivity in deciding whether a certain candle- stick formation meets the guidelines for that particular formation, but this subjectivity is no different than that used with other charting tech- niques.
You will have to decide these answers based on your trading temperment, your risk adversity, and your market philoso- phy. Likewise, through text, illustrations and real examples I will pro- vide the general principles and guidelines for recognizing the candlestick formations. But you should not expect the real-world examples to always match their ideal formations.
Consequently, I have included many such examples. These examples span the entire investment spectrum from futures, fixed-income, equity, London metal markets and foreign exchange markets. Since my background is in the futures markets, most of my charts are from this arena. I also look at the entire time from intra-day to daily, weekly, and monthly candlestick charts. For this book, when I describe the candlestick lines and patterns, I will often refer to daily data.
For instance, I may say that in order to complete a candlestick pattern the market has to open above the prior day's high.
But the same principles will be valid for all time frames. Two glossaries are at the end of the text. The first includes candle- stick terms and the second Western technical terms used in the book. The candlestick glossary includes a visual glossary of all the patterns. As with any subjective form of technical analysis, there are, at times, variable definitions which will be defined according to the users' experi- ence and background.
This is true of some candlestick patterns. Depend- ing on my source of information, these were instances in which I came across different, albeit usually minor, definitions of what constitutes a certain pattern.
For example, one Japanese author writes that the open has to be above the prior close in order to complete a dark-cloud cover pattern see Chapter 4. Other written and oral sources say that, for this pattern, the open should be above the prior high.
In cases where there were different definitions, I chose the rules that increased the probability that the pattern's forecast would be correct.
For example, the pattern referred to in the prior paragraph is a reversal sig- nal that appears at tops. Thus, I chose the definition that the market has to open above the prior day's high.
It is more bearish if the market opens above the prior day's high and then fails, then it would be if the market just opens above the prior day's close and then failed. Much of the Japanese material I had translated is than specific.
Part of this might be the result of the Japanese penchant for being vague. The penchant may have its origins in the feudal ages when it was accept- able for a samurai to behead any commoner who did not treat him as expected. The commoner did not always know how a samurai expected him to act or to answer. By being vague, many heads were spared.
However, I think the more important reason for the somewhat ous explanations has to do with fact that technical analysis is more of an art than a science. You should not expect rigid rules with most forms of technical analysis-just guideposts. Yet, because of this uncertainty, some of the ideas in this book may be swayed by the author's trading philosophy. Another example of subjectivity: In the Japa- nese literature many candlestick patterns are described as important at a high-price area or at a low-price area.
Obviously what constitutes a "high-price" or "low-price" area is open to interpretation. This could be viewed as a limitation.
Extended experience with candlestick charting in your market specialty will show you which of the patterns, and variations of these patterns, work best. In this sense, subjectivity may not be a liability. As you gain experience in candlestick techniques, you will discover which candlestick combinations work best in your market. This may give you an advantage over those who have not devoted the time and energy in tracking your markets as closely as you have.
As discussed later in the text, drawing the individual candlestick chart lines requires a close. Therefore, you may have to wait for the close to get a valid trading signal. This may mean a market on close order may be needed or you may have to try and anticipate what the close will be and place an order a few minutes prior to the close.
You may also prefer to wait for the next day's opening before placing an order. This aspect may be a problem but there are many technical systems especially those based on moving averages of closing prices which require a closing price for a signal. This is why there is often a surge in activity during the final few minutes of a trading session as computer- ized trading signals, based on closing prices, kick into play.
Some tech- nicians consider only a close above resistance a valid buy signal so they have to wait until the close for confirmation. This aspect of waiting for a close is not unique to candlestick charts.
On occasion, I can use the hourly candlestick charts to get a trade signal rather than waiting for the close of that day.
For instance, there could be a potentially bullish candlestick pattern on the daily chart. Yet, I would have to wait for the close before the candlestick pattern is com- pleted. If the hourly charts also show a bullish candlestick indicator dur- ing that day, I may recommend buying if the prevalent trend is up even before the close. The opening price is also in the candlestick lines. I hope that, as candlestick charts become more common, more newspapers will include openings individual stocks.
Candlestick charts provide many useful trading signals. They do not, however, provide price targets. There are other methods to forecast tar- gets such as prior support or resistance levels, retracements, swing objectives, and so on. Some Japanese candlestick practitioners place a trade based on a candlestick signal.
Candlestick patterns should always be viewed in the context as to what occurred before and in rela- tion to other technical evidence. With the hundreds of charts throughout this book, do not be sur- prised if you see patterns that I have missed within charts. There will also be examples of patterns that, at times, did not work.
Candlesticks will not provide an infallible trading tool. They do, however, add a vibrant color to your technical palette. Candlestick charts allow you to use the same technical devices that you use with bar charts. But the candlestick charts give you signals not available with bar charts. So why use a bar chart? In the near future, candlestick charts may become as standard as the bar chart.
In fact, I am going to make a bold prediction: A s more technicians become comfortable with candlestick charts, they will no longer use bar charts. I have been a tech- nical analyst for nearly 20 years.
And now, after discovering all their benefits, I only use candlestick charts. I still use all the traditional West- ern technical tools, but the candlesticks have given me a unique perspec- tive into the markets. Before I delve into the topic of candlestick charts, I will briefly discuss the importance of technical analysis as a separate discipline.
For those of you who are new to this topic, the following section is meant to empha- size why technical analysis is so important. It is not an in-depth discus- sion. If you are already familiar with the benefits of technical analysis, you can skip this section.
Do not worry, if you do not read the following sec- tion, it will not interfere with later candlestick chart analysis information. Yet the markets are influenced at times, to a major extent, by emotionalism.
An ounce of emotion can be worth a pound of facts. As John Keynes stated, "there is nothing so disastrous as a rational investment policy in an irra- tional Technical analysis provides the only mechanism to mea- sure the "irrational" emotional component present in all markets. Here is an entertaining story about strongly psychology can affect a market.
Soybeans were sharply higher. There was a drought in the Illinois Soy- bean Belt. And unless it ended soon, there would be a severe shortage of beans. Suddenly a few drops of water slid down a window. More than pairs of eyes [the traders- editor's note] shifted to the big windows. Then came a steady trickle which turned into a steady downpour. It was raining in downtown Chi- cago. The shouts cascaded from the traders' lips with a roar that matched the thunder outside.
And the price of soybeans began to slowly move down. Then the price of soybeans broke like some tropic fever. It was pouring in Chicago all right, but no one grows soybeans in Chi- cago. In the heart of the Soybean Belt, some miles south of Chicago the sky was blue, sunny and very dry. But even if it wasn't raining on the soybean fields it was in the heads of the traders, and that is all that counts [emphasis added]. To the market nothing matters unless the market reacts to it.
The game is played with the mind and the emotions [emphasis added]. In order to drive home the point about the importance of mass psy- chology, think about what happens when you exchange a piece of paper called "money" for some item like food or clothing?
Why is that paper, with no intrinsic value, exchanged for something tangible? It is because of a shared psychology. Everyone believes it will be accepted, so it is. Once this shared psychology evaporates, when people stop believing in money, it becomes worthless. Second, technicals are also an important component of disciplined trading.
Discipline helps mitigate the nemesis of all traders, namely, emotion. As soon as you have money in the market, emotionalism is in the driver's seat and rationale and objectivity are merely passengers. If you doubt this, try paper trading. Then try trading with your own funds. Technicals can put objectivity back into the drivers seat. They provide a mechanism to set entry and exit points, to set ratios, or levels.
By using them, you foster a risk and money management approach to trading. As touched upon in the previous discussion, the technicals contrib- ute to market objectivity. It is human nature, unfortunately, to see the market as we want to see it, not as it really is. How often does the fol- lowing occur? A trader buys. Immediately the market falls.
Does he take a loss. Usually no. Although there is no room for hope in the market, the trader will glean all the fundamentally bullish news he can in order to buoy his hope that the market will turn in his direction. Meanwhile prices continue to descend. Perhaps the market is trying to tell him something.
The markets communicate with us. We can monitor these messages by using the technicals. This trader is closing his eyes and ears to the messages being sent by the market. If this trader stepped back and objectively viewed price activity, he might get a better feel of the market.
What if a supposedly bullish story is released and prices do not move up or even fall? That type of price action is sending out volumes of information about the psychology of the market and how one should trade in it.
I believe it was the famous trader Jesse Livermore who expressed the idea that one can see the whole better when one sees it from a distance. Technicals make us step back and get a different perhaps, better perspective on the market. Third, following the technicals is important even if you do not fully believe in their use. This is because, at times, the technicals are the reason for a market move. Since they are a market moving factor, they should be watched. Fourth, random walk proffers that the market price for one day has no bearing on the price the following day.
But this academic view leaves out an important component-people. People remember prices from one day to the next and act accordingly. To wit, peoples' reactions indeed affect price, but price also affects peoples' reactions. Thus, price, itself, is an important component in market analysis. Those who disparage technical analysis forget this last point. Fifth, and finally, the price action is the most direct and easily acces- sible method of seeing overall relationships.
There may be news not known to the general public but you can expect it is already in the price. Those who have advance knowledge of some market moving event will most likely buy or sell until current prices reflect their information.
Thus, current prices should reflect all available information, whether known by the general public or by a select few. For those who are in a rush to get to the "meat" of the book that is, the techniques and uses of candlesticks , you can skip this chapter, or return to it after you have completed the rest of the book. It is an intriguing history. Among the first and the most famous people in Japan to use past prices to predict future price movements was the legendary Munehisa He amassed a huge fortune trading in the rice market during the s.
Before I discuss Homma, I want to provide an overview of the economic background in which Homma was able to flourish. The time span of this overview is from the late s to the mids. During this era Japan went from 60 provinces to a unified country where commerce blossomed. From to , Japan was a country incessantly at war as each of the daimyo literally "big name" meaning "a feudal lord" sought to wrestle control of neighboring territories. This span between and is referred to as "Sengoku Jidai" or, literally, "Age of Country at War.
By the early three extraordinary generals-Nobunaga Oda, Hideyoshi Toyotomi, and Ieyasu Tokugawa-had unified Japan over a year period. Their prow- ess and achievements are celebrated in Japanese history and folklore. This era is referred to as the Tokugawa Shogunate. The military conditions that suffused Japan for centuries became an integral part of candlestick terminology.
And, if you think about it, trad- ing requires many of the same skills needed to win a battle. Such skills include strategy, psychology, competition, strategic withdrawals, and yes, even luck. So it is not surprising that throughout this book you will come across candlestick terms that are based on battlefield analogies.
There are "night and the "advancing three soldiers pattern", "counter attack lines", the "gravestone", and so on. The relative stability engendered by the centralized Japanese feudal system lead by Tokugawa offered new opportunities. The agrarian econ- omy grew, but, more importantly, there was expansion and ease in domestic trade. By the 17th century, a national market had evolved to replace the system of local and isolated markets.
This concept of a cen- tralized marketplace was to indirectly lead to the development of techni- cal analysis in Japan. Hideyoshi regarded Osaka as Japan's capital and encour- aged its growth as a commercial center.
Osaka's easy access to the sea, at a time where land travel was slow, dangerous, and costly, made it a national depot for assembling and disbursing supplies. It evolved into Japan's greatest city of commerce and finance. Its wealth and vast store- houses of supplies provided Osaka with the appellation the "Kitchen of Japan.
In Osaka, life was permeated by the desire for profit as opposed to other cities in which money making was despised. The social system at that time was composed of four classes. In descending order they were the Soldier, the Farmer, the Artisan, and the Merchant. It took until the for merchants to break down the social barrier. Even today the traditional greeting in Osaka is makka" which means, "are you making a profit? In Osaka, Yodoya Keian became a war merchant for Hideyoshi one of the three great military unifiers.
He became very wealthy-as it turned out, too wealthy. The Bakufu was apprehensive about the increasing amount of power acquired by certain merchants. In , certain officials and merchants tried to corner the rice market. The punishment was severe: their children were executed, the merchants were exiled, and their wealth was confiscated.
The rice market that originally developed in Yodoya's yard was insti- tutionalized when the Dojima Rice Exchange was set up in the late s in Osaka. The merchants at the Exchange graded the rice and bargained to set its price. Up until , the Exchange dealt in actual rice. After , the Rice Exchange began to issue and accept rice warehouse receipts.
These warehouse receipts were called rice coupons. These rice receipts became the first futures contracts ever traded. Rice brokerage became the foundation of Osaka's prosperity. There were more than 1, rice dealers.
Since there was no currency standard the prior attempts at hard currency failed due to the debasing of the coins , rice became the defacto medium of exchange. A daimyo needing money would send his surplus rice to Osaka where it would be placed in a warehouse in his name.
He would be given a coupon as a receipt for this rice. He could sell this rice coupon whenever he pleased. Sometimes the rice crop of several years hence was mortgaged. These rice coupons were actively traded. The rice coupons sold against future rice deliveries became the world's first futures contracts. The Dojima Rice Exchange, where these coupons traded, became the world's first futures exchange.
Rice coupons were also called "empty rice" coupons that is, rice that was not in physical possession. To give you an idea of the popularity of rice futures trading, consider this: In , there were a total of , bales rice used to trade in bales of empty-rice coupons traded in Osaka.
Yet, throughout all of Japan there were only bales of Into this background steps Homma, called "god of the markets. The Homma family was considered so wealthy that there was a saying at that time, "I will never become a Homma, but I would settle to be a local lord. Sakata was a collections and distribution area for rice.
Since Homma came from Sakata, you will frequently come across the expression "Sakata's Rules" in Japanese candlestick literature. These refer to Homma. This was in spite of the fact that he was the youngest son. It was usually the eldest son who inherited the power during that era. This was probably because of Munehisa's market savvy. With this money, Homma went to Japan's largest rice exchange, the Dojima Rice Exchange in Osaka, and began trading rice futures. Homma's family had a huge rice farming estate.
Their power meant that information about the rice market was usually available to In addition, Homma kept records of yearly weather conditions. In order to learn about the psychology of investors, Homma analyzed rice prices going back to the time when the rice exchange was in Yodoya's yard.
Homma also set up his own communications system. At prearranged times he placed men on rooftops to send signals by flags. These men stretched the distance from Osaka to. After dominating the Osaka markets, Homma went to trade in the regional exchange at Edo now called Tokyo.
He used his insights to amass a huge fortune. It was said he had consecutive winning trades. His prestige was such that there was the following folk song from Edo: "When it is sunny in Sakata Homma's town , it is cloudy in Dojima the Dojima Rice Exchange in Osaka and rainy at Kuramae the Kuramae exchange in Edo.
This song reflects the Homma's sway over the rice market. In later years Homma became a financial consultant to the govern- ment and was given the honored title of samurai. He died in His trading principles, as applied to the rice markets, evolved into the candlestick methodology currently used in Japan. This gives you an idea of the difficulty of translating Japanese into English. The same Japanese symbols for Homma's first name, depending on the translator, can be Sokyu or hisa.
His last name, again depending on the translator, can be either Homma or Honma. Johannes and Yui, Tsunehiko. Exhibit 3. On the candlestick chart, prices seem to jump off the page presenting a stereoscopic view of the market as it pushes the flat, two-dimensional bar chart into three dimensions. In this respect, candlecharts are visually exciting. Drawing the daily bar chart line requires open, high, low, and close.
The vertical line on a bar chart depicts the high and low of the session. The horizontal line to the left of the vertical line is the opening price. The horizontal line to the right of the vertical line is the close. Although the daily bar chart lines and candlestick chart lines use the same data, it is easy to see that they are drawn differently. It represents the range between that session's opening and closing.
When the real body is black filled in it means the close of the ses- sion was lower than the open. If the real body is white empty , it means the close was higher than the open. The thin lines above and below the real body are the shadows. These shadows represent the session's price extremes.
The shadow above the real body is called the upper shadow and the shadow under the real body is known as the lower shadow. Accordingly, the peak of the upper shadow is the high of the session and the bottom of the lower shadow is the low of the session.
It is easy to see why these are named candlestick charts since the individual lines often look like candles and their wicks. If a candlestick line has no upper shadow it is said to have a shaven head. A candlestick line with no lower shadow has a shaven bottom. To the Japa- nese, the real body is the essential price movement. The shadows are usually considered as extraneous price fluctuations. Exhibits 3. Prices had a wide range and the market opened near the low and closed near the high of the session.
They are called spinning tops and are neutral in lateral trading bands. Doji Examples tions on stars and harami patterns , these spinning tops do become important when part of certain formations. The spinning top can be either white or black. The lines illustrated in Exhibit 3. It is the diminutive size of the real body that makes this a spinning top. Instead, they have horizontal lines.
These are examples of what are termed doji lines. A doji occurs when the open and close for that session are the same or very close to being the same two- or three-thirty-seconds in bonds, a cent in grains, and so on. The lengths of the shadows can vary. Doji are so important that an entire chapter is devoted to them see Chapter 8 The Magic Candlestick charts can also be drawn more colorfully by using the classical Japanese candlestick chart colors of red and black.
Red can be used instead of the white candlestick. This could be especially useful for computer displays of the candlestick charts. The obvious problem with this color scheme is that photo copies and most computer printouts will not be useful since all the real bodies would come out as black.
Some readers may have heard the expression yin and yang lines. These are the Chinese terms for the candlestick lines. The yin line is another name for the black candlestick and the yang line is equivalent to the white candlestick. In Japan, a black candlestick is called in-sen black line and the white candlestick is called yo-sen white line.
The Japanese have a proverb that says, "the first hour of the morning is the rudder of the day. It furnishes the first clue about that day's direction. It is a time when all the news and rumors from overnight are filtered and then joined into one point in time. The more anxious the trader, the earlier he wants to trade.
Therefore, on the open, shorts may be scrambling for cover, potential longs may want to emphatically buy, hedgers may need to take a new or get out of an old position, and so forth. After the flurry of activity on the open, potential buyers and sellers have a benchmark from which they can expect buying and selling.
There are frequent analogies to trading the market and fighting a battle. In this sense, the open provides an early view of the battlefield and a provi- sional indication of friendly and opposing troops. At times, large traders may try to move the market on the open by executing a large buy or sell order.
Japanese call this a morning attack. Notice that this is another mil- itary analogy. The Japanese use many such military comparisons as we shall see throughout the book. The names of the Japanese candlestick charts make this fact : dent. These names are a colorful mechanism used to describe the tional health of the market at the time these patterns are formed.
After hearing the expressions "hanging man" or "dark-cloud cover," would you think the market is in an emotionally healthy state-of course not! These are both bearish patterns and their names clearly convey the unhealthy state of the market. While the emotional condition of the market may not be healthy at the time these patterns form, it does not preclude the possibility that the ket will become healthy again. The point is that at the appearance of, say, a dark-cloud cover, longs should take defensive measures or, depending on the general trend and other factors, new short sales could be initiated.
There are many new patterns and ideas in this book, but the tive names employed by the Japanese not only make candlestick charting : fun, but easier to remember if the patterns are bullish or bearish.
For example, in Chapter 5 you will learn about the "evening star" and the "morning star. Of course, the evening star which comes out before darkness sets in, sounds like the bearish signal-and so it is! The morning star, then, is bullish since the morning star appears just before sunrise. Margin calls in the futures markets are based on the close.
We can thus expect heavy emotional involvement into how the market closes. The close is also a pivotal price point for many technicians. They may wait for a close to confirm a break- out from a significant chart point. Many computer trading systems for example, moving average systems are based on closes. If a large buy or sell order is pushed into the market at, or near, the close, with the intention of affecting the close, the Japanese call this action a night attack.
Now let us turn our attention to how the candlestick lines, alone or in combination, provide clues about market direction. Reversal patterns are these technical clues. Western reversal indicators include double tops and bottoms, reversal days, head and shoulders, and island tops and bottoms.
Yet the term "reversal pattern" is somewhat of a misnomer. Hearing that term may lead you to think of an old trend ending abruptly and then reversing to a new trend. This rarely happens. Trend reversals usu- ally occur slowly, in stages, as the underlying psychology shifts gears. A trend reversal signal implies that the prior trend is likely to change, but not necessarily reverse.
This is very important to understand. Com- pare an to a car traveling forward at 30 The car's red brake lights go on and the car stops.
The brake light was the reversal indicator showing that the prior trend that is, the car moving forward was about to end. But now that the car is stationary will the driver then decide to put the car in reverse? Will he remained stopped? Will he decide to go forward again? Without more clues we do not know. Exhibits 4. The prior for instance, could con- vert into a period of sideways price action.
Then a new and opposite trend lower could start. See Exhibit 4. Exhibit 4. It is prudent to think of reversal patterns as trend change patterns. I was tempted to use the term "trend change patterns" instead of "rever- sal patterns" in this book.
Top Reversal nical analysis literature, I decided to use the term reversal patterns. Remember that when I say "reversal pattern" it means only that the prior trend should change but not necessarily reverse. Recognizing the emergence of reversal patterns can be a valuable skill. Successful trading entails having both the trend and probability on your side. The reversal indicators are the market's way of providing a road sign, such as "Caution-Trend in Process of Change.
You should adjust your trading style to reflect the new market environment. There are many ways to trade in and out of positions with reversal indicators. We shall discuss them throughout the book. An important principle is to place a new position based on a rever- sal signal only if that signal is in the direction of the major trend.
Let us say, for example, that in a bull market, a top reversal pattern appears. This bearish signal would not warrant a short sale. This is because the major trend is still up. It would, however, signal a liquidation of longs. If there was a prevailing downtrend, this same top reversal formation could be used to place short sales.
I have gone into detail about the subject of reversal patterns because most of the candlestick indicators are reversals. Now, let us turn our attention to the first group of these candlestick reversal indicators, the hammer and hanging-man lines. The real bodies are near top of the daily range. The variety of candlestick lines shown in the exhibit are fascinating in that either line can be bullish or bearish depending on where they appear in a trend.
If either of these lines emerges during a downtrend it is a signal that the downtrend should end. Hanging Hanging Man Candlesticks Man as in "the market is hammering out" a base. Interest- ingly, the actual Japanese word for this line is takuri. This word means something to the affect of "trying to gauge the depth of the water by feeling for its bottom. Such a line is ominously called a hanging man see Exhibit 4. The name hanging man is derived from the fact that it looks like a hanging man with dangling legs.
It may seem unusual that the same candlestick line can be both bull- ish and bearish. Yet, for those familiar with Western island tops and island bottoms you will recognize that the identical idea applies here. The island formation is either bullish or bearish depending on where it is in a trend. An island after a prolonged is bearish, while the same island pattern after a downtrend is bullish.
The hammer and hanging man can be recognized by three criteria: 1. The real body is at the upper end of the trading range. The color of the real body is not important.
A long lower shadow should be twice the height of the real body 3. It should have no, or a very short, upper shadow. The longer the lower shadow, the shorter the upper shadow and the smaller the real body the more meaningful the bullish hammer or bear- ish hanging man. Although the real body of the hammer or hanging man can be white or black, it is slightly more bullish if the real body of the hammer is white, and slightly more bearish if the real body of the hanging man is black.
If a hammer has a white real body it means the market sold off sharply during the session and then bounced back to close at, or near, the session's high. This could have bullish ramifica- tions. If a hanging man has a black real body, it shows that the close could not get back to the opening price level. This could have potentially bearish implications. The logic for this has to do with how the hanging-man line is generated. Usually in this kind of scenario the market is full of bullish energy.
Then the hanging man appears. On the hanging-man day, the market opens at or near the highs, then sharply sells off, and then rallies to close at or near the highs. This might not be the type of price action that would let you think the hanging man could be a top reversal. But this type of price action now shows once the market starts to sell off, it has become vulnerable to a fast break. If the market opens lower the next day, those who bought on the open or close of the hanging-man day are now left "hanging" with a losing position.
Thus, the general principle for the hanging man; the greater the down gap between the real body of the hanging-man day and the open- ing the next day the more likely the hanging man will be a top. Another bearish verification could be a black real body session with a lower close than the hanging-man sessions close.
Hanging Hanging Man. A variation of a hanging man emerged in mid-March. Its lower shadow was long, but not twice the height of the real body.
Yet the other criteria a real body at the upper end of the daily range and almost no upper shadow were met. It was also confirmed by a lower close the next day. This line, although not an ideal hanging man, did signal the end of the upturn which started a month earlier.
Candlestick charting techniques, like other charting or pattern recognition techniques, have guidelines. But, they are not rigid rules. As discussed above, there are certain aspects that increase the impor- tance of hanging-man and hammer lines.
But, as shown in the hanging man of mid-March, a long lower shadow may not have to be twice the height of the real body in order to give a reversal signal. The longer the lower shadow, the more perfect the pattern. The interesting feature of this chart is the buy signal given early in New lows appeared at hammers 3 and 4 as prices moved under the July lows at hammer 2.
Yet, there was no continuation to the downside. The bears had their chance to run with the ball. They fumbled.
0コメント