Preface

This bock is about applying the popular time-tested 300 years old 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 Malaysian stocks. This is because Malaysian stocks, especially lower liners and second boards, tend to exhibit short-term rallies only to be followed by short-term corrections. Their tracing cycle ranges from three to fifteen days (see Chart E-1.1 and Chart E-1.2).

Chart P-1. 1 Time Engineering Daily - Trading Cycles range from 3-15 days
Chart P-1.2 KLCI Eaily - Trading cycles range from 3-15 days

It is fun to be on the right side cf the market, buying at or near market bottoms and selling at or near market tops. But the question is, "How do I knew 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 cmsiticn?

Questions like "Is this the right time to buy?" or "Is this the right time to sell?" has always been a talking point amongst traders and investors. The objective of this book is to provide an answer to these questions.

There are nary techniques out there, mainly from the Vfest, like the moving average, relative strength index, NACD, stochastic, momentum, Bollinger bands, Elliott waves etc;, which can help you time your entry and exit. I strongly believe that these Western techniques should be part of a trader's arsenal.

But complimenting Western techniques with that of Japanese candlesticks will give you that extra edge in getting a much better price - a lcwer 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 two periods and sometimes up to ten periods earlier than Western indicators is because candlestick signals are based on an analysis of price itself.

When you are analysing the candle chart, you are in effect analysing the psychology cf the market participants that is reflected in its price. ISb injiicatcrs can beat atechnicpe that analyses price in itself.

This passage taken from the Sakata GChc sums up the candlesticks' reason d'etre :

"The psychology cf the market participant, the supply and demand equation and the relative strength cf the buyers and sellers are all reflected in the are candlestick cr in a acr:bdraticn of candlesticks."

Vfestem indicators, on the other hand, use formula that take into account prices of several periods. The NACD, for example, uses a 12-cay, 26-day and 9-day exponential moving average as its parameter, dce parameters used are more than two periods, the resultant signal, when it is triggered, tends to lagbdrmdprice (see Chart P-1.3 l^elo^). This is the reason why Western irddcatcrs tend to call a buy or sell between three to ten periods (and sometimes more) from the market's bottom or top. The longer the param-etersused, thencxedistant is the signal.

Chart P-1.3 KLCI Daily - Western indicators, like NACD, tend to lag behind candlesticks

This book is written for the beginner as well as for the advance trader. Part 1 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 eachpattem, but also offers suggestions on the proper action to take as well as a stcp^loss paint to exit if the sigral fails.

As the candlestick technique prides itself in spotting market U-turns, I have devoted nary 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.

Eart 2 of this book covers the more advanced aspects of trading with candlesticks. It emphasizes the importance cf using candlesticks together with Western technical indicators to improve the accuracy of candle signals. Several popular Vfestem technical indicators are covered in this book with examples drawn from Malaysian stocks and futures to illustrate that this technique works fox valayoan stocks. This technique also holds true for other markets as well - including the U.S., European, Japanese and Asian markets. It also works for those of you who are trading commodities futures, index futures and currency futures.

The Japanese candlestick: technique is a very powerful short-term trading technique. In markets that exhibit rallies and declines from between three to fifteen cycles like that experienced in Malaysian stocks, it becomes even more indispensable. It is therefore very citable for use by remisers, stockists, scalpers, day traders and ^crt-termpcsi-ticntraders.

This technique is equally useful for medium term and long term forecasting through the use of weekly and monthly candlestick charts in ccn:b>inaticn with longer-term Western technical indicators fee Chart P-1.4).

Chart P-1.4 KLCI Weekly - Weekly candle charts are best for long-term investors

Chart P-1.4 KLCI Weekly - Weekly candle charts are best for long-term investors

Harein lies the adaptability cf technical analysis in that it woks ine^pecthecf the tine frame used. You can apply this technique for intra-ctey trading through the use of a 1-minute chart, a 5-minutes chart, a 15-ninutes chart, a 30-minutes chart or an hourly chat.

For longer-term investors like fund managers who tend to hold stocks for over a period of more than a month, I have found that the weekly candle charts provides the most consistent buy and sell signals within the Malaysian market.

Winning from the market requires two ingredients. The first is, you must have a proven trading technique. The second is, 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 a part of money management. To that extent, this book will also cover the second.

Good luck and Happy Trading.

Fred Tam

Kuala Lumpur, Malaysia March 2001.

Ibis peƧ^ is iitanrt crally left tQsrk

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