Preface

"A clever hawk hides his claws"

Would you like to learn a technical system refined by centuries of use, but virtually unknown here? 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 candlesticks will help improve your market analysis. My focus will be mainly on the U.S. markets, but the tools and techniques in this book should be applicable to almost any market.

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 candlesticks will add another dimension of analysis.

Do not worry if you have never seen a candlestick chart. The assumption 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 community.

If you are a seasoned technician, you will discover how joining Japanese 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 candlestick charts are as a stand alone charting method. To help guide you, I

have included a glossary of all the western and Japanese candlestick terms used.

The Japanese technicals are honed by hundreds cf years of evolution. Yet, amazingly, we do not know how the Japanese analyze our markets with their traditional technical tool called candlesticks. This is disconcerting if you consider that they are among the biggest players in the financial 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?"

The Japanese use a combination of western chart and candlestick techniques to analyze the markets. 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 candlesticks 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.

Contents

Preface ix

Chapter 1 INTRODUCTION

Some background, 1

How I learned about candlestick charts, 1

Why have candlestick charting techniques captured the attention of traders and investors around the world?, 4 What is in this book, 5 Some limitations, 7

The importance cf technical analysis, 8

Chapter 2 A HISTORICAL BACKGROUND

PART ONE: THE BASICS

Chapter 3 CONSTRUCTING THE CANDLESTICKS

Drawing the candlestick lines, 21

Chapter 4 REVERSAL PATTERNS

Hammer and hanging-man lines, 28

Engulfing pattern, 38 Dark-cloud cover, 43 Piercing pattern, 48

Chapter 5 STARS 55

The morning star, 56

The evening star, 59

The morning and evening doji stars, 64

The shooting star and the inverted hammer, 70

The inverted hammer, 75

Chapter 6 MORE REVERSAL PATTERNS 79

The harami pattern, 79

Harami Cross, 85 Tweezers tops and bottoms, 88 Belt-hold lines, 94 Upside-gap two crows, 98 Three black crows, 101 The counterattack lines, 103 Three mountains and three rivers, 107 The importance of the number three in candlesticks, 112 Dumpling tops and fry pan bottoms, 113 Tower tops and tower bottoms, 115

Chapter 7 CONTINUATION PATTERNS 119

Windows, 119

Upward- and downward-gap tasuki, 129 High-price and low-price gapping plays, 131 Gapping side-by-side white lines, 134 Rising and falling three methods, 135 Three advancing white soldiers, 143 Separating lines, 147

Chapter 8 THE MAGIC DOJI 149

The importance of the doji, 149 Doji at tops, 150

Doji after a long white candlestick, 154

The long-legged doji and the rickshaw man, 154

The gravestone doji, 159

Doji as support and resistance, 161

The tri-star, 162

Chapter y PUTTING IT ALL TOGETHER . 165

Chapter

Chapter

Chapter

Chapter Chapter

16 CANDLESTICKS WITH ELLIOTT WAVE

Elliott wave basics, 253

Elliott wave with candlesticks, 254

17 CANDLESTICKS WITH MARKET PROFILE"

Market profile" with candlesticks, 261

CANDLESTICKS WITH OPTIONS

Options basics, 268 Options with candlesticks, 269

HEDGING WITH CANDLESTICKS

20 HOW I HAVE USED CANDLESTICKS

CONCLUSION

Glossary A CANDLESTICK TERMS AND VISUAL GLOSSARY Glossary B AMERICAN TECHNICAL TERMS

BIBLIOGRAPHY

INDEX

275 281 287 289 303 309 311

PART TWO: THE RULE OF MULTIPLE

TECHNICAL TECHNIQUES

Chapter 10 A CONFLUENCE OF CANDLESTICKS 177

Chapter 11 CANDLESTICKS WITH TRENDLINES 185

Support and resistance lines with candlesticks, 185

Springs and upthrusts, 193

The change of polarity principle, 201

Chapter 12 CANDLESTICKS WITH RETRACEMENT LEVELS 209

Chapter 13 CANDLESTICKS WITH MOVING AVERAGES 215

The simple moving average, 215

The weighted moving average, 216

The exponential moving average and the MACD, 216

How to use moving averages, 217

Dual moving averages, 220

Chapter 14 CANDLESTICKS WITH OSCILLATORS 227

Oscillators, 227

The relative strength index, 228 How to Compute the RSI, 228 How to Use RSI, 229 Stochastics, 232

How to Compute Stochastics, 232 How to Use Stochastics, 233 Momentum, 236

Chapter 15 CANDLESTICKS WITH VOLUME AND OPEN INTEREST 241

Volume with candlesticks, 242 On balance volume (OBV), 244 OBV with candlesticks, 245 Tick volume™, 245

Tick Volume™ with candlesticks, 246 Open interest, 248

Open interest with candlesticks, 249

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