THE POWER OF JAPANESE CANDLESTICK CHARTS

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Erick Stafford
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3 THE POWER OF JAPANESE CANDLESTICK CHARTS

4 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offi ces in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market s ever changing temperament and have prospered some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, visit our Web site at

5 THE POWER OF JAPANESE CANDLESTICK CHARTS Advanced Filtering Techniques for Trading Stocks, Futures, and Forex REVISED EDITION Fred K. H. Tam

6 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. 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore All rights reserved. First edition published by Pelanduk Publications in No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore , tel: , fax: , enquiry@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for any damages arising herefrom. Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley& Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley& Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D Weinheim, Germany ISBN (Hardcover) ISBN (epdf) ISBN (epub) ISBN (o-book) Typeset in 12/14 pt, Perpetua Std Regular by Aptara Printed in Singapore by C.O.S Printers Pte. Ltd

7 CONTENTS v Index of Reversal Index of Continuation Preface Acknowledgments ix xi xiii xxi PART I BASIC CANDLESTICK TECHNIQUES CHAPTER 1 Introduction 3 Historical Background 4 Reasons Candlestick Charts Are So Popular Today 5 Construction of the Candlestick Chart 7 Construction of a Bar Chart 8 CHAPTER 2 Single Candle Types 11 Single Candles 11 The Doji 35 CHAPTER 3 The Umbrella Group 59 White Hammer or Hanging Man (Also Called White Umbrella Candle) 59 Black Hammer or Hanging Man (Also Called Black Umbrella Candle) 60 White Inverted Hammer or Shooting Star (Also Called Inverted White Umbrella Candle) 60

8 vi CONTENTS Black Inverted Hammer or Shooting Star (Also Called Inverted Black Umbrella Candle) 61 CHAPTER 4 Reversal 67 Introduction 67 Index of Reversal 69 Single Candlestick 70 Double Candlestick 90 Triple Candlestick 119 Multiple Candlestick 156 CHAPTER 5 Continuation 171 Introduction 171 Double Candlestick 172 Multiple Candlestick 185 Windows (Gaps) 192 CHAPTER 6 Summarizing Part I 209 Can One Trade the Market and Profit Just by Applying Candlestick Chart Analysis? 210 Candlestick Chart Analysis Is Best Used in Conjunction with Technical Indicators 210 Conclusion 211 PART II ADVANCED CANDLESTICK TECHNIQUES CHAPTER 7 Filtering with Western Indicators 215 Using Filtering or the Rule of Multiple Techniques 216 Scenario 1: In the Case of a Bull Market or Bullish Trend 216 Scenario 2: In the Case of a Bear Market or Bearish Trend 216 Scenario 3: In the Case of Overbought or Oversold Situations 216 Filtering with Moving Averages 217 Filtering with MACD (Moving Average Convergence Divergence) 218 Filtering with Relative Strength Index 221 Filtering with Stochastic 224 Filtering with Momentum 229 Filtering with Williams Percentage Retracement 229 Filtering with Directional Movement Index 232 Filtering with Commodity Channel Index 235 Filtering with Volume 238 Filtering with Bollinger Bands 238 Filtering with Elliott Wave Theory 240

9 CHAPTER 8 P.I. System Trader 247 The P.I. System Trader Mimics Candlesticks 248 Trading Rules for P.I. System Trader 250 Advantages of P.I. System Trader 250 CHAPTER 9 Sakata s Five Methods 253 Sakata s Constitution and Sakata s Five Methods 253 Sakata s Constitution (Soba Sani No Den) 254 The Japanese Method of Three 254 Conclusion 267 CHAPTER 10 Computerized Candlestick Forecasting 273 The Era of Computerized Candlestick Scanning 274 Features of the Nison Candle Scanner 275 Nison Candle Highlighter on MetaTrader 4 Platform 280 CHAPTER 11 Conclusion: Facts about Candlesticks 285 About the Author 287 Reading List 289 Index 291 vii CONTENTS

11 INDEX OF REVERSAL PATTERNS ix Single Candlestick Bullish Reversal Bearish Reversal Pages Spinning Top Spinning Top Hammer Hanging Man Inverted Hammer Shooting Star Doji at the Bottom Doji at the Top Bullish Meeting Line Bearish Meeting Line Bullish Belt-Hold Line Bearish Belt-Hold Line Double Candlestick Bullish Reversal Bearish Reversal Pages Bullish Engulfing Bearish Engulfing Fred Tam s White Inside Out Up Fred Tam s Black Inside Out Down Piercing Line Dark Cloud Cover Thrusting Line Incomplete Dark Cloud Cover Bullish Harami Line Bearish Harami Line (continued )

12 x INDEX OF REVERSAL PATTERNS Bullish Reversal Bearish Reversal Pages Bullish Harami Cross Bearish Harami Cross Homing Pigeon Bearish Homing Pigeon Tweezers Bottom Tweezers Top Triple Candlestick Bullish Reversal Bearish Reversal Pages Doji-Star at the Bottom Doji-Star at the Top Three-River Morning Doji-Star Three-River Evening Doji-Star Abandoned Baby Bottom Abandoned Baby Top Three-River Morning Star Three-River Evening Star Tri-Star Bottom Tri-Star Top Breakaway Three-New- Price Bottom Bullish Black Three Gaps Breakaway Three-New- Price Top Bearish White Three Gaps Three White Soldiers Three Black Crows Advance Block Deliberation Upside Gap Two Crows Multiple Candlestick Bullish Reversal Bearish Reversal Pages Concealing Baby Swallow Ladder Bottom Tower Bottom Tower Top Eight-to-Ten New Record Lows Eight-to-Ten New Record Highs

13 INDEX OF CONTINUATION PATTERNS xi 1. Double Candlestick Pages Separating Lines Kicking Pattern On-Neck Pattern In-Neck Pattern Thrusting Line Multiple Candlestick Pages Rising Three Methods Falling Three Methods Mat Hold Pattern Windows (Gaps) Pages Windows (Gaps) Tasuki Upside Gap 195 Tasuki Downside Gap Up-Gap Side-by-Side White Lines 199 Down-Gap Side-by-Side White Lines High-Price Gapping Plays 203 Low-Price Gapping Plays

15 PREFACE xiii 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). 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.

Encyclopedia of Candlestick Charts

Encyclopedia of Candlestick Charts Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley