( Even Master Shifu of Kungfu Panda, knew that the best way for Panda to learn, is by using a riceball as a bait. I.e. if you want to learn technical analysis, do some of your own readings as well. Of course, nothing beats experience, but how many of us can afford to have 20 years of experience when we’re still below 30s? We read from other’s experiences. We learn from others. That’s how.)
3 C’s to Successful (Insert Endeavor. i.e. Trading/Investing/Studying et al):
A very wise Indian named TGC Prasad used to say “An unusual man is an ordinary man who strives to do extraordinary things.”
So here’s to my unusual adventure to — reading and learning Mr. Steve Nison’s Japanese Candlestick Charting. (Thank you Mr. Uy for lending me your copy. The book is quite expensive and thanks to the likes of you, I don’t have to use my pdf anymore. Hard copies are still better than soft copies.) 😛
Personal Notes/ Highlights from the book:
1.) “A clever hawk hides it claws” – Japanese Proverb
3.) If you wish to know the road, inquire of those who have traveled it.
4.) The beginning is most important.
Cautions on Subjectivity
5.) “One should not expect rigid rules. Most forms of technical analysis are guideposts. For instance, if one of the Japanese books says that a candle line has to be surpassed to forecast the next bull move, I equate “surpassed” with “on a close above.” This is because, to me, a close is more important than an intraday move above resistance or below support. This is another example of subjectivity.
Importance of Technical Analysis
6.) The importance of technical analysis is multifaceted. First, while fundamental analysis may provide a gauge of supply/demand situations (i.e. p/e ratios, economic stats and so forth), there is no psychological component in such analysis. Yet the markets are influenced at times, to a major extent, by emotionalism.
7.) There is nothing so disastrous as a rational investment policy in an irrational world – John Maynard Keynes. Technical analysis provides the only mechanism to measure the “irrational” emotional component present in all markets.
8.) To the market, nothing matters unless the market reacts to it. The game is played with the mind and the emotions.
9.) The markets communicate with us. We can monitor these messages by using technicals. If the trader stepped back and objectively viewed the price activity, he might get a better feel of the market. Price action sends out volumes of information about the psychology of the market and how one should trade in it.
10.) One can see the whole better when one sees it from a distance – Jesse Livermore
Technicals make us step back and get a different, and perhaps better perspective on the market.
11.) Through inquiring of the old, we learn the new – Japanese Proverb.
12.) The military conditions that suffused Japan for centuries became an integral part of candlestick terminology. Trading requires many of the same skills needed to win a battle. Such skills include strategy, psychology, competition, strategic withdrawals, and yes, even luck.
There are “night and morning attacks”, the “advancing three soldiers pattern”, “counterattack lines”, the “gravestone” and so on.
The Wealthy Rice Traders in Osaka
13.) In Osaka, life was permeated by the desire for profit (as opposed to other cities in which money making was despised.) The traditional greeting in Osaka is “Mokarimakka” which means “Are you making a profit?”
14.) Rice brokerage became the foundation of Osaka’s prosperity. There were more than 1,300 rice dealers. Rice became the de facto medium of exchange.
15.) The Dojima Rice Exchange where these coupons traded, became the world’s first futures exchange.
Even the “god of rice markets” was hardworking
16.) Homma, called “god of the markets” , had a huge rice farming estate. Their power meant that information about the rice market was usually available to them. 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 Sakata. After domiunating the Osaka markets, Homma traded in the regional exchange at Edo (now called Tokyo). He used his insights to amass a huge fortune. It was said he had 100 consecutive winning trades.
Homma became a financial consultant to the government and was given the honored title of samurai. He died in 1803. Homma’s books about the markets were said to have been written in the 1700s and evolved into the candlestick methodology currently used in Japan.
17.) Even a thousand mile journey begins with the first step
18.) Without oars, you cannot cross in a boat.
19.) Drawing Candle Lines: Distinguish Real body, Shadows, upper Shadow, lower shadow et al
Shaven head – if a candle line has no upper shadow
Shaven bottom – if a candle line has no lower shadow
20.) Japanese say the real body is the essence of the price movement.
21.) A small real body (white or black) is a spinning top.
22.) Spinning tops are components of candle formations including morning and evening stars, harami, hammers and others.
23.) Doji – no real body because open and close are the same. Dojis have implications as a reversal signal. – An indecision point. Nonetheless, this should be viewed as a tentative clue, and the first sign of a potential reversal.
24.) Japanese place great emphasis on the open and close because they are the two most emotionally charged points of the trading day.
The First Hour
25.) 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 or she wants to trade. Therefore on the open, shorts may scramble to cover, longs way want to emphatically buy, hedgers need to take a new or get out of an old position and so forth. In this sense, the open provides an early view of the battlefield and provisional indication of friendly and opposing troops.
The Closing Hour
26.) The other pivotal price point is the close. Heavy emotional involvement can be observed into how the market closes. A close may confirm a breakout from a significant chart point. Margin calls are also based on the close. Many computer systems are calculated from closes. If a large buy or sell order is pushed into the market near a close, the Japanese call this action “a night attack”. If this is done on the open, it is called “a morning attack.”
(FT comment: in layman’s terms- painting the tape – forcing the close)
27.) An ounce of emotion can be worth a pound of facts.
28.) Candlestick patterns are a colorful mechanism describing the emotional health of the market.
29.) Darkness lies one inch ahead.
Potential Signs of Reversal
30.) Trend changes usually occur slowly in stages, as underlying psychology shifts gears.
31.) Umbrella Lines – They look like umbrellas. Umbrella lines are candles with very long lower shadows and a small real body at the top end of the range.
Hammers – If an umbrella line emerges during a downtrend, it’s a signal that the downtrend should end. This umbrella line is called “a hammer”, as in “the market is hammering out” a base. The Japanese word for the hammer is takuri. This word means “trying to gauge the depth of the water by feeling for its bottom.”
Hanging Man – if the umbrella line happens after a rally. The name “hanging man” is derived from the fact that it looks like a hanging man with dangling legs.
A hanging man should be confirmed, while a hammer need not be.
32.) The longer the lower shadow, the shorter the upper shadow, the smaller the real body, the more meaningful the bullish hammer or bearish hanging man. (FT comment: Focus on the SHADOWS!)
33.) A white hammer is a “power line.” – 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 ramifications. The aspect of closing near the highs is the reason why the hammer should have no , or miniscule upper shadow. If there was a long upper shadow, then the market didn’t close near the highs, which is an important criterion for the hammer.
(FT comment: Reminds me a lot about the huge bullish hammers of TDY in those big 50% days.- it closed up 50% and always closed at the highs.)
34.) The lower shadow required at least two or three times the height of the body. The market had to be pushed down sharply lower during the session. As the Japanese would say, there was a “kamikaze fight” as the bears lost control as adduced by the fact that the market closed at, or near, its session highs.
(FT comment: reminds me a lot about the NI,DIZ action past couple of days 8-10, 18-28, but they all closed around 20% from its lows on that single day.)
35.) A hanging man comes after an advance. Because a long lower shadow is viewed as a plus, and since the hanging man has such a shadow, it is especially important that one waits for bearish confirmation with the hanging man. At a minimum, this would be a lower opening under the real body of the hanging man. (FT comment: Check the bearish hanging men of SGI,CAL, MJC for examples – past 3 months will already show them)
36.) The slope from one high to the next was decreasing – his means that although new highs are still being made, the pace of the rally was slackening – this hints that bulls are losing control of the market, and a hanging man session as well as spinning tops are huge alerts for possible reversal signals.
(TDY’s pace of ascent in the third day showed that the pace was slackening- an omen to its profit taking decline, sending it from 14 to 11)
37.) Note that if the market doesn’t close under the hanging man’s real body, the bull trend remains entrenched. This is the reason why even if the pace of ascent slackens, hanging men needs to be confirmed with other evidences.
Next studies — to be continued —
(We end at chapter 4 page 42.) The book’s total page count is 268 pages, without the glossary and index.
We will continue with the Steve Nison book lessons (around 5 to 6 more extra posts, either next week or when I’m free. )
Hope you guys learned something as I did,
– Faceless Trader
Steve Nison’s Japanese Candlestick Charting Techniques (2nd Edition)