Candlestick Analysis

Steve Nison is a busy man. Ever since his first book “Japanese Candlestick Charting Techniques” was published in 1991 he has run his own advisory business, which gives trade recommendations to institutional investors and [[hedge fund]]s. He is also one of the most respected teachers on trading the financial markets, and his seminars are always a sell-out wherever he goes. Since the publication of his first book he has written another two best sellers on Candlestick analysis. His first book is affectionately known as the “modern-day bible” of trading.

Tom Hougaard caught up with Steve Nison during a quiet day in the market.

Tom Hougaard: How did it all start?

Steve Nison: 30 years ago I worked for a commodity broker and advisory service. All my work was based aroundfundamental analysis. Today it is hard to imagine that all investment decisions 30 years ago were based on fundamental research. I knew nothing about technical analysis before I started working in this business and while I studied for my MBA we were not taught anything about charts.

The president of the company however was well frequented with the use of charting. During our meetings with our clients I realised that he used technical analysis to derive his trading recommendations, but he explained the recommendations using fundamental analysis. 30 years ago technical analysis was considered somewhat of a black art that no one with respect for themselves would use.

While fundamental analysis can explain the forces at play in a bull or bear run, psychology will create thevolatility. Fundamental analysis can't explain this.

As John Maynard Keynes said: it is extremely dangerous to have a rational investment policy in an irrational world. I think the president of the company knew better than anyone at the time how to integrate technical analysis into fundamental research.

I started studying everything I could find on technical analysis. Back then we used bar charts and line charts to display price action, and it wasn't until I met another commodity broker some 15 years later that I discovered Japanese Candlestick charts.

In 1987 I met a Japanese broker, and while I was in her office discussing the markets she used an expression describing chart patterns that I had never heard before. She used Candlesticks on her own charts, which is the Japanese tradition, and I really got hooked on this tool immediately.

Unfortunately there was no material written in English whatsoever to aid me, and the next 3 years was spent not only translating books but also making it understandable to Western society. That meant spending a lot of time reading about and coming to understand the philosophy of the East, including the principles of Yin and Yang. I ended up learning a whole lot more than just a charting tool.

Technical analysis is the only way to measure the emotional component of the market. We know that many times an ounce of emotion can be worth a pound of facts. How else to explain the sudden shift in the market without a change in the fundamentals?

A fascinating attribute to candle charts is that the names of the candle patterns are a colourful mechanism describing the emotional health of the market at the time these patterns are formed. If you heard the expression “dark-cloud cover,” would you think the market is in a healthy emotional state? Of course not! This is a bearish pattern and as the name suggest there is darkness over the market.

TH: Did you begin to apply your new-found knowledge immediately?

SN: At the time I worked at Hutton as a commodity advisor. No-one knew I was using Candlestick charts to derive buy and sell signals, and I was extremely successful in my analysis. This fuelled my desire to learn more and more. I had good help from some fine Japanese traders who had used Candles all their trading life. One such trader was Morihiko Goto who told me that his family had used this form of charting for generations.

The Japanese stock market started back in 1870 but rice trading had been around for long before that. Charting the fluctuations of rice prices on the Osaka Exchange probably took place more than 100 years before the opening of the stock market. It is hard to pin down exactly when Candlestick charts came to life.