The Big Saturday Interview: Steve Nison, King of Candlesticks
When it comes to trading with Japanese candlesticks, the first name that comes to mind is Steve Nison. Author of two of the best-selling books on Japanese candlestick analysis, Japanese Candlestick Charting Techniques
and Beyond Candlesticks: New Japanese Charting Techniques Revealed,
I conducted a telephone interview with Steve Nison in late February, reaching him at his office in New Jersey, where he is President of Steve Nison’s Candlecharts.com, an educational and advisory service for traders and active investors. Nison talked about the relationship between Japanese candlesticks and Western technical analysis, some of the biggest mistakes traders make when using candlesticks improperly, and how his “trading triad” combines the three most important factors in successful trading with Japanese candlesticks.
Penn: Who needs to be looking at price charts–and why should those price charts be in Japanese Candlestick form?
Nison: First of all, I think the fundamentals are important the longer the investment time horizon is. But the shorter the time horizon is–and candlesticks are mostly used by traders–the more important the emotionalism of the market becomes. By “shorter term” I mean anywhere from one day to maybe two or three weeks.
John Maynard Keynes, probably the most famous economist of the 20th century said it’s extremely dangerous to have a rational investment policy in an irrational world. I mean how many times have we seen, for example, the overall market fall off and even sound, fundamental stocks get dragged down because the markets falling down.
So prices have two components. There’s the fundamental, the rational side: PE ratios, and so on. But the emotional aspect is also very important, and the only way to gauge the emotional aspects is through technical analysis, the price chart.
The fastest, easiest way to see who’s winning the battle between the bulls and the bears is with the candlestick line. It visually shows you what’s going on between the bulls and the bears. It really shows you the psychology behind the market.
Penn: There are some traders who say they can’t imagine looking at price charts any other way than with the candlesticks.
Nison: Right. The Japanese used to use bar charts, and they switched. There’s really no specific starting date for candlesticks. But the closest I was able to find was probably around the 1870s when the Japanese stock market began trading. Before then, the Japanese used to use bar charts. But they switched over to candlestick charts.
We in the West have been using a less visual form of charting for too long a time. When I do my seminars, I’ve spoken to thousands and thousands of both retail traders and institutional traders. And at the end of my seminar, I often ask “Who here would ever go back to a bar chart?” And not one person has ever raised their hand.
Penn: Can you think of one, two or three things that people think they know about Japanese candlesticks that they really don’t?
Nison: First of all, you know, there are other books on candles, and I have no idea where some of those authors get those patterns from. I’ve had every pattern I have revealed corroborated by two or three different sources, whether it’s through Japanese books, or Japanese traders, and so forth. So traders need to be very careful where they get their candlestick information from.
What I have now is what I call my trading triads. It’s not in my books. The triad has three components. And of the three legs to very successful trading candlestick charts are the first leg.
When properly used, candlesticks are very helpful for getting early reversals. And I underscore the world “properly”. When candlesticks are properly used, you avoid bad trades and losing trades.
The second leg of the triad is Western technical analysis. In the courses I teach, if you have a candlestick signal confirming a Western signal, you increase the likelihood of a market turning.
And the third leg is trade management. Trade management–and obviously we don’t have time to get into it in this brief interview–includes things like risk and risk/reward analysis. What I call “the market chameleon,” adapting to changing market circumstances. What I call “candles and context.”
Penn: Can you give an example?
Nison: You have a beautiful candlestick signal. Say you have a hammer, which is a single candlestick line. It’s potentially a bottom reversal signal. But sometimes you use that hammer to initiate a new long trade. Sometimes you use it to exit or cover a short position, and sometimes you don’t do anything with it.
So the main misuse of candlesticks is, yes, a lot of people know how to recognize the candlestick signal. But the real challenge and my teaching is about what to do with the candlestick signal. You buy, you sell, or you stand aside. And what do you look at to let you determine whether or not you should be buying, selling or standing aside.
“Candlesticks can be used in all markets, and all timeframes. Intraday, daily, weekly…”
Penn: You mentioned time horizons. In which time frames are Japanese candlesticks most or least effective? And are candlesticks used the same way in different markets?
Nison: Candlesticks can be used in all markets, and all timeframes. Intraday, daily, weekly… In fact, in a lot of the original books I had translated from Japanese to English, the charts were weekly charts.
There are some nuances between using candles on intraday charts, and constructing them on intraday charts. And also with foreign markets. And also in the indexes. But essentially all the strategies can be used in all markets in all timeframes.
When I began to do the research into candlesticks, when my first book came out in the 1980s, this was when the stock market was buy and hold and that was it. So the candles became very popular first in the futures market because that was the most active market.
Then, in the 1990s with the advent of short term trading, online trading and day trading, candlesticks became very, very popular in every market.
So over the last three or four years there was been the explosion of interest in the forex market. Candlesticks are probably the most popular form of charting in forex. So it’s interesting how the progression as gone as market become more active, as more traders get involved with them, the candlesticks become very, very popular in those markets.
Penn: You talked about technical indicators as part of your trading triad. Are there some technical indicators that work better with candlesticks than others? Or can you pretty much treat them as you would have treated prices on a bar chart?
Nison: Right, you treat it the same as you would a bar chart. There are so many technical indicators. I have a few of my favorite ones. I have an indicator that worked really well. I haven’t revealed it yet, but it will be revealed at an upcoming seminar.
I like using oscillators. But the point is that traders will have their own favorite Western technicals based on experience. So my suggestion, my strategy to them, would be to stay with the Western strategy they know best. If you understand Elliott wave really well, which I don’t, stay with it.
For example, if you have a candlestick confirmation, say, with a bullish candlestick signal like a morning star, or a bullish engulfing pattern at the bottom of a Wave 5–which you recognized as a Wave 5–then a trader could be much more aggressive on the trade.
So, again, my suggestion would be to use those Western signals you are most comfortable with. You find what’s best in your particular market, and just add the insight of the candlesticks to increase the likelihood of the trade working out.
“If you have a doji, where the open and the close are the same, it’s giving us a sense that the trend may be losing momentum…”
Penn: If you were to pick three candlestick patterns that traders should master–if no more–what might those three patterns be?
Nison: To start with, what I would suggest is learning the basics of how to draw the candlestick line. So, in that sense, the taller the real body (the area between the open and the close), the more the momentum is in that trend. So a tall white real body means bullish momentum. The long black real body is bearish momentum.
If you have a doji, where the open and the close are the same, it’s giving us a sense that the trend may be losing momentum.
What I would also suggest is not only to look at the real bodies. People forget about the shadows (the lines representing the spaces between the real body and the high and the real body and the low). Those are lines above and below the real body, those little lines on the candlesticks, those thin lines.
And a long lower shadow, for example, tells the trader that the market is rejecting lower levels. So long lower shadows, a candlestick like a hammer with a long lower shadow… the real body is usually showing us that the market is rejecting lower levels.
That is the power of the candlesticks. By looking at the candlestick line, for example, the hammer, we see that long, lower shadows mean that the market is rejecting lower levels.
Penn: And that reflects the psychology of the market. As you were saying before.
Nison: What it means is that the bears are getting a little bit more uncomfortable about the ability of the market to hold lows. And the bulls are getting a little bit more confident because they can see that the market is rejecting lower levels.
So, essentially, as an introduction, just look at the size of the real bodies and look at the shadows.
Penn: The first part of the triad is knowing and understanding the candlestick. But that’s only part of the picture.
Nison: Right, right. Trading with candlesticks in isolation is–and I use a lot of Japanese proverbs in my seminars–there’s a Japanese proverb that says, like leaning a ladder against the clouds. Nothing substantial.
Yes, you could have a great candlestick signal. But is it confirming a Western signal? What about trade management and risk/reward? Does it look like a good trading opportunity?
It’s a multi-step process. First, recognize the candlesticks. But then know what to do with it. Using the candlesticks in isolation is the quickest way to get burnt with the candlesticks. Just because you recognize that the hammer is a bullish signal, it doesn’t mean you should be buying it.
Penn: Just a few other questions. You mentioned that candlesticks could be used in all timeframes, but is there something in the makeup of candlestick lines that makes them less effective as the timeframes get longer?
Nison: I don’t know if it’s less accurate, but my feeling is that if you’re looking at weekly charts, you’re looking at longer term investments. Now, one of the downsides with candlesticks is that you don’t get price targets. So if you are using a long term, it’s fine to use candlesticks, maybe you get a candlestick signal at a support area, you may have an opportunity to buy.
A lot of the companies I work with, do seminars for, they’re very fundamentally oriented. But they’re looking for stocks that are at support with bullish candlesticks. You know they may have 20 undervalued stocks, and which ones do you buy? You don’t buy the ones that break support. You buy the ones that are either at support or have a bullish candlestick signal.
“From my perspective, the vast majority of those who use candlesticks are going to use them on daily or intraday charts, and get those very short turning signals…”
Penn: Right.
Nison: So those are for longer term investments. And so they’re using the candlesticks in addition to the fundamentals to know when to get into a longer term trade.
From my perspective, the vast majority of those who use candlesticks are going to use them on daily or intraday charts, and get those very short turning signals. That’s where the major edge to the candlesticks is, to get reversal signals in one, two or three sessions. So traders who are looking for those quick turnarounds are mainly going to be geared toward the shorter term charts.
You can still use candlesticks on weekly charts. But the downside is that you need a close to get a candlestick signal–open, high, low and close. So on a weekly chart, by the time you get it… Say you have a bullish engulfing pattern with a white candlestick wrapped around a black candlestick. By the time it’s the close of the week and you get a bullish engulfing pattern, the market could be well on the road.
Penn: Is there anything we haven’t talked about yet that you think is important for people who are just beginning to trade–with our without Japanese candlesticks–or who are trying to improve their success as a trader?
Nison: Yes, it’s not only candlesticks. It’s education. If I had to pick one work, for those who trade successfully compared to those who don’t, it’s education. That’s what it’s all bout, and that’s the core focus of what we do.
That’s why we offer the free educational newsletters, it’s why we have our products. So whether you use candlesticks or not, become knowledgeable about the strategies, and know the pluses and the minuses. You know, for example, candles don’t give price targets, so you have to think about that. It all has to do with education, understanding the fact that you shouldn’t use candlesticks in isolation. So, just, really, become an educated trader.
Penn: You know, I first read you first book maybe five, six years ago, when I started writing seriously about technical analysis. I figured that I knew all I needed to know about candlesticks until I saw your latest DVD last year and realized how much I’d forgotten, how much I’d misunderstood, how much I thought I knew that I really didn’t know.
Nison: Yes, it’s interesting. I tell people, the books will take you to about a 2. The DVD’s will take you all the way from 1 to 10.
I got a quote a few years ago, and it kind of echoes what you said. A guy says, I bought your DVD’s. He wasn’t sure why. He thought he knew 100% because he had my books. But after he got the DVD’s, he realized he only knew 10%. And that’s because what I’ve done in my most recent educational resource is include probably 30 to 35 candlestick signals. Most of them are so rare that it doesn’t pay to waste brain cells looking for them.
So one of the things I’ve done is maybe focus on the 12 or 13 most important ones and then, the real focus as I mentioned before, is what to do with them. And that’s the main difference between the book, I think, and the other educational resources. The book will let you recognize the candlestick signals. What you do with them is the focus of my DVD’s and my seminars.
Penn: And this all goes back to the emphasis you put on both the training and the triad.
Nison: Right, right. The training triad. Candlesticks, Western technicals, and trade management. All three, really, have to be incorporated to really fully harness the power of the candlesticks.
Penn: Thank you very much for giving me a little bit of your time this afternoon.
Nison: Thank you.
Steve Nison, CMT is the founder and president of www.candlecharts.com. Steve has the distinction of introducing the previously secret candlestick technique to the Western world. He is also an expert on Western technical analysis with over 30 years of real world experience. He has presented his trading strategies in over 20 countries to traders from almost every investment firm and been a guest speaker at numerous universities as well as the World Bank and the Federal Reserve.
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