Japanese Trading Methods

By Isaías de la Peña Balbuena

This book is an introduction to four of the main Japanese trading methods.  Ichimoku Kinko Hyo, Heikin Ashi candlesticks, Renko charts, and Kagi charts.

These four methods of technical analysis of the financial markets have in common the discipline and patience that they bring to our trading.

In general, the Japanese culture considers discipline and patience a virtue, which inevitably ended up being transferred to their trading systems.

All four systems are particularly well suited to trend following. They will allow us to stay much longer within the trend. Instead, they may present some problems in lateral markets.

This book is structured into five parts.

1.  Introduction (or review) to the formation of the Japanese candlesticks with their main formations.
2.  The Ichimoku Kinko Hyo system
3.  Heikin Ashi candlesticks
4.  Renko charts
5.  Kagi charts

The book focuses on Japanese methods of technical analysis "beyond" traditional Japanese candlesticks, which are already a standard in technical analysis.  However, I have felt it necessary to present an introductory chapter on these candlesticks and their main formations. This chapter may come in handy for those readers who need to acquire some notions about Japanese candlesticks or those who may be interested in a review to dust off concepts.

The second part of the book is devoted to Ichimoku Kinko Hyo. It is a straightforward system to understand and, above all, to trade. It presents very clear strategies both in the entries and the exits of the trades, avoiding subjective judgments. Something essential in trading. Not only that, but as we will see, its name does it justice. The time we spend analyzing each chart is dramatically reduced. At a glance, we will be able to decide if we have a possible trade or if we should look for another one. Besides, being a system that works best over long timeframes (four hours or daily) makes it a very suitable system for non-professional traders to find ways to make their daily activities compatible with trading in financial markets.

The book will describe the main strategies used in the Ichimoku system. All of them, with a checklist of the main points that the trade must meet to achieve a high probability of success.

The third part of the book is devoted to Heikin Ashi candlesticks. This type of candlestick combines very well with the Ichimoku System. They are more straightforward and intuitive to use than traditional Japanese candlesticks.  Furthermore, they introduce a much smaller number of formations, significantly simplifying their theory. At the same time, they feature smoother charts that are well suited to trend following.

The fourth and fifth parts of the book are devoted to Renko and Kagi charts.

Unfortunately, these types of charts are relatively unknown, and there is very little information in any western language, especially with Kagi charts. It is a shame because, in my opinion, both types of charts naturally bring discipline and patience to our trading. For those traders who are a little impatient, who close their positions prematurely and do not let trends run, they can mean the transition from losses to profits. In both cases, the time dimension is irrelevant. They focus on nothing but price action and will allow us to see trends and support and resistance levels with amazing ease.

These Japanese trading methods of technical analysis can make a big difference in your trading, especially if you are impatient and tend to close your trades too early.  They can also be applied to any financial market, be it the stock market, Forex, futures, options, cryptocurrencies, or commodities.

 

• Language: English
• Publisher: Isaías de la Peña
• Release date: Nov 29, 2022
• ISBN: 9798215321355

Book preview

Japanese Trading Methods

Ichimoku Kinko Hyo, Heikin Ashi, Renko and Kagi

Isaías de la Peña Balbuena

Copyright © 2020 by Isaías de la Peña Balbuena.

All rights reserved

No part of this book may be reproduced in whole or in part without the written consent of the author. It is allowed to quote small pieces whenever the book and the author are identified for their publication in reviews, blogs, etc.

Any opinion, analysis, or other information contained in this book is provided as a general comment on the market and as educational material only. It should not be considered as an offer to buy or sell any type of asset or financial product.  It is not, in any way, financial advice. I am not a registered Financial Advisor.

The author is not responsible for any trades in the financial markets influenced by the contents of this book. The tools offered, training and published reports have been prepared only for general information and to generate ideas.

The reports does not take into account the specific investment objectives or financial situation nor the particular needs of the readers of the book.

This book presents the information in the most truthful way possible and simply constitutes a description of a series of strategies to operate in the financial markets, it is not guaranteed that the reports are accurate, complete or updated, being subject to changes, so that these cannot reflect events that occurred after the date of publication of this book.

No guarantee can be made that the results of using the trading strategies listed in the book can be similar to the examples given in the text.  Past performance does not guarantee future performance.

Finally, please pay close attention to the legal and practical advice and guidelines published on the website by the Securities and Exchange Commission (SEC), the National Securities Market Commission (CNMV), or any other body with similar characteristics in the reader's country of residence.

Index

Preface

Introduction to Japanese Candlesticks

Brief History of the Ichimoku Cloud

Components of the Ichimoku Cloud

Different Types of Trading Signals

TK Cross

Kumo Breakout

Chikou Kumo break and Chikou Cross

Kijun break and Kijun bounce

Ichimoku and Heikin Ashi Candlesticks

Renko ChartsWhat is a Renko Chart?

Pros and Cons of Renko Charts

The Size of the Renko Box

Types of Renko Charts

Should we use Wicks in our Boxes?

Some Trading Systems Using Renko Charts

Kagi Charts

Kagi Charts

Conclusion

Other Books by the Same Author

Preface

The first time I saw a chart showing the Ichimoku cloud, it seemed extremely complicated. Some kind of cloud that changes its color from time to time, and several other lines which I couldn't understand.  When I was told that some lines were in the past while others are in the future, a big question mark was raised about the entire system.

Fortunately, digging a little deeper, I realized that reality is the exact opposite of the first impression we received.

As soon as I devoted some time to understand it, I began to like the Ichimoku system more and more.  Especially for the crystal-clear rules and the discipline it brings to our trading system.

From there, I went deeper into other Japanese methods like Heikin Ashi candlesticks, Renko charts, and Kagi charts. With the last two, I discovered a new dimension of trading. They are systems where the time factor is irrelevant, which allows you to trade in zen mode as a friend, and excellent trader told me.

These four methods of technical analysis of the financial markets have in common the discipline and patience that they bring to our trading.

In general, the Japanese culture considers discipline and patience a virtue and, inevitably, that ended up being transferred to their trading systems.

All four systems are particularly well suited to trend following, either bullish or bearish. They will allow us to stay much longer within the trend. Instead, they may present some problems in lateral markets with price consolidation.

This book is structured into five parts.

1. Introduction (or review) to the formation of the Japanese candlesticks with their main formations.

2. The Ichimoku Kinko Hyo system

3. Heikin Ashi candlesticks

4. Renko charts

5. Kagi charts

The book focuses on Japanese methods of technical analysis beyond traditional Japanese candlesticks, which are already a standard in technical analysis.  However, I have felt it necessary to present an introductory chapter on these candlesticks and their main formations.

This chapter may come in handy for those readers who need to acquire some notions about Japanese candlesticks, or those who may be interested in a review to dust off concepts.

Those readers who already use Japanese candlesticks can go directly to the next chapters without any problem.

In fact, their knowledge comes in handy, of course, but is not strictly necessary. The Ichimoku Kinko Hyo system is not based on traditional Japanese candlestick formations, although it can lean on them, Heikin Ashi candlesticks are formed differently and combine very well with the Ichimoku cloud. Finally, the Renko and Kagi don’t even use candlesticks themselves.

The second part of the book is devoted to Ichimoku Kinko Hyo. It is a straightforward system to understand and, above all, to trade. It presents very clear strategies both in the entries and the exits of the trades, avoiding subjective judgments. Something essential in trading.

Not only that, but as we will see, its name does it justice. The time we spend analyzing each chart is dramatically reduced. At a glance, we will be able to decide if we have a possible trade or if we should look for another one.

Besides, being a system that works best over long timeframes, (four hours or daily), make it a very suitable system for non-professional traders to find ways to make their daily activities compatible with trading in financial markets.

The book will present a description of the main strategies used in the Ichimoku system. All of them, with a checklist of the main points that the trade must meet to achieve a high probability of success.

Similarly, all the strategies presented in the book for the Ichimoku cloud have clear rules for exiting the trades. Either because it has not worked or because the trend itself is running out.

Some knowledge of financial markets and the application of charts to these markets is assumed. However, it is not necessary to be an expert in any of these subjects since it is a simple system to use and can be used as a stand-alone system. We don't need any additional indicators.

Remember that patience, control of emotions, and discipline are crucial points in trading. The very nature of the Ichimoku Kinko Hyo system will help you with these three components.

The third part of the book is devoted to Heikin Ashi candlesticks. This type of candlestick combines very well with the Ichimoku System. They are more straightforward and intuitive to use than traditional Japanese candlesticks.  Furthermore, they introduce a much smaller number of formations, which significantly simplifies their theory. At the same time, they feature smoother charts that are well suited to trend following.

The fourth and fifth parts of the book are devoted to Renko and Kagi charts.

Unfortunately, these types of charts are relatively unknown, and there is very little information in any western language, especially with Kagi charts.

It is a shame because, in my opinion, both types of charts naturally bring discipline and patience to our trading. For those traders who are a little impatient, who close their positions prematurely and do not let trends run, they can mean the transition from losses to profits.

In both cases, the time dimension is irrelevant. They focus on nothing but price action and will allow us to see trends and support and resistance levels with amazing ease.

The chapters can be read, mostly, in the order you prefer. They are all independent, and it is not necessary to read one before the other.  If you are particularly interested in any of the systems, you can go directly to it.

In the same way, if you already know some of them well, and you do not want to review it, you can skip directly to the others.

Note. This book has elements in common with two of my previous books such as Easy Ichimoku and Trading with Renko charts, to which additional information on Kagi charts and Heikin-Ashi candlesticks has been added.

Introduction to Japanese Candlesticks

The purpose of this book is an explanation of the Ichimoku Kinko Hyo system.  However, I have considered it appropriate to start with an introductory chapter on traditional Japanese candlesticks and their main formations, in case some readers need to learn about them or would like a quick review.

This chapter does not intend to be exhaustive.  This subject can become very complicated, and several volumes have been written on the use of Japanese candlesticks alone. 

This chapter does not intend to be exhaustive.  It is a subject that can become very complicated, and several volumes have been written on the use of Japanese candlesticks alone.

Although Japanese candlesticks are a relatively late arrival to the traders in Europe and the United States, they are, in reality, the oldest type of technical analysis.

Japanese candlesticks were developed in no less than the Eighteenth Century to take advantage of the movements in the prices of the rice futures market in Japan.

Their story is quite impressive. The foundational theory of Japanese candlesticks was developed by Munehisa Homma, who was born in 1724 and died in 1803.  He was also known as Sokyu Homma.

Munehisa Homma was a very wealthy rice merchant from Sakata and was trading in the Ojima rice futures market in Osaka, the world's first futures market.

It is said that to get ahead of the news about market prices, he established a private courier network that covered the distance of approximately 600 kilometers (372.8 miles) between the two places, which allowed him to make an impressive fortune.

But, in addition to being a tremendously practical person, as we have seen by the establishment of that private network of messengers, he was also very observant.

Munehisa Homma realized that, although supply and demand were the main forces driving the prices of rice futures, as they do in any market, their prices were also influenced in some way by the emotions of the traders.

For instance, the expectations of the futures traders about how good or bad the rice crop was assumed to be, influenced the price of the rice futures.

Many times it was something unfounded that had nothing to do with the harvest itself, which was still in its previous phases, and nobody knew if it was going to be good or bad.

Today, we would say that the expectations of the futures traders did not match the fundamentals.

Based on these observations, Homma developed the first studies on market psychology and the difference between price and value. He also described the rotation between bull markets (Yang) and bear markets (Yin).

His success as a futures trader was genuinely incredible. It is said that he was able to perform more than a hundred winning trades in a row, which gave him an immense fortune.

From this point, some authors directly attribute to Homma the creation of the first candlesticks, but this point is not clear.  Possibly, they were developed somewhat later based on Homma's observations.

Regardless of who was their first developer, the importance of Munehisa Homma's observations on market psychology cannot be denied. This is why he is considered the father of Japanese candlesticks.

What seems truly unbelievable is that, although these candlesticks,  were developed in the 18th century, they did not begin to reach Western traders until the 1990s, at which time, the theory of Japanese candlesticks was already very well developed in Japan.

The access to the theoretical knowledge of Japanese candlesticks  by western traders is due to Steve Nison who was, almost accidentally, interested in this technique and commissioned translations of several books that ended in his extremely influential book Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East  

This book changed, single-handedly, the way we trade today in the United States and Europe.

Japanese candlesticks provide us with a large amount of information, both individually and by looking at the different formations of various candles that may appear. So much so, that some traders only use this method on their trades, without any additional indicator.

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bull candle

Figure 1.1 Bullish candlestick.