Book Reviews

Most investors are familiar with common line and bar charts but if you want to demystify the ancient Japanese art of candlesticks, The Secret of Candlestick Charting will help.

In the 1600s, the Japanese developed a method of charting and technical analysis to analyse the movements in the price of rice contracts. This technique, called candlestick charting, displays the open, high, low and closing prices in a format similar to a modern-day bar chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices; they don’t involve any calculations.

The interpretation of candlestick charts is based primarily on patterns, for example, bullish, bearish, reversal and neutral, but there are sub-branches of each. There are also two basic types of candles – the white body and the black body. As with regular bar charts, a vertical line is used to indicate the periods (normally daily) high to low. When prices close higher than they opened, a white rectangle is drawn on top of the high-low line. This rectangle originates at the opening price level and extends up towards the closing price. A down day is drawn in black. The combination of several candles results in patterns (with names like “bullish engulfing pattern”), which give insight into future price activity. There is much debate whether candlesticks work, but there is ample evidence to prove that used at the appropriate time, candlesticks are uncannily accurate.

Australian writer Louise Bedford gives a concise and interesting introduction to candlestick charts, including useful historical details and how they were taken up by Western traders and technicians. Also helpful is the usage of English in naming the candlestick patterns, as the original Japanese terminology can be confusing. A simple explanation as to how candles are constructed, and information on time frames and their applications sets the scene for the rest of her book. The explanations are clear and easy to understand, even for the beginner.

There are 31 major and important candlestick patterns detailed. The book is divided into three main parts, Candlestick Pattern Secrets, Analysis Secrets and Trading Secrets. These have been further categorised into headings that include reversal patterns, continuation patterns, gaps, support and resistance, Western techniques and a handy seven golden candlestick rules.

At the end of each chapter, Bedford includes a “review”, which is a series of questions the reader can answer. The answers are also included with appropriate explanations. There is an extensive glossary explaining terms in simple language and the books’ index is concise and accurate. Charts presented are on Australian markets, which help put readers in familiar territory, rather than looking at overseas markets that can confuse local or inexperienced readers.

While there are plenty of charts demonstrating patterns, some of them display too much data. It would have been more constructive had Bedford provided a “close up” or more detailed view. The majority of the charts, however, are readable.

Overall, her book is full of useful information for investors who are already familiar with basic charting concepts. There are many books on the alleged secrets of candlesticks, but many are overstocked with information unlikely to be used. This book, however, lays the foundation for further detailed study, while providing a solid grounding for anyone looking at candlesticks.

The Secret of Candlestick Charting is further enhanced by Bedford’s easy and pleasant writing style, which includes smatterings of humour and personal tips, tricks and observations.

Andrew Doig - Shares Magazine

This is without a doubt the best Australian book on candlestick charting. It brings together the work of Steve Nison and Greg Morris and shows how it is applied in the Australian market. Instead of a mind numbing array of candlestick patterns, Louise concentrates on the major patterns and formations which have provided consistent success in Australian markets.

She also details how she combines these analysis techniques with other indicators and technical approaches. This add to the analysis of trading opportunities, and provides a means of verification. The same combination of classic candlestick charting and modern technical analysis is used to manage the trades.

The book shows when to most effectively apply candlestick analysis, and when it is less useful. This is valuable because few techniques work consistently in all market conditions. Knowing when to apply them, and when not to, gives the trader an important edge. This is a very practical book on this specialist charting technique.

Daryl Guppy - trader, author and sharemarket educator