Japanese Candlestick Charting Techniques by Steve Nison: Summary and Key Ideas

Where this guide comes from

• The book's coverage comes from its publisher, Penguin Random House, and from the chapter listing and term index in its Google Books record. We use those only to say what the book covers, not what it says.
• Nison's own views come from interviews in 2003 and 2009 and a 2004 article, all published after the book. Where this page cites them, it says so.
• The plain-English explanations of each candle and pattern are TradingLoot's own. They describe how these terms are generally understood, not Nison's exact definitions or rules.

What the book sets out to teach

The publisher presents candlestick charts as a long-standing form of technical analysis for traders of all skill levels, one that "can be fused with every other technical tool available," including traditional Western technical analysis. It describes hundreds of examples across today's markets, and says this revised edition adds all-new charts with more intraday markets, new candlestick techniques, more focus on swing, online and day traders, new Western techniques used with candles, and more attention to capital preservation.

The Google Books chapter listing shows the shape of that teaching. It runs from a historical background and the basics of drawing candles, through reversal patterns, stars, continuation patterns and the doji, to a chapter on putting it all together. It then turns to convergence and clusters of candles, and to candles used with trend lines, retracements, oscillators and volume.

Nison and the arrival of candles in the West

Nison is credited with bringing candlestick charting to Western traders, and he makes that claim himself. Stocks & Commodities introduced him in 2003 as the first to bring Japanese candlestick methods to Western trading, and in a 2004 article he wrote that candlesticks were unknown in the Western world until he wrote about them in the 1980s. In the 2003 interview he described how it started: in the mid-1980s, a Japanese broker at the New York brokerage where he worked received chart books from Japan drawn with candlesticks. He then had Japanese books on candlesticks translated, and contacted the Nippon Technical Analysts Association.

Why candles instead of bars

In plain English: a candlestick uses the same four prices as a bar chart: the open, high, low and close of a period. The difference is emphasis. The block between the open and the close, the real body, is filled in, usually light when the close is above the open and dark when it's below. Thin lines above and below the body, the shadows, show the high and low. At a glance you can see whether a session closed strongly or weakly, and how far price travelled before being pushed back.

Nison put the appeal simply in 2009: "It visually shows you what's going on between the bulls and the bears." He tied that to timeframe, saying the shorter the horizon, the more the market's emotion matters, and that a price chart is the way to gauge it.

Reading a single candle

In the book: a chapter on the basics, and one devoted to the doji.

Nison in 2009: asked which patterns traders should master, he suggested starting with the basics of the candle itself: the size of the real body and the shadows. A tall light body shows bullish momentum and a tall dark body bearish momentum. A long lower shadow shows the market rejecting lower prices. A doji, where the open and close are the same, suggests the trend may be losing momentum.

In plain English: small bodies, sometimes called spinning tops, show a session where neither side made much progress. Long shadows show where price was tested and rejected. A doji is the extreme case of indecision: buyers and sellers ended the session where it began. After a long move, that pause can be the first hint the move is tiring. On its own, it's a question rather than an answer.

Reversal and continuation patterns

In the book: chapters on reversal patterns, stars, more reversal patterns and continuation patterns. The record's term index names many patterns, including those below.

In plain English: a reversal pattern suggests the current trend may be stalling or turning; a continuation pattern suggests a pause before the trend resumes. A reversal pattern needs a trend to reverse, so the same shape in a sideways market means much less. This page covers a handful of well-known examples only. The descriptions are general, and they aren't the book's exact criteria.

Hammer and shooting star

Single candles with a small body and one long shadow. A hammer appears after a decline, with a long lower shadow: sellers pushed price down and buyers pushed it back. A shooting star appears after a rise, with a long upper shadow: buyers pushed up and sellers took it back. The shooting star appears in the book's term index; the hammer is the example Nison used in his 2009 interview, calling it a potential bottom reversal signal.

Engulfing patterns

Two candles, where the second candle's real body wraps around the first's, in the opposite color. A bullish engulfing pattern forms after a decline, a bearish one after a rally. Both appear in the term index. In 2003, Nison used a bullish engulfing pattern at a major support area as his example of a signal worth acting on more aggressively.

Stars

A star is a small-bodied candle that stands apart from the long candle before it. In a morning star, a long dark candle is followed by a small star and then a strong light candle, a three-candle picture of selling fading and buying taking over. The book has a chapter on stars, and the morning star and doji star appear in its term index.

Windows

"Window" is the Japanese candlestick term for what Western chartists call a gap: a range where no trading took place between one session and the next. Rising and falling windows appear in the term index. Traders commonly watch a window's edges as possible support or resistance afterwards.

Change of polarity

Old support becoming new resistance once it breaks, and the reverse, an idea Western analysts also use. The phrase appears in the term index, and it's a good example of the book connecting candle analysis with support and resistance.

Other named patterns are left out of this book summary. For an introduction to candle anatomy and a few common patterns, with context and limitations, see TradingLoot's guide to reading Japanese candlesticks. It draws on other educational sources, not on this book, and leaves morning and evening stars and harami out of scope. Chart patterns, which form across many periods, are a separate topic.

Context and confirmation

This is the theme Nison returns to most often in his later interviews, and the one that matters most for anyone using candles.

In 2003 he said that some patterns work better in some markets than others, and that the more signals confirm a support or resistance level, the more likely a reversal there becomes. Asked which patterns are most powerful, he said he always asks to see the chart, because "your reaction to the pattern itself depends on the overall market environment of where that pattern forms."

In 2009 he was blunter: "Using the candlesticks in isolation is the quickest way to get burnt with the candlesticks." A good-looking signal still has to answer other questions: whether it confirms a Western signal, and whether the risk and reward make sense.

The book's chapter listing points the same way, with chapters on convergence and on clusters of candles. In plain English: convergence means several independent signals lining up at the same price area. A bullish candle at a level that is also support, a retracement level and a rising trend line says much more than the same candle in the middle of nowhere.

Candles with Western tools

In the book: chapters on candles with trend lines, retracements, oscillators and volume; moving averages appear in the term index; and a glossary of Western technical terms.

Nison in 2009: he said indicators work on candle charts just as they do on bar charts, and advised traders to keep using the Western methods they know best and add candles on top. His example was a bullish candle signal, such as a morning star or bullish engulfing pattern, appearing where a trader's own Elliott Wave count also suggests a low, as a reason to act more confidently.

In plain English: the two approaches answer different questions. Western tools such as support and resistance, trend lines and retracements help say where a turn might matter. Candles help show whether buyers or sellers are actually taking control there, often within a few sessions.

Strengths and limits

Nison's 2009 interview gives a balanced picture. On the plus side, he said candles can be used in all markets and on all timeframes, and that their main edge is spotting reversals within one to three sessions, which suits daily and intraday traders.

He was equally clear about the limits:

• "candles don't give price targets," so where to take profit has to come from somewhere else.
• A candle signal needs the period's close. On a weekly chart, by the time the signal is complete, the market may already have moved a long way.

TradingLoot adds a third: recognizing candles involves judgment. Two traders can label the same candle differently, and shapes that look decisive on a past chart are less obvious as they form. Testing your own reading is the safeguard.

Recognizing a signal is not a strategy

Nison drew this line himself. In 2009 he said the main misuse of candles is that many people can recognize a signal, while the real challenge is knowing what to do with it: buy, sell or stand aside. His hammer example: the same hammer might be a reason to open a long trade, a reason to close a short one, or a reason to do nothing.

He was also candid about the book's role. "The book will let you recognize the candlestick signals," he said, adding that what to do with them was the focus of his later courses and seminars. He described a framework he calls the "trading triad," combining candles, Western technical analysis and trade management, and said it isn't in his books.

What this means for a reader: on Nison's own account, the book teaches you to read candles and use them alongside Western tools. Turning that into a complete trading plan, with entries, stops, targets and position size, is still your job. The publisher does say this edition gives more attention to capital preservation, so risk isn't absent from the book.

Putting it into practice: TradingLoot's workflow

This is TradingLoot's own synthesis of the ideas above. It isn't a set of instructions from Nison or the book, and it doesn't guarantee results.

1. Learn a few signals well. Body size, shadows, the doji and a handful of patterns cover most of what you'll see. Nison himself has said only a dozen or so signals are key.
2. Read the context first. Before naming a candle, note the trend and where price sits relative to support and resistance.
3. Look for confirmation. Give more weight to candles that agree with another signal at the same area, such as support, a trend line or a retracement level.
4. Don't treat the name as a trade. Decide in advance whether a signal means enter, exit or wait in your plan.
5. Take stops and targets from other tools. Candles don't give targets, so use structure, such as recent highs and lows or support and resistance, to set them.
6. Practise recognition on replay. Reading candles as they form, without seeing what comes next, is very different from spotting them afterwards. See practising on history with replay.
7. Journal the results. Record which signals you acted on, in which context, and how they worked out. Over many trades, that tells you which ones earn a place in your plan. See Trading Journal Software Compared.

Possible misreadings

Common ways candlestick ideas get misused, as TradingLoot sees it.

"A hammer means buy."

A pattern name isn't an instruction. Nison's own hammer example could mean buy, cover a short, or do nothing, depending on context.

"The more patterns I know, the better."

Breadth isn't the point. Nison has said only a dozen or so signals are key; knowing a few well, in context, is more useful than memorizing many.

"Candles tell me how far price will go."

They don't give price targets, in Nison's words; other tools have to supply them.

"Candles replace Western technical analysis."

The publisher and Nison both present them as something to combine with Western tools, not a replacement.

"Any pattern list online is the same thing."

Nison warned in 2009 that traders should be careful where their candlestick information comes from. Pattern names and definitions vary between sources.

What the book doesn't give you

• A complete trading system. By Nison's account, the book teaches recognition and integration.
• Price targets from candles themselves. Nison has said candles don't provide them, though the book covers using candles with Western tools such as retracements.
• Statistical performance data for each pattern. For pattern statistics, see Bulkowski's encyclopedia.

Who it's for

This is TradingLoot's guidance, based on the publisher's description and Nison's views.

Likely to suit

• Traders who already look at candlestick charts and want to understand what they're seeing.
• Swing and day traders, whom the publisher says this edition focuses on more.
• Traders with a Western toolkit who want to add candle signals to it.

May not need it

• Readers who want a complete, ready-made trading system.
• Readers looking mainly for pattern statistics or backtested performance figures.

Key takeaways

• Candles show the same prices as bars, but make the balance between buyers and sellers easier to read.
• Start with the basics: the size of the real body and the length of the shadows.
• A doji signals indecision, which matters most after an extended move.
• Where a pattern forms matters more than what it's called.
• Candles work best combined with support and resistance and other Western tools.
• Candles don't give price targets; set stops and targets with other tools.
• Recognizing a signal is only the first step; deciding what to do with it is the strategy.

How it fits with other technical analysis books

On TradingLoot's technical analysis books page, Nison's is the book dedicated to candlesticks. For the broad foundation, including the Western tools Nison pairs candles with, see our guide to Murphy's Technical Analysis of the Financial Markets, whose publisher says it includes candlestick material too. For pattern statistics, see Bulkowski; for reading individual bars intraday, see Brooks.

Related book summaries

• 

  Technical Analysis of the Financial Markets summary

  John J. Murphy

  The broad framework of Western technical analysis that candlesticks are combined with.

• 

  Encyclopedia of Chart Patterns summary

  Thomas N. Bulkowski

  From candle signals to chart patterns, with each pattern measured by how it has performed and failed.

Related TradingLoot resources

• Backtesting, Replay and Paper Trading Explained: ways to practise reading candles and test signals.
• TradingView vs TrendSpider and Futures Charting Software Compared: charting platforms for candlestick charts.
• All book guides.

Book details

TradingLoot doesn't claim a first-hand reading of this book. The details below say what its description is based on.