The reversal charts
Very few references to the Japanese Kagi, Renko and Three-line Break charting and trading systems exist in the West. Only Steve Nison, who introduced the Candlesticks method to Westerners, and Martin Pring, the well-known technical analyst, dedicated chapters to the old Japanese charts in their books. Explanations found inside the user guides accompanying some charting software programs don’t amount to much. While scarcity of information is nobody’s fault, the trader who already sensed the presence of the Bar chart to be at toxic levels these days and who wants to look for answers somewhere else will be well advised if he doesn’t consider the neglected topics of Kagi, Renko and Three-line Break to be an indication of worthlessness on their part.
In 2003, with the Internet firmly anchored in day-to-day business routine, increased inclusion of the Japanese charts in charting software packages and intense Bar chart supremacy, the timing for publishing a book like this was perfect.
I called it “The reversal charts” because one concept these three Japanese charting styles have in common is a unique built-in reversal device inexistent in the Bar, Line or Candlestick charts. The text is written in plain language everybody can understand. Actually this seems to be the proverbial book anybody could have written but nobody else did. The reader will not be confronted with new Latin based terminology and will not be required to memorize any complicated algebraic formula. The Japanese charts are ideal judgmental approaches to analyzing the markets in contrast with the rigors of numeracy dexterity that is perceived as a prerequisite for success in the computer age. This means that everybody with a patience to gain knowledge of how their principles work can trade the charts just like the early traders did.
Everybody’s thoughts will be as good as anybody’s when trading according to their rules. With Kagi, Renko and Three-line Break, the price becomes a charting style in itself empowered by clear messages an Indicator can only imitate and by the consistency a trading system can only aim at.
The book follows a simple structure: chart description (this is how far the information on the reversal charts available today came to and from where my book takes over), specific patterns, failure symptoms, case studies, intra-day aspects and system backtesting. The fact that the elegance of the old Japanese charts comes with a price of its own is clearly defined when the methods of fine-tuning their reversal amount are explored in detail. Improperly tuned, the Japanese charts can be poor performers. On the other hand, properly tuned, they are supposed to do a similar or better job than the Indicators, Oscillators, waves, patterns or cycles on the other charts do but easier simply because they focus only on the two major events the market produces: the trend and the reversal.
Not to say that the Japanese charts came first in history. Many of the modern trading innovations originated from the teachings of the old Japanese charts.
My preference is to use them the way they were used in the beginning, that is, as standalone theories, and to avoid interference from Moving Averages, Volume or other Bar chart artifacts. While the reader is free to do otherwise, he will find out that mixing old models with new ones is more of a mental game than a financially rewarding endeavor.
The charts in the book abound and every main chapter has an Addendum where charts from all time frames are displayed. After studying them, the reader will agree that the old Japanese charts had what it takes to withstand the vagaries of the markets and the thick and thin of time. Their qualities are as fresh at the moment as they always were. The reader will realize that the Bar chart is nothing more than a breeding and burial ground for countless opinions, which can only replace one another and where one opinion alone cannot prevail.
If you read between the lines, the most important point in the book is that while the precision of the other charts was, is and will remain illusory, the imperfections of the Japanese charts are something that can be worked with.
“The reversal charts” is an invitation to discover price symmetry, tranquility and reflection from a different angle. With the addition of the colorful Kagi, Renko and Three-line Break to the spectrum of Bar, Line and Candlestick charts, the rainbow of trading ideas is now complete for all traders to benefit from. The trader can choose to become skilled at adjusting the sensitivity of the old Japanese charts to the current market conditions or, like Sisyphus or Don Quixote, to forever fight back the passage and artificiality of the ever-changing techniques on the other charts.
Writing this book led me to the conclusion that the best lesson from the past is to learn from the present.
Aug. 1, 2003