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Each of these five methods is, in itself, an algorithm than can be used independently. What this means is that you can, for instance, specialize in trading with only one of the methods. It is up to us to use one or more of the five formulas contained here. It Algorithm in Tabular Format for the Five Sakata Methods 39 is important always to keep in mind what they really are: the trading tactics of the five fundamental market phases. The phase of the market is our essential building block. It will define everything else.
As you can see, Table 7. The reason is that all else will develop from this. We must, above all, learn to think in terms of phases. Many traders expect a magical entry signal, leaving aside all else. This is not the correct approach. When studying a market to trade, we should first ask what phase the market is in now.
From the answer to this question, all else will flow in an easy and natural way. Sokyu Honma knew instinctively that market phases provide the golden door to market knowledge. We should heed his teaching. Once the market phase is established, our tabular algorithm will tell us which trading method corresponds to that phase.
Following this will come a tactical entry or exit rule, plus the conditions that reinforce the rule and the key candlestick pattern to actually trade it. This is why we have included five steps to trade each of the five Sakata methods: market phase, method, original rule, conditions, and candlestick pattern. We must mention here that the original Sakata rule gave us only the specific phase the market was in. We have added the confirmation rules, as well as the candlestick pattern, that makes trading each one of the methods more precise.
This is not an arbitrary decision. All of the rules that seem to have been added to each of the Sakata methods have been strictly deduced from the five Sakata methods as a whole.
All confirmatory rules are contained within the method. We have simply used the intersection points of the five methods where they naturally reinforce each other. As an example, San Ku, the gap phase, tells us to buy or sell the last gap that the market has experienced as soon as this gap closes in the opposite direction, but only if three former gaps have taken place.
We have integrated this in San Sen and San Zan, the buying of a triple bottom or a triple top. The reason for this is that San Ku gives us information about the end of a move, and we want our triple bottom or triple top, the San Sen and San Zan phases, to be as fully confirmed as possible.
Therefore, without any need to go beyond the five Sakata methods, we find all of the necessary confirmatory rules. Each of the five methods is used to confirm the others. The five methods are interrelated. We make the most efficient use of them. This is also the case when we come to the candlestick patterns.
We choose the strongest ones from them. Let us now examine our entry rules in detail. The key entry rules are: 1. Buying or selling a very long range at the close 2. Buying or selling the close of a third consecutive bar chart in the same direction and 4. Buying or selling a breakout of San Poh All these rules are implicit in the five methods. Let us now look at the conditions needed to confirm our trades. The confirmation add-ons are all elements from the other four methods that we can use when we trade one specific method.
In each instance, we will be on the lookout for the following conditions: triple tops or triple bottoms, at least three gaps in the direction opposite to our trade, and a trend in place.
After our main rule and conditions to confirm that the phase is in place, we will place our trade at a precise candlestick pattern.
Here we have some preferred key candlestick patterns two of which we use. The first is three white soldiers or its opposite, three black crows. We note that they coincide with San Pei. We shall study them later. We also use the Marubozu pattern. In fact, it has the same effect as our first pattern in taking a position.
It has a very large range, but in only one time unit i. These two key candlesticks patterns are all that we need. We have included some other patterns in our previous chapter on candlesticks simply for added help in analyzing market behavior.
What we mainly use, in fact, are simply these two key patterns. They really do work! Here is their explanation. This very long range tells us that the market has suddenly received tremendous strength. This is a rare occurrence.
When it occurs, it is telling us that the market is ready to begin a new trend. The long day is a pattern that we mentioned in our candlestick patterns because it is similar to the Marubozu, although never as strong, if considered by itself. We mention it here because it is important to evaluate it, along with the Marubozu. We want our Marubozu to share the very long range of the long day.
In fact, the Marubozu is a species of the long day. Thrusts will always be long days. It is this thrust quality that makes these patterns so important. We need a special kind of energy that comes to a market suddenly in order to push it along. This is especially true when markets are turning around. Only real strength coming from the opposite direction can turn a market around.
This turnaround always comes as a surprise. This invisible strength that was silently hiding and waiting for its opportunity is what a thrust gives us. This is why the Marubozu is so powerful. Always keep this in mind. The triple sequence of the three black crows or the three white soldiers, another of our key candlestick patterns, corresponds to the San Pei pattern, which we shall explain later.
For now, it is sufficient to know that the strength of this pattern comes from its three sequential time units that, when combined, make a very long-range equivalent to the thrust.
Therefore, in all, two patterns are enough — the Marubozu, which is the strongest and has a very long range in one unit, and the sequence in three steps or bar charts three black crows or three white soldiers. Let us now examine each of the five algorithms given in Table 7.
It is formed when the market consolidates horizontally, oscillating in three upward waves within a range. Tops are made when markets change from a trend to a consolidation. In itself, a top does not represent a turning point or a reversal of the entire trend. Generally, a top is exceeded and the former trend continues. This is the case for most single tops that are simply swing peaks before normal reactions within a trend.
A simple or double top is not enough to reverse a trend, although they sometimes do. A double top, or its variation, the head and shoulders, appears when the market changes from trending to nontrending and begins to test itself. When a simple or double top appears, the preceding trend can continue following a breakout of the simple or double top.
It could also reverse itself and initiate a new downtrend. In fact, we need additional elements to detect a turning point by which the entire preceding trend will reverse itself. This is why we wait for a triple top. Nothing is stronger than a triple top. Also, a fourth testing of the triple top may imply a breakout on the upside and a resumption of the trend. Therefore, if we are expecting the best conditions for a market reversal, we will find them in the triple top. The triple top implies that the market has not had sufficient strength to continue the trend.
It is a strong consolidation. Even if it does not necessarily mean a reversal, it is evidence of very strong resistance. This is accentuated if the top is within a historical range of tops. The universal trading lore confirms this. For many Western traders, the third top is key. They agree that the triple top is one of the strongest points from which a short sell is advised.
They found that the triple top is stronger than a double top or a simple top. In How to Make Profits in Commodities, as well as in other books, Gann tells us to wait for a triple top. By waiting for at least three tops to form, we will have a model market phase.
The market phase that a triple top represents is the lateral nontrending consolidation at the end of an upward trend.
The Secret Code of Japanese Candlesticks (Wiley Trading)
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The Secret Code of Japanese Candlesticks (Wiley Trading)
He designed a specific and simple method to identify and to trade of the phases. His method is called "The five Sakata Methods". In it each market phase has its unique and specific trading strategy. For instance when a market reaches a top, and will reverse, the trading phase the market it is in is called San Zan and has its unique trading strategy.
The secret code of Japanese candlesticks
The Secret Code of Japanese Candlesticks