Felipe Tudela – The Secret Code of Japanese Candlesticks (Wiley Trading)

The truth about Japanese candlesticks is very simple. ‘Japanese candlesticks’ refers to the method that has guided the success of Japanese traders for centuries. Originally, Japanese traders made no use of Japanese candlesticks. They used another method.

The book seeks to develop adequate reflexes and the right attitude of a trader. Here is the method and its five rules:

1. Without being greedy, look at past market movements and think about the time/price ratio.
2. Try to buy a bottom and sell a top.
3. Increase the position after a rise of 100 bags from the bottom or a decline of 100 bags from the top.
4. If the forecast is incorrect, try to recognize the mistake as soon as possible. Then, close the position and stay out of the market for 40 to 50 days.
5. Close 70 to 80 % of the positions, if they are profitable, closing what is left after a top or a bottom is reached.

The first rule tells us to study the market in a detached manner, maintaining objectivity. The second rule concerns the selection of an entry point. For the same, one must act at the right time. The third rule addresses our position allocation. This encourages traders to increase his/her position following a rise of 100 bags from a bottom or a decline of 100 bags from a top. This rule indicates a price/volume ratio. The fourth rule is about risk control, including stops. The fifth rule also concerns risk control, position allocation, and asset allocation. Asset allocation is implicit in rule 3, since assets are not all in the market at the same time.

The ‘five Sakata methods’ belong to the objective part of Sokyu Honma’s method and focus on the structures or phases of the market. There are five structures or basic configurations:

1. San Zan means three mountains and is the triple top.
2. San Sen means three rivers and is the triple bottom.
3. San Ku means a triple gap and refers to the empty intervals between prices.

For the buying method, we wait for a third gap to appear in a downward market. Then, we wait as long as it takes for a market turnaround, so that it goes upward and closes the previous downward gap. Then, we buy. We will exit the position at the third gap.

For the selling method, we wait for at least a third gap in an upward trend, which means that the trend is near its end. Then, we wait for a turnaround of the market and the beginning of a downward trend.

Once the market has turned around and closed the former uptrend gap, we sell. We will exit at the third gap in the downward trend.

• San Pei means three lines and refers to a continuously ascending trend that is composed of three time/price units.

We buy, preferably after a triple bottom takes place and as soon as a ‘three white soldiers’ advancing in the same direction pattern appears. We exit our position as soon as a third gap appears. However, we could keep a trailing stop and exit the trade when the stop is triggered.

We short sell as soon as the market turns around from a triple top.

• San Poh means three rests and refers to a corrective movement within a trend that is made up of three time/price units.

The San Zan Algorithm refers to a triple top. 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. A simple or double top is not enough to reverse a trend, although they sometimes do.

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. 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.

Usually, a very long range will mean the approach of real offering and selling power. This is why long ranges are unusual. They do not come every day.

In Japanese traditional trading, we always trade the past – never the future. Our future is the past. In order to trade San Zan, we also need some preliminary conditions in the past behavior of the market.

Next, the San Sen Algorithm implies a triple bottom. It is formed when the market consolidates, oscillating in three downward waves contained within a horizontal range. Bottoms are made when markets change from a downward trend to a lateral consolidation. Like tops, bottoms do not necessarily represent turning points or reversals of the entire trend by themselves.

The triple bottom implies that the market did not have enough strength to continue the trend. It is a strong consolidation. Although this does not necessarily mean a reversal, it has created very strong support.

The San Ku Algorithm is all about gaps. Gaps are the third Sakata market phase. This is a phase that has several unusual aspects. A gap is the manifestation of an invisible market phase. A market gap has an identity in, and of, itself. The market is measured by gaps. Gaps tell us where, on its course, the trend is. We will learn from gaps if the market is exploding and beginning a new trend or if it is in the middle of a trend or at the end of it.

Gaps are used to measure the market. We can also measure its heat or volatility at a maximum. This is why these authors also talk about the exhaustion gap, the gap that signals the end of a trend. In reality, all gaps are measures. The main ones imply huge forces that exhaust previous phases and begin new ones. The new phase can be the continuation of another trend segment or its final collapse. A great deal of energy is released in gaps.

If a gap that appeared in the past is closed later, we will take action. When that gap is closed, we have a market entry. For example, if the price on a particular day gapped from 30 to 35, without any price in between, and later the market reverses and the price fill the past gap between 30 and 35, coming back to 29 and closing the gap, we would sell short. The past gap was closed today (the present), so we sold short.

Following this, is the San Pei Algorithm. The San Pei market phase is the trending phase of markets. The San Pei algorithm is a procedure to trade trends in a very precise way. In the San Pei market phase, we have mini-trends. These always occur after a consolidation of some kind. In this case, we will see trends appearing after a triple bottom or triple top has occurred. For a trader, it is very important to be able to identify a real trend. This may not be as easy as it seems. an uptrend appears when a market makes a series of higher tops and higher bottoms. A downtrend appears when the market makes lower tops and lower bottoms.

Every trend has, necessarily, a beginning or first part, a middle phase, and an ending phase. It is sufficient, then, to express this in its minimal form – three time/price units or bar charts. This gives a San Pei. It consists of three consecutive bar charts with higher tops and higher bottoms, respectively. This is the smallest trend and it can be identified. When this minimal trend occurs, the market is already trending. One can be sure that a trend is underway.

When San Pei is formed from three descending time/price units, we have the three black crows. This is our signal to go short. When San Pei consists of three consecutive ascending time/price units, we have the three white soldiers. This is our signal to go long.

The next algorithm is the San Poh Algorithm. This concerns a market corrective phase and how to trade it. This market phase corresponds to a correction within a trend. It always occurs within a trend. The correction of a trend is a market phase in itself. This corrective phase is a key and fundamental to understanding market cyclical development. We must look attentively for its occurrence. Even within the strongest of trends, a market needs to breathe and to reassess itself. It will give us information about the strength or weakness of the trend. At times, the market will pause for a while and test its previous level within the trend itself.

San Poh is a three-price/unit correction. Its origin is a bar chart that will contain three corrective inner bar charts. These three corrective bar charts, each of which is preferably lower than the one preceding, may exceed from time to time the original bar chart within which the correction occurred.

The main rule is to buy as soon as the correction ends and the market resumes its trend and a breakout of the high of the original bar occurs.

Candlesticks are an add-on after the fact to help interpret the five market phases. The basic candlestick patterns are as follows:

1. Long Day: This is a candlestick that has a body with a very long range and a very small shadow.
2. Short Day: This is a small candlestick that has a body that is square or almost square. The shadows are small.
3. Marubozu: This is a candlestick that has one or both body extremes without a shadow. They are reversal or continuation patterns. They are more significant when both of their extremes have no shadows.
4. Doji: This is a candlestick that has its open and close at the same level. This means indecision. The market is thinking about its next move.
5. Turning Top: This is a small body that has two shadows larger than the body. It means indecision.
6. Rising Star: This is a small body with a gap above or below a long day: a turning point pattern. It shows indecision.
7. Parasol: This is a reversal pattern: the hammer and the hanged man. Both belong to this same pattern.

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.

In these kinds of systems, the use of more than one or two parameters reduces the efficiency of the system. The different parameters are, so to speak, on different wavelengths and block each other, undermining the system. This is why the best systems that use mathematical indicators employ very few parameters, which is the only way to get them working in harmony.

One key aspect of the Sakata algorithm and its five procedures is that each individual phase of the five Sakata methods confirms the others. For instance, San Zan will be confirmed by the presence of San Ku, San Poh, San Pei, and San Zen. The same is true for each of the other four methods.

Another issue should be discussed if one is to succeed in trading with Sokyu Honma’s methodology. This methodology must never be used without a plan. By a plan, it does not mean the algorithm and observing its rules in a disciplined way. This is important, but is very far from being what is most needed. By a plan, it actually means the complete trading strategy that takes into account all of the elements, including the trader himself, and that will make a business of his trading.

In order to ensure success in his trading, a trader must have market knowledge, as well as being able to control his risk through asset allocation, position allocation, stop placement, money management, etc.

Traders do not ruin themselves because of bad signals, but because they badly manage their trades and have no plan. Bad traders think that trading is mainly about signals. They buy system after system in search of the trading grail. Never could they be so far from the truth. They should be looking in another direction – having a robust plan.

Good traders can succeed even without the use of precise signals. This is because, for them, trading does not rely on a simple magic formula that tells them what and when to buy. A plan is a necessity. Without one, we are at a loss as traders. The first thing that we need to learn is how to create a consistent and robust plan. Such a plan will enable us to trade for years – maybe for a lifetime. This is why the time and effort that is used in constructing such a plan is well spent. Consider it to be a lifetime investment.

To make this plan become a reality, there are certain conditions the trader must follow. These conditions imply an attitude, the trader’s attitude, given as follows:

1. Totality
2. Integration
3. Practice
4. Forgiveness

When trading, emotions come into play, as well as perceptions and wishes. Many of these can bias reality, leading to failure. If one wants to trade correctly, he/she need to learn why we want to trade and to accept trading reality in relation to ourselves.

Trading is not simply buying or selling in the market. It is much more than that. One could say that buying and selling are only the tip of the iceberg of what concerns trading. One must have knowledge of the whole iceberg and not just its tip.

The market sequence is objective. This means that it is independent of the trader. The market will go through its phases independently of what one does or thinks about it. On the other hand, trading behavior is subjective. It is dependent on the trader’s actions and attitudes.

The trading rules of the five Sakata methods are also objective. They can be compared to a formula that determines the phase of the market’s cycle, if certain conditions exist. Trader’s actions or attitudes will not change anything about it.

However, there is a trading cycle or sequence that pertains to traders. If they do not follow this cycle or sequence, trading will fail, even though there is objective market behavior. This trading cycle or sequence depends on traders and has its own rules. That is why it is called subjective. It is the responsibility as traders to ensure that this cycle gets to completion. No one can do this but them.

It is what traders do and not what the market does that will ensure our success. This is why looking outside is futile. This secret is invisible to most traders. The reason is that traders are always looking beyond themselves. They escape from themselves because they are lured by easy gain or greed.

However, trading is difficult. It requires learning, studying, hard work, and lengthy experience. It implies integrating many elements that are not exciting and that will not give a rush of adrenaline. In fact, most people who trade are trading their wishful thinking.

Trading is very easy once one agrees to plan for trades and to study them deeply, in order to ensure that there are risk control elements, money management elements, and everything else that the science of trading tells to consider. Great traders are great readers. Trading is a science that has its own literature with which one should become fully acquainted.

One should also continually think about trading principles, trading strategies and plans, and how to refine or perfect what one is already doing. This reading and thinking should be accompanied by unending practice of what one reads and thinks. Practicing and experimenting are fundamental. This practice should begin on a very small scale and with amounts that a trader can afford to lose as part of the learning experience.

All analysts are not traders, but all traders should be analysts. Analysis of the market is merely one aspect of trading. Trading includes operating in the market. Operating in the market can give unexpected results. In trading, such things as slippage, volatility, and efficiency of execution are things that are present and can decide results.

Analysts usually fail because the market never works as expected by the majority, and here we mean the majority of professionals, not just a majority of small traders. Most fundamental analysts fail due to bad market theory or to biases because they are paid to give results that are in accordance with the views of their brokerage houses. The bottom line is that, in general, one cannot trust fundamental analysts.

Technical analysis fails, too, and is subject to the same flaws as fundamental analysis, and for the same reasons. For instance, brokerage houses do not favor analysts who warn the public of an imminent reversal at the end of a bull market, and near a reversal that no one expects. The brokerage houses will lose their buyers, if there is a market frenzy precipitated by someone who caused their customers to panic. One should not trust the majority of technical analysts either. Nevertheless, both types of analyses are important. Fundamental analysis teaches us about underlying value. Technical analysis teaches about actual price. They do not always coincide. Something of great value can be underpriced and something of no value can be overpriced. The market moves about above or below the true value.

Trading implies actual market action. The trader must account for everything, even for the failure of the best analysis. Trading is far from simply knowing what the market will do and acting on it. The reason for this is that the goal of trading is to make profits, and profits are made with assets. The trader uses the science of managing his assets within a market environment.

The first rule of Sokyu Hamma’s Samni No Den tells us to study the market in a detached manner, maintaining objectivity. The second rule concerns the selection of an entry point. The third rule addresses our position allocation. The fourth rule is about risk control, including stops. The fifth rule also concerns risk control, position allocation, and asset allocation. Asset allocation is implicit in rule 3, since our assets are not all in the market at the same time.

The strength of a trading signal is directly proportional to the length of the time window selected. The reason for this is that the longer the time frame, the more difficult the market will be to manipulate voluntarily or involuntarily. The selection of time window depends strictly on trading horizon and type of trading. If one is a short-term trader, he/she will probably select a daily time window. If one is a medium- term trader, he/she will select a weekly and a daily time window. As a very long-term trader, one is better off with weekly and monthly time windows. If, on the other hand, one is a day trader, he/she should use an intraday time window and a daily time window, even though benefit would be greatly from also taking into account the longer time windows.

The fundamental market structure is therefore made up of pivots and swings. Pivots are the beginning and ending points of every move. This is why they are the market’s turning points. The move that occurs between two given pivots is the swing. These two concepts of pivots and swings will help us to measure the markets and develop an awareness of the market structure.

Pivots in themselves have a spatial structure that will provide clues about market behavior. What characterizes an uptrend is that its lower pivots are in an ascending series, and the same is true of its higher pivots. This is why we say that the market is making higher tops and higher bottoms. A downtrend is the opposite figure. A market makes lower tops or high pivots and lower bottoms or low pivots.

When a significant time change occurs, it means that the market’s phase is about to change. This time element can be used to analyze every market phase. An above-average duration means a change of some kind is about to occur. Time cycles are especially important and meaningful. Average trends have their times, as do average double bottoms, double tops, intervals between gaps, and corrections. Their time size will tell whether the present market phase is within a major whole market cycle or within a smaller market sub-cycle.

Indicators, such as moving averages, will smooth data, but this smoothing will cause relevant information to lag behind. When there is a moving average turning point, prices will have long turned around. If a trader acts upon what the moving average tells, he/she could be acting on information that arrives too late. A false signal is issued due to this lag in the information transmission time caused by the smoothing of price data. This is the problem with mathematical indicators. In general, they are lagging indicators. They give information that is not always on time or accurate. Most indicators will give false signals. These result in losing trades.

False signals are created by a contradiction between what the smoothed information of the average tells us and what the underlying market is really doing. This happens because mathematical statistical-based indicators are quantitative. To obtain quantitative, smoothed information, the price that one must pay is the surrender of quality.

Therefore, there are two approaches: the quantitative approach, which reads market information filtered by statistics, and the qualitative approach, which reads directly the market’s structure as it is. Examples of the first approach are indicators such as moving averages, stochastics, MACDs, Bollinger bands, etc. Examples of the second perspective are chart pattern reading, bar chart reading, and all of the techniques that do not rely on averages but on a direct reading of what the market is doing. The difference between the two approaches is that the information is not real in the first case, although useful.

Both approaches, the statistical and the reality-based approach, can be combined. There is no need to deny the validity of statistically based indicators, but simply to acknowledge their limits. Their main limit is their blindness to market quality. By reintroducing quality, using a qualitative market approach, the statistical indicators become enhanced because we compensate for their blindness. In fact, we are recovering the information that the indicators took away from us. We do this by reintegrating the fundamental market structure with statistically based information. Combining both approaches for an efficient market reading can, in this way, constitute a valid approach and may be used in certain circumstances.

The market will very often go against public opinion. This is because people are so enthusiastic about the market’s immediate behavior that they enter a kind of hypnotic trance. In a bull market, no one wants to be told about reversals or the end of the trend. They all want to be where the money is being made. This is fine as long as the market maintains its trend. The problem with this approach is that enthusiasm takes a very long time to build. It accumulates in a slow, snowballing motion as a result of stories of other people’s success in the market.

The opposite of opinion is ‘knowledge.’ Knowledge will always be true, because it is based on reality and not on what somebody tells reality should be. Knowledge is always true, because it takes only reality into account.

To convert complex things into simple and understandable things is what intelligence is all about. To be able to reduce all of the apparent complexity and market randomness to something simple that we are able to grasp intuitively and understand is what knowledge of general conditions is all about. When things seem too simple, they are often disregarded, although, in fact, they should not be. Intelligence loves simplicity.

Indexes are among the best tools for keeping an eye on general conditions. They enable us to know what the market is doing in general and what its general condition is at a given time. An index is an average of the prices of a number of stocks. It is really an equity curve, since it integrates the historical value of the market.

Sector behavior enables to select our market. By reading sector indexes, traders will be able to assess the relative performance of each sector, in comparison to the market in general. Using the sector indices, one is able to refine that knowledge in order to tell how each individual sector is behaving relative to the whole market. This enables one to focus on the best performing sectors in order to select our stocks from those sectors. This will depend on the ultimate trading strategy. The strength of the sector will benefit the strength of the individual stocks that are selected, in the same way that a weak sector will affect all stocks in it, whether good or bad.

Everything is related in the markets, as are interest rates and currencies. Traders should check the long bond and the T-bill prices, as well as the US dollar index and the main currencies. This will give an idea of how the economy and the markets are behaving and will reinforce the knowledge of general conditions. Interest rates will give valuable information about the cost of money. Futures will also talk about general market conditions. Traders should have a look at gold and oil. Their prices depend on what is happening to the economy. Their behavior does not follow a general rule, but will depend on many changing factors.

The more one knows about economics, the more he/she will benefit from trading. However, as in trading, the right approach must be taken. This is why economic schools of thought matter as it can help market success. For instance, a Marxist approach would cause one to become losers in the markets. The same can be said for a Keynesian approach. If the approach chosen is from the Austrian School, a fortune could be made.

There are two levels of thought in trading the markets: strategy and tactics. Strategy refers to the whole trading plan, taking into account all elements that should be included for trading to be profitable.

Strategy is a long-term perspective. It includes not only market knowledge but also risk and money management. Strategy includes all elements that are not dependent on a specific trade. Strategy is there to stay.

Tactics are the opposite of strategy. They are the immediate specific actions that are taken in the market. Tactics will depend on the market, changing from day to day. With tactics, one is always adapting his moves to market changes. Traders will have a series of tactical moves for these that will be applied when encountering a given set of circumstances. A strategy will contain its tactical weapons as a subset of the general trading plan.

GENERAL CONDITIONS AND STRATEGY: This is the first strategic element. One must first assess technically the general conditions of the market. For this, traders will use mainly charts in combination with the first rule of the Samni No Den and the five Sakata methods.

VEHICLE SELECTION: is the next strategic move. It is the most important choice since this is the instrument that is actually going to be traded. This selection is more important than precise timing. Choosing the right stock, which is in the correct market phase, is a key decision. Before choosing the vehicle, traders must know what they are going to trade.

ENTRY POINT: is the next strategic element. These strategic moves will become tactical at the moment when the market behavior asks to choose one of the five Sakata methods.

One must never delay a trade. This will be an excellent trading discipline. It is not as easy as it seems. Being able to execute a trade exactly at the right time, after waiting, requires practice.

Exiting a trade is another strategic consideration. This strategic element corresponds to the second Samni No Den rule, which says try to buy at the bottom and sell at the top.

INITIAL POSITION SIZING: Position sizing is defined by the general strategy. One must know how he/she is going to allocate assets. For this, one must test different position sizing alternatives. These position- sizing alternatives are another way of controlling risk and return. This involves a necessary tradeoff. The kind of position size that is chosen can diminish risk, but also diminish overall returns. The opposite is also possible. A position-sizing strategy could enhance overall returns. It is therefore necessary to be very careful when considering allocation strategy design. The only way to really know how the specific position size that has been chosen will work is by testing. This means that one must test different position size alternatives.

After testing the different position sizing strategies, tabulate them so that a classification of the results is prepared in an easy-to-understand format. By doing so, it will be easier to make a good choice.

Some classical allocation numbers are 2, 4, and 5. This means that traders often scale in two, four, or five stages, such as buying a total of two lots, four lots, or five lots.

HOW TO SCALE POSITIONS: Defining a scale is the first step once one has decided to allocate assets progressively, as the market moves or declines by definite increments. What traders must always keep in perspective is the reason behind this scaling, this allocation of resources in a progressive way as the market advances or declines.

HOW TO ADD TO POSITIONS: The first possibility is to add in the direction of the market, only when the market is moving in a definite and unique direction. The other possibility is to wait for a correction before buying or selling.

ASSET ALLOCATION: is the next strategic consideration. It is a fundamental element of any trading plan. This step answers the question of total commitment of assets once traders have all their positions in the market. One must define in advance the total percentage of assets he/she is going to allocate.

STOCK ALLOCATION: TO DIVERSIFY OR NOT: is another fundamental strategic consideration – whether to diversify or not. Diversification is a must. If one does not diversify, he/she will lose an opportunity to diminish our risk. Even with the best entry signals, traders will have trades that will fail. However, what is true for a trade considered individually ceases, in great measure, to be true for trades when taken collectively.

There are two main approaches to diversification. The first consists of diversifying among many assets to diminish risk. This is the ‘don’t put all your eggs in the same basket’ approach. The second approach to diversification consists in having a very small number of stocks, but watching them very attentively. This is the ‘put all your eggs in the same basket and watch the basket’ alternative.

SELECTING A STOP: This is the next element to consider in a strategy. Selecting a stop is what Sokyu Honma’s Sanmi No Den fourth rule refers to. Traders select stop once everything else is in place within our plan.

HOW TO EXIT A TRADE: Closing or exiting a trade is the last strategic consideration, and a most important one. The main tenets of the rule are to exit partially – 70 to 80 % of the positions – as soon as a

reasonable profit has been attained and to exit what remains, and reverse positions, when the market reaches a top or a bottom.

THE PRICE FACTOR CLOSING STRATEGY: Using targets is one of the available exit methods. It consists mainly of setting, in advance, a number of profit points to be made. As soon as the market reaches its target, the trade is exited. A target must not be arbitrary. One must take into account the risk/reward and win/loss ratios when testing.

THE TIME FACTOR CLOSING STRATEGY: Using time targets is another possibility for exiting trades. This can be a very powerful and profitable exit strategy. In this case, there is a fixed time limit for the trade to develop. As soon as the time limit has been reached, the trader closes the trade.

EXIT ALLOCATION: This is not a decision to make during the trade. It is a decision that must be planned in advance. The final decision must depend on the results of the tests.

It is essential to manage risk. Most traders fail due to a lack of risk management. They either overtrade or do not work their plan and all of its elements.

When trading, one must study the market, the trading system, position allocation, asset allocation, where to place stops, etc. Traders should also know everything about our system before and after testing it. Accomplishing all of this in an orderly way is being organized in matters that concern trading.

THE ELEMENTS OF RISK:

1. Market Risk: is the risk of the market, as a whole, collapsing. This cannot always be avoided.
2. Vehicle Risk: is the risk of losing because chosen trading instrument does not work.
3. System Risk: At a given moment, the system will stop working for a lengthy period or even indefinitely.
4. Money Management Risk: is the risk of not having a sound money management structure, of having incomplete or bad money management, or of not following money management rules, even if they are sound.

After dealing with these risks, individuals must account for the risk of lack of knowledge, of not having an adequate market knowledge base. An ignorance of market behavior can be fatal.

RISK AND REWARD IN TRADE SELECTION: The different possibilities are as below:

1. High risk that results in high reward.
2. High risk that results in low reward.
3. Low risk that results in low reward.
4. Low risk that results in high reward

‘Always use a stop’ is not necessarily true. In many cases, stops make trading a hassle or do not work. Many traders have their stops caught by the market and executed, only then to see the market turn around. It is true that traders need stops. However, sometimes it is not convenient to use a stop in the normal way. It may lead them to constantly lose on potentially good trades. For instance, a time stop is

also a stop. This means exiting the market after a given period. Also, when a trade is closed, it is a stop. It is therefore important to use the right kind of stop. A stop is only relative protection. No stop provides absolute protection. The market can easily go through the stop. If it does, the stop may not be executed when it is most needed. Alternatively, the stop may be executed too late. Then, losses could be devastating.

Ultimately, putting it all together in a simple but winning approach involves the following steps:

1. Know yourself
2. Think your plan
3. Have a plan: Make it complete
4. Have a plan: Make it simple
5. Have a plan: Tactics first
6. Build a prototype
7. Test the prototype
8. If it works, use it for a time
9. Expand the trading

Trading philosophy is concerned with the underlying universal principles of reality, as applied to trading and the trader. This differs completely from trading psychology. Trading psychology concerns the mind, personality and behavior. Trading philosophy involves the principles that rule the trader’s mind and life. Trading philosophy makes trading psychology and trading action possible. Trading philosophy concerns truth and reality in its specific relationship to trading and to the trader’s life. Without a trading philosophy, the reality of the market will always escape the trader.

A love of trading, if real, will enable the trader to overcome any obstacle and persevere until he succeeds. Trading is difficult. It implies work, study, and making mistakes along the way. Only a passion for trading will enable a trader to overcome all obstacles.

Temerity describes a trader who trades a half-baked method or system that seems to work, but has not been fully tested or, if fully tested, has not been integrated within a complete and robust trading plan. Most unsuccessful traders act with temerity, which they often confuse with courage.

Successful traders are courageous. Courage is necessary in order to trade a robust and successful plan. Courage enables one to take action with something that really works and with full knowledge of why and how it works. Courage never involves blind action. Only temerity does.

Traders act on knowledge, but never on impulse. All temerity must be excluded when trading. When courage is present, fully controlled trading is enabled and success must come. Another condition needed to trade successfully is detachment from results; as well as prudence, which means practical knowledge.

In conclusion, Sokyu Honma offers us an integrated approach to the markets and trading. This approach consists of two main aspects that form the foundation of his two methods. His first method is the Samni No Den of the market. We call it his subjective method, because it gives the rules that the trader must follow while he trades. These rules teach a trader how to measure the market, where to enter and exit, how to correctly position size his assets, how to exit the market when he is mistaken, and how to position size his exits if his trade succeeds.

Sokyu Honma’s second method, the five Sakata methods, gives the trader an objective view of market structure and its cycles. The market is seen as a clockworklike machine with five phases that repeat themselves. According to this second method, the market goes through a series of phases or cycles, which make up the entire market cycle. We have named this five-phased complete cycle ‘Sokyu Honma’s great market cycle.’

Bushido teaches us courage, correct action and all the conditions needed to control our trading lives, helping us to escape the vagaries of lack of discipline and chaos. Bushido is the root of trading success and the core of Sokyu Honma’s trading success. He has given us the most valuable legacy and inheritance that any trader could hope for. This success can now be ours.