"Reading the Message of the Markets" By Steve Rhodes - steve@tfnn.com Every day the markets are open, "Bulls - Buyers" and "Bears - Sellers" battle each other. Every transaction requires a buyer and seller, meaning that one person believes that what they are selling will no longer go up in price, while the other person believes just the opposite is true. So who is right and how do you know when to get in and when to get out? The answer is easier than you think and I'm going to teach you how to use a set of tools that will let you read the message of the markets. Learning how to use these tools will answer the questions, should I be in or should I be out, should I be a buyer or should I be a seller? Each day s battle between the buyers and sellers leaves signs in the form of "Japanese Candlesticks", the most powerful charting language for reading the message of the markets. A candlestick is a method for recording four points of activity for the trading session you are viewing. For example, if you are looking at a daily chart, the candlestick represents the four points for the day, whereas a weekly chart would represent the four points for the week. Those four points being, the open of the trading session, the close of the trading session (both of which encapsulate the
body of the candle) and the intraday high and low that price traveled to during the trading session. On my charts, I use green to represent that the price closed higher than the opening price and red to denote that the price closed lower than the opening price. The filled in area of the candle, the point that marks the open and close is referred to as the body of the candle, the essence of price. The intraperiod high and low is referred to as the "shadow" or "wick" and is represented by a small thin line. Not all candles are created equal. Some are more powerful than others, some are neutral, and some provide signals of an ensuing reversal in the direction of the markets. Bullish candlesticks suggest a downtrend is about to end, bearish candlesticks suggest an uptrend is about to end and neutral candlesticks are a period of pause. Below is a glossary of bullish candlesticks, white bodies mean the stock closed up and black bodies mean the stock closed down.
Below is a glossary of bearish or neutral candlesticks. We do not trade on candlesticks alone. Candlesticks confirm other patterns or indicators.
As I mentioned earlier, not all candlesticks are created equal, nor are all candlestick reversal patterns. If you would like to further your education on candlestick charting, I have a six hour on-line course, "Candlesticks: Silent Signals and the Speed of Trust", that will compress decades of education into hours - Click here. The real power behind candlestick charting is that it is used to confirm other patterns or indicators. Most traders use some type of indicator to increase the probability of getting into a successful trade. For example, some use moving averages, some use the AB=CD ("Lightning Bolt") pattern, some use Fibonacci retracement or expansion patterns and the list goes on and on. However, just because an indicator suggests that now might be the right time to execute a trade, it is the candlestick that signals when to take action. Let me explain it like this. Picture yourself playing a game of blackjack and the rules of the game that we are going to play by are candlestick rules. This means that the dealer (or market in our case) has to reveal both of their cards before we decide our next move. Another rule is that the amount of money that you decided to wager on your hand (the trade you wish to execute in our case) can be taken off of the table after the dealer reveals their cards. So if you are dealt a seven and a four on your first two cards, a hand that most people would feel good about playing (in market terms, this would be the equivalent of your indicator giving you a signal to move forward with your trade) and the dealers cards end up being a ten and an ace (in market terms, a candlestick that has not confirmed that you should enter the trade), you get to take your wager off of the table. Question, how often would you play the game of blackjack if you played by candlestick rules? Candlestick charting increases the odds of a successful trade by gargantuan proportions. So, let's go look at some stock market charts, using a very popular indicator, one available on most every charting package and we will use candlestick rules to answer that age old question, should we be buyers or sellers. The indicator we will use is called the Relative Strength Index (RSI). The Relative Strength Index was developed by J. Welles Wilder and published in a 1978 book, New Concepts
in Technical Trading Systems. The RSI is classified as a momentum oscillator, which measures the velocity and magnitude of directional price movement. The RSI is most typically used on a 14 day moving average timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Let's go see what it actually looks like on a chart. The bottom area of the chart examples that I show contain the RSI. The red squiggly line is the RSI's 14 day average and the black horizontal lines represent the 70 and 30 levels. In the game of the markets, one would do very well if as a guideline they bought when the RSI was at 30 and sold when the RSI was at 70. However, using candlesticks to determine entry and exit would dramatically improve these RSI guidelines, since the RSI is a momentum calculation. As an example, let's start with a chart of the Dow Jones Industrial Index from December 1928 through the crash of 1929. Combining candlestick patterns along with the RSI would have had you out of the market at the market highs and back in the market at the market lows. Candlestick charting, would have kept you from buying when the RSI was at 30 prior to the market crash. It's always great to see the markets hand before you take action. Click here to watch the video and I'll show you how to read the message of the markets using the RSI and candlesticks.
Another example is when the DOW made a high August 16, 1937 when the RSI reading was at 72.76 and the following three trading sessions provided the candlestick confirmation to be out of the market or short the market. On March 31, 1938, the RSI reading was at 18.84 and the following session created the bullish candlestick signal to be long the market or the closing of a short trade. Click here to watch the video and I'll show you how to read the message of the markets using the RSI and candlesticks. In 1986 while the DOW was making lows in the RSI, it was a set of bullish signals that would have had you back in the markets and at the highs in 1987, candlestick signals and the high reading of the RSI would have had you out of the market or short, taking full advantage of the "Crash of 1987". Click here to watch the video and I'll show you how to read the message of the markets using the RSI and candlesticks.
If you would like to learn more about how to use the RSI and candlesticks to improve your trading and investing, I'll be holding a FREE 60 minute on-line workshop for all subscribers to my daily newsletter service, "Mastering Probability". There are two great ways to become a subscriber now and get access to this free, exclusive workshop: OPTION #1 Sign me up for the Mastering Probability newsletter which includes a 30 day unconditional money back guarantee, the free 60 minute RSI workshop and the 90 minute Money Management workshop. If you would like to take your education even further and register for my six hour on-line candlestick workshop, Candlesticks: Silent Signals and The Speed of Trust, I'll throw in a two month subscription to my newsletter service for free and you will receive access to the 60 minute on-line workshop. The candlestick workshop sells for $595 but if you subtract the value of my newsletter service ($149 per month x 2) the net cost of the workshop is just $297. OPTION #2 Sign me up for Candlesticks: Silent Signals and The Speed of Trust, which includes two free months of Mastering Probability, the free 60 minute RSI workshop and the 90 minute Money Management workshop. No matter which option you choose, you also receive my 90 minute workshop on money management, another $149 value, free with your subscription to Mastering Probability. Thank you for your time in reviewing this report and I hope to see you Feb. 20 th. Regards, Steve Rhodes