“A good beginning is the most important of things.” (Japanese proverb)

WHAT ARE CANDLESTICKS?

Japanese candlestick (also called “candle”) chart analysis, so called because the lines resemble candles, have been refined by generations of use in the Far East. These charts are used internationally by traders, investors and premier financial institutions.

Candle charts:

* Are easy to understand: Anyone, from the first-time chartist to the seasoned professional can easily harness the power of candle charts. This is because, as will be shown later, the same data required to draw a bar chart (high, low, open and close) is used for a candle chart.
 
* Provide earlier indications of market turns: Candle charts can send out reversal signals in a few sessions, rather than the weeks often needed for a bar chart reversal signal. Thus, market turns with candle charts will frequently be in advance of traditional indicators. This will help you to enter and exit the market with better timing.
 
* Furnish unique market insights: Candle charts not only show the trend of the move, as does a bar chart, but, unlike bar charts, candle charts also show the force underpinning the move. Enhance Western charting analysis: Any Western technical tool you now use can also be used on a candle chart. Candle charts, however, will give you timing and trading benefits not available with bar charts. This merging of Eastern and Western analysis will give you a jump on those who use only traditional Western charting techniques.

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CONSTRUCTING THE CANDLESTICK LINE

The broadest part of the candlestick line is the real body. It represents the range between the session’s open and close. If the close is lower than the open the real body is black. The real body is white if the close is higher than the open. The real body is white if the close is higher than the open.The thin lines above and below the real body are called the shadows. The peak of the upper shadow is the high of the session and the bottom of the lower shadow is the low of the session.The color and length of the real body reveals whether the bulls or the bears are in charge. Note that the candle lines use the same data as a bar chart (the open, high, low and close). Thus, all Western-charting techniques can be integrated with candle chart analysis.At Candlecharts.com, we have found the candles are most potent when merged with Western technical analysis. Accordingly, we harness the best charting techniques of the East and West to provide you with uniquely effective trading tools.
                         
USING INDIVIDUAL CANDLE LINES

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A critical and powerful advantage of candle charts is that the size and color of the real body can send out volumes of information. For example:

* a long white real body visually displays the bulls are in charge
* a long black real body signifies the bears are in control.
* a small real body (white or black) indicates a period in which the bulls and bears are in a “tug of war” and warns the market’s trend may be losing momentum.
 
While the real body is often considered the most important segment of the candle, there is also substantial information from the length and position of the shadows. For instance, a tall upper shadow shows the market rejected higher prices while a long lower shadow typifies a market that has tested and rejected lower prices. The slogan of our firm is “Helping Clients Spot Market Turns Before the Competition.” This is based on the powerful fact that candle charts will often provide reversal signals earlier, or not even available with traditional bar charting techniques.

Elliott is my primary method of analysis and it allows me to make most of my forecasts. It is a fairly simple theory and consists of two basic principles:

• Impulsive action consists of five waves – see figure X.1 below
• Corrective action consists of either three waves or a more complex pattern

But in order to understand this we first need to define “impulsive” and “corrective.”

An impulsive move is one in the direction of the main trend and such a move is usually fast, direct and easy to classify.

A corrective move is contra-trend and tends to dither and dather, wibble and wobble. It is not easy to classify and generally if you are not sure what you are seeing it is more likely it is corrective.

Here is an Elliott five-wave impulsive rally:

Figure X.1 – an Elliot Wave “five”

The Elliott five should obey the following rules:

• Wave 3 is never the shortest and is generally the longest
• Waves 1 and 5 do not overlap.
• Wave 2 and 4, which are “corrective” are generally of a different shape from each other – this is called “alternation.”

We will now look at an Elliott five in the real world:

You may say, “but this chart does not look anything liked your illustration!”

In some ways I would agree with you but a stylized illustration is always going to look different from real life. The key points are that we can count five waves and that the move obeys the rules.

Now we will look at another real-life example:

Chart X.2 – FTSE Daily

This chart goes back a few years but it is the best signal I have ever seen Elliott give. From the peak labeled “Cycle B” you will see I have labeled the decline down to “Inter 1” as a i, ii, iii, iv, v move.

Yes, you can count five waves in declines as well as rallies.

This brings us to the next point – Elliott waves are “fractal!” Yes Elliott discovered “chaos theory” many years before anyone else!

The concept is simple but can seem confusing at first. Basically all the waves subdivide into “fives” and “threes” themselves. Here is Figure X.1 with waves 1 and 2 so subdivided.

I suggest you do the same. Take what you find useful and make it your own.

I do have a fairly major problem with the way some people interpret Elliott and in particular the hype that is sometimes involved. Elliott is good for trading markets but it is also very good if you happen to write a market letter. Elliott often comes up with big forecasts and big forecasts sell subscriptions.

But let the marketing department loose on your advertising copy and it is not long before Elliott becomes a gift from the Gods, a technique that never fails. Now that kind of stuff is DANGEROUS because it can fool traders into not using proper risk control and money management.

If someone tells you that Elliott is “always right” then they are talking bollocks!

But the system does allow for many very complicated wave counts and in this way it can count all market action. To me this is useless, if the system accommodates everything a market may do then it loses all ability to provide good trading opportunities.

I prefer to keep it simple. I really only look at two factors and those are impulsive and corrective action. If I can correctly identify which of these we are seeing then I can draw appropriate conclusions:

• If corrective I know that the main trend should resume shortly so I look for a signal that is happening or has happened.
• If impulsive I know to trade with that trend and if we are in the fifth wave I know that we may get a contra-trend signal.

So my version of Elliott is a lot simpler than you may find elsewhere. But I would encourage you to do further research and reading a few books on Elliott is worthwhile – even one good idea can reap a very healthy harvest. As I indicated above I do allot time every day for research and would suggest at least one hour per day for this vital task.

But even in this simplified version there is still a fait bit to take in.

So far we have covered the basics. For the remainder of this article I am going to use real life examples, often linked to winning trades, to illustrate how I apply the principles of my version of the Elliott Wave Theory.

Here is the first one.

The above chart formed the basis for two winning trades, the first on Friday 29th June; and the second, the next session, on Monday 2nd July.

Spend a few minutes studying the chart – can you see the signals?

You were following the 5-point trading plan and were enjoying 95% success. But when you lost, you lost 30 points. Here is how it would work out over 100 trades. 95 trades would be winners at 5 points each and that equals profits of 475 points. You would also have 5 losers at 30 points each and your net profit would be 325 points (475 less 150 = 325). At £10 per point that would be £3250 but if you were using the 5-point plan you would have doubled up on making that many points and your winnings would be far higher.

To get back to the chart can you see the signals?

The key to this is the decline I have marked 1, 2, 3, 4 and 5. Once a move has seen five waves it is complete and we are due a rally (or a decline if it had been a five-wave advance) and that is the basis of the trades done on the following days.

Now I am going to mention one very important rule I use and this is that I want to see all the waves within a “five” to be roughly similar in terms of time. As a general rule, I would expect no wave to last longer than twice any other. At the same time you must be flexible. Applying Elliott Wave Theory is an art; it is not a mechanical process. If everything else is great but wave 4 is three times wave 1 in terms of time that may be acceptable.

Let me take you through this a step at a time so you can see exactly what I do:

· First do not try and “force” a wave count on the market. Just wait and you will find they develop all on their own.

· Once you have seen a count, work out the implications. For example in the chart above, I knew to expect a rally and we saw this start from “5”

· Having seen five waves down off a new high, as in this case, the implication is that we are now in a new downtrend but this is not so relevant for shorter term trading using binary bets.

· We saw the first rally off the low (marked 5) and as a wave count always has a correction following an impulsive move I was looking for a pullback. Using Elliott I also knew that any such move would fail to make new lows – ie it would be a buying opportunity.

· We duly saw the pullback come in on 29th June (I have labeled this as a re-test) and if you look at the chart carefully you will see that the decline traced out an a-b-c form.

· This was our buy signal and Lunch Time Trader duly logged a £560 gain on this trade which only lasted a few hours. That gain was assuming betting at £10 per point.

· Trade 2 was all part of the same thing. I was on guard for the rally to itself be a correction. If we see five waves off the top it suggests a major trend change – in that aspect Elliott was wrong as we did see a very minor penetration to new highs on Friday 13th July. But even if it had been a correction the wave count argued for higher prices first.

· So when we saw that a-b-c decline, marked on the chart at “Trade 2” – we went in again looking for a rally.

· The rally did come in but we got out when the trade started to look uncertain.

· One final, but important point, Elliott is not infallible, whatever anyone says, and, however carefully you work on the waves, not all your trades will win. I have to say this to counter all the hype that surrounds Elliott.

In fact, I will mention one pundit in the US who has written books on Elliott and is convinced it is infallible – we used to exchange letters but I then committed the cardinal sin – blasphemy, I questioned whether Elliott really was infallible. For this sin I was excommunicated and no longer received his letter. Good thing really, as he pretty much completely missed the bull market from 1987 – 2000 as he was so sure Elliott was “right.” He even “proved” that it had not been a bull market at all by expressing the market in terms of the price of Gold, or some such, and inflation adjusting. On that basis it was actually a bear market – but all the bulls weren’t bothered – they had already banked their profits!

Anyway enough of the deluded. On to the next chart.

This was a particularly nice trade and again its roots lay in Elliott but there were other factors as follows:

• The set-up here came in because the Elliott pattern up to the decline labeled a-b-c had been highly negative – I was looking for a big impulsive decline.

• In the event all we got was that a-b-c – a fairly feeble corrective form. This brings us to another important point because it is when a move fails to materialize that we know to look in the other direction.

• In this case all we saw was a feeble a-b-c so we had two signals we were instead going up. One in the form of the corrective nature of the decline, it counted as an a-b-c, and the second because our previous sell signal had not produced much – what does not go down, will go up! (and vice-versa)

• On top of that we had the spike low, see chart. But this is another buy signal showing determined buying.

• Then we had the form of the subsequent rally which I have labeled as 1, 2, i, ii meaning the fast action in the form of the third waves (remember these are generally the longest and also the fastest) was still to come.

• Finally, and these were critical factors, the financial markets were in disarray because of the sub-prime mortgage crisis and the US was about to make an interest rate announcement – timed at 7:15 after FTSE closed.

• I reckoned the US was not going to upset markets and that is was an odds-on bet that the announcement would be positive.

• But using binary bets I could get much better odds than that and recommended the net “FTSE to end up >50 points” at around 30. This had odds of over 2 to 1.

• This is what I was talking about when I talked about “value” bets above. If I can get 2 to 1 on a bet that should be evens I will be betting all day!

• With all these factors going for it this bet should have been a winner – and it was! After the interest rate news came out – rates down 0.5% – the bet was priced at around 60 and it closed at 100 the next day.

• I should mention that IG quote prices 24 hours on most bets and we were able to buy this bet after 17:00 on Tuesday (after FTSE had closed for that day) but based on and expiring at Wednesday’s close. FTSE was actually up over 150 points on Wednesday.

That completes a basic introduction to Elliott Wave.

Right now your task is to start looking at charts and counting the waves – I assure you it can be a very profitable way to spend some time and it’s also fun!

Finally here are a few suggestions of how you might surf the (Elliott) waves:

• Third waves are the most dynamic and it is during a third wave that the further out bets like “FTSE to end up >150 points” might come good and these bets are generally very cheap. But don’t necessarily go so far out, also check out “FTSE to end up >50 points” and “FTSE to end up >30 points” plus the HiLo bets. Remember if you are in a “downwave” you will be looking to bet that FTSE will be down, not up.
 
• Once the fifth wave is complete, up or down, think about what sort of move we might see and bet accordingly.

• The same applies when corrections look to be over. Ferret out the bets that will win once the main trend resumes.

• Sometimes FTSE gives two clear alternatives but by using “tunnel” bets you can often make money whichever of those comes good.

Summary

In this article we have learnt:

• The basics of how I use Elliott Wave Theory
• The five-wave form
• Corrective and impulsive action
• How to interpret the waves
• How to trade (surf) the waves

John Piper author of The Way To Trade

Scams and frauds are designed to take your money through false promises and phony claims. Money management is supposedly designed to increase your net worth. Sometimes these two worlds meet and the results are not in your favor, i.e., you have a considerable decrease in net worth. The information in this article won’t keep future money managers honest but it will help you find the one who is right for your situation. There are four criteria you must consider before you give your money to anyone to manage.

1) Philosophy– This is the thought theology used by the money manager to make your money grow. In other words, does (s)he focus on stocks, options, mutual funds, annuities, a blend of investment vehicles, etc.? Does this philosophy coincide with your risk tolerance? If stocks are too risky, a manager concentrating in that arena isn’t for you. The philosophy also points you to their performance.

2) Performance– We all know the markets are not stagnant. They go up, they go down. No investment manager can predict the market with absolute certainty. But, they should perform well, or even above average, in their specialty. For example, a stock focused money manager in today’s market environment should have performance numbers that would make even Warren Buffet take notice. You want as long a performance record as possbile. To be fair, one market cycle should give you a decent indication of the manager’s performance in his/her area(s) of expertise.

3) Process– This is the means the manager uses to select securities for the portfolios. For example, does (s)he rely only on in house research or does (s)he incorporate research from outside sources? If so, who are they and on what frequency are they used? 4) Personnel– Besides wanting to know the manager’s experience, you’d be wise to learn all you could about the folks working in the office. Who actually manages the portfolio? His/her experience? How long has (s)he been in business? Who will manage your account when (s)he is out of the office, on vacation, on business?

Some people would say cost is one of the criteria. I say it is, but to a lesser degree. In over 30 years in this business, I can guarantee that paying the highest commission did not necessarily result in receiving the best advice. Paying the lowest commission did not necessarily result in receiving the worst advice.

Cost comes in the form of fees and commissions. ALL money managers charge. Cost, initially, should not be in your criteria because it often becomes the ONLY determining factor. That will skewer your thinking and could result in not having a

winning team working for you. Make the above four parameters your primary criteria and cost will take care of itself. How? You will be quoted a charge. If you are not comfortable with that price, negotiate. All fees and commissions are negotiable. If the manager refuses to negotiate, then and only then, make cost a member of the criteria team.

This article won’t solve all of the money management problems or costs associated therewith. However, it’ll at least start you thinking in the right direction and keep your money in your pocket until you are ready to hand it over.

2004 (c) This article may not be reprinted without permission of the author who can be reached at tom-koziol@excite.com

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There is one indicator more than any other which determines the health of an economy and it is the Real Rate of Return. Furthermore this is the simplest of all indicators to understand because it determines the safety of assets. Next time you hear the TALKING HEADS discussing the nuances of the markets, filter what they say through your own understanding of the Real Rate of Return. The Real Rate of Return is the one number that determines the safety of principal. It is calculated by taking the current BOND YIELD and subtracting the expected INFLATION rate from it. The result is the REAL return on giaranteed money from the government.

Interest Rates are on the rise as we have been expecting and this pressure has put a tremendous amount of pressure on the stock market. The essential simplicity at work here is very, very basic. If Interest rates on Bonds are yielding 5.14% and inflation is forecasted at 5%. The difference is the REAL RATE of RETURN, (in this instance we are speaking about .14%). The REAL RATE of RETURN is what sparks major rallies and declines on Wall Street.

The reason for this is that the Bond market is the largest financial market in the world. There are literally trillions of dollars invested in debt denominated assets. These investors are primarily interested in the security of their principal and taking as minimal risk as possible. They historically have been thrilled with REAL RATES of RETURNS that would be in the 2% – 5% annually. During the 1970’s this indicator went NEGATIVE for a while indicating INFLATION was rising faster than interest rates and BOND INVESTORS actually had substantial negative returns. During this time there was much “screaming and gnashing of teeth.”

It has always been my estimation that Federal Reserve Chairman, Alan Greenspan’s key task is to keep the REAL RATE of RETURN as high as possible. HE has been extremely successful at doing this. If you read back over any history of the financial markets you would be WISE to view events through this indicator. The economic climate becomes remarkably different and people’s opinions change dramatically when the REAL RATE of RETURN on the most SECURE investments is threatened.

A thorough understanding of this simplicity is necessary for success in any kind of investing as IT is the basic building block from which all other analysis is based. Although it is always difficult to forecast what will happen in the future, the one factor you can count on is that when THE REAL RATE OF RETURN is falling there is much SWEAT on the brows of Money Managers who monitor the trillions of dollars entrusted to them.

At this point KEEP YOUR EYES on this indicator and make your own forecast of INFLATION. You’ll realize that your ANALYSIS can be better than the Big Boys.

Let’s be careful other there!

Dowjonesfully,
-Harald Anderson
http://www.eOptionsTrader.com.

Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.

Article Source: http://EzineArticles.com/

In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder.

More Costs!

Let’s move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you’re relying on a 100Mhz Pentium II and a dial up service, you’re setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too – expect the unexpected. Many traders make the mistake of saying “This will do me whilst I start out, and I’ll get something better when I make some real money”. This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn’t enter the Indy 500 in a go-kart with the intention of buying a better car when you’ve won a few races, and the same thing applies here.

Earnings

When you’ve added this all together, you have a pretty good picture of how much money you need to generate from your trading in order to live. Does your past performance suggest you will be able to meet this target? It’s tempting to say “When I go full time I’ll make much more”, but how do you know this is the case? Perhaps you can take a couple of weeks holiday and try it out – if you don’t make enough in that two weeks then you’re not ready. A few weeks really isn’t enough time to know if you’re going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.

The option of part time work is a luxury many of us don’t have however. So does it have to be all or nothing – trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practising is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening. There are other try before you buy options open to the day traders who want to practise trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour. Other vendors have similar offerings, and if you have an IB account you can use AutoTrader to record tick data during the day for playback into a demo version of SierraCharts or QuoteTracker for free.

The bottom line here is that before you take the plunge, you need to have done everything in your power to prepare yourself for what lies ahead. It will still be harder than you ever thought, but it will be nigh on impossible with no preparation whatsoever.

Other Considerations

There are a few non-financial aspects to consider before going full time with your trading. If you have a family, how will the change impact them? Do you have the space to work uninterrupted during the day? It’s important that the family don’t assume that because you are at home you are automatically available to take the kids to school, or walk the dog. Make sure from the start that everybody knows the ground rules and that you can separate your working time from your free time effectively.

Consider also the social impact of leaving your full time employer. Again, if you have a partner or family are you going to drive each other nuts being in the same house all day? Relationships can be tested to the limit! Or if you live alone, are you going to drive yourself nuts being on your own all day? Trading full time can give you enormous amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot – I’ve seen it happen and it’s not pretty.

Is It Worth It?

Nobody can tell you if trading for a living is for you, it’s something you have to find out for yourself. I’ve seen traders go through highs and lows to challenge those of any stock chart, but for most it has proved to be a good move. The long list of benefits are all there for the taking, as with any change of career or indeed any major life change, as long as you go into it with your eyes open, and above all prepare, then there is no reason why it cannot work for you.

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