FTSE 100 Daily Index Chart

I wanted to share this chart with you, as it is a trade I am suggesting for this week, and the analysis is based on a combination of volume spread analysis and Japanese candlesticks – the perfect combination of the Western indicator reinforcing the Eastern Japanese candlestick, and don’t forget you can find the latest live currency charts, index charts, fundamental news, and latest currency news in the navigation bar above, along with help in finding a good ECN broker.

If we look at the volume, the first point to note is that the index is going up, and yet the volume is falling which in volume spread analysis is always a warning signal. When a market rises then this should be accompanied by rising or increasing volume, and equally when a market falls, then this should also have increasing volume. To move a market takes effort ( whether up or down ) and if the volume ois falling, then this suggests that the move is running out of momentum for the simple reason that the market makers are no longer participating in the move. The market makers are the professional money, and the one activity they cannot hide is volume, which is why we use it as one of our primary indicators when studying markets which provide true volume. The market makers will take every and any opportunity to catch you out, but provided you use volume spread analysis techniques combined with your chart reading skills, you should always have a good idea of what they are planning next!

In this case we are seeing a move up, on falling volume which provides us with the first early warning signal that we may see a reversal in the trend shortly. The market makers are not taking part, and nor should we, but instead start to look for a selling opportunity. Friday’s candle provides the ideal signal – a shooting star after a rally, suggesting weakness to follow. The daily price has tried to rise, but falling back on selling pressure in the market. The market makers are withdrawing and not buying into the upwards move, and the price on the candle has failed to penetrate the resistance immediately above indicating weakness. If we do indeed see prices fall on Monday then this candle will be a classic morning star, three candle reversal. Finally in the last two months we have seen a series of lower highs and lower lows, of which this could be the next, again adding weight to our analysis.

CHF/JPY - Daily Candle Chart 9th March 2009

I wanted to share this chart with you, as it highlights some important issues regarding timing, and in particular the need to be patient and not rush in and open a position as soon as we see a signal. Candlestick analysis is all about waiting for the signal to be confirmed as true or false – once this has happened then we have a much better chance of success, rather than rush in at the first opportunity without bothering to wait, frightened that the move will get away from us.

In this case we are looking at the daily chart for the CHF/JPY currency pair, and let’s start with the bearish engulfing signal on the 21st December 2008, following a shooting star candle. Had you been looking at this chart without the benefit of hindsight you would have seen the signal, and been waiting for prices to fall the following day, and no doubt rushed in to open a short position based on one candle. Your position would have closed at a loss, as prices moved higher in the day. On the other hand had you waited, then by the end of the day’s trading you would have known that the signal was false, as the charts were now telling you, loud and clear. Six days later we see another bearish signal, a shooting star after a long rally – a sign of weakness, when combined with the earlier bearish signal, this now starts to create a picture. Finally on the 5th January 2009, we receive a bearish engulfing signal which now confirms the weakness, and we would now be looking to trade short with a much better chance of success. Being patient is one of the hardest lessons to learn in trading, but it is one you need to learn, and learn fast. Chasing the market is the quick way to lose all your capital! So be patient and wait for the signal to be confirmed, and if it isn’t just remember that the signal is still there, and could be the first sign of a change, but only the FIRST sign!

Now the second example is really confirming the above in reverse with a bullish engulfing signal on the 27th February – a great signal and we open our position on the 28th February and go long – well in this case we may have survived, or we may not, depending on how tight our stop loss was, but again we are too early because we have been too impatient, and frightened that the move will get away from us. Had we waited, six days later we see another bullish engulfing candle, which when added to the first signal gives extra weight to our decision, and therefore a better chance of success. Now that bull rally is still continuing today, over one month later. So the moral is, be patient – I know it can be hard at times, but if you are constantly chasing the market you will lose – be patient and wait, and then use the earlier signal as a confirmation of a later one, adding weight to the decision. You may still be wrong, but at least you have waited and not rushed in at the first opportunity.

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Dollar Yen Chart ( USD/JPY) - Daily 25th February 2009

This is a great chart and a currency pair I am trading at the moment, so it is very relevant and has three excellent signals on the daily chart, all of which I have used to identify reversals in the last few weeks. The first of these occurred just before Christmas last year, with a great bullish engulfing signal following a sharp sell of which is a pre-requisite for this signal – in other words we must see a strong move before the signal in order for it to carry enough weight. In this case it did, and prices rose accordingly supported by the moving averages. The next signal occurred early in January again after a strong rally, with a classic shooting star above the 40 day moving average, indicating possible weakness in the market. The bulls have been in charge for the last few weeks, but the bears have now won the battle on the day forcing prices off their highs and back down to the open. With a confirming down bar the following day, this gave us an excellent signal to sell and to profit from the short side of the market.

Finally we have the third signal in the third week of January, a deep hammer with a narrow body and long lower wick. The important aspect to note here is that the lowest price on the day was identical to those of the bullish candle – a real giveway for us as traders and one which gives us extra confidence in the trade. Whilst this took some time to take effect, it was the first signal that a bottom had been reached and one that I have been trading ever since with last nights rise fueled by the awful economic news for Japan’s export markets. I actually entered the trade 5 days after the signal first appeared, once the wide spread up bar of the first week in February had appeared, and bought the following day on the reaction lower, a position I have held ever since. I am now looking for a target of 98.50 for the position in the short term. So in summary, three great candles, all of which gave us signals of a reversal.

Shooting Star & Hammer Candles In The CAD/JPY Daily Chart

The reason I have chosen this chart, is not because it is a currency pair I trade regularly, but simply because it has two excellent examples of a reversal that we can benefit from, provided we are paying attention and understand these classic candles. If we start with the top reversal at 78.50 on the 7th January 2009, following two wide spread up bars, we have a strong signal that prices are about to reverse with a shooting star, a candle with a small body and a long upper shadow or wick as in this case. This is the first signal that the move upwards has run out of steam. The bulls are in control initially and prices rise quickly, but gradually the bears begin to take charge, and bring pressure to bear in the market forcing prices back lower to close at or near the opening price. This is followed the day after by a wide spread down bar which confirms that we now have weakness in the market and therefore provides us with a possibility opportunity to short the market. Whilst one never trades one candle on it’s own, or indeed without the confirmation of Western Indicators, this is a classic candle that you can see in all markets in all time frames, and is one I trade more than any other. I will refer to this many, many, times as it is key to your success. Whilst Japanese candlesticks are a fantastic trading tool, you simply cannot use them in isolation, but have to be read with Western indicators which them confirm the signal. Whichever indicators you use, please remember this point, as it is key to the success of your charting skills. Personally I use simple moving averages, support and resistance, and trend lines.

To be honest, if you simply learnt how to trade using this one candle alone, you would probably make more money with this than any other. You do of course have to be patient and wait, but when they do arrive, they are one of the best candles I know, for being the first signal to a reversal and for us to make money. Now the other reason for showing you this chart is that this signal is then followed by another classic, the hammer, so called as the Japanese believe it is hammering out a bottom which we can see on the 23rd January 2009. This is identical to the shooting star, but in reverse. In this case it is the bears who have early control of the market, forcing prices lower, only for the bulls to take charge later, forcing prices to rise from the day’s low, leaving a candle with a small body and deep lower shadow or wick. Clearly the bulls have won the day, but will this continue? We do ofcourse have to wait and se, but this is the first sign that we are possibly looking at a reversal of prices in the daily chart, and to therefore pay attention. So there you have it – two great candles, the shooting star, and the hammer, both in the same chart and both indicting possible turning points for us to make money in our trading.