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Transcript of Reading the message of the markets - tfnn. · PDF fileThe Relative Strength Index was...
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Areas Covered
1.RSI – Relative Strength Index – “Internal Strength Indicator” – our focus is divergence
2.Japanese Candlesticks – entering & exiting 3.Bullish and Bearish candles & blending technique 4.Continuation candle – “Rising/Falling Three” 5.ES-Mini RSI trading plan – 7 months 82% return 6.Question & Answers
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J. Welles Wilder - 1978
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The Relative Strength Index was developed by J. Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems. It has become one of the most popular oscillator indices. Wilder recommends using a 14 period smoothing.
Wilder thought that "failure swings" above 70 and below 30 on the RSI are strong indications of market reversals for overbought and oversold conditions.
My study shows that divergence between RSI and price action is a very strong indication that a market turning point is imminent. Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm. Bullish divergence occurs when price makes a new low but RSI makes a higher low.
Relative Strength Indicator
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The RSI is a ratio of the average points gained during “up” periods over the past n periods divided by the average points lost during “down” periods over the same period.
The formula is: (n) for our purposes is 14
RS = Avg. price change on up days ÷ Avg. price change on down days.
The RS value is then entered into this formula to give you the relative strength index:
RSI = 100 – [100 ÷ (1 + RS)]
Relative Strength Index - “Internal Strength”
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RSI settings in Ensign Windows
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D
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RSI & Price divergence – Buy’s starting below 30 – Sells starting above 70
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RSI – Internal Strength/Weakness Indicator - Divergence
DOW divergence before & after 1929 crash 9
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RSI – Internal Strength/Weakness Indicator - Divergence
DOW divergence before the ‘87 crash 10
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RSI – Internal Strength/Weakness Indicator - Divergence
DOW divergence before & after the .com bubble 11
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RSI – Internal Strength/Weakness Indicator - Divergence
DOW divergence at the 2007 highs & 2009 lows 12
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RSI – Internal Strength/Weakness Indicator - Divergence
DOW divergence at 2011 highs and 2012 lows 13
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RSI – Internal Strength/Weakness Indicator - Divergence
FAS – 300% ETF – 10 minute chart 14
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RSI – Internal Strength/Weakness Indicator - Divergence
Light Sweet Crude – daily chart 15
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RSI – Internal Strength/Weakness Indicator - Divergence
30 Year Treasury Bond - daily chart 16
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RSI – Internal Strength/Weakness Indicator - Divergence
30 Year Treasury Bond – 10 minute chart 17
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RSI – Internal Strength/Weakness Indicator - Divergence
Gold contract - daily chart 18
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RSI – Internal Strength/Weakness Indicator - Divergence
Apple at the highs - daily chart 19
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RSI – Internal Strength/Weakness Indicator - Divergence
Chipotle at the highs - daily chart 20
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RSI – Internal Strength/Weakness Indicator - Divergence
S&P 500 – April 2012 highs & June lows 21
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RSI – Internal Strength/Weakness Divergence
My study shows that divergence between the RSI and price is a very strong indication that a market turning point is imminent. Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm. Bullish divergence occurs when price makes a new low but the RSI makes a higher low.
What we covered…..
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Success is neither magical nor
mysterious. Success is the natural
consequence of consistently
applying basic fundamentals.
How do we decide to enter & exit
Our mission – Identify who is winning the battle by using Japanese Candlestick charting 23
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We enter & exit with candlesticks
In the case of Chipotle – a bearish reversal candle 24
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The Bulls & Bears always leave signals
On a scale of 0-5, a Bear Sash is a level 4
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Candlestick misconception
We do not trade on candlestick signals alone
Candlesticks confirm other patterns or indicators
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Candlesticks tell you what the market is doing now Candlesticks do not predict the future
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What is a candlestick
The body of the candle is the essence of the price movement 28
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Bullish candle
patterns
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Bearish candle
patterns
Neutral candle
patterns 30
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Two session candle body progression - bearish
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Two session candle body progression - bullish
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The psychological edge Entry/exit techniques worth millions
Rule #1 - Traders typically use one calculation to decide to enter or exit a trade. I say, get a second opinion, by waiting one bar before putting on the trade, entry or exit. If you are trading a 15 minute chart, wait one 15 minute bar for confirmation. If you are trading a daily chart, wait one daily bar for confirmation. “Getting a second opinion”
Rule #2 – At the time you enter the trade, place both the stop and exit point(s). All of your calculations should be completed prior to entering the trade, the point at which you are most objective. “Eliminate the emotion”
Rule #3 – Use candlestick patterns to confirm entry/exit. “Let the market communicate to you”
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The power of the “second opinion” - Candle Blending
Watch this area on the next slide
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The power of the “second opinion” candle - Blending
How much stronger is the blended candles message?
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Rising Three Methods “The market is taking a rest from battle”
Basic rule: Market in up trend First candle is a (up/green) long real body Followed by a series of small bodies (5 max) (red or green) which are retracing within the first candle (including the shadows) And finally a (up/green) candle, usually long (although not a requirement) that closes above the close of the first candle Market meaning: Bulls back in control Support/Resistance: Not used
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Rising Three Methods
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Rising Three Methods
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Falling Three Methods “The bear chase begins”
Basic rule: Market in down trend First candle is a (down/red) long real body Followed by a series of small bodies (5 max) (red or green) which are retracing within the first candle (including the shadows) And finally a (down/red) candle, usually long (although not a requirement) that closes below the close of the first candle Market meaning: Bulls back in control Support/Resistance: Not used
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The S&P500 E-mini is a futures contract that tracks the S&P500 index. It is traded on the Chicago Mercantile Exchange (CME) via their Globex electronic platform. Trading is 23 ½ hours a day, 5 days a week, using the symbol ES. Each 1 point move in the E-mini is worth $50 per contract and the minimum move of the E-mini futures contract (tick size) is 0.25 index points or $12.50 per tick.
Trading the ES-Mini with RSI/Price Divergence
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Areas covered thus far
1. Divergence between price and the RSI suggest a market turn.
2. Our entry or exit signals come from bullish or bearish candlestick patterns.
If you thought what you just learned was valuable, wait until you see what’s next
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Results of trading ES Mini 30 minute chart using Price/RSI
Divergence between 9/14/12 – 2/20/13
53% Return 1.82 Expectancy
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Results of trading ES Mini 30 minute chart using Price/RSI Divergence between
9/14/12 – 2/20/13
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ES-Mini 30 minute “expectancy table”
MASTERING PROBABILITY EXPECTANCY TABLE AS OF: 9/14/2012 - 2/20/2013
Distribution % Factor Expectancy # of Trades
Winning % 83% 2.30 1.90 19
Controllable Loss % 17% (0.45) (0.08) 4
Uncontrollable Loss % 0% 0.00 0
Profit/(Loss) Risk Expectancy 1.82 23
Capital $ 100,000 $ 100,000
Risk $
1,000 $1,000
Actual Results 9/14/12 - Present Risk Expectancy
1.82 1.82
Est. Trades Per Year - Run Rate
55 23
Estimated Profit $ 100,347 $41,811
100% 42%
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Price/RSI divergence rules for trading the 30 minute ES-Mini
•Minimum price divergence is 2 points above or below the wick of measuring swing point candle •Minimum time divergence is 5 candles •Single candle entries - do not exit until 31 or below (short) or 69 or above (long) RSI reading •Single candle entries stop must be the greater of entry plus/minus 5 points OR 2 points above/below of divergent swing point candle •Single candles always move to breakeven once price moves 5 points in your direction •Blended candles always use a 5 point trailing stop •Blended candle entries - exit at 32 or below (short) or 68 or above (long) RSI reading 45
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S&P Futures 9/14/12 High – RSI/Price Divergence
Entry after close of Dark Cloud Cover 46
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S&P Futures 9/14/12 High – RSI/Price Divergence
Exit after first bullish candle/2nd RSI below 31 47
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S&P Futures 9/20/12 – RSI/Price Divergence
Entry after close of Bullish Engulfing/Bull Sash 48
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S&P Futures 9/20/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion >69 RSI 49
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S&P Futures 9/21/12 – RSI/Price Divergence
Entry after close of Blended Bullish Engulfing 50
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S&P Futures 9/21/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion >69 RSI 51
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S&P Futures 9/21/12 – RSI/Price Divergence
Entry after close of Dark Cloud Cover 52
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Exit after first bullish candle/2nd opinion RSI<31
S&P Futures 9/21/12 – RSI/Price Divergence
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S&P Futures 9/24/12 – RSI/Price Divergence
Entry after close of Blended Bullish Engulfing 54
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S&P Futures 9/24/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion RSI>68 55
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S&P Futures 9/26/12 – RSI/Price Divergence
Entry after close of Bullish Engulfing 56
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S&P Futures 9/26/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion near 70 RSI 57
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S&P Futures 9/28/12 – RSI/Price Divergence
First trade turned into the next trade as our stop was not hit 58
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S&P Futures 9/30/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion >69 RSI 59
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S&P Futures 10/9/12 – RSI/Price Divergence
Enter on blended candle 60
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S&P Futures 10/9/12 – RSI/Price Divergence
Stopped out on the trade – 5 point trailing stop 61
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S&P Futures 10/10/12 – RSI/Price Divergence
Entry after close of Blended Bullish Engulfing 62
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Exit after first bearish candle – RSI >68
S&P Futures 10/10/12 – RSI/Price Divergence
63
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S&P Futures 10/16/12 – RSI/Price Divergence
Entry after close of Blended Bearish Engulfing 64
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S&P Futures 10/16/12 – RSI/Price Divergence
Exit at small loss with 5 point trailing stop 65
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S&P Futures 10/21/12 – RSI/Price Divergence
Entry after close of Blended Bullish Engulfing 66
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Exit at 1.5 point profit with 5 point trailing stop
S&P Futures 10/21/12 – RSI/Price Divergence
67
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S&P Futures 10/22/12 – RSI/Price Divergence
Entry after close of Morning Star Candle 68
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Exit at 5 point profit with 5 point trailing stop
S&P Futures 10/22/12 – RSI/Price Divergence
69
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S&P Futures 10/31/12 – RSI/Price Divergence
Entry after close of Blended Bullish Engulfing 70
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S&P Futures 10/31/12 – RSI/Price Divergence
Exit after Evening Star Candle is RSI 70 area 71
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S&P Futures 11/1/12 – RSI/Price Divergence
Entry after close of Blended Bearish Engulfing 72
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S&P Futures 11/1/12 – RSI/Price Divergence
Exit at 2.5 point loss with 5 point trailing stop 73
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S&P Futures 11/7/12 – RSI/Price Divergence
Entry after close of Bearish Engulfing 74
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S&P Futures 11/7/12 – RSI/Price Divergence
Exit after first bullish candle/2nd opinion – RSI <28 75
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Entry after close of Bullish Engulfing
S&P Futures 11/16/12 – RSI/Price Divergence
76
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S&P Futures 11/16/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion – RSI > 69 77
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S&P Futures 12/5/12 – RSI/Price Divergence
Entry after close of Bullish Engulfing 78
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S&P Futures 12/5/12 – RSI/Price Divergence
Exit after first bearish candle/2nd opinion – RSI > 69 79
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S&P Futures 12/12/12 – RSI/Price Divergence
Entry after close of Bear Separating Line 80
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S&P Futures 12/12/12 – RSI/Price Divergence
Adjust exit because of gap down bullish – RSI < 30 81
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S&P Futures 12/14/12 – RSI/Price Divergence
Entry after Bull Separating Line & 2nd opinion 82
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S&P Futures 12/14/12 – RSI/Price Divergence
Exit after first blended bearish candle near 70 RSI 83
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S&P Futures 1/15/13 – RSI/Price Divergence
Entry after Bullish Engulfing & 2nd opinion 84
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S&P Futures 1/15/13 – RSI/Price Divergence
Exit after Shooting Star Bear Eng candle near–RSI> 69 85
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S&P Futures 1/31/13 – RSI/Price Divergence
Entry after Bull Sash 86
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S&P Futures 1/31/13 – RSI/Price Divergence
Exit after Blended Bearish Eng candle – RSI > 69 87
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ES-Mini 30 minute “expectancy table”
MASTERING PROBABILITY EXPECTANCY TABLE AS OF: 7/12/2012 - 2/20/2013
Distribution % Factor Expectancy # of Trades
Winning % 84% 2.24 1.89 27
Controllable Loss % 16% (0.48) (0.08) 5
Uncontrollable Loss % 0% 0.00 0
Profit/(Loss) Risk Expectancy 1.82 32
Capital $ 100,000 $ 100,000
Risk $ 1,000 $1,000
Actual Results 7/12/12 - Present Risk Expectancy
1.82 1.82
Est. Trades Per Year - Run Rate 58 32
Estimated Profit $ 105,979 $58,184
106% 58%
88
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Results of trading ES Mini 30 minute chart using Price/RSI Divergence between
7/12/12 – 2/20/13
89
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S&P Futures 9/11/12 – RSI/Price Divergence
Enter on close of second hammer candle 90
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S&P Futures 9/11/12 – RSI/Price Divergence
Exit on close of Dark Cloud cover after 70 RSI 91
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S&P Futures 8/24/12 – RSI/Price Divergence
Enter on close of blended Bullish Engulfing 92
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S&P Futures 8/24/12 – RSI/Price Divergence
Exit on close of Bearish Engulfing after 70 RSI 93
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S&P Futures 8/19/12 – RSI/Price Divergence
Enter on close of blended Bearish Engulfing 94
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S&P Futures 8/19/12 – RSI/Price Divergence
Exit on close of Bullish Engulfing after 30 RSI 95
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S&P Futures 8/6/12 – RSI/Price Divergence
Enter on close of blended Bearish Engulfing 96
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Exit on stop out at breakeven
S&P Futures 8/6/12 – RSI/Price Divergence
97
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S&P Futures 8/3/12 – RSI/Price Divergence
Enter on close of Bearish Engulfing 98
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S&P Futures 8/3/12 – RSI/Price Divergence
Exit on stop out 99
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S&P Futures 8/2/12 – RSI/Price Divergence
Enter on close of Hammer Candle 100
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S&P Futures 8/2/12 – RSI/Price Divergence
Exit at next Price/RSI reversal 101
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S&P Futures 7/24/12 – RSI/Price Divergence
Enter on blended Bullish Engulfing 102
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S&P Futures 7/24/12 – RSI/Price Divergence
Exit stopped out 103
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S&P Futures 7/18/12 – RSI/Price Divergence
Enter on Bearish Engulfing 104
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Exit on Bullish Engulfing
S&P Futures 7/18/12 – RSI/Price Divergence
105
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S&P Futures 7/12/12 – RSI/Price Divergence
Enter on blended Bullish Engulfing 106
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S&P Futures 7/12/12 – RSI/Price Divergence
Exit on 5 point trailing stop 107
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S&P Futures 7/12/12 – RSI/Price Divergence
Enter on blended Bullish Engulfing 108
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S&P Futures 7/12/12 – RSI/Price Divergence
Exit on 5 point trailing stop 109