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Steve Nison’s Candle Charting Essentials and BeyondVolume 2 of the Nison Educational Series

Founder and President: Candlecharts.com

Foundation ofEast + West

EAST & WEST CONFIRMATIONEAST & WEST CONFIRMATION

Where acandle signalconfirms aWesternTechnical signal

Foundation ofEast + West:

Candles and Trend Lines

Sloping Trend Line

Channels

Horizontal Trend Line

Change Polarity

Crack/Snap

Falling Off the Roof

Sloping trend Lines

Rising support line(higher lows)

Falling support line(lower lows)

Falling resistance line(lower highs)

Rising resistance line(higher highs)

Rising Support Line

www.candlecharts.com 7

trend lines

Candles for Early Reversals

Scenario1

Scenario2

Candles and Trend lines

How Education Saves You Big $$$

Major resistance 2.00-2.01

Long term resistance zone

Long term resistancezone

The Value of Owning the Knowledge

Trend lines and Candle Confirmation

Reading the Market’s Message with the Light of the Candles

SupportSupport

ResistanceResistance

Change of Polarity

Don’t look through a well!

Why would we trade differently with Piercing Patterns4 and 5, compared to Piercing Patterns 1,2 and 3?

Hint: “Change of Polarity”

If I had only seen this!

1- Bear Harami2- Dark Cloud Cover3- Bearish EngulfingPattern

Target

Crack and Snap

Hammer and Crack and Snap

Crack and Snap

Target

Falling off the Roof

Falling Off the Roof

Watch slope of trend lines

What’s differentabout this session?

East and West: 1 of 3

Candles and Volume

Light volumebreakout

And then!

Reading the Shifting Market Psychology

Candles and Volume

Higher volume on white candlecompared to black on this bullishengulfing pattern magnifies thelikelihood of a reversal

Candles and Volume to increase success

Volume and Candles

Volume Confirming the Candle Signal

Candles And Volume: High Volume Doji

Crack and Snap with Volume

Selling Climax Confirmed

Candles and Open Interest

O.I declined

Followed bybear harami

Open Interest

Resistance

Candles and Open Interest

Candles, West and Open Interest

Bullish Engulfing PatternBottom Bollinger BandDeclining O.I.

The West Bollinger Bands

Oscillators

Intraday Charts

The East Record Sessions

Disparity Index

Overbought/Oversold

Foundation ofEast + West:Candles and

Bollinger Bands

Doji in context

Candles and Bollinger Bands

Bullish Engulfing Pattern

Bearish Engulfing Pattern

Besides the BB what are otherturning signals ala’ candles?

The East and the West

East and West = Higher Confidence

Who’s inchargehere?

How about now?

Candles and Oscillators

Oscillators

Objective

Derived from price- plotted separately

Includes Stochastics, MACD, RSI, etc.

Best in lateral markets

Overbought/Oversold

Divergence

Positive Divergence Negative Divergence

Oscillator

Divergence

Oscillators Not Effective in Strongly Trending Markets

Concept – closes cluster to highs

Most common – 9 and 14 period

Two lines - %K and %D

Stochastics

Faster %Kline crosses% D line fromoverextendedlevels

Using Stochastics

Bullish andBearishDivergence

Stochastics

Doji without/with confirmation

Candles and Stochastic Cross

Noconfirmation

confirmation

Candles and Stochastics Cross

Candles and Negative Divergence

Candles - Stochastics Cross - Divergence

Candles and Bearish Divergence

Candles and Stochastic Cross

Bullish

Crossover, but no

bullish candle

signals

Bullish

crossover on

this close,

any hints

with the

candles?

• Compares advances to declines

• Most common 9 and 14 period

• Uses : Divergence, Extremes (70%and 30%)

Relative Strength Index (RSI)

Candles and Oscillators: Divergence

Candles and Positive Divergence

MACD line and Signal line

MACD Line – spread of two exponential

moving averages

Signal Line – Exponential moving average

of MACD line

Moving Average Convergence/Divergence (MACD)

MACD linesCrossesSignal line

OverboughtandOversold

Using the MACD

Bullish andBearishDivergence

Moving Average Convergence/Divergence (MACD)

MACD Cross: Candles for Early Reversals

Candles in Context with Oscillators

Harami

MACD Cross: Candles for Early Reversals

Candles and MACD Cross

Candles and MACD Crossover

Candles and MACD Cross and Divergence

Dual Moving Averages

Short term from longer term m.a.Example:

10 day moving average = $2330 day moving average = $31

Price oscillator = $23-$31= -$8

If 10 and 30 day moving averages are the same Moving

Average Price Oscillator = 0

Overbought/oversold, divergence

East and West – Candles for Confirmation

Overbought area

reversal

signals?

Any reversal

signals?

The Disparity Index

A method to gaugeoverbought/oversold thatcompares current close toa moving average

The Disparity Index

Disparity Index

overbought

On the blue lines this marketis overbought, but tradinglaterally relieves this asshown by the time themarket gets to the red lines.This is a plus for momentumtraders on a breakout.

Disparity Index

Record Sessions

low for move

9 record session highsRecord Session High: After a new low forthe recent move, each succeeding high iscalled a record session high.

Record session lows: after a high for therecent move each lower low is a recordsession low

These arenot record sessions

Record Session Highs

Hammer

Bearish engulfingpattern

The rally that started with the hammerculminated at a bearish engulfingpattern at 10 record session highs

Record Session Lows

Note how the eighth recordsession low formed adragonfly doji at a supportarea

Record Sessions Lows

Record Sessions

Haven’t made alower low and nowrelieved potentialoversold situationso count startsagain

Foundation ofEast + West:Retracements

Retracements

($150)

($162)

($138)

Retracements

Earlier Reversal Signals

“Hidden” support/resistance

Using Intraday windows

Successful retest of support/resistance ondaily chart including daily windows

Is the market overextended?

Deeper insights into the importance of dailychart’s support/resistance

Using intraday charts to uncover “hidden” support (1 of 3)

On this daily chartwhere is firstsupport after thistall white candle onApril 15? Let’s goto the intraday….

On this 15 minute chart fromApril 15, see how we get a supportzone near 82? So instead of 78 asfirst support (from prior dailychart) we have 82 as first support.

April 15

Support zoneobtained fromintraday chart

On this daily chart we see whatoccurred after April 15

Moving Averages

Types of Moving Averages

• Simple

• Weighted

• Exponential

• Dual and Triple Moving Averages

Simple Moving Average

• Formula: Add price (usually close) for Nperiods / N periods

• Example: 20 day moving average ofclose: add total of last 20 day’s closingprices and divide by 20.

Moving Average Not Effective in a Sideways Market

Uses of Moving Averages

Support / ResistanceTrend Indicator

Moving average

Candles and Moving Averages

Convergence of Signals

25 daymovingaverage

Close underm.a. supportarea but notehow we got anearlier reversalwith thegravestone

Gravestone doji

Western Price Patterns

www.candlecharts.com

NecklineNeckline

LeftShoulder Right

Shoulder

Head and Shoulders Top Inverted Head and Shoulders

Three Buddha Top

Candles and Western Patterns

Inverted Three Buddha

Getting in Before the Move

H&S sell signal here

Candles shout sell here!

Buying Before the Market ‘Does its Thing”

Inverted headand shouldersconfirmed hereat 132.90

Now let’s seewhat thecandles show!

Note howthe necklinebecamesupport

Buy signalbased onInvertedhead andshoulders at1.3290 fromprior slide

Buy here

Buying Before the Market ‘Does its Thing”

Candles “Shine” for Safety First Trading

West for Targets

Bullish shadows

Box Range Breakouts

East & West = Profits

Box Range Breakout

Ascending

Descending

Descending Triangle

Ascending triangle

First Leg

Target

Candles and Swing target

East and West

For Bull Flag patterntake height of movebefore theconsolidation and addthat to the bottom ofthe box range

Doji as signal to exit

Bull Flag Bear Flag

Flag Pole

East and West

West for Targets, Candles for Confirm

harami

harami145

Target Confirmed

Bear pennantconfirmed

How it all comes together – The highs in the NASAQ

1- RisingResistance Line

2- Shooting Star

2a – BearishEngulfing

3- Falling Window

4- BearishDivergence

5- High-WaveCandle

How it all comes together (hourly)

neckline Interview

Head andShoulder top

TASC Interview - Jan. 24, 2003 S&P at 860

“… the heads and shoulders top on theS&P gives a target to near 775. A closeover 870 would void this.” Hammer

1) Once the neckline’ssupport is broken, itshould becomeresistance.

2) To get a target with thehead and shoulders topwe measure from the topof the head to theneckline.

Bloomberg TV Interview - July 28, 2003 S&P at 996

hammer

DojiShooting star

Priorresistancebecomes newsupport

target

Next Interview hereon Jan. 24 asmarket approachingmy target …….

Lowspredicted inJanuary

“Major support near 960.My upside target is 1160”

“Falling offthe roof”

BearishEngulfingPattern

New Interview:“I am looking formajor resistanceat 1150 to 1175”

Bloomberg TV Interview – January 24 , 2004 S&P at 1154

From July 28 interview:“My upside target is 1160”

What we learned:What we learned:

Importance of East with West

Candles and trend lines

Candles and volume

Candles and oscillators

Record session highs andlows

Candles and retracements

Disparity Index

Candles and price patterns

Bringing it all together-callingthe highs and lows

www.candlecharts.comFounder and President: Candlecharts.com

TradeManagement

Essentials

If a candle signaldoes not confirmanother signalthen use candlesignal to offset atrade

A candle signalconfirminganother signal isa necessarycondition (butnot sufficient) fora new trade

East + West Confirmation

Where a candle

signal confirms a

Western technical

signal

Candles and trend Lines

CandlestickCharting

Techniques

WesternCharting

Trade Management

• Protective Stops

• Price Targets

• Risk/Reward

• Prevailing Trend

• News

• If … Then Principle

•Market Chameleon

TradeManagement

The Importance of Protective Stops: 1 of 4

Why Use Protective Stops

Lots of reasons to be bearish!

Protective Stops

Look at all thereversal signals

Wrong!

Protective Stops>

Protective Stops

Candlesticks do not give price targets

Support and Resistance/Pivot Highs and Lows

This high is higher than thesession before and after it

This low is lowerthan the sessionbefore and after it

Pivot highs

P = Pivot High:Higher highthan candlebefore andafter

Box range Breakout

Bull Flag

Price Targets

Bullish Engulfingpatterns as support

Bear Stearns Collapse

Falling off the Roof

target

Trend Channels

B Targetline

Targetline

Candles for reversals and Western for targets

Bearish engulfingpattern at top of bullchannel

target

• Protective Stops

• Price Targets

• Risk/Reward

• Prevailing Trend

• News

• If … Then Principle

•Market Chameleon

TradeManagement

A candle signal – even if itconfirms other indicators – is notenough of a reason for a trade.You must always considerrisk/reward

Reading the Market’s Psychology

Risk/Reward

Why I went long:

1) Bullish engulfing at support

2) Other spinning topsconfirming support

3) Trend line breakout of price

Was this a good trade that justdidn't work out or did I make amistake in judgment that I can'tsee?

Thank you,Gary B

Why I went long:

1) Bullish engulfing at support

2) Other spinning topsconfirming support

3) Trend line breakout of price

Was this a good trade that justdidn't work out or did I make amistake in judgment that I can'tsee?

Thank you,Gary B

Same Signal- but how different the strategy!

Same signal but how different the tactics

Risk/Reward

Great lookinghammer, but whatabout risk/reward?

Candles and Risk – Reward: part 1

Candles and Risk - Reward: Part 2

www.candlecharts.comnison@candlecharts.com732.254.8660 USA

Bearish Engulfing Pattern but R/R?

Weekly

Candles in Context

Candles in Context – 1 of 2

Candles in Context – 2 of 2

Candles in Context of R/R

Risk- Reward

Group of bull signals-but can’t do anything with them

Candles in Context- R/R

Hammerand crackand snapbut?

Candles in Context – R/R

Candles in Context

Dragonflybut?

A candlestick line or patternrequires two criteria:

• The shape of the line or pattern• The preceding trend

BearishEngulfingPattern

Hi Steve,I love your analysis but I have a question.Wouldn’t the next candle after the bearish engulfing pattern be a bullishengulfing pattern and negate the bearishness of the first candle? - Bob

Candles and Trend

Candles and Trend: 1 of 2

Candles and Trend: 2 of 2

Candles and Trend

Going with longer term trend

Prevailing Trend

BearishShadows

Prevailing trend

20 day m.a under50 day m.a and bothsloping down

Short term rally

Prevailing Trend

20 day m.a over50 day m.a and bothsloping up

Prevailing Trend

20 day m.a over50 day m.a and bothsloping up

If shorting just lookfor a small move

Trend and Battle of windows

Rising windowas support

Falling window asresistance

Based on the market holdingabove this 30 period movingaverage the odds favor abreakout to the upside

Going with the Trend with Windows

Trend of Higher Degree

Daily chart Aug. 13 Hammer intradayAug. 13

Biotech Sector

AMGNBuy ?

Sector Analysis

Stay Awayfrom theTrade

The If…Then Principle:

• If the market does not act asforecasted then exit the position (ProtectiveStops)

• Initiate a position when the marketjustifies your potential trade (i.e. If themarket breaks above resistance, then buy.

• If the market does something differentthan before then adjust trading strategy

Double Top

Double Top Confirmed

Head and Shoulders Top?

If… then

Was Head and Shoulders Top Confirmed ?

If… then

Potential Inverted Head and Shoulders

The bullish ascendingtriangle and the newhigh close for the movestrongly hints that themarket will break out.But resistance held.

If…Then

If… Then

H&S confirmed

Near support,any clues bearslosing force?

If…Then

Breaks the cycle

As market changes we must adaptour market outlook and tradingstance

Adapting

Adapting Slide 1 of 3

Adapting Slide 2 of 3

of 3Adapting

Adapting to What the Market is Saying

Initial Target

Anything happening tochange your mind?

The low of thebullish engulfingpattern assupport. Oncehammer is formed(at the arrow) wethen adjust oursupport

Adapting

Candles in Context: 1 of 3

Which is a better sale?

Scenario 1 Scenario 2

Which is a better sale?

What we learnedWhat we learned

Candles in context

Candles to ext

Candle to enter a new trade

Candle by candle analysis

Protective Stops

Targets

Risk/Reward

If.. then principle

Adapting to the market

Candles through the prism ofmarket conditions

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