Reading the message of the markets - tfnn. · PDF fileThe Relative Strength Index was...

Hosted by: Steve Rhodes – Steve@tfnn.com

Reading the message of the markets

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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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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

RSI – Internal Strength/Weakness Indicator - Divergence

DOW divergence before the ‘87 crash 10

RSI – Internal Strength/Weakness Indicator - Divergence

DOW divergence before & after the .com bubble 11

RSI – Internal Strength/Weakness Indicator - Divergence

DOW divergence at the 2007 highs & 2009 lows 12

RSI – Internal Strength/Weakness Indicator - Divergence

DOW divergence at 2011 highs and 2012 lows 13

RSI – Internal Strength/Weakness Indicator - Divergence

FAS – 300% ETF – 10 minute chart 14

RSI – Internal Strength/Weakness Indicator - Divergence

Light Sweet Crude – daily chart 15

RSI – Internal Strength/Weakness Indicator - Divergence

30 Year Treasury Bond - daily chart 16

RSI – Internal Strength/Weakness Indicator - Divergence

30 Year Treasury Bond – 10 minute chart 17

RSI – Internal Strength/Weakness Indicator - Divergence

Gold contract - daily chart 18

RSI – Internal Strength/Weakness Indicator - Divergence

Apple at the highs - daily chart 19

RSI – Internal Strength/Weakness Indicator - Divergence

Chipotle at the highs - daily chart 20

RSI – Internal Strength/Weakness Indicator - Divergence

S&P 500 – April 2012 highs & June lows 21

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

We enter & exit with candlesticks

In the case of Chipotle – a bearish reversal candle 24

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

Bullish candle

patterns

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Bearish candle

patterns

Neutral candle

patterns 30

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

S&P Futures 9/14/12 High – RSI/Price Divergence

Entry after close of Dark Cloud Cover 46

S&P Futures 9/14/12 High – RSI/Price Divergence

Exit after first bullish candle/2nd RSI below 31 47

S&P Futures 9/20/12 – RSI/Price Divergence

Entry after close of Bullish Engulfing/Bull Sash 48

S&P Futures 9/20/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion >69 RSI 49

S&P Futures 9/21/12 – RSI/Price Divergence

Entry after close of Blended Bullish Engulfing 50

S&P Futures 9/21/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion >69 RSI 51

S&P Futures 9/21/12 – RSI/Price Divergence

Entry after close of Dark Cloud Cover 52

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

S&P Futures 9/24/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion RSI>68 55

S&P Futures 9/26/12 – RSI/Price Divergence

Entry after close of Bullish Engulfing 56

S&P Futures 9/26/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion near 70 RSI 57

S&P Futures 9/28/12 – RSI/Price Divergence

First trade turned into the next trade as our stop was not hit 58

S&P Futures 9/30/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion >69 RSI 59

S&P Futures 10/9/12 – RSI/Price Divergence

Enter on blended candle 60

S&P Futures 10/9/12 – RSI/Price Divergence

Stopped out on the trade – 5 point trailing stop 61

S&P Futures 10/10/12 – RSI/Price Divergence

Entry after close of Blended Bullish Engulfing 62

Exit after first bearish candle – RSI >68

S&P Futures 10/10/12 – RSI/Price Divergence

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S&P Futures 10/16/12 – RSI/Price Divergence

Entry after close of Blended Bearish Engulfing 64

S&P Futures 10/16/12 – RSI/Price Divergence

Exit at small loss with 5 point trailing stop 65

S&P Futures 10/21/12 – RSI/Price Divergence

Entry after close of Blended Bullish Engulfing 66

Exit at 1.5 point profit with 5 point trailing stop

S&P Futures 10/21/12 – RSI/Price Divergence

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S&P Futures 10/22/12 – RSI/Price Divergence

Entry after close of Morning Star Candle 68

Exit at 5 point profit with 5 point trailing stop

S&P Futures 10/22/12 – RSI/Price Divergence

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S&P Futures 10/31/12 – RSI/Price Divergence

Entry after close of Blended Bullish Engulfing 70

S&P Futures 10/31/12 – RSI/Price Divergence

Exit after Evening Star Candle is RSI 70 area 71

S&P Futures 11/1/12 – RSI/Price Divergence

Entry after close of Blended Bearish Engulfing 72

S&P Futures 11/1/12 – RSI/Price Divergence

Exit at 2.5 point loss with 5 point trailing stop 73

S&P Futures 11/7/12 – RSI/Price Divergence

Entry after close of Bearish Engulfing 74

S&P Futures 11/7/12 – RSI/Price Divergence

Exit after first bullish candle/2nd opinion – RSI <28 75

Entry after close of Bullish Engulfing

S&P Futures 11/16/12 – RSI/Price Divergence

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S&P Futures 11/16/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion – RSI > 69 77

S&P Futures 12/5/12 – RSI/Price Divergence

Entry after close of Bullish Engulfing 78

S&P Futures 12/5/12 – RSI/Price Divergence

Exit after first bearish candle/2nd opinion – RSI > 69 79

S&P Futures 12/12/12 – RSI/Price Divergence

Entry after close of Bear Separating Line 80

S&P Futures 12/12/12 – RSI/Price Divergence

Adjust exit because of gap down bullish – RSI < 30 81

S&P Futures 12/14/12 – RSI/Price Divergence

Entry after Bull Separating Line & 2nd opinion 82

S&P Futures 12/14/12 – RSI/Price Divergence

Exit after first blended bearish candle near 70 RSI 83

S&P Futures 1/15/13 – RSI/Price Divergence

Entry after Bullish Engulfing & 2nd opinion 84

S&P Futures 1/15/13 – RSI/Price Divergence

Exit after Shooting Star Bear Eng candle near–RSI> 69 85

S&P Futures 1/31/13 – RSI/Price Divergence

Entry after Bull Sash 86

S&P Futures 1/31/13 – RSI/Price Divergence

Exit after Blended Bearish Eng candle – RSI > 69 87

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%

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Results of trading ES Mini 30 minute chart using Price/RSI Divergence between

7/12/12 – 2/20/13

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S&P Futures 9/11/12 – RSI/Price Divergence

Enter on close of second hammer candle 90

S&P Futures 9/11/12 – RSI/Price Divergence

Exit on close of Dark Cloud cover after 70 RSI 91

S&P Futures 8/24/12 – RSI/Price Divergence

Enter on close of blended Bullish Engulfing 92

S&P Futures 8/24/12 – RSI/Price Divergence

Exit on close of Bearish Engulfing after 70 RSI 93

S&P Futures 8/19/12 – RSI/Price Divergence

Enter on close of blended Bearish Engulfing 94

S&P Futures 8/19/12 – RSI/Price Divergence

Exit on close of Bullish Engulfing after 30 RSI 95

S&P Futures 8/6/12 – RSI/Price Divergence

Enter on close of blended Bearish Engulfing 96

Exit on stop out at breakeven

S&P Futures 8/6/12 – RSI/Price Divergence

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S&P Futures 8/3/12 – RSI/Price Divergence

Enter on close of Bearish Engulfing 98

S&P Futures 8/3/12 – RSI/Price Divergence

Exit on stop out 99

S&P Futures 8/2/12 – RSI/Price Divergence

Enter on close of Hammer Candle 100

S&P Futures 8/2/12 – RSI/Price Divergence

Exit at next Price/RSI reversal 101

S&P Futures 7/24/12 – RSI/Price Divergence

Enter on blended Bullish Engulfing 102

S&P Futures 7/24/12 – RSI/Price Divergence

Exit stopped out 103

S&P Futures 7/18/12 – RSI/Price Divergence

Enter on Bearish Engulfing 104

Exit on Bullish Engulfing

S&P Futures 7/18/12 – RSI/Price Divergence

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S&P Futures 7/12/12 – RSI/Price Divergence

Enter on blended Bullish Engulfing 106

S&P Futures 7/12/12 – RSI/Price Divergence

Exit on 5 point trailing stop 107

S&P Futures 7/12/12 – RSI/Price Divergence

Enter on blended Bullish Engulfing 108

S&P Futures 7/12/12 – RSI/Price Divergence

Exit on 5 point trailing stop 109