EEAASSTT && WWEESSTT CCOONNFFIIRRMMAATTIIOONN · Steve Nison’s Candle Charting Essentials and Beyond Volume 2 of the Nison Educational Series 23 Oscillators Not Effective in Strongly

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

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Founder and President: Candlecharts.com

Foundation ofEast + West

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EAST & WEST CONFIRMATIONEAST & WEST CONFIRMATION

Where acandle signalconfirms aWesternTechnical signal

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2

Foundation ofEast + West:

Candles and Trend Lines



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Sloping Trend Line

Channels

Horizontal Trend Line

Change Polarity

Crack/Snap

Falling Off the Roof

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Sloping trend Lines

Rising support line(higher lows)

Falling support line(lower lows)

Falling resistance line(lower highs)

Rising resistance line(higher highs)

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3

Rising Support Line

www.candlecharts.com 7

trend lines


Candles for Early Reversals



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Scenario1

Scenario2


Candles and Trend lines


How Education Saves You Big $$$

Major resistance 2.00-2.01



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Long term resistance zone



Long term resistancezone



The Value of Owning the Knowledge



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Trend lines and Candle Confirmation


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



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© Steve Nison’s Candlecharts.com 20

SupportSupport

ResistanceResistance



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Change of Polarity


Change of Polarity


Change of Polarity



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Don’t look through a well!

1

2

3

4

5

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

1

2 3


Snap

Crack

Target

Stop

Buy



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Crack and Snap


Crack and Snap


Crack and Snap



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Hammer and Crack and Snap


Crack and Snap


Sell

Target

Stop



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Falling off the Roof


Falling Off the Roof


Watch slope of trend lines

What’s differentabout this session?



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East and West: 1 of 3







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Candles and Volume


Candles and Volume

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Candles and Volume

Light volumebreakout

And then!


Reading the Shifting Market Psychology



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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



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Volume Confirming the Candle Signal


Candles And Volume: High Volume Doji


Crack and Snap with Volume



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Selling Climax Confirmed


Candles and Open Interest

O.I declined

Followed bybear harami


Open Interest

Resistance

Candles and Open Interest



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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



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Foundation ofEast + West:Candles and

Bollinger Bands


Bollinger Bands

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Doji in context


Candles and Bollinger Bands



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Bullish Engulfing Pattern

Bearish Engulfing Pattern



Besides the BB what are otherturning signals ala’ candles?





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The East and the West


East and West = Higher Confidence

Who’s inchargehere?

Who’s inchargehere?

How about now?



Candles and Oscillators


Candles and Oscillators

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Oscillators


Oscillators

Objective

Derived from price- plotted separately

Includes Stochastics, MACD, RSI, etc.

Best in lateral markets

Overbought/Oversold

Divergence


Positive Divergence Negative Divergence

Price

Oscillator

2

12

1

Oscillator

Price

12

12

Divergence



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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



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Doji without/with confirmation


Candles and Stochastic Cross

Noconfirmation

confirmation


Candles and Stochastics Cross



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Candles and Negative Divergence





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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?



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• 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



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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)



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MACD Cross: Candles for Early Reversals


Candles in Context with Oscillators

Harami



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doji

MACD Cross: Candles for Early Reversals


Candles and MACD Cross


Candles and MACD Cross



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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



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East and West – Candles for Confirmation

Overbought area

Any

reversal

signals?

Any reversal

signals?



The Disparity Index


The Disparity Index

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

The Disparity Index



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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


Record Sessions

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low for move

1

23

45

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8

9

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

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Hammer

Bearish engulfingpattern

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


Record Session Lows

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

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64 5

3

2

1



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Record Sessions Lows

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Record Sessions

13

4

5

7

8

2

6

9

1

3

8

2

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109

4

7

1

2

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

12 3

4

3

5

10


Foundation ofEast + West:Retracements

Foundation ofEast + West:Retracements

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Retracements

(B)

(A)

50%

38.2%

61.8%

$100

$200

($150)

($162)

($138)


Retracements

62%


Retracements



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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….



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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


Moving Averages

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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



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Uses of Moving Averages

Support / ResistanceTrend Indicator

price

Moving average


Candles and Moving Averages


Convergence of Signals



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25 daymovingaverage

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


Gravestone doji





Western Price Patterns


Western Price Patterns

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www.candlecharts.com

NecklineNeckline

LeftShoulder Right

Shoulder

Head

Head and Shoulders Top Inverted Head and Shoulders

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Three Buddha Top


Candles and Western Patterns



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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



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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

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Box Range Breakouts



East & West = Profits

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Box Range Breakout



Ascending

Descending

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Descending Triangle



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Ascending triangle



First Leg

Target

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Candles and Swing target



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East and West

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

Doji as signal to exit

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Bull Flag Bear Flag

Flag Pole

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East and West

144


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West for Targets, Candles for Confirm

Bear

harami

Bull

harami145


Target Confirmed

Bear pennantconfirmed

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How it all comes together – The highs in the NASAQ

1

5

4

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1- RisingResistance Line

2- Shooting Star

2a – BearishEngulfing

3- Falling Window

4- BearishDivergence

5- High-WaveCandle

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How it all comes together (hourly)

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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.

149

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”

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“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”

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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

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www.candlecharts.comFounder and President: Candlecharts.com

TradeManagement

Essentials

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

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

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East + West Confirmation

Where a candle

signal confirms a

Western technical

signal

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Candles and trend Lines



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CandlestickCharting

Techniques

WesternCharting

Tools

Trade Management

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3

• Protective Stops

• Price Targets

• Risk/Reward

• Prevailing Trend

• News

• If … Then Principle

•Market Chameleon

TradeManagement

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The Importance of Protective Stops: 1 of 4

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167


Why Use Protective Stops

Lots of reasons to be bearish!

Out

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Protective Stops

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Protective Stops

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Protective Stops

Look at all thereversal signals

Wrong!

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Protective Stops>

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Protective Stops

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Protective Stops



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Candlesticks do not give price targets

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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

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Pivot highs

P = Pivot High:Higher highthan candlebefore andafter

P1

P2

P3

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Box range Breakout

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Bull Flag

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Price Targets

Bullish Engulfingpatterns as support

Bear Stearns Collapse

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Falling off the Roof

target

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Trend Channels

A

B Targetline

Targetline

C

C

A

B



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Candles for reversals and Western for targets

Bearish engulfingpattern at top of bullchannel

target


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3

• Protective Stops

• Price Targets

• Risk/Reward

• Prevailing Trend

• News

• If … Then Principle

•Market Chameleon

TradeManagement

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

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Reading the Market’s Psychology

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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

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Same Signal- but how different the strategy!

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Same signal but how different the tactics

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Risk/Reward

Great lookinghammer, but whatabout risk/reward?

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Candles and Risk – Reward: part 1

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Candles and Risk - Reward: Part 2

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[email protected] USA

Bearish Engulfing Pattern but R/R?

Weekly

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Candles in Context

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Candles in Context – 1 of 2

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Candles in Context – 2 of 2

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Candles in Context of R/R

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Risk- Reward

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

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Candles in Context- R/R

Hammerand crackand snapbut?

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Candles in Context – R/R

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Candles in Context

Dragonflybut?

204


69



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A candlestick line or patternrequires two criteria:

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

206

207


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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

208


Candles and Trend: 1 of 2

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Candles and Trend: 2 of 2

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Candles and Trend

211


Candles and Trend

212



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Going with longer term trend

214

Prevailing Trend

BearishShadows


Prevailing trend

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

Short term rally

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Prevailing Trend

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

217

Prevailing Trend

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

If shorting just lookfor a small move

218


Trend and Battle of windows

Rising windowas support

Falling window asresistance

219


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

Trend

220


Going with the Trend with Windows

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Trend of Higher Degree

Daily chart Aug. 13 Hammer intradayAug. 13

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Biotech Sector

AMGNBuy ?

Sector Analysis

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Stay Awayfrom theTrade

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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

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Double Top

Double Top Confirmed

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Head and Shoulders Top?

If… then

227


Was Head and Shoulders Top Confirmed ?

If… then

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Potential Inverted Head and Shoulders

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Potential Inverted Head and Shoulders

230


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

If…Then

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If… Then

H&S confirmed

Near support,any clues bearslosing force?

232


If…Then

Breaks the cycle

233

As market changes we must adaptour market outlook and tradingstance

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Adapting

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Adapting Slide 1 of 3

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Adapting Slide 2 of 3

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Slide 3 of 3Adapting

238


Adapting to What the Market is Saying

Initial Target

Anything happening tochange your mind?

239


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

Adapting

240


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Candles in Context: 1 of 3

Which is a better sale?

Scenario 1 Scenario 2

241



Which is a better sale?

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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

Trend

News

If.. then principle

Adapting to the market

Candles through the prism ofmarket conditions

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Documents

EEAASSTT && WWEESSTT CCOONNFFIIRRMMAATTIIOONN · Steve Nison’s Candle Charting Essentials and Beyond Volume 2 of the Nison Educational Series 23 Oscillators Not Effective in Strongly