Contents
Contents : PFP Trading Theory Training

This help files has been provided for all Pattern Forecaster Plus users to assist them in learning and trade with the ancient art of Japanese Candlesticks.  Within this help file, I will attempt to disclose and discuss many of the common techniques to effectively trade with Japanese Candlesticks.

Learning the Basics of Investing

    Learning Common Basic Investment Techniques

Learning to Better Implement the Breakout Systems

    Using the TC/BR Investment Technique

    Using the Breakout Systems

    Using and Understanding the Fractal System

Investing Hints, Tips & Suggestions

    Hints, Tips & Suggestions

Other investment resources and training tools can be accessed by visiting my web site and clicking on the RESOURCES button.  My web site address is http://www.ment.com

All contents and information herein is exclusively owned by Matheny Enterprises.  Copyright Matheny Enterprises 1998.  The Pattern Forecaster Plus (PFP) is a trademark of Matheny Enterprises.  This file is protected by US copyright laws and International copyright treaties.

Contact Matheny Enterprises at:

33332 Nottingham Way, Unit C

Dana Point, California  92620  USA

Phone : (714) 240-6977

Fax : (714) 248-8747

E-mail : Bmatheny@ment.com


Learning to Read and Understand a Candlestick Chart
Learning Common Basic Investment Techniques

This section will attempt to show the PFP users how to better read and understand a candlestick chart and how to implement some basic investment techniques to help insure profits.  The art of reading a candlestick chart is something that is learned.  Just knowing the candlestick patterns does not mean that you are going to be able to properly read a candlestick chart.  The candlestick chart is designed to provide you MUCH more then a bar chart and many investors do not completely understand the concepts of the candlestick chart yet.  Therefore, I will attempt to illustrate many of the advanced concepts of candlestick charting and other trading techniques within this section.

Training Lessons

    Lesson 1  Acceleration and Deceleration of a Market Trend

    Lesson 2  Trends vs. Consolidation within a Market

    Lesson 3  Market Breath and how it Relates to Candlesticks

    Lesson 4  Finding Support & Resistance Levels

    Lesson 5  Finding and Staying With a Market Trend

    Lesson 6  Understanding the Short-term Nature of Candlesticks

    Lesson 7  How to Attempt to Trade a Consolidating Market

    Lesson 8  When, Where & Why Confirmation Patterns are Important

    Lesson 9  Following the Foot Steps of the Candlesticks

    Lesson 10  Review Lesson : Putting the Pieces Together


Lesson 1  Acceleration & Deceleration of a Market Trend
Lesson 1 Acceleration and Deceleration of a Market Trend

Market Acceleration and Deceleration is a concept of watching the markets price activity for strength and weakness.  Much like an automobile accelerates and decelerates through city streets, the market reacts the same way.  Investors need to learn to watch for this type of market price activity because it can help guide them to greater profits.

Well use the charts above to attempt to illustrate how the market accelerates and decelerates within a trend.  I like to use analogies to bring home a point and so the readers will have something to associate with as Im explaining something.  For this case, I will use a train moving into a train station.  As the train moves into the train station, it slows, then stops to let people off.  After the new passengers load into the train, it begins to accelerate to its new destination.

A.	Now lets apply this analogy to the market price of the chart above.  As the market nears the end of its previously bearish trend, the size of the black candles begins to shrink as the trend decelerates.  Then, the market trend reverses and begins to accelerate upward as the bullish trend strengthens.  As the bullish trend accelerates, notice how each trading session is able to close near the high of the session.  This is a good sign that the market is continuing to accelerate upward.

B.	The last white candle of the first bullish trend shows the market is beginning to decelerate with its inability to close near the high of that session.  Then, the following session is a black doji line that indicates the bullish trend has possibly ended and the market might reverse.  This doji line forms a Bearish Harami pattern (P0) formation that provides us further indication the market may move downward.

C.	The next candle is a large black candle that confirms the bearish harami line and shows us how quickly the market intends to take back the bullish ascent.  After this big black bar, another small black candle forms (which is actually a black lower shadow).  This small black candle is still a bearish candle, but does not show us the market is continuing to accelerate downward.  The interesting thing though is that the small black candle formed with a bearish gap between it and the previous candle  another strong bearish sign.  Then, the following candle is a very large black candle that closed near the low of the session  a good sign of bearish acceleration.  Lastly, another small black candle formed  again the market shows us that the bearish trend may not continue.

P1.  At this point a White Hammer forms that gaps below the previous black candle.  The hammer itself indicates that this may be the beginning of a potential market bottom.  If we look back at the bearish trend, well notice that there are three distinctive gaps that have occurred within the trend  a Bearish Three Gaps Pattern.  We know that the bearish three gaps pattern means that the bearish trend will likely exhaust at some point in the future.  The next candle to form is white and again gaps above the white hammer.  This new pattern formation is a Three River Morning Star pattern  a potential bottom formation and a clear identification of market support (shown by the blue line).

Notice that an Engulfing Bearish pattern formed shortly after the Three River Morning Star pattern.  The reason I mention this is because this Engulfing Bearish pattern is actually a Last Engulfing Bearish pattern because it did not receive confirmation with the following trading session and actually formed near the end the bearish trend.

D.	The type of price activity seen here at D is a clear example of congestion.  Nearly every other candle is an opposite color to the prior candle and the market price is not really going anywhere.  Also, notice how the market attempted to break the support level created by the Three River Morning Star pattern, but the following trading session drove it back above the support level.  This is a good sign that the support level is strong and will likely hold.

P2.  The second pattern I would like every one to notice is a Three River Evening Star pattern formation.  This pattern occurred shortly after the market attempted to break the support indicated by the Three River Morning Star pattern.  This Three River Evening Star pattern is indicating a resistance level (shown in blue) near the high of the Doji Star pattern.

P3.  Immediately after the Three River Evening Star patters formed, a Piercing Line pattern formed with a large white candle that closed at the high of the session.  This type of candle is called a Long White Closing Bozu Line  one of the strongest bullish candle types.  The Piercing Line can be acted upon by aggressive investors, although conservative investors should wait for confirmation of the pattern.


Lesson 2 Trends vs. Consolidation within a Market

One of the best ways to identify if a market is trending, or shows the capability of trending, is to visually scan the chart to determine the following:

1.	If the white candles out number the black candles.

2.	If the black candles out number the white candles.

3.	If the number of black and white candles are about even.

Over a 5 to 7 candle (session) range.

If the white candles out number the black candles, youre seeing a bullish trend.

If the black candles out number the white candles, youre seeing a bearish trend.

If the white and black candles are about even in number, youre seeing consolidation.

Ideally, investors should look for and trade markets that exhibit good trending capability.  There is almost no opportunity to profit while trading a market that is consolidating (unless the market breaks out of the consolidation with a big rally or sell-off).  Ive seen investment strategies where investors buy (or sell) a market while it is consolidating with the concept that the market will breakout of the consolidation at some point.  Sometimes these theories work well, other times they dont.  I suggest investors try to identify markets that trend for trading.  If the market does not trend up and down, then there is little chance of trading effectively.

When any market enters a trending phase, investors should rely upon the candlestick patterns, good protective stop loss methods and the other breakout systems included within the PFP software application for trading signals.

When any market enters a consolidation phase, investors should really study the chart and wait for the optimal signals before investing in the market.  The breakout systems, any type of protective stop loss system and even the candlesticks cant effectively trade a consolidating trend.  A word of warning, extended consolidation within a market can be very costly to short term investors because the whip-saw activity of the market price will likely generate loss after loss before the market exits the congestion band.  It is better to look for another market to trade and just keep you eye on the market that is congesting.


Lesson 3 Market Breath and how it Relates to Candlesticks

The chart above is of the S&P 500 from the December 1996 contract.  The price range is from 685 to 710.  As we all know the S&P has climbed over 400 points since this contract traded.  This example is simply to illustrate how the market breathes as it continues to trend.  The shaded areas illustrate how the market breathes.

The market breathes as traders buy and sell the market.  There are day traders, short term traders, intermediate term traders and long term traders that are all trying to make money in the markets.  In my opinion, the short term and day traders are the ones that cause the market to breathe on a short term basis.  They do this by exiting their positions to pull profits after the market has moved a few points.  They are smart traders.  They are attempting to pull profits  which is a good thing.

How does this relate to candlesticks?  It relates because the candlestick patterns are short term leading indicators and thus will likely catch each and every potential correction in the market  whether or not the market correction will result in a big enough price move to make a profit.

How does an investor resolve this problem?  Use the weekly chart to review the markets overall trend and to more clearly identify major market tops and bottoms.  Every market will eventually exhibit this type of breathing.  Investors need to be aware of these market characteristics so they can trade more effectively.  The markets breathe just like the ocean tides fluctuate with the lunar cycles.  Some tidal changes are extensive. Others are very small.  The markets react the same way  just not on a regular schedule like the ocean tides.


Lesson 4 Finding Support & Resistance Levels

Support and resistance levels can be identified by many means.  Japanese candlestick can aid in identifying support and resistance levels as well as other techniques such as Fractal formations, market tops and bottoms, and trend channels.  As we discuss the image above, well touch on a few of the techniques and how to use them.

The easiest way to understand support and resistance is to think of a skyscraper.  As one jumps into the elevator and goes to different levels, each level has a unique floor and ceiling.  Support should be thought of as a market floor.  Resistance should be thought as a market ceiling.

As the market price moves below a support level (through the floor), the support level then changes to a resistance level (the new ceiling for the market price).  Inversely, as the market price moves above a resistance level (through the ceiling), the resistance level then becomes a support level (the new floor for the market price).

Within most charts, investors will be able to identify many different levels of support and resistance.  Because of this, investors should concentrate their efforts on support and resistance levels that are most relevant to the immediate market price activity.  Sometimes these immediate support and resistance levels can be carries back to previous support and resistance levels that have formed.  The market is unique in this manner that once a support or resistance level has formed, it will usually maintain that level in the future as the market price continues to fluctuate.

A.	The high at this level is obviously a resistance level because the market was not able to continue to bullish rally.  This type of resistance is fairly easy to find on a chart.  Any major market reversal will typically be a support or resistance level.

B.	The resistance level created by the Three River Evening Star pattern formation is near the high of the white star candle.  This type of pattern formation is a potential top formation which is why investors should pay close attention to the resistance level that has formed here.

C.	This support level is created by an extended Tweezers Bottoms pattern formation between the two candles with equal lows.  This type of candlestick formation clearly identifies market support at the lows of the two candles.  When the market attempts to test a price level twice (sometimes more) and cant break that price level, investors should consider this a defined market support level.

D.	At this level another Tweezers pattern forms to identify a new resistance level.  Notice though that the previous resistance levels at B had been broken with the market rally.  The tweezers tops pattern that formed at D is again a clear indication the market has reached a new ceiling.

E.	Only a few trading sessions after D, the market fell back to a previous resistance level (B) that carried forward to create a support level at E.  This is an excellent example of how a resistance level (a ceiling) will become a support level (a floor) as the market moves above the ceiling.

F.	The support level found here is an intermediate support level because the market fell after a bullish rally, then began to rally again.  The interesting thing about this support level is that one could carry it back to the Doji (between A and B).  Sometimes the open and close levels of Dojis are actually a support or resistance level.  Dojis are unique candles because the represent indecision in the market  which is sometimes caused by support or resistance.

G.	The resistance level found at this point is caused by the intermediate market reversal.  This type of market reversal is indicative of a market resistance level because the market price immediately reversed after attempting to rally.  One could also attempt to carry this resistance level back to the first top on this chart at A.


Lesson 5 Finding and Staying With a Market Trend

The chart above is that of an international currency.  The reason I choose this chart is because the currency markets have a characteristic of extended trending at times.  For short-term traders, these trends can be very profitable (if these traders are not caught on the wrong side of the trend).  For position traders, monitoring the markets overall trend is the key to a successful trade and profits.

As a short-term investor, there are many opportunities to make a quick profit on this chart.  There are also signals that may cause some losses  some big and some small.  In my opinion, the trading signals found within a market such as this can be misleading to some investors.  The Western technical indicators, such as Stochastics, Williams Percent Retracement, and others, will quickly reach their extreme levels and can cause investors to trade the opposite side of the market trend.  This reaction within these indicators can cause unwanted losses to occur and cause investors to loose confidence in the market.

Many means have been devised to attempt to track and stay with the markets overall trend.  One of the most common is the use of a long term moving average, often ranging from 50 session averages to 200 session averages.  One of the biggest problems with this technique is that the market price crosses above and below these averages rather late.  Also, during market congestion unwanted extreme losses can result.

The Pattern Forecaster Plus software application uses a couple of techniques to attempt to track and follow the markets overall trend  the Trending Candle / Body Reversal technique, the Adjusted Stop Level Breakout System and the Relative Momentum Index.  Investors should also choose to use an age old technique that has proven itself over the years as well  called the Weekly chart.  The Daily chart above illustrates the effectiveness of the Trending Candle / Body Reversal investment technique on a trending market.

The Weekly chart is one of the most important investment analysis methods for tracking and trading the markets overall trend.  Many traders recently have begun concentrating on the extreme short term side of the markets (in most cases intra-day charts).  By doing so, many of them have neglected the information contained within the Daily and Weekly charts because they are concentrating on only one market perspective.  It is imperative that all investors use and track multiple perspectives of any market.  Without using the information contained within the different perspectives of the market price activity, investors are likely to misinterpret the markets trends and the potential for the market to continue trending.

The chart above is a Weekly chart of the same market on the top of this page.  Notice that the Weekly chart more clearly displays the markets overall trend and eliminates the potential false reversal signals seen in the Daily chart as the market Breathes.  Notice how clearly trends A, B and C are defined on the Weekly chart.  I know that many of you are thinking but the Daily chart gave quickly entry and exit signals.  This is true and Im attempting to instruct investors to use the Daily chart for the short-term entry and exit signals.  Im also attempting to show investors how the Weekly chart can be very instrumental in the success of many investors by providing a crisp, clear picture of the markets overall trend.

One other thing I should mention is how the congestion area on the Daily chart (between trend B and C) has been reduced to a series of small candles and Dojis on the Weekly chart.  This further illustrates why the weekly chart can be an important tool for investors.


Lesson 6 Understanding the Short-term Nature of Candlesticks

The chart above illustrates the effectiveness of the Japanese Candlestick technique in a shorter-term trending market.  As you can see, the chart above is illustrating the ability to trend on a short-term basis.  Japanese Candlesticks are ideal for this type of trending market.  The candlesticks actually begin to fail in a market that exhibits a longer capability to trend as described in Lesson 5(like the currency market example earlier)

Although this chart shows a greater number of incorrect trading signals, the overall result is still quite profitable.  Trading with a momentum or breakout system would create a system that would have delayed entry and exit signals that would result in greater potential losses and greater slippage when entering and exiting trades.

Every market, at some point, will exhibit the ability to trend both short-term and long term.  For this reason, investors should know how to identify short-term trends and the potential for long term trends.  Short-term trends usually last between 5 and 14 trading sessions.  Long-term trends usually last between 14 and 30 trading sessions  sometimes much longer.  The prior statements are just generalizations  not rules.  Trends will vary and investors should spend some time looking at their favorite charts to try to identify the different types of trends.

Candlesticks are short term in nature because they were designed to follow the markets price activity and the natural Breathing of the market presents periodic short-term turning points within the price activity.  Candlesticks follow the market like the old saying riding on ones coattails.  Thus, with a Daily candlestick chart, the analysis results will be short-term in nature.  A Weekly candlestick chart will be long-term in nature because the candlesticks represent 5 trading sessions not 1.


Lesson 7 How to Attempt to Trade a Consolidating Market

Trading a consolidating market is one of the most difficult aspects of investing.  When a market is moving sideways, or trending within a consolidated range, the market trends are usually very fast and very volatile.  Many times, by the time an investor executes a trade and gets filled, the move is over and the market has reversed.  Now is when investors begin to realize the importance of a trailing protective stop level.

This chart will help to illustrate trading within a consolidating market will show investors some of the benefits of effective candlestick trading as well as how losses can compile within a consolidating market.  When reviewing the chart above, please notice the number of price gaps that have occurred within this congestion band.  This is very common as the volatility of the market increases within the congestion band.  Its almost like the market price is reacting like an atom  bouncing off its boundaries until it finally breaches the boundaries and finds new ones.

A.	An Engulfing Bullish line begins this chart and issues a clear buy signal for the aggressive trader.  If the conservative trader wants to wait for a confirmation signal, it may be too late.  When the market enters a congestion band and an investor wants to trade it, the investor must adopt an aggressive stance and use a trailing protective stop level.  In this instance, the investor should enter a long position and place a protective stop below the low of the two candles.  Also notice how a Tweezers Bottoms pattern formed to clearly define the support level.

B.	After A, a price gap led the acceleration to the upside before the market price showed its intention to turn with a Dark Cloud Cover.  Throughout the bullish trend prior to B, investors should have been trailing their protective stops below the lows of the candles and below any price gaps that formed (for protection against the gap being filled).  The Dark Cloud Cover pattern was a clear indication that the market might reverse even though we had not prior knowledge of a resistance level there.  Aggressive traders would have reversed their position and gone short with a stop above the high of the black candle.  Conservative traders should trail their stop to the low of the black candle and/or just exited the prior long position.

C.	It is a common belief that a bearish trend reacts 3 times faster than any bullish trend.  In the case from B to C, this is certainly the case.  A couple of interesting points though are the price gap after the Dark Cloud Cover and the Doji that followed.  I mentioned earlier that the open to close price range of the Dojis are often a support or resistance level.  Therefore, I assumed that this level would eventually turn into a support or resistance level.  As well, the white candle at this level has the exact same low as the lows at A.  Also the white candle formed a Thrusting Line pattern which is not necessarily a bullish pattern, but is similar to the Piercing Line pattern.  Aggressive traders would exit any short positions at this point and go long with a stop below the support level (or the low of the white candle).  Conservative traders should wait for confirmation of the Thrusting Line pattern.

D.	Here we have what looks like a Long Legged Doji line or a Black Hangman.  Because the body of this candle gapped well above the previous candles, we would consider this a potential star pattern and the potential beginning of a market top.  Also notice that these two candles have the exact same low price  again a Tweezers Bottoms pattern and a new support/resistance level.  Investors should trail their stops to the new support level.  The following trading session confirmed our suspicion and created a Three River Evening Star Pattern that tells us the market has topped and we should be sellers of this market.  It also confirmed the resistance level create by B is holding well.

Note : At this point we have established a trading range (between the highest and lowest support and resistance levels) and two intermediate support/resistance levels.  The two intermediate levels dont mean much to us yet, but we know they are there  or at least they may turn out to be important levels.

E.	Here at E we find a very large Doji line with a low that breached the lower support level.  This Doji created a Bullish Harami Line pattern that indicates a potential bullish market reversal and it also showed that the lower support level is still holding because the selling pressure that drove the market price below it was not able to hold below the support level.  By the close of the session the market price closed slightly above the open of the session to create a Long Legged White Doji Line.  If short, investors should trail their stops just above the high of the white Doji line.  Also, this Doji line might just be showing us another intermediate support/resistance level  so well mark it.  The other interesting thing is that after the Doji, a Bearish Last Engulfing pattern formed.  We know it is a Bearish Last Engulfing pattern because it was unable to test and breach the lower support level and the following trading session rallied instead of sold off.  This while candle after the Bearish Last Engulfing pattern created a pattern called a White Inside Out Up pattern which issues a buy signal and is a variation of a candlestick pattern.  Investors should place their stops below the lower support level.

F.	Even though the market price was slow to accelerate from the pattern at E, the support/resistance level at L2 sure confirmed itself as the market price gapped extremely high as it broke above this level.  Following the gap, a very large Engulfing Bearish pattern formed which opened slightly above the resistance at L1 and closed much lower.  This pattern formation is a clear indication that the market will sell-off.  Investors should enter a short position and place a protective stop above the resistance level at L1.  The smaller black candles that followed confirmed the trend reversal, as well as confirmed the intermediate support/resistance at L2 and L3 by slowing the markets decent.  The large black candle that follows helps to confirm the support/resistance levels at L2, L3 and L4 by opening above L2 (showing the buyers were able to open the market higher), with a low below L4 (showing the sellers attempted to drive the market much lower) and closing above L4 (showing the buyers were able to push the market above the support at L4 before the market closed).

G.	The large white candle that follows again helps to confirm the three intermediate support/resistance levels and creates another White Inside Out Up pattern which indicates a potential buy signal.  The next black candle creates a Black Harami line that indicates a potential bearish market reversal and shows that the support/resistance levels at L2 and L3 are in jeopardy.  The next white candle creates a Piercing Line pattern and again confirms that support at L3 is holding.  The Piercing Line pattern also generates a buy signal.  Aggressive traders should enter a long position and place a protective stop below L4.  The following session confirms the Piercing Line pattern with a price gap.  Because of the recent breaches of the support/resistance levels at L2, L3 and L4, investors should wait to insure that the market price does not retest these levels before trailing their stops higher to L3 or L2.  Notice how L3, our first intermediate support/resistance level created by a Doji, became a substantial support level as the market price fought to rally from the signals a G.

H.	Just prior to the large white candle at this level is another price gap.  The general rule with price gaps is that the market price will eventually fill the gap.  Take a look at the previous price gaps and see how the market price has filled each and every gap.  The large white candle here at H is a good sign that the market may attempt to move much higher.  A sign that the market may stall is created because the buyers were not able to hold the earlier highs of this session.  Because of the price gap just prior to H, investors should trail their stop levels to just below the price gap.  Following the large white candle at H, a small black line has formed to create a Black Meeting Lines pattern that indicates a potential bearish trend.  Although this pattern warns of a potential bearish price move, there is not real clear signal here at H to indicate a sell-off.  Investors should just protect any profits from a previous trade.

I.	After another price gap between H and I, a couple of black lines attempt to retest the support at L2 and L3.  This attempt to retest these levels is short lived because another White Inside Out Up pattern forms at I which indicates another potential buy signal and shows that the support at L3 and L2 is holding.  Aggressive investors should enter a long position and place their protective stop levels below the low of the black candle that breached L3.  The market continued to rally nicely with 2 additional price gaps after the pattern a I.  Investors should have trailed their protective stop levels accordingly.

J.	Here at J we have another price gap just before this large white candle.  Investors should have kept their protective stop levels below the most recent price gap until the additional white candle formed.  By the time the second white candle formed, investors should begin to realize that the bullish market trend is slowing and may reverse soon.  By this time investors should trail their stops to the low of this second white candle and waited to see if the trend continued.  The next candle is a large black candle that creates an Engulfing Bearish Line which generates a sell signal and again shows that the sellers have driven the closing market price below the support at L1.  This large black candle will have caused our previous long position to become stopped out and investors should now enter a short position and place their stop level above the high of the black candle.  The following candle is a black candle that creates a bearish price gap and begins to retest the support levels at L2, L3 and L4.  Investors should stay with this bearish trend as the market continues to move lower.  This type of congestion channel breakout, or boundary breakout is a sign that the market price is becoming extremely volatile and is attempting to exit the previous trend channel.  Notice how eventually the market price broke through all of the support levels and gapped below the last (at L5) as it continued lower.  This is probably the breakout of the congestion band and the beginning of an extended bearish trend.


Lesson 8 When, Where & Why Confirmation Patterns are Important

Confirmation patterns are an important tool for investors to use when they are thinking of entering a market position or when they are in a market position and want to maximize their profits.  Confirmation pattern can be used to attempt to identify which patterns will have a greater ability to follow through with the potential market trend.  Confirmation patterns typically have a much greater ability to trend than aggressive patterns without confirmation.

The chart above is highlighted with some confirmed patterns that have formed.  Some formed at opportune times, other at inopportune times.  Confirmation patterns are not 100% accurate all of the time (much like any other investment techniques).  Although I believe confirmation patterns are roughly 70 to 80% accurate most of the time at identifying market trend reversals.

A.	This pattern is a Dark Cloud Cover Confirmation that indicates a potential bearish price reversal and will generate a sell signal.  Remember Lesson 3 and the fact that the market breathes throughout a trend.  This is exactly what is happening here.  Even though the Dark Cloud Cover Confirmation pattern has formed, the market does not continue downward.  In fact, the confirmation pattern is followed by an Engulfing Bullish pattern.  This is a sure sign that the market will probably not continue lower and may eventually attempt to rally again.

B.	Shortly after A, after the market traded within a congestion band for a while, an Engulfing Bullish Confirmation pattern formed just as the market began another rally.  This particular confirmation signal is rather strong because the confirmation candle gapped above the Engulfing Bullish pattern.  This is a good signal that the market has re-entered a bullish trend and should continue to rally.

C.	Only a few trading days later, an Engulfing Bearish pattern formed and confirmed.  This, again, is a solid confirmation signal of a bearish reversal signal that issues a sell signal, yet the market price did not continue much lower.  In fact, a Doji (in a star formation) followed the confirmation signal, then a white candle followed the Doji.  This pattern formation, as we know, is a Three River Morning Star pattern that indicates a potential market bottom reversal signal and identifies a new support level.  As long as the market stays above the support level, we should expect the market price to move higher.

D.	At this point, another Doji formed to create a Bearish Harami Cross which indicated a potential bearish market reversal.  This pattern confirmed the following session with a large black candle.  Remember, Harami Lines are not action signals  they simply warn that the market may reverse.  Investors should always wait for a confirmation of the Harami Line pattern before acting  unless they are taking a VERY aggressive position in the market.  After D, notice how the market oscillated between white and black candles.  This type of candlestick activity is indicative of a congesting market.  Notice also that the market price fell and tested the support level indicated by the previous Doji line.  When the support level held, investors should have realized that the market may continue to rally above the support level.

E.	After the market congestion, a White Inside Out Up pattern forms and confirms to indicate the market is beginning to rally.  As well, notice that the confirming candle is gapping above the White Inside Out Up pattern and has closed above the resistance level.  This is a good sign that the market will continue to rally.

F.	After an extended bullish rally that started at E, the market reaches this point where an Incomplete Dark Cloud Cover pattern forms at the market top.  The Incomplete Dark Cloud Cover pattern is very common within an up trend and investors should wait for a confirmation signal before acting on the signal.  This signal confirms with a smaller black candle and issues a sell signal.  Following this sell signal are two Dojis  or a Doji Cluster.  The bodies of the two Dojis can possibly turn into a resistance level in the future.  Therefore, investors should pay special attention to these types of Doji patterns.

G.	After the sell signals at F, the market price fell back to the support level from D and formed a Piercing Line pattern that issues a buy signal and warns that the market may reverse to the upside.  Notice that after this Piercing Line, the market rallied back to the resistance level created at F.


Lesson 9 Following the Foot Steps of the Candlesticks

Candlesticks translates into the Japanese term Nihaba Ashi which means Foot Prints or Foot Steps.  The Japanese believe the candlesticks follow the markets price activity and will typically generate patterns at each turning point of the market.  Investors use these pattern to assist in identifying the turning points of the markets and to attempt to effectively trade these market trends.

The previous examples have hopefully illustrated how the candlesticks, as well as the other investment models included within the PFP software, will attempt to automate the process of identifying the pattern formations and using its internal ability to judge the patterns probability, generate a buy or sell signal.  The PFP program, like any other investment analysis program, is not 100% accurate all of the time.  At best, the PFP program will average 70 to 80% accuracy and on average will be 50 to 70% accurate.  As I continue to develop the PFP software application, I will attempt to increase the accuracy of the program to the point that (I hope) the system will become one of the most accurate systems in the world.  This new release of the PFP software (code named Vancouver) is my most recent attempt to improve the accuracy of this software application.  I hope the inclusion of the four new investment models (the revised BLAM system, the Fractal system, the Adjusted Stop Level Breakout system and the BLM Indicator system), the three new technical indicators (derived from existing technical indicators) and the inclusion of the Vision Flags which graphically represent where and when the investment signals have formed on the chart, will be considered a great improvement by the users.

Candlesticks are a superior method of charting compared to bar charts and provide investors with a much greater ability to see the markets characteristics within the chart.  I believe that any investor, after learning a thing or two about candlesticks, will understandably choose to continue using candlestick charts.  The examples included herein should have provided enough evidence of the abilities and benefits of the candlesticks, and should have also provided enough insight into the basic investment technique used by professional investors that anyone using this software for the first time will be able to quickly learn and understand these techniques for investing.

Spend some time applying the techniques discussed herein and using the PFP software application.  The PFP software application is an excellent teaching tool that will quickly teach anyone to recognize, understand and trade using Japanese Candlesticks and the other investment libraries.  Investors should also investigate the Trending Candle / Body Reversal investment system because it embodies many of the same principles used in the analysis of Japanese Candlesticks.  As well, investors should continue to investigate the other investment analysis models and the breakout models because they help to overcome the short-term nature of Japanese Candlesticks.

As you continue your endeavors to learn and invest using candlesticks and the other techniques included within the PFP software application, remember this phrase…

One man can not move a mountain, yet one man can create a path so that others can travel across the mountain  - create you own unique path with the information contained herein.


Lesson 10  Putting the Pieces Together
Lesson 10 Review Lesson : Putting the Pieces Together

Within the previous 9 lessons, investors have learned some of the most elementary and essential components of investing.  Many of these techniques are simple to understand, others (like Candlesticks) are a bit more difficult to understand.  I used to tell my clients that Investors are similar to Carpenters.  Carpenters have many tools for the different types of woodworking required in completing their jobs.  Investors are very similar because they use different types of tools to accomplish their job  profiting in the markets.

One of the hardest parts of investing is knowing which signals to take and which signals to ignore.  There is no Golden Rule when it comes to this problem.  The PFP software application attempts to use its intelligence to gauge the probability of any potential signal and issue a signal.  But, investors need to be aware of the types of investment techniques they should use to better understand and interpret the market.  That is why I put together this section and these lessons.

The elementary concepts that are discussed herein are designed to assist the investor understand the price activity of the markets.  Weve seen trending markets and congesting markets, the benefits of candlesticks and the benefits of the other investment techniques (such as the Trending Candle / Body Reversal system), and weve seen successful trades and non-successful trades.  The bottom line is that not every trade will be a profitable trade and investors should use the techniques described herein to attempt to become more profitable.

Apply the techniques discussed herein and investors will quickly see how these methods will assist them in investing.  Use the PFP software application and investors will quickly see how this application will teach them to recognize and understand the candlestick pattern formations.  Learn to switch between an Aggressive Investor and a Conservative Investor as the market requires and investors will quickly learn how to adjust their trading style to the market and attempt to gain greater profits.


Using the TC/BR Investment Technique

The Trending Candle / Body Reversal (TCBR) investment technique is a system that was developed by a professional investor named Geert Strubbe.  Mr. Strubbe is a personal friend of mine and volunteered this system for inclusion within the CSF and PFP software applications.  The TCBR system is an investment technique that embodies many of the same principles of the Japanese Candlestick technique.  More information on the TCBR trading system can be found within the PFP programs help file.

The most obvious benefit of the TCBR system is that it works very well in trending markets (such as the S&P, the Currency markets and others).  If an investor is attempting to trade a market that exhibits a good capability to trend, the investor should review the signals generated by the TCBR system for effectiveness.  When a PFP user first loads a chart, the chart is scanned using the TCBR system and users can enable the Vision Flags to see where and when the TCBR system generated investment signals.  The TCBR system generates multiple investment signals allowing investors to scale into a market position.  If investors do not choose to scale into a market, then they should simply buy or sell into a market position and watch as the trend continues.  Remember to trail your protective stop levels accordingly as new TCBR signals form.

The TCBR system tracks the markets ability to trend up or down by identifying a pattern formation called a Trending Candle (TC).  A TC can be a black candle or a white candle.  If it is a black candle, the trend is presumed bearish.  If it is a white candle, the trend is presumed bullish.  Each subsequent TC of the same color will generate an additional buy or sell signal and move a protective stop level up or down.  The only drawback to this technique is when the market enters a congestion area.  The TCBR system will likely generate signals too later to be profitable when the using it on a congesting market.


Using the Breakout Systems

The PFP software application uses a couple of Breakout systems.  The first is the Adjusted Stop Level Breakout System (ASL).  This system uses a series of special averages that are based on simple moving averages, exponential moving averages and a series of logic based rules that assist in adjusting the values of the averages.  This allows the ASL system to quickly adjusted to the markets acceleration or deceleration within a trend.  The ASL system generates buy and sell signals when the market price breaks above or below the previous sessions ASL values.

The benefit of the ASL system is that within a trending market the ASL system will quickly identify the markets acceleration up or down and generate a proper signal.  The drawback is that when the market enters a congestion band, the ASL system may generate a few incorrect signals.  Remember, whenever the market enters a congestion band (or area), the best results for investing are going to be generated by the Candlestick signals.  Within a trending market, investors are advised to enable all of the investment models so as to take advantage of the trend following and market breakout signals.

Another breakout system is the Fractal top and bottom patterns.  The Fractal formations have not yet been completely integrated into the PFP software application.  Ideally, the Fractal system will be integrated into the PFP program so that each fractal formation will be tracked and the PFP program will identify when the fractal levels are broken.  Currently, the PFP software only identifies the fractal pattern formations and the corresponding support or resistance levels.  The PFP users must use this information to determine when the fractal levels have been broken.

The last system that I consider somewhat of a breakout system in the new BLM Indicator system.  This system is based on three new indicators that I created based on modifications and enhancements of other indicators.  Actually, this system is based on a combination of common Western technical indicators.  I have been working on this technique for quite some time and implemented it within this version of the PFP software because I believe it is ready to be introduced to the world


Using and Understanding the Fractal System

The Fractal System, as disclosed by Dr. Bill Williams, is based on a mathematical formula that can be found within nearly every item created by nature.  Much like the Fibonacci values, the fractal values generate an infinite series of numbers.  For the purposes of use within the PFP software application, I have implemented only the Fractal Top and Fractal Bottom pattern formations.  These formations can be found throughout any chart as the market forms intermediate and major market top and bottom formations.  The Fractal pattern formation is also used to identify support and resistance levels within the market.

Investors should use the information derived from the Fractal pattern formations to better understand where support and resistance levels are located and can enter market positions when the market price breaks above or below a fractal support or resistance level.  Also, investors can use the information derived from the Fractal pattern formations to better understand the potential price moves of the market.  Many times other candlestick pattern will form within a Fractal pattern formation that will help guide the investor in making a decision.

As I continue to implement the Fractal system into the PFP program, the PFP program will be able to better use this information within its interpretative engine.  At this point in time, the Fractal patterns are identified and the support and resistance levels are identified for investors.  How the investors choose to implement this information is up to the individual investor.


Investment Hints, Tips & Suggestions

This section is provided to users of the PFP software application to help them understand and trade more effectively with the PFP software program.  Some of these hints, tips & suggestions might be considered simple and obvious to experienced investors  yet can be very valuable to beginning investors.  Others may be considered Expert by investors because they would never have though of them before.  I hope this section will provide the additional guidance and experience that many investors require to become more effective in the future.

Notice : After users complete the adjustments to the investment analysis libraries, Western technical indicators or chart appearance to the desired result, PFP users should press F3 to save these settings to a Custom Page so the PFP program will remember the settings and continue to use them for the chart in the future.

Overcoming the short-term nature of candlesticks

1.	Increase the settings for the Stochastics and the Williams Percent Retracement indicators to compensate for the markets trend.  Suggested settings for Stochastics indicator would be 7, 3, 3 or 8, 5, 3 or 14, 7, 3 or 21, 11, 3.  The last value (the Smoothing Value) can be increased from 3 to 4, 5 or 6 (as needed) to additionally smooth the Stochastics indicator.  The Williams Percent Retracement (WPR) indicator can be increased from 14 to 21, 27 or 34.

2.	Disable the short-term libraries of the PFP software application to eliminate the short-term investment signals.  Disable the Std. Candlestick Lib, the Enhanced Candlestick Lib, the F. Tam Candlestick Lib, the T. Hikita Candlestick Lib (and possibly others as needed).

3.	Concentrate your analysis on the longer-term investment analysis libraries and attempt to ignore the shorter-term investment analysis libraries.  The longer term libraries are the Tom DeMark Sequential Lib, the Geert Strubbe TC/BR Lib, the BLAM Lib, the Adjusted Stop Level Lib and the BLM Indicator Lib.

4.	Track and trade the Weekly chart instead of the Daily chart.  Many position investors neglect to study the Weekly chart for investment signals.  The Weekly chart can be a golden key to the success of the position trader and will easily filter out the short-term corrections of any market.

5.	Use the Variable Compression option of the PFP software application to view a custom compressed chart.  Some suggestions would be to compress the Daily chart to a Variable 3 session, 7 session or 9 session chart.  This type of compression is unique to the PFP program and will attempt to filter out the short-term market corrections.

Adjusting the Western Technical Indicators

1.	Increase the Stochastics values to better adjust the Stochastics indicator reaction to the market trend.  Increasing the Stochastic values will adjust this indicator to better identify the markets overall trend.  Decreasing the Stochastics values will adjust this indicator to better identify the markets short-term trend.  The Stochastics indicator is used as a confirming indicator for the Candlestick Libraries.  Therefore, increasing the Stochastics values will cause the Candlestick Libraries to become less sensitive to the markets short-term trend and decreasing the Stochastics values will cause the Candlestick Libraries to become more sensitive to the markets short-term trend.

2.	The Williams Percent Retracement (WPR) indicator reacts much quicker than the Stochastics indicator (in most cases).  Decreasing the WPR value will cause the WPR indicator to react more quickly to market trend reversals and Increasing the WPR value will cause the WPR indicator to react less quickly to market trend reversals.  Suggested values for the WPR indicator are 9, 14 and 21.

3.	The Moving Averages are used only to identify crossover points of the averages within the PFP program.  Many investors use much longer term Moving Averages to gauge the markets ability to trend (in some cases 40 session to 200 session averages).  PFP users can adjust the Moving Averages values and settings to their desired values.  I suggest using a 3 and 7 setting for the averages and setting the averages on the Closing Price.  This setting provides good convergence/divergence of the averages and investors can track the markets ability to trend by determining if the market closed above or below the short term moving average.

4.	The RMI indicator is a variation of the RSI indicator.  I find the RMI indicator to be very useful.  Again, decreasing the RMI values will cause the RMI indicator to react more quickly to the price trends.  Increasing the RMI values will cause the RMI indicator to react more slowly to the market price trends.  Both the RSI and RMI indicators are used within the BLM Indicator Lib.  Suggest values for the RMI indicator are 14 and 3, 20 and 5, 34 and 7.

5.	RSI measures the bullish or bearish strength of the market.  Increasing the RSI value will cause the RSI indicator to react more slowly to market trends.  Decreasing the RSI value will cause the RSI indicator to react more quickly to market trends.  Suggest values for the RSI indicator is 9, 14 and 21.

6.	The MACD indicator reacts like the Stochastic indicator by converging and diverging as the market price turns.  The MACD indicator requires 3 values.  The first value should be less than the second value.  For  example, if the first value is entered as 5, the second value should be a minimum of 6.  The last value is similar to a smoothing value and should be 3, 4 or 5.  The default values for the MACD is 5, 34 and 5.  Other suggested values are 14, 34 and 5 as well as 19, 34 and 5.

7.	Bollinger Bands are variations of traditional trading bands.  Bollinger Bands provide investors with trading bands that increase and decrease their width as the market volatility increases and decreases.  The suggested values for the Bollinger Bands is 21.

When to adjust the technical indicators

The technical indicators should be adjusted whenever investors wish to attempt to increase the PFPs ability to correctly analyze the markets price moves.  The PFP program uses the Western technical indicators within its analysis engine.  If the Western technical indictors do not effectively reflect the markets price activity, the PFP program may issue signals that are not very accurate.  For the best results, the Western technical indicators should be adjusted to properly reflect the markets price moves.  This means that the indicators should move up and down to correspond with the markets price moves.

One of the best ways to tell if investors need to adjust the Western technical indicators is to run a short CandleVision on a chart and then enable the CandleVision Flags to see where the signals were issued.  If the signals appear to be generated at inopportune times, try to increase the technical indicator settings and re-run the CandleVision to see if this adjustment improves the PFPs signals.  If the adjustments detract from the PFPs ability to correctly generate investment signals, bring up the technical indicator settings window (CTRL-D) and click on the REVERT button.  The REVERT button will set all of the technical indicators to a default (short-term) settings.  Then adjust the technical indicators to your desired settings and re-test the market with the CandleVision.

Adjusting the Investment Libraries for Better Results

The PFP program is unique in the fact that investors can enable or disable individual investment libraries (models) as they wish to attempt to increase the investment analysis results.  The PFP program includes both short-term and intermediate/long-term investment models.  Ideally, the best results are generated by enabling all of the investment libraries within the PFP program.  Although sometimes the best results are generated by enabling only some of the investment libraries.  For example, if an investor is attempting to trade a market that is exhibiting a long term trend (more than 25 sessions on average), the best results will likely be generated by disabling the Std Candlestick Lib, the Enhanced Candlestick Lib, the BLAM Lib, the Fred K.H. Tam Lib and the T. Hikita Lib.  If an investor is attempting to trade a market that is exhibiting a short-term trend (less than 15 sessions on average), the best results will likely be generated by disabling the TCBR Lib, the ASL Breakout Lib and the Tom DeMark Sequential Lib.

Within the PFP software application, certain investment analysis libraries will produce investment signals more regularly than others.  This occurs because some investment analysis libraries contain more abstract (detailed) patterns that will occur on a less regular basis.  To better understand the information contained within each investment analysis library, I have briefly detail them below:

Std Candlestick Library  Includes all of the single candlestick formations.

Enhanced Candlestick Library  Includes all of the multiple candlestick pattern formations including Confirmation, Continuation and Combination signals

Tom DeMark Sequential Library  Includes Tom DeMarks Sequential theory investment system.  The Sequential theory is a longer-term major market top and bottom reversal system.

G. Strubbe TC/BR Library  Includes Geert Strubbes Trending Candle / Body Reversal investment system.  This system is designed to track and trade them markets overall trend.

BLM Ind. / Balanced Length Avg. Movement Library  This library consists of two individual libraries.  The first, the BLM Indicator system consists of three unique indicators derived from revisions to existing technical indicators.  This system attempts to track and trade the markets intermediate and overall trend.  The second system, the BLAM system, uses a series of moving averages to identify market acceleration and deceleration points as well as potential market stalling points.

Fred K.H. Tam Candlestick Library  Includes 4 unique patterns that were identified by Mr. Fred K.H. Tam (Malaysia).  These patterns consist of pattern formations that the original Japanese Candlestick technique did not disclose.

Takahiro Hikita Candlestick Library  This library consists of very rare and unique Japanese Candlestick pattern formations that were donated by Mr. Hikita.

3, 2 & 1 Line Break Candlestick Library  This library is only used when users compress a chart to a 3, 2 or 1 Line Break chart.  There are really only two patterns within this library (although we do identify four other distinct patterns as well).

Adjusted Stop Level Library  Includes a market breakout system derived from tracking the market price and the Adjusted Stop Levels.  The Adjusted Stop Levels are a combination of simple moving averages, exponential moving averages and logic.

Fractal Library  Includes pattern formations that identify Fractal Top and Bottom formations.

Bollinger Band Library  This library includes analysis of the market price against the Bollinger Band indicator.  This library determines where the price is in respect to the Bollinger Bands.

Technical Indicator Library  Includes analysis of the Western Technical indicators such as the Stochastics, Moving Averages, Williams Percent Retracement, RSI and RMI.