What a nasty situation U.S. congressmen are finding themselves in courtesy of the $700M financial bail-out plan. The U.S. senate has now passed on the ball to the U.S. Congress after approving a sweetened version of EESA to force another showdown at the lower house. Lobbying is being done around the clock to insure the passage of the bill. Concessions from both parties are being offered and accepted without hesitation or second thoughts. And why not, everyone was a given a terrifying preview of what might happen again if approval of the modified Emergency Economic Stabilization Act of 2008 is once more derailed. The 778 points Dow dive last Monday after Congress failed to pass the bill, sent a terrifying reminder to everyone concerned. The spill off effect in other bourses worldwide was just as unnerving.

A lot of finger pointing ensued in the aftermath of the failed passage of the bill. Had the congressmen simply done their jobs clean without the unnecessary political grand standing and uncalled for fire brand speeches aimed at gaining political advantage over the issue, the Dow would not have dropped that much. The current scenario is a chilling reminder of the stock market crash of 1929. Stocks started to nose dive on October 24, 1929 - Black Thursday. Leading Wall Street Bankers tried to remedy the situation by pooling their resources together. Their efforts failed resulting into the now infamous Black Tuesday Stock Market Crash of October 29, 1929. This pulled down the country into the era of the Great Depression.

We may really see a repeat of 1929 , and, what a friend and fellow blogger aptly termed as "The Collapse of The House of Card." The effect will be felt in all corners of the globe and will be long lasting. Recovery will be slow and painful.

The congress men who will once again shoot down this bill come Friday will be praised by the growing number of their discontented constituency. But, will they be willing to put in their hands the blame for not doing anything to prevent another Black Friday scenario in the U.S. I doubt it. On the other hand if they choose to support the bill and pass it, they may prevent a world wide financial crisis but they risk the chance of not being voted back into office by their disgruntled constituents.

DAMNED IF YOU DO, DAMNED IF YOU DON'T INDEED!

I have been using the Japanese Candle Stick Charts in trading the spot foreign currency market since I came across Steve Nison's book "Japanese Candlestick Charting Techniques" second edition sometime in early 1990's. I was assigned in Singapore then. My "batting average" and profitability did improve significantly when I incorporated the newly acquired knowledge from this book into my daily trading regimen. When Nison's second book ("Beyond Candlesticks") came out, I was already assigned to our San Francisco office. By that time, I have proclaimed myself as a Nison follower and a Japanese Candlestick chart fanatic. (I wouldn't trade without taking a closer look at candlestick charts first!) The second book was actually a big let down to me. I was expecting to read trading techniques using the candlesticks since the first book dealt mainly on the discussions about what the candlestick is. Nison wanted to come out with a clear cut guideline on how to use Japanese Candle Stick Charting Techniques in trading the various financial markets in the second book, unfortunately much of his discussions was made with the benefit of "hindsight". His dissertations were based on past price movements which were already known to him at the time of the book's writing. So, l resigned myself to doing my own experimentation and interpretations based on real live market feeds with a focus on the forex market with which I was passionately involved with. At about this time, Nison was, I believed, doing the same thing although much of his work was focused on the stock market. (Many of his website contents and cd's came out 8-10 years after his first book was published.)

Before anyone accuses me of being a charlatan, I wish to clarify that I am not claiming to be an expert on the use of the Japanese Candle Stick Charting Technique here. My intention for this blog post is to share with you my experiences and difficulties in using this remarkable charting technique which has now become a necessary fixture in every trader's desktop.

For backgrounders, let me brief you on what the Japanese Candlestick Chart is.

Candlestick charts are said to have been developed in the 18th century by legendary Japanese rice trader Homma Munehisa. The charts gave Homma and others an overview of open, high, low, and close market prices over a certain period. This style of charting is very popular due to the level of ease in reading and understanding the graphs. Since the 17th century, there has been a lot of effort to relate chart patterns to the likely future behavior of a market. This method of charting prices proved to be particularly interesting, due to the ability to display five data points instead of one. The Japanese rice traders also found that the resulting charts would provide a fairly reliable tool to predict future demand.

The method was picked up by Charles Dow around 1900 although Dow's version (bar charts) was way different from Nison's (candle stick charts).

(Charles Henry Dow was an American journalist who co-founded Dow Jones & Company Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which became one of the most respected financial publications in the world. He also invented the famous Dow Jones Industrial Average as part of his research into market movements. Furthermore he developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis.)

Steve Nison, on the other hand is regarded as the “Father of Japanese Candlesticks.” Based on his intense study of original manuscripts on Japanese Candlestick charts which were exclusively translated for him, Nison was literally the author of the first books ever written and published about the subject.

I have been trading currencies long before Nison's first book came out. I was properly schooled in the Western methods of technical analysis (to my dismay and confusion). So, when I came across Nison's book, I was an instant convert, and with good reason.

One of the many mistakes I made as a start up trader at that time was to over indulge myself with using the various Western methods of technical analysis like Stochastics, MACD, Momentum Index, Elliot Wave Theory, etc. My over-indulgence with these technical tools made me mistakenly believe that the markets must move according to the technical models I have so painstakingly pieced together. My technical savvy made me forget the fact that markets are moved by real people, traders who buy or sell because of personal conviction or belief in a particular fundamental. My over indulgence with my better than average technical analysis skills made me forget that the basic objective of these technical tools I so fondly acquired through these years is to approximate the underlying sentiment of the market so as to come up with a calculated future market direction. I totally lost sight of the basic fact about charts and what they are supposed to provide us - the real underlying sentiment of the market, its hesitation, its strength! I totally ignored the basic thing about charts - that every chart is suppose to tell us a story, the story of the greater majority of traders trading at that particular time, whether they are buying or selling or staying on the sidelines; or whether they are buying/selling with conviction or on mere speculation!

Nison's Japanese Candlestick Charting Technique made me remember and made me go back to basics! The vivid graphical presentation of the underlying market sentiment by Japanese Candlestick charts is so simple and so remarkably clear that you are able to discern immediately market strengths and weaknesses. It so vividly reveals the over-all emotion the market has at any given time. To me, it serves as an effective radar that measures, detects, and translate market movements no matter how big or small they may be. It is so super sensitive that it is able to graphically illustrate (in the form of varying candlestick formations) the real story behind every market movement. It is so damn effective that I became an instant convert and a fanatic user of it. I really can never trade any market without first taking a close look at a Japanese Candlestick chart and read the story it wants to tell me.

The mystery of Japanese Candlestick Charts is in its simplicity. The myth lies in its usage.

(Next: Understanding Japanese Candlestick charts.)

• 1. Thou must first know thy self and thy market well.

Trading stocks, currencies gold, or commodity futures, or any other securities(fast moving markets) via the internet can be terribly taxing! Before you decide to plunge into it you must know offhand if you are ready to lose a lot of good night sleep for just monitoring the markets; or if you have the stomach to take frequent roller coaster rides during peak market activities (like watching your investment tremendously grow within seconds just to see it melt down in the next)! You must know first if you have the discipline to be able to maintain your cool during wild and wide price swings and still be able to call the shots objectively according to your pre-determined trading objectives. This means you should not to let fear overshadow you when the market moves against your position, nor allow greed to take the better of you when the market is in your favor. Remember always that markets are frequently unpredictable and that you must learn to adapt to its peculiarities fast otherwise it will eat you up alive.

• 2. Thou must deal only with registered brokers.

Make sure the broker is registered! If the broker is based in the U.S., contact the Securities and Exchange Commission (SEC) and also check with your state securities regulator as well. You can research the investment online using the SEC's EDGAR database at http://www.sec.gov/edgar.shtml. To contact your state regulator call the North American Securities Administrator's Association (NASAA) at (202) 737-0900 or online at http://www.nasaa.org/home/index.cfm. You may also contact the Commodity Futures Trading Association (CFTC) at http://www.cftc.gov/ and the Financial Industry Regulatory Authority (FINRA) at http://www.finra.org/index.htm. The rule of the thumb you must use here is “avoid the unregistered and junk the brokers with recorded complaints.”

For non-US based brokers, you must demand verifiable documentations from the broker regarding their affiliations and representations. Some online brokers are merely introducing brokers (IB), meaning they act as marketing representatives for a bigger broker, in which case you must demand to see the IB contracts and investigate the affiliation of the principal broker. Other brokers “white label” for their principals. Their websites may appear and have the looks of a big broker when in fact they are mere affiliates of other brokers. Don’t deal with white labelers if they don’t publish their principals. White labelers make money through an additional spread of a pip or two built in into their price quotes. While I don’t have anything against white labelers who are affiliated with established brokers of good standings, I would advise you to avoid them unless they have incorporated more add-on features or services other than those offered by their principals to justify the additional cost to you.

Big Daddy's suggestion that you deal only with registered brokers is not being biased against overseas brokers. It's just that online investors must always be provided with a forum or a venue to file any claims they may have against their online brokers in the future. And at this point in time,only U.S. based brokers can provide us with this safety net.

• 3. Thou shall shall not invest money you can not afford to lose!

One of the major pre-placement considerations an investor must make is determining the amount of capital he will be using. There is not set rule for this. In fact, everything is left to the discretion of the investor. However, one must understand that every investment involves a certain amount of risk. Placing an investment (online or otherwise) is in reality a form of risk-taking with the hope that the placement will generate a certain amount of profit after a while. However, the presence of the entailing risks also tells us that there is a possibility of losses. In fact, in fast moving markets the likelihood of losing all of your investment is all too real. This is the very reason why you must not invest more than your 'risk capital'. Risk capital is that part of your liquid assets or your wealth which if lost will not affect your lifestyle or your family's way of life. Never ever invest money meant for your your family's daily subsistence. Doing so will make an emotional wreck out of you. You will turn out to be an emotional trader; setting aside fundamentals; trading out of fear of losing the money on which you and your family depends on; holding on too long to losing positions hoping the market will finally turn into his favor. Once you become emotional trader you start trading on false hopes which ultimately lead you to disaster and the total loss of your investment.

• 4. Thou shall not use unprotected computers!

Never use computers, whether at an airport, library or an office when accessing your financial accounts or records. Make sure you only enter confidential information on websites with the "locked padlock" icon in the browser frames (must have https at the beginning of the web address) Avoid using public wi-fi facilities in accessing your account or executing your online trades. Hackers are everywhere nowadays. It is advisable to do your online transactions only at the comforts and confidentiality of your abode. Turn off and unplug the computer you are using for trading when you are not on trade.

• 5. Thou shall not trade without a plan!

Never attempt to trade without a trading plan. A good money manager does not buy or sell out of whims and intuitions. No matter how long his experiences have been in trading a particular market, the successful investor/trader always prepare a plan before taking a plunge, so to speak. His every action stems from a careful study of a particular security, commodity, or currency contract. He always has a sound fundamental basis (underlying economic data) and/or a reliable technical view for the following trading decision parameters:

o the choice of item/market to trade, (which security, commodity, or currency)
o the specific position to take (whether to buy or to sell)
o the specific price range on which the position will be executed (entry point)
o the targeted price objective or exit point on which the trade must be closed

All these trading decision parameters must be clearly defined and set before executing any trade. Never attempt to trade fast moving markets online in the same manner and with the same do or die spirit as in p lacing bets on online gambling sites. Every trading decision must be based on a trading plan and every trading plan must be followed to the letter.

• 6. Thou shall not execute orders without trading stops!

Every trading plan must incorporate trading stops which shall act as a safety nets to limit your losses in case the market moves unfavorably against your established positions. There is no set or fast rule for creating your stops. However, in establishing your initial position you need to set your initial stop with a wider range - taking into account the highs and lows of the trading range established for the day, the proximity of your entry price to historical turn points (chart supports and resistance levels), and your tolerance level as dictated by your initial equity. (Make it a point that your initial stop must not be beyond the price level where it will eat up more than 20% of your equity). When the market starts to move in your favor, adjust your initial stop turning it into a trailing stop in the direction of the price movement. You must adjust your trailing stops tighter and tighter (closer to the spot price) as prices approach historical turn points or significant technical price levels (such as those established using the Fibonacci theory).
Stops are vital to your becoming a disciplined investor. They help you decide without hesitation when to cut a losing or winning trade. They prevent you from becoming an emotional trader and a perpetual loser. But most important of all,trading stops limit your actual loses. I have seen people lose all their investments in one single session because they adamantly held on to losing positions in the hope that the price will soon make a turn-around. I have also seen people who have reached their profit objectives but out of greed, held on to their positions. And when the market whipsawed they ended up losing everything.

• 7. THOU SHALL NOT TRADE ON MARGINS BEYOND 250:1 RATIO.

One of the main attractions of trading on line is the fact that most brokerage houses offer trading opportunities on margin basis (where you are allowed to put up only a fraction of the cost of the contracts you are buying or selling). This ratio may vary from broker to broker. While this is an advantage to the investors since it allows them to maximize the returns on their investments, it can also work against them because high margin ratios can also wipe out their equity fast in very volatile markets. For the more experienced traders who are incorporating strict money management strategies into their trading plans, the margin ratio may be a non-issue. However, for the ‘newbies’, trading with a lower margin ratio (between 50:1 and 250:1 ratio) will keep them in on volatile markets and allow them ample time to react to rapid price changes in the market place. At the same time, the lower margin ratios allow investors to avoid margin calls because it provides them elbow room to make the necessary adjustments on their positions (like temporarily freezing their positions by executing an opposite trade) thus temporarily avoiding actualizing losses. Investors must remember that brokers are not required to issue margin calls when an account falls below the required maintenance margins. They can just go ahead and cut your positions at a loss. Investors need to read, remember, and understand the fine lines in the brokers’ agreement regarding margins and margin calls.

• 8. THOU MUST ‘DEMO’ TRADE FIRST BEFORE ACTUAL TRADING.

Most online brokers offer demo trading on their sites which allows you to open demo accounts and trade live markets using only virtual money. This is a good chance for you to hone up your trading skills in real live market situations without risking your own money. You may do demo trades for as long as necessary (although some online brokers allow you only a maximum of 30 days to use their platform). Never open a real account unless you already feel comfortable with yourself, your trading plan, the broker’s trading platform, and the volatility of the market you are trading. If you are not yet satisfied with the outcome of your initial demo account, then go ahead and request for an extension of the demo account or, better still, open other demo accounts with other online brokers. Do not forget that trading volatile markets requires a large amount of self-restraint and discipline so never rush to a decision at all times.

• 9. THOU MUST KEEP YOURSELF WELL INFORMED AT ALL TIMES.

You must update yourself with everything that is going on in the financial marketplace. The internet has plenty of sources for real-time financial news updates, commentaries, and forecasts and projections. You must find time to go through the more important items which are relevant to the market you are trading. Do not look only or limit your search to information favoring your current position in the market. You must also be sensitive to contrary news, opinions, and forecasts. Use favorable factual data and information as your basis for initiating your trades. On the other hand, use any contradicting information, opinion or forecast as your basis for setting your trading stops (whether they should be tighter or wider). Subscribe to newsletters from as many online brokers as are available. Most important of all, you must sharpen your skills at digesting all of the available information you happen to go through and be able to create an informed and calculated trading decision from the same as fast as the need arises.

• 10. THOU MUST ALWAYS INSURE AN UNINTERUPTED COMMUNICATIONS WITH YOUR BROKER.

Online investments depend a lot on your uninterrupted internet connections with your broker. Your trading could be adversely affected if for example your internet connection is down at the time the market makes a major move. You can lose a big opportunity to cash in on that market movement, or lose an opportunity to cut your loss if you happen to be on the other side of that market movement. There may also be instances where even the broker’s system breaks down due to heavy traffic, or computer glitches, or other natural calamities which may prevent orders from being filled. The online investors must be prepared for such contingencies. They must be familiar with the broker’s alternative options in case they cannot access their accounts online. And this should include automated telephone trading, fax orders, and direct phone dealing arrangements. All these alternative trading options must be arranged with your brokers prior to instituting your initial trades.