Other Charts, Technical Indicators, and Money Supply
The popular periodical Investor's Business Daily publishes the relative strength number for securities. The relative strength of a security is designed to measure a security's relative price change in the year prior and compares it to all other securities. A relative strength number of eighty and above is considered exceptional.
Japanese Candlestick Charts
Japanese candlestick charts are read much like bar charts. The main difference with a Japanese candlestick chart is what is reported on the chart. The high and low for the day, and the opening and closing price of the day are shown. Also, there is a difference in the charts for when the end of the day price is lower than the beginning of the day price, and vice versa. There are many terms that go with the formations that Japanese candlestick charts make; there is also a general consensus with many professional traders that Japanese candlestick charts are inherently too complicated for any serious use.
If you find a charting system, ratio, or indicator too complicated, too difficult, or too hard to understand, feel free to switch to a chart system or indicator you feel comfortable with. Day trading is difficult enough, and you shouldn't feel obligated to complicate it further.
Technical indicators are a day trader's best friend. Even though not every indicator works every time, there are so many that do work reliably that the study of several can have a combined effect of being very valuable. Technical indicators are drawn from business information, investor activity, market activity, etc. Keep in mind that with technical indicators it is best to use several at once, and if they are all telling the same story, then you can consider the information as good.
The first technical indicators involve money supply. Money supply is literally a measure of the amount of money that is in circulation, and includes both paper and electronic forms of money. It can represent the cash in circulation, the amount in checking and savings, and the amount in commercial paper — often referred to as M1, M2, and M3, with the lowest M number representing the most basic form of money: cash in circulation.
When money supply increases through an expansionary regime of a country's treasury or central bank, there is literally more money available for people to use to buy things with. One of the things people have a tendency to buy when there is more money available is securities. A study in the sixty years following World War II proved that security prices go up when there is an expansionary money supply. The money supply indicator is calculated monthly, and shows a year over year percentage increase or decrease. This number is adjusted for the Consumer Price Index, which has the effect of taking into account the impact of inflation.
The money supply indicator is calculated by starting with 100 and adding the percent change in M2, and subtracting the percent change in the Consumer Price Index. The resulting number gives that month's money supply indicator. If the number is under 100, that means that the rate of the money supply is less than that of inflation. In this situation, equities historically have remained flat during these times. If the situation was reversed and the money supply indicator was over 100, equities would generally do well, as has been historically shown.