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Interest Rate Investing

Interest rate investing does not just refer to finding the bank that offers the best rate on certificates of deposit. Interest rate investing has to do with anticipating and profiting from changes in stock prices, commodity prices, stock options prices, bond prices, and futures contracts based upon changes in the prevailing interest rate. When interest rates go up substantially it may be more profitable to invest in bonds or dividend stocks than in growth stocks whose rapid growth rates have been slowed because companies are paying high interest rates on borrowed money. Our focus on interest rate investing does not have so much to do with after interest rates have gone up as with anticipating and profiting from rate increases. Both fundamental and technical analysis have their part to play in profitable interest rate investing. Candlestick analysis will help both traders and those interested in long term investing to profitably read market reaction as interest rates rise or fall.

An investor dedicated to buy and hold investing will probably say that he will wait until interest rates go up and then buy bonds or dividend stocks. The question we should ask this individual is just how long will he wait as interest rates rise until he buys. What if rates start to fall? The point of this is that interest rates are fluid and are intertwined with the economy, monetary policy, and Forex. The savvy individual can certainly buy bonds, for example, at high interest rates. However, it will be smart to use a tool like Candlestick pattern formations to analyze how the various aspects of markets and rates are affecting prices in order to buy at the top of the interest rate curve. There is more profit to be made from interest rate investing than just waiting for the top of the next interest rate cycle.

The long term investor may be very happy with the purchase of 30 year US treasuries at a high rate of interest. He will be even happier as interest rates fall in later months and years as he will still be receiving a high rate of interest. However, he will have his money tied up for a generation in this investment. The moment a bond is issued it is worth its face value. The moment that interest rates change the bond is worth either more or less than its face value if someone wishes to buy or sell the bond. As interest rates fall an investor holding a high yielding corporate bond or US Treasury note will be able to sell that security and make a profit. With that profit in hand he will be able to reinvest the money using Candlestick chart analysis for picking stocks or other promising investments.

People typically invest in dividend stocks because of their quarterly return on investment. When interest rates go up dividend stocks often go down in price. Providing that their dividend stays the same they remain competitive with bonds and treasuries as an investment. Buying stocks that pay dividends when interest rates are high will commonly let the investor profit from a high dividend rate but also profit from selling stock when interest rates fall again. Of course another variation on interest rate investing is selling short on interest rate sensitive stocks when one expects interest rates to rise. The key is to stay profitably tuned into the markets with Candlestick signals.


Market Direction: The visual and mechanical aspects of candlestick signals allow for logical stop loss processes. Most investors have a difficult time deciding when to be back out of a trade or when to take profits. The candlestick signals has some very simple rules that allow for easy decision-making. There will often be times where coming out of a position may not be a clear-cut decision. A candlestick sell signal may have appeared. However, confirmation of that sell signal may have some conflicting information. An example can be seen in the QCOR chart today. Friday's close created a Bearish Engulfing Signal. This occurred just as the stochastics were approaching the oversold condition. The QCOR price close right on the T-line on Friday. Using the simple rules pertaining to a Bearish Engulfing Signal allows an investor to manage a position without the fear of getting whipsawed.

QCOR

 

Upon seeing a Bearish Engulfing signal, there are very easy execution rules. If it opens lower and starts trading lower the following day, close out the position. This should be the confirmation that would demonstrate the bears were still participating after the sell signal. If the price opens higher, there is a relatively simple sell strategy. Put a stop loss one penny below the previous day's close. The rationale would be if the uptrend was in progress, if it opens higher, in this case remaining above the T-line, there would be that much more evidence the T-line was acting as support. If the Bears were able to bring the price down through the previous day's close after it had opened higher, that would be more evidence the bears were now in control, especially bringing the price back down through the T-line.

Although there was some evidence it was time to close out the position based upon weakness, there was also considerations that had to be analyzed that would show the uptrend was still in progress. As can be seen in the QCOR chart, after the price bottomed out, it came back up through the T-line and closed above where it opened. This conveys a completely different story. After some profit-taking, the price did a Bullish Harami, and it traded back up above the T-line. This now produced more evidence the uptrend was still in progress. Placing stop losses at the appropriate level would help keep the emotions out of the decision-making process. At the position been stopped out one penny below the previous day's close or on the lower open, reentry decisions could be made very easily. Once it was seen that the price had hit its lows and was starting to move back up, reentering the trade as it came back up through the previous day's close would not have a psychological hurdle. The position would have been closed out when prices appeared to be moving lower and the position could have been reestablished at approximately the same level it was stopped out, knowing that the price move was now back in a positive mode.

Having specific stop loss strategies allows for rational decision-making could be applied when the markets are not showing a decisive direction. A flat trading market will instigate some backing and filling in slow moving price movements. Candlestick analysis allows for closing out positions in the logical point and getting back in at a logical point. If you keep in mind that candlestick analysis was developed by Japanese Rice traders utilizing common sense investment practices, you can develop very effective trading strategies based upon that common sense.

Chat session tonight at 8 PM ET .

Good Investing,

The Candlestick Forum Team


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