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1. If Dow Futures is down close to 100 points before the market opens, don't trade
2. If a stock didn't open higher or isn't trading above yesterday's closing price, don't buy
3. Stop loss right below the support line
4. Don't buy stocks at market open
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1. Candlestick Secrets. 2. Options Trading 101 - Introduction to options trading
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 Dow Jones Today
How dow performs today? Will Dow bounce back or continue to decline?
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Archive for the ‘Learn The Stock Market’ Category
Saturday, August 29th, 2009
Moving Average (MA) is one of the most popular and easy-to-use tools available for technical analysts. There are two main types of moving averages: simple moving average and exponential moving average.
How Do We Calculate Simple Moving Average?
A simple moving average is calculated by computing the average closing price of a security over a specified number of periods. For example, a 10-day moving average is calculated by adding the closing price for the last 10 days and dividing the result by 10. 1+2+3+4+5+6+7+8+9+10=55, 55/10 = 5.5 (Assuming that the closing prices for the 10 days are 1-10 consecutively). When you plot the moving average for each date on a graph, it forms a curve.
Trading Signals:
- A buy signal is triggered when closing prices cross above the moving average (MA).
- A sell signal is triggered when closing prices cross below the moving average (MA).
Example:
Let’s look at the stock charts for MSFT and YGE as an example. A buy signal is generated when prices cross above the 10 day moving average as circled in 1, 2, 3. A sell signal is generated when price crosses below the 10 day moving average.
 
Disadvantage:
The main disadvantage of a simple moving average is that it does not reflect the current trend quickly. For example, if the stock prices in the last 10 days for a certain stock were 100, 99, 98, 45, 44, 45, 43, 42, 43, 42, the simple moving average would be 60.1. This moving average is 50% above the current price which wouldn’t be accurate to trigger an entry signal. In other words, if there is an extreme high or extreme low in the stock price, it distorts the true value of the stock. For this reason, another type of moving average called exponential moving average (EMA) was developed, giving more weight to the most recent prices.
Tags: calculating simple moving average, ema, exponential moving average, how to calculate simple moving average, moving average, msft, simple ma, simple moving average, stock charts, technical analysts, technicians, yge
Posted in Learn The Stock Market, Technical Analysis | No Comments »
Thursday, August 27th, 2009
Triangles usually represent continuation patterns. A triangle is a congestion area where resistance, forming the upper boundary, and support, forming the lower boundary, converge on the right. The triangle’s upper boundary represents sellers overpowering buyers, preventing the market from rising. Its lower boundary represents buyers overpowering sellers, preventing the market from declining. As the two boundaries start to converge, a breakout forms.
There are 3 types of triangles:
1) Symmetrical Triangles-
- A fair balance of power between bulls and bears. Both are equally confident since bulls keep paying up and bears keep selling lower.
- Represented by the convergence of an ascending support line and a descending resistance line.
- The breakout is likely to resume in the direction of the trend that preceded the formation of the triangle.
2) Ascending Triangles
- These triangles are bullish patterns, with a flat upper boundary and a rising lower boundary, converging on the right.
- The flat boundary shows that bulls are becoming more aggressive while bears are losing their ability to drive down the prices. Bears are defending the line that they’ve drawn, but if they collapse and the attacking bulls succeed, its breakout is likely to be steep.
- An ascending triangle is more likely to result in an upside breakout, thus the logic of buying upside breakouts from ascending triangles is derived.
3) Descending Triangles
- These triangles are bearish patterns, with a flat lower boundary and a declining upper boundary converging on the right.
- The flat boundary shows that bears are becoming more aggressive while bulls are losing their ability to drive up the prices. Bulls are defending the line that they’ve drawn, but if they collapse and the attacking bears succeed, its break is likely to be sharp.
- A descending triangle is more likely to result in a downside breakout, thus the logic of shorting downside breakouts from descending triangles is derived.
Broadening Formation (Inverted Triangle)
This inverted triangle is basically a triangle turned backwards and is relatively rare. Instead of trendlines converging at the right, the trendlines actually diverge in a broadening formation. It is also known as a megaphone top.This type of pattern usually occurs at major tops and is usually a bearish formation.
MORE ABOUT TRIANGLES
Posted in Learn The Stock Market, Technical Analysis | No Comments »
Wednesday, August 26th, 2009
Price Patterns: Reversal and Continuation
There are two main price patterns:
1) Reversal Patterns- Indicates that the trend will reverse. A few of the most common reversal patterns include:
a. Head and shoulders
b. Double tops and bottoms
c. Triple tops and bottoms
2) Continuation Patterns- The trend pauses for awhile but it resumes. A few of the most common continuation patterns include:
a. Triangles (1), Triangles (2)
b. Rectangles (Coming Soon!)
c. Flags and Pennants (Coming Soon!)
Tags: continuation patterns, double tops and bottoms, flags, head and shoulders, price patterns, rectangles, reversal patterns, triangles, triple tops and bottoms
Posted in Learn The Stock Market, Technical Analysis | No Comments »
Tuesday, August 25th, 2009
What are Triple Tops and Bottoms?
The triple top or bottom is another reversal pattern, which rarely occurs. It is a stronger pattern than the double top or bottom pattern since the likelihood of a reversal is higher.
The triple top or bottom pattern is a slight variation of the head and shoulders pattern. The main difference is that in a triple top, the three peaks are around the same level, whereas in a head and shoulders pattern, the head is at a slightly higher peak than both of the shoulders.
A triple top pattern is complete after both troughs have been broken on heavy volume. Prices must close below the support levels to complete a triple top pattern, signaling the reversal to a new downtrend. There might also be a return move to the breakout point, but should not exceed it, before the downtrend resumes.
Volume
Similar to volume in the presence of a head and shoulders pattern, volume during a triple top pattern tends to decline at each subsequent peak, but increases at the breakdown point, leading to the new downtrend.
As you can see, a triple bottom pattern is a mirror image of the triple top.
A triple bottom pattern is complete after both peaks have been broken on heavy volume. Prices must close above the resistance levels to complete a triple bottom pattern, signaling the reversal to a new uptrend. There might also be a return move to the breakout point, but should not decline below it, before the uptrend resumes.
Volume
Similar to volume in the presence of a head and shoulders pattern, volume during a triple bottom pattern tends to decline at each subsequent bottom, but increases at the breakout point, leading to the new uptrend.
Example:
As you can see from the example below, the stock WMGI just formed a triple bottom pattern. After reaching its 3rd bottom at about $13.75 per share, it rallied up to $16.50. That’s a 20% gain!
Tags: head and shoulders, price patterns, reversal patterns, triple bottom pattern, triple top pattern, triple tops and bottoms, triple tops or bottoms
Posted in Learn The Stock Market, Technical Analysis | No Comments »
Sunday, August 23rd, 2009
What are Double Tops and Bottoms?
A double top or bottom is another reversal pattern, which is common and easily recognized.
- A prior uptrend sets a new high, usually on increased volume.
- Then, the stock price declines on a lighter volume.
- The price rallies again but is unable to pass the previous peak and falls again.
- If the price breaks support, declining below the previous low, a double top pattern has formed. (If the price does not break support, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original uptrend.)
- After a double top pattern has formed, there is a possibility of a return move to the breakout point, but should not exceed it, before prices resume to the new downtrend.
Volume during a Double Top Pattern
In a double top pattern, there is usually heavier volume during the first peak and lighter volume on the second. However, when the price breaks support, signaling a reversal to a downtrend, it usually occurs on heavier volume.
A double bottom pattern is a mirror image of the double top.
- A prior downtrend sets a new low, usually on higher volume.
- Then, the stock price rallies.
- The price declines again but is unable to fall under the previous low and bounces up again.
- If the price breaks resistance, rallying above the previous peak, a double bottom pattern has formed. (If the price does not break resistance, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original downtrend.)
- After a double bottom pattern has formed, there is a possibility of a return move to the breakout point, but should not decline below it, before prices resume to the new uptrend.)
Volume during a Double Bottom Pattern
In a double bottom pattern, there is usually heavier volume during the first bottom and lighter volume on the second. However, when the price breaks resistance, signaling a reversal to an uptrend, it is important that it occurs on heavy volume.
Example of a Double Bottom Pattern:
Citigroup’s stock just recently formed a double bottom at around $2.80 and rallied up over $4.40, which was yesterday’s close. The stock is now trading at $4.70 so if you bought at the second bottom and sold it now, you would have made a 68% gain!
Tags: citigroup double bottom, citigroup stock gain, double bottom pattern, double top pattern, double tops and bottoms, double tops or bottoms, head and shoulders, price patterns, reversal patterns, volume during a double bottom pattern, volume during a double top pattern
Posted in Learn The Stock Market, Technical Analysis | No Comments »
Monday, August 17th, 2009
1. How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition
 
This book is written by the founder of Investor’s Business Daily and it is good for both beginners and experienced investors. It focuses mostly on the fundamental, with a few sections on technical indicators and stock charts.
2. The Neatest Little Guide to Stock Market Investing
 
This book teaches you all the basic information that every beginner needs to know from PE ratio to building a winning portfolio in a simple and easy-to-follow manner.
3. Reminiscences of a Stock Operator (Wiley Investment Classics)
 
This book was first published in 1923, and is still a bible for many investors. This book doesn’t teach you how to read a stock chart, nor does it show you how to read financial statements. Instead, it teaches you about human nature and how greed, fear, and impatience controls the stock price.
4. The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)
 
This book was written by Benjamin Graham, Warren Buffett’s teacher. What more do I need to say? The revised version was released in 2003 with commentary by Jason Zweig.
5. One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
 
This book was written by Peter Lynch, one of the best money managers in America. This book doesn’t teach you how to read financial statements. Instead, it teaches you how to find good companies around you. For example, by observing people’s attitudes in a store can help you determine which companies might be a better buy.
Click here for a list of top technical analysis books.
Posted in Learn The Stock Market | No Comments »
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