Archive for the ‘Learn The Stock Market’ Category
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 | Comments Off
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.
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Click here for a list of top technical analysis books.
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Monday, August 17th, 2009
I read over 100 books on stock trading, including technical analysis, fundamental analysis, general investing books, and mechanical trading systems. The following 10 are the best technical analysis books in my opinion:
1. The Definitive Guide to Swing Trading Stocks
- This book covers all the basic principles in trading as well as advanced strategies on how to trade successfully. You will learn how to swing trade stocks using multiple time frame, how to choose the right stocks to add on your watchlist, identify trends, trade-entry setups, profit taking methods, money management skills and how to manage portfolios. Best of all, the author reveals his own unique swing trading method that work for him, along with other traders. Most importantly, he explains the reasons why these strategies work. He also discusses other factors that are important for stock selection such as position size, stop-loss strategy, profit taking, portfolio balancing, trading statistics, and many more.
2. Trading for a Living: Psychology, Trading Tactics, Money Management
- This book is divided into 3 major parts: Psychology, Trading Tactics, and Money Management. You will learn many popular technical indicators and how to use them efficiently to generate trading signals.
It also helps you discipline your mind to be successful in the stock market. The book also covers money management skills. One thing that I don’t follow from this book is the author’s 2% stop loss because I think that is way too little in today’s volatile market.
3.  High Probability Trading
- This book is quite interesting because it offers a few unique points that you wouldn’t find in other books. One of them is the discussion on overbought areas, which are identified by using the indicator, stochastic. Marcel Link, the author, suggested that we should not sell a stock while it is in the overbought area. Instead, we should wait until it pulls back from the overbought area or else you will miss a lot of good opportunities. I agree with him as I backtested the strategy with my own mechanical trading system.
4. Profitable Candlestick Trading: Pinpointing Market Opportunities to Maximize Profits
- This is the best book I read on candlesticks. Unlike other candlestick books, this one introduces candlesticks and how you would trade them in simple steps. For each pattern, there is a chart and steps that you need to follow. I finished the book in 2 days and I fully understood all the patterns and how they work.
5. Come Into My Trading Room: A Complete Guide to Trading
- This is the first book I read on technical analysis. I read the book 3 times for about 1 month to digest everything presented in the book. It will be much easier if you read “Trading for a Living” before reading this one, as they were both written by the same author. I followed the techniques presented in the book when I first started trading, but I didn’t make much profit. Obviously, that does not mean that this is a bad book. There might be thousands of people following his techniques and making fortunes. Currently, I’m only using daily charts to make my trading decisions. I don’t use weekly charts because I usually don’t hold a stock for over a week.
6. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance)
- This book is perfect for beginners. It is a very comprehensive book that covers almost every technical indicator that you need to know. However, if you already read the top 4 books and understand each of them well, then you don’ t need to read this book as you wouldn’t learn much new. I finished this book in 2 days skipping 2/3 of the book because I already knew the concepts and indicators presented in the book.
7. Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis (Wiley Trading)
- This is a good book to read if you are a computer programmer and know how to build your own trading systems, or at least you should be able to program tradestation to backtest trading signals in order to read this book.
8. Short-Term Trading in the New Stock Market
- This book covers trading skills and strategies and the author’s 7-step approach to the stock market. It also covers how to set stop losses and when you should not buy a stock, which is when the risk-reward ratio is less than 1:3. The book offers some interesting points and history stock market events that seemed to repeat itself.
9. A Beginner’s Guide to Day Trading Online (2nd edition)
- If you plan to day trade online, you should read this book as it shows you different trading strategies based on technical analysis and how they apply to day trading. It describes, step by step, on how to set up an online trading account and how to read the screen.
10. Encyclopedia of Chart Patterns (Wiley Trading)
- A great book on technical analysis and chart patterns for both beginners and experienced traders.
Click here to see a list of top fundamental analysis books.
Posted in Learn The Stock Market, Technical Analysis | Comments Off
Friday, August 14th, 2009
Learn the Stock Market Lesson – The Purpose of Volume in the Financial Markets
Volume is a significant indicator in technical analysis because it provides important clues about the intensity behind price movements. Volume can be measured by shares, contracts, or dollars that trade hands between sellers and buyers.
Rising volume tends to confirm trends and declining volume brings doubt. If there is a big price movement, the perceived strength of that movement is based on its volume. The higher the volume is at the time of the price move, the more significant and stronger the move is.
Rising volume shows that traders are still coming in, letting the trend to continue. But if traders start to abandon the market, volume falls and the trend is less likely to continue.
Volume During an Uptrend
During an uptrend, volume confirms the price trend if the volume is heavier when the price moves higher and lighter when the price dips. This shows that the buying pressure is greater than the selling pressure, allowing the uptrend to continue.
Volume During a Downtrend
During a downtrend, volume confirms the price trend if the volume is heavier when the price decreases and lighter on bounces. This shows that the selling pressure is greater than the buying pressure, allowing the downtrend to continue.
Trading Techniques
- When the stock price breaks out from a trading range and if there is a sudden increase on the volume of a stock, it usually indicates the beginning of a trend. Get in on that trend.
- When a trend is in a well-established move and if there is a sudden increase on the volume of a stock, it usually indicates the end of a trend. It’s probably best if you skip or leave that trade.
- Divergences between price and volume tend to signify turning, or reversal, points. For example, when the price of a stock rises to a new high but volume shrinks, it shows that the price increase did not attract much interest and a downside reversal is likely. Likewise, if the price falls to a new low and volume falls as well, it shows that the price decline attracted little interest and an upside reversal is likely.
To use more objective ratings of volume, you can study an indicator called Force Index, which was developed by Dr. Alexander Elder, author of the books, “Trading For a Living” and “Come Into My Trading Room.”
Tags: alexander elder, come into my trading room, downside reversal, force index, purpose of volume, rising volume confirms trends, trading for a living, trading techniques, upside reversal, volume during break out
Posted in Learn The Stock Market, Technical Analysis | Comments Off
Friday, August 14th, 2009
Is this time to buyMcDonalds? Click here to watch a free video analysis by Adam on Starbucks and McDonalds.
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Sunday, August 9th, 2009
Learn the Stock Market Lesson – Types of Technical Indicators
You can argue about trends but technical indicators are objective. Indicators are derived from prices and the more complicated they are, the more they deviate from prices and reality. Therefore, using simple indicators work the best.
The good technical indicators are immune to parameter changes and give useful signals at a broad range of settings. This means that if an indicator you are using gives great signals on a 20-day window for a certain stock but bad ones when you switch to a 15-day window, then the indicator is not too reliable.
Technical indicators can be divided into three major groups:
1) Trend-following- These indicators include moving averages, MACD (moving average convergence-divergence), Directional System, among others. These indicators help us stay long in uptrends and short in downtrends.
2) Oscillators – These indicators include Stochastic, Rate of Change, and many more. Oscillators help us identify turning points, or reversals, by displaying when markets are overbought (too high and about to fall) or oversold (too low and about to rise). They work great in trading ranges, catching upturns and downturns. The disadvantage is that they can give premature buy signals in downtrends and sell signals in uptrends.
3) Miscellaneous Indicators – These indicators include Bullish Consensus, Commitments of Traders, and New High-New Lower Index, which measure the current mood of the market.
The tricky part is that indicators from different groups often contradict one another. For example, when markets decline, trend-following indicators turn down, signaling us to sell but at the same time, oscillators can become oversold and signal us to buy.
Tags: bullish consenus, commitments of traders, directional system, downtrends, macd, miscellaneous indicators, moving average convergence divergence, new high-new lower index, oscillators, overbought, oversold, rate of change, stochastic, stock market indicators, trend-following indicators, types of technical indicators, uptrends
Posted in Learn The Stock Market, Technical Analysis | 1 Comment »
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(1) The importance of psychology in price movement
(2) How to spot mega trends
(3) Understanding of technical price objectives
(4) How to picture price objectives
(5) How to trade with moving averages
(6) How to use point and figure trading techniques
(7) How to use the RSI indicator
(8) How to correctly use stochastics in your trading
(9) How to use the ADX indicator to capture trends
(10) How to capitalize on natural market cycles.
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