Posts Tagged ‘stock market’
Tuesday, July 28th, 2009
Learn the Stock Market Lesson – Support and Resistance
Support and resistance is a concept in technical analysis, which is essential to understand in order to master reading price trends and pattern charts.
–> What is Resistance?
Example – Assume that Bob has been holding shares in Microsoft for 2 months and notices that, during that time period, its price had failed to pass $25 several times. However, he also notices the price has gotten very close to moving above $25. In this example, the price level near $25 is a level of resistance. If the price were to rise above $25, there would be a break in the resistance.
As you can probably assume from the example above, resistance refers to the price at which a stock trades, but not exceed past, for a period of time. The stock stops rising and does not break resistance because sellers start to outnumber buyers.
In other words, this resistance price level occurs when selling is sufficient enough to disrupt or reverse an uptrend. It is represented on a chart by a horizontal line that connects several tops, signifying that sellers are overpowering buyers. Resistance is also regarded as a ceiling because its price level prevents the prices from moving up and past it.
When the price reaches the resistance level, supply is believed to be stronger than the demand, which means that it is preventing the price from rising above the resistance. However, resistance does not always hold and when it breaks, it signals that the bulls have beaten the bears in that fight, creating new highs.
–> What is Support?
The support price level occurs when buying is sufficient enough to disrupt or reverse a downtrend. It is represented on a chart by a horizontal line that connects several bottoms, signifying that buyers are overpowering sellers. Support is also regarded as a floor because its price level prevents the prices from falling below it.
When the price reaches the support level, demand is believed to be stronger than the supply, which means that it is preventing the price from falling below the support. However, support does not always hold and when it breaks, it signals that the bears have beaten the bulls in that fight, creating new lows.
–> Strength of Support and Resistance
The strength of support and resistance is important because it helps you determine whether the trend is likely to continue or if it is going to reverse. Their significance can be determined by the:
- length of time they spend in a support or resistance area (the longer the period of time, the more significant the area is),
- volume (if a support or resistance level is formed on heavy volume, the level is regarded as more important than if formed on low volume),
- time (the more recent the trading took place, the more important it is)
–> False Breakouts
But beware of false breakouts. For example, the market might break a price resistance and rally, but then quickly reverses and falls. Likewise, the market can also break support briefly just before it reverses and rallies. Professionals love false breakouts because it provides one of the best trading opportunities.
Breakouts are similar to tails except that tails have a single wide bar, but false breakouts can have several bars, none of which are especially tall.
Tags: Learn The Stock Market, resistance, stock market, stock market lessons, support, support and resistance, Technical Analysis, what is support and resistance
Posted in Learn The Stock Market, Technical Analysis | Comments Off
Sunday, July 26th, 2009
YGE was on my watchlist this past Tuesday, July 21. If you purchased their shares at Wednesday’s opening price and held them until Friday’s closing price, you would be up about 17%! I hope some of you bought their shares. It’s a shame that I didn’t buy any because on Wednesday morning, the stock price didn’t open higher than Tuesday’s close, which is a rule that I follow by. I don’t buy stocks unless they trade higher than the previous day’s close.
Tags: Daily Stock Picks, stock market, yge
Posted in Daily Stock Picks | Comments Off
Friday, July 24th, 2009
Learn the Stock Market Lesson — Uptrends, Downtrends, and Trendlines
What are uptrends and downtrends?
Uptrend pattern:
- Each rally reaches a higher point than the preceding rally.
- Each decline reaches a higher point than the preceding decline.
(higher highs and higher lows)
Downtrend pattern:
- Each decline stops at a lower point than the preceding decline.
- Each rally stops at a lower level than the preceding rally.
(lower lows and lower highs)
What are trendlines?
Trendlines are lines that connect nearby bottoms or nearby tops, which are used to identify trends. The most important trait of a trendline is its angle, or slope, because it identifies the dominant market force.
Uptrendline:
- A line that connects 2 or more nearby bottoms and slants upwards.
- Bulls are in control. Look for buying opportunities.
- If we draw a line parallel to it across the nearby tops, it will mark a trading channel.
Downtrendline:
- A line that connects 2 or more nearby tops and slants downwards.
- Bears are in control. Look for shorting opportunities.
- If we draw a parallel line across the nearby bottoms, it will mark a trading channel.
Trading range:
- The lines connecting the tops and the lines connecting the bottoms are not slanting upwards nor downwards – the lines are close to the horizontal.
- We can either wait for a breakout to step in or trade short-term swings within that range. (Beware of false breakouts)
- Often referred to as “trendless”
Techniques
It is better to draw trendlines across the edges of congestion areas instead of price extremes because extreme points reflect panic only among the weakest crowd members. The breaking of a trendline is one of the warnings of a trend reversal.
A trendline is also more important and valid if:
1- It’s over a longer timeframe. A trendline on a weekly chart is more important than a daily trendline.
2- The trendline is longer in length. A short trendline reveals mass behavior for only a short period of time whereas a longer one reveals mass behavior for a longer time.
3- There is more contact between the price and trendline. A trendline that is only beginning to form only touches 2 points. More points of contact makes the trendline more valid.
4- Increasing Volume. When prices move in the direction of a trendline, an increase in volume confirms that trendline.
Real Life Example:
Uptrend:
Tags: downtrends, stock market, Technical Analysis, trading range, trendless, trendline lines, uptrends, what are uptrends and downtrends
Posted in Learn The Stock Market, Technical Analysis | Comments Off
Thursday, July 2nd, 2009
Learn The Stock Market Lesson – The Mind of the Stock Market : Why Do Stock Prices Go Up?
The Fact:
Like many traders, I myself, once believed that prices go up when there are more buyers than sellers and down when there are more sellers than buyers. However, Dr. Alexander Elder stated in his book, “Trading For A Living,” that, although, the previous statement seems logical, it is not true. This is because the number of instruments, such as stocks or futures, bought and sold in any market is always equal by definition. If you want to buy a share of a stock, someone has to sell it to you. Likewise, if you want to sell short a certain share, someone has to buy it from you. It takes two to transact. Essentially, the number of stocks bought and sold is equal in the stock market just as the number of long and short positions in the futures market is always equal. If there is an odd amount, such as only one buyer or only one seller, there is no trade and therefore, there will be no price movement. Rather, the common logic and argument that people hold refer only to those willing to buy and sell.
So Why Does Price Rise And Fall Then?
Prices rise and fall due to the alterations in the intensity of greed and fear among buyers and sellers. This means that every change in price reflects the battle between the bulls and bears. Price rises when buyers feel confident and do not mind paying a little extra because they are expecting prices to rise even higher. When these optimistic bulls meet the fearful and defensive bears, the market rallies and continues as long as bull are greedy enough to meet sellers’ demands.
The more aggressive their feelings are, the sharper the rally is. For example, if buyers feel just a little stronger than sellers, the market rises slowly. It is the job of technical analysts to determine exactly when the buyers are strong and when they are not.
Similarly, the rally ends when many bulls lose their enthusiasm, causing the price to slide. There is now greed among bears and fear among bulls. That’s when the bears feel optimistic and do not care about selling short at lower prices. Bulls are now the fearful ones and they agree to buy only at a discount. As long as bears feel like winners, they continue to sell at lower prices. The downtrend continues until the bears start feeling cautious and refuse to sell at lower prices.
As you can see, the process is more complex than the view that stocks go up when there are more buyers than sellers and down when there are more sellers than buyers. Rather, it relates more to market “panics” in buying or selling. To conclude, there are never more buyers than sellers or more seller than buyers.
For more information, I recommend you to read Dr. Elder’s “Trading For A Living.” This was the first book that I read when I began my trading career and until this day, it is still one of my favorite books. The book covers a lot about trading psychology, which I mentioned in an earlier post that it is crucial to control your emotions. So if you guys haven’t already, I suggest you go to the nearest library and pick up his book or just go on Amazon and purchase it from there.
Tags: dr. alexander elder, fear, futures, greed, stock market, stock market lesson, stocks, the mind of the market, the stock market, trading for a living, trading psychology, why does price go up
Posted in Learn The Stock Market, Technical Analysis | 2 Comments »
Saturday, June 6th, 2009
Learn The Stock Market Lesson - Commissions and Slippage
Have you ever wondered why many traders lose and get beaten by the market? Such factors include not only emotional and thoughtless trading, but commissions and slippage as well. Many amateurs ignore or refuse to believe this, but the fact is that the trading industry and the market are designed so that most traders lose money. Commissions and slippage play a significant role in accomplishing that.
Commissions are what you pay to enter and exit a trade. It is a fee charged by brokers for their service in facilitating a transaction, such as the buying or selling of securities. Commissions vary from brokerage to brokerage. However, this does not mean that you should look for the lowest commission available, although that is a factor that many traders consider before a transaction. This is because the brokerage that charges a low commission might not necessarily be the best one for you. For example, discount brokerages offer no advice and are probably not recommended for new investors. Depending on your preference, you might feel that a full-service brokerage suits your taste better because of their personalized service, but of course, commissions are much higher also. I will do a comparison of online brokers in a later post.
Slippage is the difference between the price at which you place your order and the price at which it actually executes at. It is like paying 70 cents for a pen even though the store posted the price to be 68 cents. Slippage often occurs when market orders are used but if you place a limit order, it is filled at your price or not at all.
There are 3 kinds of slippage:
1) Common – This slippage is due to a spread between buying and selling prices, or the spread between the bid and the ask.
2) Volatility-based – Slippage often occurs during periods of higher volatility, rising up with market volatility.
3) Criminal – This type is caused by criminal activities of floor traders, who have many ways of stealing money from customers.
To reduce slippage, avoid thin and fast-moving markets because when there is a big rally or drop, you can get hit with a 20-30 point slippage, and sometimes even more. You can also use limit orders, buying and selling only at a specified price.
Remember to beware of your commissions and slippage. It is recommended that you keep a record, making note of what the floor traders and brokers are taking from us from each transaction.
Tags: brokers, comissions, common slippage, criminal slippage, discount brokerages, discount brokers, slippage, stock market, volatility based slippage
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Thursday, May 28th, 2009
Learn The Stock Market Lesson - Bears, Bulls, Hogs, And Sheep
Legend has it that Wall Street was named after a wall that was designed to keep farm animals from wandering around Manhattan. Today, four animals are still frequently mentioned on Wall Street: bears and bulls, hogs and sheep. Stock traders often say, “Bulls make money, bears make money, but hogs get slaughtered.”
Here is how you can remember each of the 4 animals and what they symbolize:
Bulls- When a bull attacks, he has a tendency to lower his horns and strike upwards. Therefore, the term “bull market,” means a rising stock market. A bull is a buyer – a person who bets on a rally and profits from a rise in prices. The trader would also be known as a bullish trader.
Bears- A bear fights with its paw, striking downwards. Therefore, the term “bear market,” means a falling stock market. A bear is a seller – a person who bets on a decline and profits from a fall in prices. The trader would also be known as a bearish trader.
Hogs/Pigs- Hogs are greedy and get slaughtered when he loses site of his original strategy and becomes too greedy. They are tempted to buy shares which they cannot afford due to their greed of being able to make quick cash. They are often unable to control their emotions, panic, and make bad decisions, which is why they get slaughtered in the long run. Some hogs overstay their positions—waiting for profits to get bigger even after the trend has reversed itself.
Sheep- Sheep usually has no trading strategy. In Dr. Alexander Elder’s wonderful book, “Trading for a Living,” he describes sheep as being “passive and fearful followers of trends, tips, and gurus…You recognize them by their pitiful bleating when the market becomes volatile.”
What happens during the open market?
Bulls are buying, bears are selling, hogs and sheep get trampled while the undecided traders wait on the sidelines, watching and waiting for the “right” time to come in. A trade occurs when there is a consensus between a buyer and a seller—either a bull agrees to a seller’s terms and pays, or a bear agrees to a buy’s terms and sells a little cheaper. The presence of undecided traders puts pressure on both bulls and bears because the buyer knows that if he waits too long, another trader can step in, snagging away his bargain. A seller knows that if he holds out on a high price for a long period of time, another trader may step in, trying to sell at a lower price. This pressure leads buyers and sellers to come to consent of a price, causing a transaction to be processed.
Keep in mind that without a distinct and disciplined trading strategy and using techniques such as technical analysis and fundamental analysis, you may become either a hog or a sheep and you will eventually be washed out by the market. (I will be discussing some trading techniques such as technical and fundamental in a later post).
Source Used: Trading for a Living: Psychology, Trading Tactics, Money Management Written by Dr. Alexander Elder
(This is a GREAT beginner’s book. I recommend everyone to at least read this book, if not own a copy of it. It is pretty cheap on Amazon.com if you want your own copy or you can look in your local library.)
Tags: alexander elder, bear market, bears, bull market, bulls, fundamental analysis, hogs, price, sheep, stock market, Technical Analysis, trading for a living, wall street
Posted in Learn The Stock Market | Comments Off
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