Candlestick Charts

On a candlestick chart, you will see a line of candles, each representing a day of trading. Every candle has a body and two wicks, one above and one below. The body of the candle represents the spread between the opening and closing prices. The tip of the top wick represents the high price of the day and the tip of the lower wick represents the low price of the day.

Candlestick chartists believe that the most important piece of daily data is the relationship between the opening and closing prices, represented by the body of the candle. If prices close lower than they opened, the body is black and if the prices close higher, the body is white.

The downside to using candlestick charts is that the candles take up a lot of space. For example, a bar chart shown on a computer screen can show six months of daily data, without having to adjust the scale. Candlestick charts, in that same space, will only reveal about two months of data.

Point and Figure Charts

Point and figure (P&F) charts are based only on prices and disregards volume. Unlike bar and candlestick charts, they do not have a horizontal time scale. Point and figure charts consist of columns that have a series of stacked Xs or Os. A column of Xs is used to represent a rising price, while a column of Os represent a falling price.

P&F charts make congestion areas stand out, which helps traders find levels of support and resistance.

Fundamental analysis is the study of economic forces that cause prices to move higher, lower, or stay the same. This method is different from technical analysis, which concentrates on the study of market action. In other words, fundamentalists study the causes of market movement, while technicians study the effect. However, both help you determine the direction that prices are likely to move and it is recommended that you study both methods.

The main idea of fundamental analysis is to find out the company’s intrinsic value by studying qualitative and quantitative factors. Quantitative factors are numerical and can be measured. Such factors include a company’s financial statements. As a fundamentalist, you need to know the company’s expenses, revenues, assets, and liabilities. Questions to keep in mind when studying fundamental analysis are:

-Is the company actually making profit?
-Are the company’s sales increasing?
-Is the company’s revenue growing?
-How much does the company own in debt?
-Are they able to repay its debt?

This means you should be spending a lot of time studying the company’s balance sheets, income statements, and cash flow statements to gain insight on the company’s future performance.

Qualitative factors are based on the quality of the company that are impossible to quantify, such as its quality of management. Other factors to consider are its organization, competition, and regulation (certain regulations might limit potential profits).

How does fundamental analysis compare to technical analysis? Which method should you use?

Many traders believe that technical analysis is a more effective approach because, by definition, the technical approach includes the fundamental. Technicians believe that anything affecting the price, such as fundamentally or psychologically, will be reflected on charts. Thus, they believe that the study of fundamental becomes unnecessary. However, the reverse is not true.

Again, this is not as to say that technical analysis is better than fundamental analysis, or vice versa. Keep in mind that there are times when there are conflicts between the charts and fundamentals, causing discrepancies. Some traders choose to use only one approach and if you don’t want to use both approaches, make sure you try both of them first and find out the one that works better for you.

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.

Many companies issue 2 different types of stocks: common stocks and preferred stocks. Common is definitely not a derogatory term as one might think. Common just means that it is the standard one that the company issues. Likewise, the name “preferred” does not mean that these shares are better, but rather it offers investors privileges and rights different from those offered by common stock. The main differences between the two are the levels of risk and privileges involved.

Common stocks, also referred to as voting shares or ordinary shares, is considered to be more risky and speculative than preferred stock because they are the last priority for ownership structure, should a company go out of business. This means that they are paid after all the other creditors, preferred stockholders and bondholders if a company goes bankrupt. They are last to receive interest and dividends. An advantage is that due to what is called preemptive right, common stockholders have the first right to purchase any new shares of common stock the firm decides to issue before any non-holders. Another advantage is that common stock provides voting rights on matters of corporate policy. Shareholders’ voting rights are based on one vote for each share of stock held. However, they cannot vote on dividends.

Common stock shareholders can be paid dividends variable with the company’s growth. For example, the company’s board of directors will decide whether or not to pay out a dividend. When a company makes profit, after tax, retained earnings may be distributed to shareholders as dividends. If you are one to take this risk, you could receive a great increment of dividends.

Preferred stocks, also called hybrid investment, tend to be more expensive but do not fluctuate as often. It is a more stable investment because it guarantees a regular dividend that is not directly fixed to the market, like the common stock. That means that if the company grows, you would receive the same amount of dividends. You should buy preferred stocks if you want to have priority and have a greater claim on the company’s assets. Even though preferred stockholders are paid before stockholders, they are paid after bondholders. Preferred stockholders do not enjoy voting rights. They can only vote on certain issues such as if the company wants to merge, liquidate asses, or issue more bonds or preferred stocks.

There are 4 types of preferred stocks:
1) Cumulative preferred stock – Guarantees an investor that if one or more dividends are not paid, the missed dividends will be accumulated. All the dividends must be paid in full before any common stock dividends can be distributed.
2) Noncumulative preferred stock – Any dividends missed are lost to the stockholder.
3) Participating preferred stock – You receive extra dividends when a company does well.
4) Convertible preferred stock – Allows you to convert a certain number of preferred shares to common shares.