Archives for October 2019

When things don’t go well in any sort of endeavor, time honored advice is typically to get back to the basics. Better advice in stock trading, options trading, or commodity trading is to stick to trading basics from the start and not need to “get back to” trading basics. So, what are trading basics? The basics of trading are to work from a plan and to work the plan. The plan in trading basics is a well thought out and frequently tested trading strategy. Successful trading requires a knowledge of the fundamentals for trading stocks, trading options, trading commodities such as gold futures and oil futures , or trading futures in such exotic entities as futures on interest rates. It also requires technical analysis tools such as Candlestick chart analysis in order to take advantage of a breakout gap, full scale stock price reversal, or to sell stock at the top of a trading cycle.

A good trading strategy includes taking the time to learn how to do and routinely carry out fundamental analysis. It includes learning how to do technical analysis with Candlestick analysis in order to anticipate and profitably trade changes in stock prices, commodity prices, or futures prices. Starting with the trading basics puts traders in the position to make money in trading. Carrying on with trading basics brings the trader closer to profitable trading. Besides learning the basics of fundamental and technical analysis the trader needs to learn and use the trading basics of using a trade station, making trades in a timely manner, and simply being there when the trading action starts.

The most important factor to success in trading is showing up. That sounds silly but it is the foundation of trading basics. The new trader will need to dedicate an amount of time to learning about market and what is traded. He will need to deep in touch with market news for stocks, bonds, options, and the rest. For the beginning trader who envisions successful trading as executing trades via clicks of a mouse trading basics will require that he learn how to devote a portion of his time to the homework necessary for successful trading. No matter what equity a trader is trading he will find that the market moves when the market decides to move. Traders profit from following the market, doing technical analysis, and executing timely trades. This means that when the trader is not “doing his homework” he needs to be at the trade station following the equity which he is trading.

The last of the trading basics mentioned here the periodic review of trading results. This is not the least important of the basics; it is the most essential to long term success. No one is capable of setting up a trading strategy for all seasons. Markets change, rules change, currencies change, and trading software changes. A trade needs to review his results and then review his trading process. It is by doing so that the trader gets better at predicting stock price, learns how to spot a stock market correction, and learns to avoid overpriced stock. It is by following the basics that the trader comes to long term success.

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Market Direction

Let the market tell you what the market is doing! This is sage advice that comes from the Japanese Rice traders. Their  centuries of falling candlestick signals developed a very simple trend analysis program. It provided the visual graphics of what investor sentiment was doing. This has a completely different investment philosophy than what has been created over the past 100 years of Wall Street analysis. The purpose of fundamental analysis is to reveal which stocks/sectors will have the greatest potential for the future. Investing in future price movements based upon fundamental research is a high risk/low probability investment program. Yet it seems to be the most accepted in this day and age. The Japanese Rice traders had a completely different perspective on how to make money from the markets. Let the market tell you what the market is doing! Then invest in those entities that are confirming what the market is conveying.

DOW

The Dow chart reveals a very slow steady uptrend for the month of December. The market indexes can provide a certain amount of statistical direction based upon the first few trading days of a new year. The Dow had been up over 125 points during the day. This was the first time the Dow has moved in a range more than 100 points in the last four weeks of trading. This low volatility phenomenon last occurred in 1996. A strong bullish characteristics of todays trading indicated the Bulls still in control. The magnitude of todays trading reveals what the thought process was for many money managers as they were assessing whether 2011 was going to be a strong or weak year.

A strong bullish move in the overbought conditions usually indicate exuberance coming into the trend. However, closer analysis to today’s trading revealed many stocks moving in the same range as they have been for the past four weeks, there just was more stocks moving positive. This would indicate a continuation of the buying. The exuberance was not showing up. This would indicate more upside trading on the short term. The strength of the market revealed in the first week of a new year is usually a prelude to the strength of the market over the year. This is one of the rules of thumb. Do rules of some always work? Not necessarily, but the anticipation of certain expect nations can be better verified by witnessing what the candlestick signals are doing during specific time frames.
The combination of these indicators are very important for portfolio management as well as option training. Just as the first week provides an indication of the potential strength of the market trends for the year, the strength of a candlestick signal will illustrate the strength of a price move. Obviously, the stronger the signal, the more compelling for establishing a position of a portfolio. The strength of a signal will also determine what type of option strategy should be applied to the trade.

Mini option training – Tuesday night January 4, 2011.

Tomorrow night will be a two-hour introduction to option training presented by the Candlestick Forum. This training is to introduce investors to the basics of options. Why they are used, how they are used most effectively, and how to apply the correct training strategy to the correct trend analysis. Most investors oversimplify the option training strategies. If a stock price is going higher, by the calls! That is where most investors lose their money. Learn how to correctly use calls and puts. Learn how to correctly use call strategies and put strategies. Time and magnitude are very important factors for trading options correctly. Join us to learn the basics of options and how they can be applied successfully using candlestick analysis.

Chat session tonight at 8 PM ET – the strong sectors for the beginning of 2011

Good Investing,
The Candlestick Forum Team

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Futures options are similar to futures themselves in that both give the holder the right to buy or sell the underlying commodity for a specific price on a specific day. Beyond this there are some significant difference between the two and how they are traded.

Rights and Requirements

The main difference between futures options and futures has to do with rights and requirements. Futures options give the holder the right to buy or sell (depending on the option) the underlying commodity for a specific price on a specific date while futures obligate the purchase or sale. While there are investment strategies for futures that eliminate the need for an investor to accept delivery of 10 tons of pork bellies, the basic concept is the same; futures require the buyer to take delivery (in one form or another) of the commodity in question.

Futures Options Contracts

Futures options markets trade options contracts, which specify the underlying asset, the expiration date, and the strike price. Those involved in day trading can trade options contracts to make a profit on the difference between the buying price and the selling price when the options are sold before expiration, or to make a profit from the underlying asset when they are exercised.

As with futures contracts, futures options contracts are traded by day traders and longer term traders in futures markets, and also by non traders with an interest in the underlying commodity. When traded for the underlying commodity, options contracts work the same way as futures contracts, but only give the right to buy or sell the underlying commodity rather than the obligation. For example, a farmer will sell options on his cattle if he thinks prices are going to drop before he takes them to market; conversely, a meat processing company will buy futures on cattle if they believe that prices will rise. Both are non-traders but they have interests in the commodity. The final part of the equation is the investor who attempts to make a profit by successfully trading these commodities.

Futures or Cash Settlement

Futures options are settled in either cash or a futures contract in the underlying security when they are exercised. In-the-money, cash-settled futures options are valued using the trading price of the underlying security at expiration, and the profit is placed into the trader’s account. In-the-money, futures settled options are converted into the appropriate futures contract, which the trader can then buy or sell to realize the profit or hold the purchase and simply continue commodity trading.

Because futures options contracts only give the holder the right to purchase, successful traders don’t have to purchase losing positions. If an investor is holding a position that has not prospered according to the contract, he or she can just walk away from the agreement and let it expire. This is the benefit of futures options over standard futures contracts; the ability to walk away from a losing position leaves the investor with a reduced exposure. Conversely, an investor that is holding a contract when the buyer does not exercise his or her position has profited by receiving the premium for selling that position. Such a strategy is helpful during negative periods in the market because it allows for profit taking in a less risky manner.

Conclusion

Futures options, although they are quite similar to standard futures contracts, still possess features that make them very desirable for successful trading. This type of trading can open new markets for investors looking to make money.

Commodities research is a basic part of commodities trading. Commodities research may be as simple as looking at commodity news reports on Bloomberg, Yahoo Finance, Google News, or your daily newspaper before starting commodity trading. More basic and timely commodities research information comes from the US Department of Agriculture via its Agricultural Market News. This information can be found online and is often what the news services pick up and report. Within the Agricultural Market News traders can find specific reports including daily updates including the Daily National Grain Market Summary. What traders read about commodities is for fundamental analysis. However, both fundamental and technical analysis are important for successful commodity trading. Reviewing recent and long term commodity price patterns will give guidance about future movement in commodities markets. The use of Candlestick charting can give the trader an advantage in trading commodities. A good place to start learning about trading commodities is with Commodity and Futures training.

Fundamental commodity analysis is the basis of what drives futures prices. However, as soon as the first trader has acted on new market fundamentals the market has changed. As traders buy futures or sell futures the commodity price changes. Options traders buying calls, buying puts, selling calls, or selling puts all change the market with the sum of their trading activity. Although the trader will have a firm grasp of his or her commodities research it is market fundamentals that drive day to day trading. Rice traders in Japan during the days of the Samurai learned that price patterns repeated themselves and were predictive of subsequent market movement. The same principles that worked three hundred years ago work today with the application of Candlestick pattern formations and Candlestick trading tactics to help the trader profit from commodity price fluctuations.

Commodities research helps the trader anticipate futures prices but understanding market principles helps the trader execute profitable trades. By doing commodity research on a daily and ongoing basis the commodities trader can anticipate major market changes. Because commodities can vary in price over years by a factor or two or more buying futures several years out allows the trader to enter a position at relatively little cost. If market conditions, such as the current drought in Russia and Europe, drive up the price of a commodity such as wheat. The trader need not wait until expiration of his or her contract. The trader can execute a sell when he previous bought or a buy when he previously sold and exit the trade at a profit. Because grain futures can trade several years into the future and oil futures even farther out that is the time horizon for commodities research. A commodity trading system that starts with research of the commodityfs prospects several years into the future gives the trader a solid sense of the possibilities of the commodities markets. Commodity futures trading then becomes a matter of analysis and not one of speculation. Commodities research will help the trader stay well grounded in the possibilities and limits of the commodities that he trades.

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Market Direction

The candlestick investor has a great advantage over other investors. The graphic formations immediately reveal what is occurring in investor sentiment. This becomes a very valuable tool for analyzing the market trends. As can be seen in the Dow chart, as the Dow approached the 50 day moving average, the trading formations became very indecisive. Today, the Dow formed a Hammer signal, with stochastics now in the oversold condition. This continued to show evidence that the 50 day moving average was going to act as support.

DOW

That information is like a batter knowing what a pitcher is going to pitch next. Because investor sentiment is a predictable reoccurring process, an investor can be prepared for the next price move based upon very simple results following a candlestick reversal signal. After today’s Hammer signal at the 50 day moving average with stochastics in the oversold condition, it becomes a very simple analysis of what should occur the following day. A positive open would be that confirmation a reversal had occurred. Waking up tomorrow and seeing  the premarket futures are trading positive, a candlestick investor will have much more confidence in establishing long positions as quickly as possible.

HAMMERS and HANGING-MAN

Recognition: The lower shadow (or tail) should be at least two times the length of the body. The color of the body is not important although a black body has slightly more Bearish indications and a white body has slightly more Bullish indications.Pattern Psychology: This pattern at the bottom of a down trend is called a Hammer. This pattern at the top of an uptrend is called a Hanging-Man Related Articles: How to Trade The Hammer Signal , How to Trade the Hanging Man.

The appearance of a candlestick signal provides an immense amount of information. It represents what investor sentiment is doing right now. The signals represent a change that have been recognized by Japanese Rice traders for centuries. As can be seen in the wheat chart, last week demonstrated a large candlestick reversal signal. The Bearish Harami forming as the price move away from the T-line, was a clear indication there had been a dramatic change of investor sentiment.

December Wheat

The T-line has an opportunity to act as support, creating a J-hook pattern. However, the strength of the reversal signal has to be addressed. The magnitude of the signal should have kept the candlestick trader prepared for a continued downtrend.

Chat session tonight at 8 PM ET

Good Investing,
The Candlestick Forum Team

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Would you like to learn about a type of commodity trading chart that is more effective than the charts you are probably using now? If so, keep reading. If you are brand new to the art/science of chart reading, don’t worry, we are going to discuss candlestick charting. This stuff is powerful, but it is really quite simple to learn and the results can be impressive!

Technical Analysis: a Brief Explanation

Stock technical analysis is simply the study of companies and their stock prices as reflected on price charts. Whether these charts employ candlestick charting or are simple bar charts, technical analysis assumes that current prices should represent all known information about the markets. Prices not only reflect facts, they also represent human emotion and the psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions…greed and fear, panic, hysteria, elation, etc. also dramatically affect prices. Markets may move based upon people’s expectations, not necessarily facts. A market “technician” attempts to disregard the emotional component of trading by making his decisions based upon chart formations, assuming that prices reflect both facts and emotion.  Charts, even those using only the basics of Japanese Candlestick charting, help the successful investor to compile data into a useful format.

Bar Chart Basics

Both standard bar charting and basic candlestick charting are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame, as shown with the horizontal element of the bar. The total vertical length/height of the bar represents the entire trading range for the desired period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar. At this point, you might be asking yourself why you need to know candlestick chart analysis if you understand a bar chart. Having said that, let’s look at the stock investing basics of Japanese Candlesticks now.

Candlestick Charting Explained

The answer to the question above may not yet seem obvious, but the results are. Basically, candlestick charts are much more visually appealing and informative than a standard two-dimensional bar chart. As with a standard bar chart, candlestick chart patterns have the basics as well; OPEN, HIGH, LOW and CLOSING price for a given time period are included. The body of the candlestick is called the “Real Body” and it represents the range between the open and closing prices. A black, or filled-in, body represents that the commodity or stock closed lower than its open, or in a bearish condition. When the body is open or white, the commodity or stock closed higher than its open, indicating a typically bullish condition. A thin, vertical line that may be found above and/or below the real body is known as the Upper or Lower Shadow, and its presence represents the high or low price extremes for the trading period. Now that you have the basics of the candlestick charting, let’s compare them to bar charts.

Comparing Candlestick Charting and Bar Charts

Lacking the Shadows of a basic candlestick chart, a bar chart cannot reflect the difference between a price extreme and a high or low. For example, a stock that opened high, but traded low for the day would not be accurately depicted in a bar chart. In a basic Candlestick chart, however, the Upper Shadow would show the extreme of the opening price as well as the trading range for the day.  In this example, the basic candlestick chart formation more accurately represents the trading of the day. In addition, since the stock closed lower than the open, the Real Body would be black; indicating that the day’s trading was bearish. A typical bar chart is simply unable to provide this level of information. And remember, these are just the basics of a candlestick chart!

In conclusion, even the most basic of candlestick charting methods provides its user with a valuable technical analysis tool. When used with a productive stock investing system, you can successfully analyze stocks and their trends before you invest. Why use a limited bar chart when you can have the power of candlestick charting? Your bottom line will know the difference!

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In the USA European style options are seen on the over the counter market while American style options are typically seen in standard options trading exchanges. Because of the increased flexibility that an American style option offers this style will often trade at a premium when compared to the less flexible European style option. Nevertheless, unless an investor is looking to pick up a stock for long term investment at a low price there is little difference between the two types as both types of contracts can be exited when the trader simply wants to take his profit and not buy or sell the underlying stock, commodity, or future in question. In trading options of either style the trader will be wise to investigate the basics of the equity in question. This is fundamental analysis and it will give the trader a broad view of the potential of the underlying equity in question. To guide the daily buying and selling of options the trader will use technical analysis with Candlestick chart formations. Thereby he will better understand market sentiment and be able to anticipate market trends and market reversal in so far as these market factors will affect the equity underlying the option in question.

Trading a European style option versus and American style option does little to change the leverage and investment risk aspects of options trading. Because in each case the trader can invest only the price of the options premium his capital outlay is the same. Because in each case the trader can exit the position with a profit and not buy the equity his degree of leverage is the same. Because in each case the trader is never obligated to buy the underlying equity unless the price performs as expected investment risk is minimal. In the end the most important aspect of trading a European style option is the typically the same as for an American style option. It is to follow the price of the underlying equity with technical analysis tools such as Candlestick patterns in order to accurately anticipate price changes and to trade accordingly.

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Market Direction: The visual capabilities of candlestick signals allows an investor to better analyze what price movements should do at specific levels. The Dow has just now pushed through the resistance level of the recent downtrend. This was fairly well expected based upon the candle formations that came up to that resistance level. Whereas other technical methods may have been tentative in their portfolio positioning prior to the breakout, the candlestick formations were illustrating strong price movements. This observation is much more important than what the actual formations are showing. Having a more clear understanding of what a price trend has a high probability of doing permits an investor to be positioning a portfolio with much more confidence.

DOW

Understanding the results of candlestick patterns also reinforces the magnitude an investor is establishing long or short positions. As can be seen in the RES chart, establishing a long position over the past few days was done so based upon the identified patterns. On a short-term basis, a J-hook pattern indicated a price movement that would be equal to wave one, prior to the profit-taking wave two. Additionally, the longer term chart revealed a Fry pan bottom pattern that was right at the breakout area. Adding the results of a J-hook pattern to the results of the longer term Fry pan bottom breakout, this created an extremely high probability trade result. The price should continue higher. Furthermore, the price should not only move higher, but based upon the results incurred after a Fry pan bottom breakout, the price should move to the upside with excessive force.

RES

All boats will rise in a rising tide. Many stocks will move higher in a rising market. Candlestick analysis allows an investor to take advantage of price movements that are going to produce excessively high rates of return under normal market conditions. To not take advantage of the information built into candlestick signals is doing a disservice to one’s own investment capabilities. The Japanese Rice traders accumulated   hundreds of years identifying where price trends are reversing and which price trends have the greater profit potential. The successful investor is going to try to find the best trading programs. A trading program does not remain in existence if it doesn’t perform successfully. Japanese candlesticks have been around for hundreds of years. That should eliminate one vital fear most investors have when learning a new trading technique. “Am I learning something that does not necessarily perform well?” If candlestick signals did not work successfully, we would not be looking at them today. Please take the time to learn how to use candlestick analysis correctly and you will have constant control of your investment future for the rest of your life.

What is an effective tool for learning how to use candlestick signals successfully? Although the Candlestick Forum has very easy to understand training CDs on all aspects of candlestick analysis, most investors do not become proficient from just reading about how to use a trading technique. New members to the Candlestick Forum website should be aware of the daily chat room. This is where an investor can reinforce and expedite the learning process. There are many good stock trade ideas being passed back and forth each day. Please take advantage of this valuable tool. It will definitely speed up the comprehension of correct analysis using candlestick signals.

Chat session tonight at 8 PM ET . Learn how to cultivate the trading portfolio to the best possible trade positioning.

Good Investing,

The Candlestick Forum Team

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In today’s world, you buy insurance for everything. You have a policy that insures your next cruise in case of hurricanes, you spend a small fortune for health insurance, and you even have a policy that protects your coffee maker! Well, if that $40 coffee maker needs a little protection, what about your stock portfolio? In this article we’re going to talk about something that will not only save you money in the stock market, it can even help you make more money. We’re going to discuss Trailing Stop Orders.

First, the definition; a Trailing Stop Order is a percentage-based stop loss strategy. Stop Loss Orders are defensive strategies that protect a stock if the price drops below a certain point. A Trailing Stop Order is different from a typical Stop Loss Order in that it does not rely on a target price, but rather a target percentage to implement a sell. A Stop Loss only prevents you from dropping below a target stock price that you determine; a Trailing Stop follows a stock as its price rises. By doing this, a Trailing Stop Order not only protects against a fall, but it also allows for additional profits. Here’s how it works:

Many stop loss strategies & techniques offer you this protection. You identify a bottom for your stock and say, “If my stock drops to X, I want to sell immediately.” In the case of a Trailing Stop, you don’t identify an exact dollar amount, but a percentage instead. This is the insurance for your original investment. Assuming your stock has risen while you have owned it, you can set your Trailing Stop percentage such that it doesn’t fall below your original price.

Remember that if you’re protecting your original return on investment, it now includes the cost of both buying and selling your shares. If you’re happy with simply not losing, place a Stop Loss Order and relax at this point; if you want more, let’s do something else.

OK, you could have just insured your stock against a bad loss; it’s good stock market advice, but your stock charting indicates a rising trend on this company. Are you willing to only protect your investment or do you want something more? That’s what I thought, you want more. I have the answer for you. The difference in a Trailing Stop Order is that since it’s a percentage, it moves with your stock price. When your stock was at $25 per share, your 20% Trailing Stop would implement a sell if the price dropped to $20 per share. Well now that your stock has soared to $50 per share, you want to protect your profit, right? That’s why you have a Trailing Stop; a 20% stop order won’t sell your stock unless it drops to $40 per share. Because the Trailing Stop can move as the stock increases, your profit is protected against an unexpected fall. That insurance just allowed you to make and protect an additional $20 per share and that money will look real nice in your pocket and it just made you a successful trader as well!

Trailing Stop Orders are a helpful way to not only protect what you have, but to protect what you might gain as well. When used as part of a stock trading plan, it can be a valuable piece of insurance for your portfolio. You have insurance for everything; it’s time to have it for your portfolio as well!