From time to time, companies will want to change the amount of shares available in their company or the price of their stock. The typical way of doing this involves stock splits and it is very successful in accomplishing the desired objectives. The stock market news has grown very accustomed to this phenomenon and while there is usually some initial excitement over a stock split, the end result is generally very smooth. We will discuss several of the reasons for stock splits and what effect they have on the stock market.

Different types of stock splits can have different effects on Wall Street news based on the reasons they are implemented. Several of the concepts to understand about this technique are literal stock splits, reverse stock splits and dividend payouts.

Literal Stock Splits

Because of the existence of reverse splits, it is necessary to differentiate between the two. For example, a literal stock split occurs when a company announces that it will do a 2-for-1 split of their common stock. If MEW Industries has 1,000 shares of public stock at $50 per share before a 2:1 split, they will have 2,000 shares of public stock at $25 per share after. The stock market average returns for these new shares will reflect the ratio that was used in the split.

There is one primary reason for this stock market strategy, which is to increase liquidity of the stock. Although there are investors buying Google stock at over $500 per share, many more investors would be inclined to buy if there were five times more shares at $100 per share. This tactic is employed by companies if their stock sales stall as the price rises. If the stock doesn’t stall companies will typically allow the price to rise, as indicated by Google over $500 per share and Berkshire Hathaway, the market’s all-time stock price leader at over $110,000 per share.

Reverse Splits

Reverse stock splits are less common and have a somewhat negative investment strategy attached to them. If the price of a stock drops too low, many mutual funds will not purchase them and they even run the risk of being delisted, or removed from the market indexes. In addition, the low stock prices create a psychological stigma as people view them as worthless. By doing a reverse stock split, companies can raise the stock price by lowering the number of outstanding shares, eliminating the problems caused by the low stock prices.

Dividends

Sometimes a company will choose to avoid a stock split and lower the share prices by paying a stock dividend to shareholders. The effect of this move is somewhat the same as a split in that it lowers the share price since the company is worth less after the payout. This can be a good investment philosophy for companies that already have a large number of available shares plus the move is usually well received by stockholders, since this is basically investing a portion of the profits back into the people that have already invested in the company.

Conclusion

Stock splits have historically been used by companies to increase or lower the number of outstanding shares or to change negative impressions of the stock price. Investment timing in companies like these has shown to be more psychological than factual since stock prices are adjusted and the resulting price movements follow. Stock splits are another interesting feature of investing and a good piece of knowledge for those who are learning about the stock market.

Stock market results require a proven trading system. Whether day-trading or long-term investing candlestick signals dramatically enhance an investor’s capability to recognize reversals. Most stock market results are based upon a mixture of investment decisions. Some investors will buy every hot stock tip that they hear. Some investors will only invest in stocks that are above specific moving averages. The best stock market results occur when an investor has a well disciplined investment strategy. Candlestick signals provide an extremely high probability format for identifying the best possible investment situations.

Stock market results should be based upon an investment strategy that is going to maximize an investor’s return. This may be overstating the obvious, but most investors confuse having an investment strategy with producing positive results. Fundamental research looks to identify stocks/sectors that have great potential for the future. The risk factor for long-term fundamental analysis is that many factors can come into the market before any expected result can occur in a stock price. Today’s fundamental research, which expects specific stock market results, may be influenced by other market factors that cannot be projected at the time of the initial analysis. World events or improvements in competitor’s products can greatly affect the long-term outcome of a stock price.

Candlestick signals provide an expected set of results. These stock market results are based upon centuries of analysis of what investor sentiment does to price movement. A candlestick buy signal in an oversold condition creates a high probability of a bullish trade. A candlestick sell signal in an overbought condition creates a high probability of a downtrend starting. Stock market results can be greatly refined when understanding what the candlestick signals are conveying. High profit trades can be much better analyzed when knowing what previous signal patterns have produced. As illustrated in the Neoware chart, the position was recommended when a bullish engulfing signal occurred in the oversold condition followed by a gap up the next day. The fact that investors wanted to come into this position with exuberant buying after a candlestick buy signal in oversold condition reveals that a strong uptrend was now in the making.

NWRE

The Bullish Engulfing signal illustrates a reversal in investor sentiment. A gap up after that reversal represents that the new investor sentiment involves very strong buying demand. This combination has a high probability of producing strong profits. The gap up from a bullish candle reveals very strong buying. Utilizing candlestick signals followed by gap ups can make a very good living for the astute candlestick investor. This is not a difficult concept. Where do you want to have your funds invested? Where the buyers are buying aggressively! The candlestick forum provides some excellent training CDs utilizing candlestick signals followed by gaps. Most investors do not want to buy a stock that is already up 10%, 15%, 20% on the day. However, a candlestick investor, knowing what the gaps mean after a candlestick signal can participate in price moves that may still have a 100%, 200%, or greater move left in it after the gap up.

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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