When trading futures and options it is important to know the basics. Both deal with trading contracts and both rarely result in the actual delivery of a product. In today’s article we will discuss the futures market, the options market, as well as define options contracts and futures contracts.

The futures market is a market in which participants will buy and sell commodities and/or futures contracts. Futures trading requires a financial contract to obligate the buyer to purchase a particular asset and the seller to sell a particular asset at a predetermined date and price. Most of the time, there is no actual delivery of a physical product and the contracts are settled in cash. When studying futures and options it is important to understand what a futures contract is.

Futures contracts are contracts on stock market indexes, commodities or currencies. The purpose of the contracts is to attempt to predict the actual value of these financial securities at a date in the future. For example, when trading commodities, these futures contracts include a commitment by the seller to deliver a specific amount of the commodity during a specific month at a price that is determined by the futures market. Also when trading futures, the buyer has also agreed to buy that commodity during that month as well at the price determined by the future market.  Most contracts are actually closed out before the delivery date and the trade never ends in actual delivery of the asset.

The options market is similar to the futures market in that an options contract is also an agreement between two parties to buy/sell an asset at a fixed price at a fixed date in the future. The difference however is that when options trading, as time passes, the buyer can let the options contract expire or opt not to fulfill it if the trade becomes unfavorable. When studying futures and options it is important that the investor understands that when someone buys an option, they pay the amount known as the premium to the seller. The premium is the actual cost of the option. The options trader in the United States trades options with a contract multiplier of 100. This is the number of shares per option traded and this contract multiplier allows even small investors to trade a large exposure, or leverage on a small amount of capital.

Continue to study options and futures to see if these markets are a good fit for you. There is a lot to learn and it can be tricky but if you take the time to learn, practice, and implement a strong options trading plan and trading strategies there is no reason why you cannot achieve success in the these markets. Good luck!

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Market Direction

What do you expect from a professional money management advisor? Most people expect too much! It is anticipated that money managers will direct funds based upon some attention paid to market direction. Most money managers are very good at advising what should go into someone’s portfolio. Unfortunately most money managers do not know WHEN funds should be allocated. Do you have funds being managed? Are your parents funds being professionally managed? Your children’s funds? And are those portfolios down 35%, 45%, 55%, or greater over the past year? How often we are hearing about people’s retirement funds being cut in half.

The old philosophy of buying a well-run company and holding it long term is not a prudent strategy. It may have been 40 years ago, but the dynamics of the marketplace has changed dramatically. The world markets are now taking effect. Staid and conservative companies such as GM and Ford now have severe worldwide competition. One year ago, US steel Corp. was acclaimed as being a well-run, well positioned company, fundamentally very sound. If this stock had been put in your parents portfolio one year ago, it would have moved from approximately $190 per share to the current $18 a share. GE Corporation from $42 a share down to $7.00 a share. There are many examples of this type, this is not a surprise to anybody after watching the markets over the past 12 months. Tthe surprise should be   realizing the number of money managers that thought it prudent to continue to hold positions through this severe market pullback.

If you are reading this commentary, it is assumed you have been looking to take more control of your own financial destiny. The Candlestick Forum provided recommendations for the past year that produced decent profits. Decent profits in the sense that a good percentage of the portfolio was allocated to short positions or the short funds. Did we short when the Dow was at 14,000 and continue to hold shorts all the way down? Definitely not, 2020 hindsight is always great. There were many zigzags as the market declined. The important fact remains that profits were made because short positions produced good profits, offsetting some of the long positions small lossesduring potential market turns. Overall, the accounts were profitable. This is a much different result than many investors witnessing their retirement accounts being decimated.

Dow Weekly Chart

Dow

Professional money managers usually do not know how to time the markets. The serious investor should be learning how to use candlestick analysis effectively. It is not a difficult process to learn. Most important, with the information built into candlestick signals, a candlestick investor would have been able to exploit profits from the downward move of the market, not be caught with a portfolio that would have lost more than 50% of its value. How do you make money in a declining market? Join us tonight in the chat room 8 PM ET. We will  discuss the signals and patterns that made good profits in the down trending market.

MDT, a recent short recommendation, has characteristics that make it a high probability high profit short trade. Candlestick analysis involves very simple visual analytical information conveyed by the formations. This allows the candlestick investor to know what investor sentiment is doing at critical support and resistance levels. This is merely common sense being enhanced by a powerful candlestick trading technique.

MDT

What is frustrating for most investors? Losing money in the markets and not being able to do anything about it. When you take control of your own investment education, you will now be able to command profits from the markets in uptrends as well as downtrends. You have to feel sorry for those people that have worked most of their lives and lost half of their retirement funds in the past 12 months. Don’t put yourself in that position.

Chat session tonight at 8 PM ET — everybody is welcome. Click here for instructions.

Good investing,

The Candlestick Forum Team

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This Week’s Special

Trading Gaps

Big Profits Using Candlestick Signals and Gaps

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Stock market training seminars usually involve information that most investors cannot comprehend all at one time. Stock market training seminars usually inundate an investor with new information and concepts that most investors cannot put into use immediately. Utilizing and understanding candlestick signals allow an investor to get more information out of stock market training seminars. Using candlestick signals allows the investor to evaluate price trends much faster. The signals demonstrate immediately what is occurring in investor sentiment at important technical levels.

Most stock market training seminars involve technical methods that anticipate price reversals occurring at specific levels. However,  interpretation of these technical levels usually requires much more time and study than what the instructors convey will be required. Using candlestick signals and applying them to any technical investing method that an investor is learning will greatly enhance the speed of understanding the new technical method. What other technical methods will anticipate at specific levels, the candlestick signals show exactly what is happening at those levels. Whether learning how to use Fibonacci numbers or newly discovered momentum trading techniques, having the knowledge of what candlestick signals illustrate before learning a new technique will make the utilization of that new technique much easier to understand.

The Candlestick Forum, Stephen W. Bigalow, is a very strong advocate of teaching investors how to use candlestick signals correctly. His private training sessions, involving two to five students at a time, is not restricted to the information taught just during the weekend training session. True stock market training seminars should include a follow what education process that make sure that investors fully understand the trading technique that they have learned. This is included with Mr. Bigalow’s private training sessions. Candlestick signals are very easy to learn and understand. Once that knowledge is in the investor’s mind, evaluating price trends and reversals becomes a visually easy process. Investor sentiment does not change. Investors do certain things when markets are oversold and they do certain things when markets are overbought.

Two full days of candlestick training with Mr. Bigalow produces a visual recognition of the major candlestick signals. Knowing how to interpret those signals becomes relatively easy once the investor psychology that formed those signals is understood. This is not a difficult process. The Japanese Rice traders have evaluated investor sentiment for over four centuries. Seeing that investor sentiment in a graphic depiction allows an investor to evaluate the direction of a price trend with relatively good accuracy. As part of the Candlestick Forum operation, students taking the private session trainings have an added benefit. Where most stock market training seminars give you the information and then you’re on your own, the Candlestick Forum provides a full spectrum of continued training. All the candlestick forum’s training CDs and e-books are available. Access to Mr. Bigalow is continuously available also. If an investor is going to spend money to become educated on how to invest successfully, they should learn an investment technique that will benefit them for the rest of their life no matter what the market conditions will be.

There are two methods of analysis that can be used to forecast the behavior in the forex markets. The first method used to perform a forex forecast is technical analysis and the second is fundamental analysis. In today’s article we will provide information on both methods as well as the tools associated with each method.

Fundamental and technical analysis both operate with the same goal. That goal is to predict price movements when trading forex. Fundamental analysis is used to conduct a forex forecast by analyzing the economic and political status of a country’s currency as well as understanding the attitudes of the traders who participate in and conduct forex trading. Fundamentalists will evaluate a country’s economy by looking at the rate of inflation, interest rates, taxes, and unemployment rate, among other things. They also evaluate a country’s political stability as it relates to any potential causes of market movement. Fundamental analysis is considered to be a macro or strategic assessment of where a country’s currency should be trading based only on the above criteria and not on the movement of the forex currency price itself.

Technical analysis is also used to determine a forex forecast and is a much more statistical and mathematical method. The price is analyzed when using this method in order to predict future price movements of currencies. This method is built on three principles discussed below.

1. Market action discounts everything. This means that the price of a foreign currency is an indication of anything that could possibly affect the market. Reasons could include criteria looked at using fundamental analysis, but with technical analysis traders don’t look at “why” but instead only focus on the actual price movements to obtain their forecast.
2. Currency prices move in trends. Technical analysts conduct trend analysis through identifying patterns. The patterns have consistently produced the same results in the past and therefore must be indicative of the same results in the future. Again, they don’t look at “why” but instead only follow the trends expected to achieve the same results.
3. History repeats itself. This means that trends will repeat themselves as well. The human psyche while continuously evolving, changes little over time. With this in mind, trends will change little over the period of 100 years and have been studied to show this. Stock price factors as well as foreign currencies factors will change little over time, only reaffirming the need to follow the trends.

When performing a forex forecast there are technical analysis tools available. The use of forex charts is one tool and there are five categories using the forex technical analysis theory.

1. Indicators (Relative Strength Index (RSI) is one example)
2. Number Theory (Fibonacci indicators)
3. Wave (Elliott wave theory)
4. Gaps (open-closing and high-low)
5. Trends (following moving average)

For those interested in learning more about the forex markets, take a deeper look at the most important technical analysis tools described above and find some technical analysis courses that you can take online. The ability to make market predictions and obtain a forex forecast is a skill that requires extensive knowledge and a lot of practice by the forex investor.

Everybody at one time or another feels like they need ‘Stock Investing for Dummies.’ Some investors go for years and years listening to advice from the next professional adviser that they hope will do better than the previous one. This is usually the process of stock investing for dummies, a constant search for somebody that can help an investor make money in their account.

If an investor wants to get out of the cycle of feeling that they need the ‘Golden Goose’ course that teaches stock investing for dummies, the process is very simple. Learn a trading method that works. Does it have to constantly work? No, but the idea is to find a trading method that puts the probabilities in the investor’s favor. Without remaining with a consistent trading program, when things aren’t working, a trading program should be able to be analyzed. When something’s broken, it can be fixed. Moving to another trading program when things aren’t working never allows an investor to understand what was wrong and what needed to be fixed. Candlestick charts analysis is the common-sense utilization of proven investment techniques. Learn how to invest properly using high-probability signals and your investment acumen will be improved for the remainder of your investment career.

Gap-up Stock Trading – The emphasis has been put on gap-up stock trading for the past few weeks during the Monday night and Thursday night chat sessions. The reason for educating investors on gap-up stock trading is simple. Gap-up stock trading, after the appearance of a bullish Candlestick signal, produces extremely high probability, high profit trades. Utilizing Candlestick analysis to interpret a gap-up is relatively simple. Investors want to get into a position with great enthusiasm.

Witnessing a Candlestick buy signal in oversold conditions illustrates a change of investor sentiment. Witnessing a gap-up in price, after the bullish signal, illustrates that not only has the investor sentiment changed, it has changed with great strength. Finding a trade that has shown a reversal and a new trend starting with great fervor is exactly what investor should be looking for.

Applying all of the indicators that reveal a high probability reversal is the first step for a finding a high profit trade. Those indicators, followed by a gap-up, demonstrate an additional reason for committing investment funds. EENC is an example of a chart that has all of the indicators in alignment.

A quick evaluation can be made visually. The most important indicator is the formation of a potential Candlestick buy signal, a Hammer signal. A Hammer signal is formed with the stochastics in the oversold area, starting to curl up. That becomes the criteria for analyzing whether this chart pattern has a high profit scenario.

The 50 day moving average becomes an important factor. Visually, it can be analyzed that the bullish candle breakout of early June was the beginning of an uptrend. It breached the 50 day moving average. The uptrend continued with relatively good strength until the appearance of a gap-up at the top. A Hanging Man formation appeared, indicating that the top was close at hand. The pullback came right back to the 50 day moving average as the stochastics came into the oversold condition.

The pullback coincides with the 50% retracement of the Fibonacci numbers. A wave one move appeared from early June until early July. A potential wave two pulled back to the 50 day moving average. A strong buy signal has now occurred, possibly starting wave three. Wave three usually has the same magnitude move as wave one. $29 to $30 now becomes the next potential target.

Once the eye becomes trained to identify high profit trades, the analysis of this chart becomes almost instantaneous. The signal created during the last couple of days warrants investigating the chart pattern further. The remaining criteria can be evaluated in less than a minute. Learning the parameters that create high profit trade situations becomes relatively easy. Having the capability of identifying high profit signals eliminates the need for ?stock trading for dummies.?

With tax season just passed, you may still be hurting from the results. If you requested an extension and haven’t filed yet, this topic might be very helpful to you. Aside from the profit potential that you can realize from trading commodities, there are handsome tax benefits as well. The current tax laws separate investment gains and losses into two expansive groups: short-term capital gains and long-term capital gains. This feature is nice because when you are commodity investing, you are allowed to split your profits between the two categories.

To understand the tax benefits of commodity trading, there are a couple of things to learn. Grab the statements from your commodity account and a calculator, and start a spreadsheet; this is quick and fairly easy to grasp. Here are the things you need to do:

1. Understand what short-term capital gains are. Profits from any commodity trade that is held for less than one year are considered short-term capital gains. Short-term capital gains are taxed at the investor’s normal tax rate; if you are in the 25% bracket, your short-term gains will be taxed at 25%.
2. Understand what long-term capital gains are. Commodity trades that are held for more than one calendar year are long-term capital gains. Long-term capital gains are taxed at a flat rate of 15% unless you are in the ten percent or fifteen percent brackets and then long-term capital gains are taxed at 5%. For those people who are holding long-term futures contracts, this is obviously a very attractive situation.
3. Add up your profits and losses. This is where you can use your calculator (or your computer if you have some spreadsheet skills). For each transaction you made while commodities trading, enter the amount of profit you made as a positive number and the amount of loss you had as a negative number. For example, imagine that you made three commodity trades; you earned $500 on the first, lost $300 on the second and made $1,000 on the third. To calculate your profits, add the numbers together. $500 – $300 + $1,000 = $1,200; $1,200 would be your profit for the year.
4. Determine your long-term capital gains. For this calculation, take the total number and multiply it by sixty percent. For our example, $1,200 x 0.60 = $720; this is your long-term capital gains on your commodity investing. Now you need to multiply this number by the 15 percent tax rate; $720 x 0.15 = $108. This will be the long-term capital gains tax responsibility on your commodity long-term investing.
5. Determine your short-term capital gains. For this calculation, take the total number and multiply it by forty percent. For our example, $1,200 x 0.40 = $480; this is your short-term capital gains for your commodity investment strategies. Now you need to multiply this number by the 25 percent tax rate (For this example we’ll assume this is your rate but we hope it is higher!); $480 x 0.25 = $120. This becomes your short-term capital gains tax responsibility on your commodity investments.
6. Add the two together. Once you add the short and long-term tax numbers together, you have calculated your tax liability for your commodity trading. $108 + $120 = $228.
7. Review your savings. In order to see your savings, multiply your total profit for the year by your tax rate and then subtract your actual tax responsibility from this number. (Remember that we assumed you were in the 25% bracket.) $1,200 x 0.25 = $300; this would have been your liability. $300 – $228 = $72. While on the surface this doesn’t seem like a lot but it is actually a 24% reduction in your tax burden for the money you made! 24% can make anyone?s investment philosophy look pretty smart!
   

Conclusion

Because of the method for computing capital gains, commodity investing can be very beneficial from a tax standpoint. Since futures contracts are taxed at a split rate, 60 percent of your earnings from commodity investments are taxed at the long-term capital gains rate and only 40 percent is taxed at the short-term capital gains rate. This is called the 60/40 tax treatment, and it will save you money in taxes. As always you should consult your tax advisor but you will likely be very pleased with your returns!

Analyzing the market trend is the first step for deciding the portfolio allocation. Candlestick signals make that analysis relatively simple. The same analysis involved in individual stocks can be applied to the market indexes in general. This is not a difficult process. Investor sentiment is illustrated in market index charts the same as they are in individual charts. Which direction is the overall trend? Applying the analysis with candlestick signals to both the Dow and the NASDAQ provide a tremendous insight during a market trend analysis.

In any analyze, the candlestick signals are indicating at important technical levels produces a huge advantage for the candlestick investor. At technical levels such as trend lines or moving averages, having the ability to see exactly what investor sentiment is doing at those levels produces low risk entry and exit strategies. A major reversal signal forming right on a resistance level or a support level creates the opportunity to get into a trade at the optimal price level.

Entering a trade just as investor sentiment is reversing creates low risk stop loss procedures. If a candlestick buy signal is occurring at a major support level, a trend line, a recent previous low, or a major moving average, the stop loss analysis becomes relatively simple. Once the position is established based upon a candlestick signal at a major support level, the stop loss can be established at the point that negates the buy signal. Because the position can be established very early in the reversal cycle, the loss potential becomes very small. This establishes the investment strategy of being able to cut losses short. Review the training tutorial on Trend Analysis; the very same procedures Stephen Bigalow uses each day for analyzing the market trend.

Market direction – The moving averages have become an important factor in the price direction of the Dow. As illustrated last week, the trading at the 50 day moving average revealed great indecision. A bullish day followed by a bearish day, followed by a bullish day, followed by a bearish day. The large bearish candle last week in the Dow finally revealed which way the investor sentiment had turned.

Notice after three days of weakness, the 20 day moving average acted as a temporary support. For the aggressive trader, analyzing what type of signal was occurring on the one minute and five minute charts just as prices reached the 20 day moving average would have allowed for some short covering or some very quick long trades. However, the major moving averages, the 50 day moving average and the 200 day moving average still should be the important levels for trend analysis.

DOW

The 50 day moving average acted as the obvious resistance level for most of the prior two weeks of trading. The failure of that level meant the 200 day moving average would be the next likely support level. The important word in that statement is “likely.” As can be witnessed in Thursday’s trading, the 200 day moving average did not appear to act as any support. Stochastics still being in a downward direction make a lower target likely. The recent lows in June become the next likely target. Or the 500 day moving average might now come into play. Whenever an obvious technical level is breached, the level that everybody else was likely to be watching, then start looking for what would be the next likely target.

If both indexes are showing no obvious potential reversal signals, then the current trend is likely to continue until something changes overall investor sentiment. Although the NASDAQ chart is indicating that the stochastics are getting toward the oversold area, nothing yet has revealed that the investor sentiment is changing. This is not a difficult process for analyzing market trends. The Japanese Rice traders say to let the market tell you what the market is doing.

What constitutes a successful trading system? Certainly a successful trading system is one that results in profits in trading stocks, trading commodities, trading futures and trading options. A stock trading system at its most basic is a set of rules, an algorithm, for deciding when to buy stock, sell stock, or sell short. A successful trading system can be applied to stocks, options, commodities and futures. A basic stock trading system is based upon technical analysis of stock prices and provides buy or sell signals. There are lots of trading systems. A truly successful trading system such as Candlestick analysis stands the test of time. Japanese Candlestick basics have been around since the days of the Samurai in Japan. Although rice traders in ancient Japan were fully aware of the fundamentals that drove rice prices, such as a good harvest, a drought, war, etc., they also learned that price patterns repeated themselves. By identifying these patterns and learning what the pattern was likely to indicate, traders developed Candlestick signals such as the Doji Candlestick which is a strong indicator of market indecision and predicts the reversal both upward and downward market trends.

A successful trading system must be one that the trader can use effectively in stock trading, commodity trading or trading derivatives. A distinct advantage of Candlestick charts is that they are easy to read. Candlestick stock charts display the same information as other, more difficult to read, charting methods. However, Candlestick signals distill the same essential information into each signal without displaying complicated, statistics that take valuable time to read. No matter how accurate a trading system is the system must be functional in the rapid paced world of day trading stocks, commodities, and derivatives.

A broader view of a successful trading system includes time management, management of investment risk, choice of trading hardware, choice of online trading software, and routine reviews of trading results. In a successful trading system picking stocks that are routinely profitable to trade may be just as important as skill in technical analysis of stocks. Exerting discipline in executing trades according to a pre-determined trading strategy is as important as setting up the strategy. Traders who maintain discipline and use an efficient tool such as Candlestick pattern formations to analyze the market will commonly have a successful trading system. By using Candlestick signals in day trading or in long term investing it is possible to profit from buying at the bottom of a price curve, from anticipation of market reversal, and from the market volatility that often follows sudden changes in stock fundamentals. And, although it is not the most glamorous aspect of successful stock trading, routine analysis of trading results leads to profitable modifications of trading systems and increased long term profits. No matter how skillful a trader is at fundamental and technical analysis he can always improve. By evaluating each Candlestick trade after the fact a trader can commonly improve his use of the system and his profits leading to an increasingly successful trading system.

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Market Direction

Washington was able to resolve the debt crisis! So that is at least what Washington thinks. However, the clear graphic depiction can be seen with candlestick analysis of what the rest of the world thinks about this latest financial crisis. Using candlestick signals allows an investor to correctly evaluate what the financial community thanks of specific events. Also, the Japanese Rice traders have one basic assumption that allow candlestick investors to make a huge amount of money. Where do most investors sell? They panic sell at the bottom! Where do most investors buy? They usually buy exuberantly at the top. Today’s 600 point plus move to the downside in the Dow clearly indicates panic coming into the market. Knowing how to utilize that information through the graphics of candlestick signals helps an investor make huge profits in one day, 20%, 30%, 60%. Panic market pullbacks occur occasionally, knowing what to do when experiencing one is a very profitable endeavor.

Member Chat session tonight at 8 PM ET,

The Candlestick Forum Team

 

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