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Introduction to Technical Analysis

04 Jun

Technical analysis is the use of charts; graphs and stock quote data to determine patterns in the stock market and attempt to predict the future based on the past. This is in essence the same technique used by economists and meteorologists to determine where the economy is headed or what the weather will be like a few days from now. But, we all know how accurate those can be. The problem with looking to the past to predict the future is that there are simply too many variables to account for; the past can never be a perfect predictor of the future. This is the same problem encountered in technical analysis.

The challenge of technical analysis is further compounded by the fact that there are many hundreds of technical indicators available. An indicator is a chart pattern, observation, or mathematical formula that can be applied to or observed on a plot of the opening, closing, high and low prices for a certain number of periods. An example of this would be the moving average convergence divergence indicator discussed in the previous article (Introduction to Trading Strategies). The third problem is that there is no one indicator that is universally applicable. Some indicators are better in certain markets. Some are better with certain stocks. Some are only applicable during certain times of the economic cycle, such as during a downturn. As a result, multiple indicators may be used for a stock, to make sure that they all give the same signal. Because of all of these challenges in using technical analysis, technical indicators are not silver bullets. By themselves, they are very poor indicators of timing, but can provide insight into which stocks warrant more detailed analysis. Below are some of the more common technical indicators used.

Pattern Analysis

This is probably the simplest and the ‘original’ technical analysis. Since the creation of the stock market, there have been visual patterns that have been observed to repeat themselves overtime on graphs of price data. These patterns such as the head and shoulders pattern, the cup and handle pattern or the triangle pattern (to name a few) offer a pretty good indication as to where the stock market is going. They also excel at predicting trend reversals or breakouts, which makes them invaluable.

Relative Strength Index (RSI)

This compares the historical number and magnitude of up and down closes, to more recent ones, hence why it is relative. It compares the strength of the stock over a long time period with the strength of the stock over a shorter and more recent time period, and then ranks the current strength relative to the longer-term strength. An up close is where the closing price is higher than the opening price. A down close is where the closing price is lower than the opening price. An RSI above 70 indicates an overbought condition that is a sell signal. An RSI below 30 indicates an oversold condition, which is a buy signal.

Trend Analysis

Effectively the same method described in the previous article, this method relies on moving averages and the MACD indicator to determine trend strengths and potential trend reversals. This allows the trader to trader to trade with the trend and be reasonably assured of success. When the trend begins to weaken (when the MACD lines start to converge) the trader can exit his position, hopefully locking in a profit.

 
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Posted in Forex, Introduction to Investing, Options & Futures, Stock Market

 

Introduction to Trading Strategies

02 Jun

There are many styles of trading available. Some use fundamental analysis, some use technical analysis, and some use no conventional analysis. Some are very risky; some are less so. Some rely on making a little bit of profit on a lot of trades; some seek to make a lot of profit on a few trades. With so many different profitable trading styles available, one thing is for sure: there is a trading style that fits every personality. In this article, I will outline all of the most common trading styles.

Momentum Trading:

Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the trend to a desired profit. The momentum trader will look for stocks that are causing a lot of buzz and are expected to have significant price movements. He will then short-list these stocks and look for increases in trading volume of call options related to the stock (see Introduction to Derivatives for more information on options). A significant increase in this indicator will tell the trader that a significant price movement is expected. These stocks will also be short-listed. The trader will then watches how things play out, watching for stocks on his short list that are performing significantly better than the market (ie. they go up when their respective markets go down). Any stocks not performing as expected are then removed from the short list. The trader will then turn his attention to the charts of the stocks. He will specifically look at the momentum and volume indicators, as these are a good way to gauge the strength of a trend.

Fundamental Trading:

Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as earnings reports, the balance sheet, reorganizations, new management, and mergers. A fundamental trader also looks for quantitative indicators such as price to earnings, return on equity and debt to equity ratios, cash flow, revenue and earnings per share. A fundamental trader will typically find his information by looking for news about a company (either online, in a newspaper or on television) and then determine how that news will affect the company’s value and, indirectly, the stock price. For specific numerical data, they will check any number of online sources (I use the Yahoo! stock research center, it’s free, easy to use, and has almost all the information you could ever need).

Technical Trading:

Technical traders are obsessed with charts and graphs. They focus specifically on the moving average convergence divergence (MACD) indicator. A moving average is an average of the closing price, opening price, high or low over a certain number of time periods. This value is a ‘moving’ average because after every new time period, a new moving average value can be calculated. The MACD indicator plots two lines that take the value of two different moving averages. These two moving averages will be fro two different time lengths, for example one may be the average over 12 time periods, the other may be the average over 26 time periods. A technical trader will play close attention to how the two moving averages interact. These can be useful for determining supports and resistances (values on the graph that the price of the stock tends to never go above or below, thereby seeming to provide ‘support’ for a falling price or ‘resist’ a rising price), as well as when a trend is reversing. When a ‘shorter’ moving average crosses a ‘longer’ moving average, it can indicate that the trend is reversing in the direction that the cross occurred.

Scalping:

The scalper is an individual who makes dozens or hundreds of trades per day, trying to “scalp” a small profit from each trade by exploiting the bid-ask spread. The bid ask spread is the difference between the bid price, the highest price a buyer is willing to pay for the stock, and the ask price, the lowest price a seller is willing to sell the stock for. Provided the stock does not increase or decrease in value by very much while the position is open, the scalper can make a tiny bit of profit by buying at a bid price and then immediately selling at the ask price. This style of trading works best in low liquidity markets, as these markets are where the highest bid ask spreads are found.

 
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Posted in Introduction to Investing, Stock Market

 

Good Beginner Trading Software

01 Jun

Stock Assault 2.0 is very useful trading software that uses state of the art Artificial Intelligence and a proven trading strategy to determine profitable trades in the stock market. It works well in any kind of market, whether it is a recession or an economic boom, as was proven during February 2009, a bad month for the economy, when Stock Assault still performed well.

Ever since I installed Stock Assault 2.0, the stock picks that it gives me have generated a tonne of profits. In fact, many of the picks it gave me are the same ones they show on their website to prove their system. You can visit their website to see all of their recent stock picks, and see for yourself the profit generating power of their system. They show all of their stock picks, including the losing ones. And yes they do have losing trades; no system is 100% perfect. What makes this system so great is that the winning picks vastly outnumber the losing picks, and all of the analyses to find the picks are done automatically.

In terms of time, this product is a godsend. Normally to trade successfully, it takes hours of manual analyses every single day. With the automated trading signals from Stock Assault, you only have to spend between 15 and 30 minutes a day managing your portfolio; and you can do it all from the comfort of your computer, provided you have an online broker account.

This software can make you a lot of money. To give you an idea, let’s say you started trading an account where you begin with $1,000. If you reinvest all of the money you make and don’t spend any of it, an estimating that you make a 3% gain per week, which is very conservative based on Stock Assault’s performance, after two years you would have $2100.  In other words, you would have earned your initial investment back 21 times in two year. This is the kind of returns that are normally reserved for those that have been trading the stock market their whole lives and now do it for a living.

Now, you need to be aware of the risks. As with any trading on the financial markets, trading with Stock Assault carries substantial risk of loss. This risk is compounded if you aren’t disciplined about following Stock Assault’s signals. You have to check every single day before the stock market’s open (they open at 9:30 ET). If you miss even one day, you risk all the money you have invested.

One more thing to be aware of, if it doesn’t start giving you trading signals right away, don’t worry. It will take about a week after it is installed to analyze the market and begin giving you trading signals.

When I purchased Stock Assault 2.0 I wasn’t sure it was for me, but with a 60-day money back guarantee I certainly thought it was worth a try. All in all, this is one of the best trading tools available to trade the stock market with consistent gains. It’s reasonable price, money back guarantee, ease of use and past performance make it a must have for anyone considering managing their own stock portfolio.  If you would like to purchase this software, <ahref=”http://a41b76qqhmrjvrmnuil5mp1evq.hop.clickbank.net/”target=”_top”>Click Here!</a>. However it is important to note that this software does not give you the tools to understand why the picks and strategy works. Therefore, while this is an amazing tool for beginner’s, or people that don’t have a lot of free time to put into this, if you want to have more control over your investments, you should eventually seek to use other software where you can make your won strategies after you have had some experience.

 
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Posted in Uncategorized

 

Introduction to Derivatives

24 May

Derivatives are very advanced tools available to traders.  It is important for every investor to be aware of them and to know how they work so that he or she can make an informed decision as to whether or not they want to include them in their portfolio.  A derivative is a type of investment whose price is determined by a variety of different factors, depending on what type of derivative contract you are trading.  However, the contract derives its value from an underlying asset.  This underlying asset is often another form of security, such as shares in a company, or a certain amount of gold.  The underlying asset can even be another derivative, or in some cases it isn’t even an asset.  In these cases the contracts are equivalent to gambling.  For instance there are futures contracts that are based on the weather (a future is a type of derivative).  This article will primarily focus on the two main types of derivatives: options and futures.  There are, however many other types of derivative investments in the world.

It is important to note that derivative’s trading is not for the risk averse, in fact this is one of the most high-risk high-reward investments there is.  As a result they are not typically used to make money (what is termed speculation) but rather to hedge or manage risk.  This leads to a contradiction, how can one of the riskiest investments be used to minimize risk?  Keep reading to find out.

Let’s start with options.  Options contracts provide the owner with the option, but not the obligation, to purchase or sell an underlying asset at a specific price before a certain date.  There are two types of options, calls and puts.  A call gives the owner the option to buy an asset.  A put gives the owner the option to sell an asset.  Let’s go over two possible examples to illustrate how options work.  Let’s say that you wanted to buy a large piece of land beside a lake to build your retirement house on, but you won’t have the money to buy the land for a year.  So you enter into an option’s contract with the owner.  The contract gives you the option to buy the land in one year for $2 million.  You pay $50,000 for the option.  Now one of two situations arises.  One year from now, it is found that the land has a large deposit of gold under it and it is now worth a lot more than $2 million.  Because the owner sold you the option, you can still buy it for $2 million.  This means that you make a net profit on the property because you paid $2 million (plus fifty thousand dollars) for the property that is worth a lot more.  Alternatively, let’s say that in one year it is found that the land is contaminated with heavy metals and is uninhabitable.  You would simply not exercise the option.  You would loose the fifty thousand you paid for the option, but you would not have to buy the house (which is now worth a lot less than $2 million, the amount you would have to pay for it).  This illustrates how options can be used to speculate on the price movement of an asset.  Options can also be used as part of a hedging strategy.  To illustrate this role, let’s use a put.  Let’s say that an investor (we’ll call him mark) purchases 100 shares in a company at $20 a share.  Mark is willing to loose $3 a share and decides to ensure that is the most he can loose.   He purchases a put option to sell 100 shares at 17$ a share.  If the price drops below $17, he can still sell his share at $17.  If the price doesn’t fall below $17, he can let his option expire.  Thus he is protected because he cannot loose more than $3 a share.

Next are futures.  A future’s contract is a contract between a buyer and a seller of a commodity to purchase a certain amount of the commodity on a certain date at a certain price.  The necessity for this system originated with farmers.  Take a wheat farmer for instance.  Before the establishment of the futures market, the farmer would have had no way of gauging demand for his wheat.  He would either have produced more wheat than he can sell, or less wheat than is needed.  Either way, he doesn’t make as much money as he could have.  The futures market allow him to enter a contract to sell a certain amount of wheat at an agreed upon price.  This allows him to produce the exact amount of wheat that he needs, no excess, no shortage.  Nowadays, most futures contracts don’t actually result in the delivery of the physical goods.  This means that any investor can use them without having to worry about what to actually do with the wheat once it arrives.  Where Futures derive their value is from the agreed upon price.  This price is set in stone, no matter what happens to the price of that commodity on the market between the date the contract is signed and the date of delivery.  This means that if a contract specifies that 50 barrels of crude oil will be bought and sold in one month’s time for $100 a barrel, and if in one month, the price of crude oil is $90 a barrel, than the buyer will loose $10 a barrel and the seller will gain $10 a barrel.  In the futures market, the gains and losses from a contract are added and deducted from the accounts of the buyer and seller on a daily basis, while the position is still open.  This differs from the stock market and option’s market where profits and losses are only realized once the position is closed.  Using futures for speculation entails a great deal of risk.  This is because you are betting on whether or not the price of a commodity will be higher or lower (depending on whether you are the buyer or seller) on the delivery date.  Futures can be used to great effect as part of a hedging strategy.  For example, if an American investor wanted to invest in a Japanese company traded on a Japanese exchange, he or she would assume a lot of risk.  There would be the risk assumed on the original investment as well as a currency risk, because the relative value of the American dollar and the yen shifts over time.  To minimize the currency risk, the investor may enter a currency future’s contract, allowing him or her to convert his or her yen back to American dollars at a predetermined exchange rate.

This is just a basic introduction to derivatives.  As I hope you have seen, they are very complicated, and there are many ways they can be used.  I hope this article has helped.

 
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Posted in Options & Futures

 

A recession – A good time to invest?

24 May

A question that is on a lot of peoples minds is ‘Should I invest while the world is in this recession or not?’.  The short answer is YES!  This is when the wisest investors take action.  It is these investors that spearhead economic recovery.  It is wise to invest when the price near rock bottom.  Many people feel that hey are taking advantage of other peoples suffering to make a profit when they invest in a recession.  The fact of the matter is that, depending on where they are investing, they may be right.  But at the same time, if every investor let this stop them from investing, then the economy would only continue to decay, and more suffering would be caused as a result.  By investing in the financial markets, or your own ventures, NOW you can help the economy recover, and pocket a lot of money in the process.

One area that is an investing gold mine right now is the housing market.  It is no secret that the housing market is in shambles and will be for a few more years, if you are familiar with real estate investment, now is the time to look for opportunities.  The banks are willing to take huge losses on the foreclosed houses that they are selling off.  This means that you can buy them for a lot less than what they area actually worth, or what they would normally sell for.  This opportunity will persist for the next couple of years for smart and patient investors.

As always, there are many opportunities on the stock market right now.  A lot of companies are trading at lower prices than they were before the recession, or will be in a few years time.  This means that you can get more leverage in the market by investing now than you can at times when the economy is better.  What is leverage you say?  Leverage is how many shares of a company you can control for a given amount of money.  For example, if we compare a company trading at 100$ a share versus a company trading at 10$ a share.  If you had a thousand dollars to invest in either company, you would be able to buy ten shares of company A whereas you would be able to buy 100 shares of company B.  This means you have greater leverage in company B.  There are also ways of increasing your leverage, such as using margin accounts or options.  But those are outside the scope of this article.  Anyway, you can have greater leverage in a recession, which means that you can make a greater profit.  Also, if you buy stocks now and hold onto them for a few years, there is a high likelihood that, if you did your homework, you will make a lot of money as the economy recovers from the recession.

Even now though, in this time of opportunity, being in a recession does not feel good.  So is investing in a recession a good idea, well it must be, the only people doing it are the well educated and wise.

 
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Posted in Introduction to Investing, Uncategorized

 

Investing 101

24 May

The first thing you want to do when looking to invest some money is to determine the amount of money you can afford to lose. You should always take a hope for the best but assume the worst mentality.  All money that you invest you should be prepared to lose.  If you are looking to expand your portfolio of investments in an attempt to make a profit, check out the various ways you can go about investing money.  Within investments lies the opportunity to reap a huge profit, as well as an opportunity to lose it all, so be sure to do a little research into the various investment methods you choose to utilize before making your choice.

Stocks (also called shares) are by far one of the best ways for a new investor to get into.  They are one of the easiest types of investments to understand (but be warned, this does not mean that they are easy to profit from).  A stock if basically a part of a company; if you own 1% of the shares that a company has available, this means that you own 1% of the company.  Each share is bought and sold at the share price.  This price is determined by the value of the company.  If the value of the company goes up, the share price goes up.  To make money off of trading stocks, you should seek to buy shares when the price is low and sell when the price is high.  In other words you should buy when you expect the value of the company to go up.  Now this is easier said than done, and there is no sure fire way to determine which way the value of a company will go.  This is because the value of a company is determined largely by the emotions that the investors are feeling towards that company, or in other words the investor confidence in the company.  With millions of investors with different goals and reacting differently to a company’s development, the confidence each investor feels will be different.  This adds a high degree of unpredictability to the stock market.  However, there are two methods for attempting to predict the direction that a share price will go that have proven to be profitable in the past: fundamental analysis and technical analysis.  These methods of analysis don’t only apply to stocks, but also to other types of investments.

Beyond the stock markets, there are also forex markets.  Forex stands for foreign exchange.  Forex traders attempt to make a profit by buying and selling foreign currency.  Betting on the direction that the relative price between the currencies will move allows one to make a profit, or take a loss.  For example, a trader may trade American dollars for euros and then wait fro the relative value of the American dollar to increase.  When this relative value ahs increased sufficiently, than the trader trades the euros they acquired for American currency.  As a result, the trader will have more American dollars than they started with.  Obviously this is advantageous for an American, while it would not be beneficial for a European.  A European would likely adopt the opposite strategy.  Forex markets offer opportunities that stock markets don’t.  Firstly forex markets don’t charge a commission on transactions.  Secondly, forex positions are easier to leverage, and often require leveraging.

Besides the stock market and the forex markets there are investment opportunities all around the world with people looking to start up their own business, but they lack the necessary funds. If you come across a person with a passion and profitable business idea, but a lack of funds, you can offer to invest in their company in the hopes they will make their business profitable.

These are just a few of the easiest investment arenas to get into.  I hope this was a good intro to investing/trading.

 
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Posted in Introduction to Investing