Archive for the ‘All Tutorials’ Category
Dow Theory: Part I
The Dow Theory is a major corner stone of Technical Analysis. It is one of the oldest and best known methods used to determine the major trend of stock prices. It was derived from the writings of Charles H. Dow as published in the newspaper he founded, “The Wall Street Journal”. It was later refined further by analysts and writers during the first few decades of the 20th century.
Seven Basic Principles of Dow’s Theory:
- The Dow Jones Industrial Average and the Dow Jones Transportation Average reflect all information, experience, knowledge, opinions and activities of all stock market invesors. Therefore, everything that could possibly affect the demand for or supply of stocks is not worthy of consideration.
- There are 3 trands in stock prices. The Primary Tide is the major long-term trend. But no trend moves in a straight line for long, and therefore there come up Seconday Reactions in the form of intermediate-term corrections that interrupt and move in an opposite direction against the Primary Tide. Within these are Ripples, or minor day-to-day fluctuations that are or concern only to short-term traders and not Dow Theorists at all.
- When the Primary Tide is upward pointing, this is also known as a “Bull Market”, there are usually three upwards pushs in stock prices. The first move up is the result of far-sighted investors accumulating stocks at a time when business is slow but anticipated to improve. The second move up is a result of investors buying stocks in reaction to improved fundamental business conditions and increasing corporate earnings. The final upwards push occurs when the general publc finally notices that all the financial news is good. During this move there is usually rampant speculation seen.
- When the Primary Tide is downward pointing, this is also known as a “Bear Market”, there are usually three downwards pushs in stock prices. The first push down occurs when far-sighted investors sell based on their experienced judgement that high valuations and booming corporate earnings are unsustainable. The second move down reflects panic as a now fearful public dumps at any price the same stock they just recently bought at much higher prices. The final push down results from distress selling and the need to raise cash.
- The two Averages must confirm each other. To signal a Primary Tide Bull Market major trend, both Averages must rise above the latest highs made by their previous Secondary Reactions. To signal a Primary Tide Bear Market major trend, both the DJIA and DJTA must drop below their last Secondary Reaction lows. One average meeting these conditions alone in meaningless, but it is not uncommon for one Average to signal a change in trend before the other, with no set time limit as to when the second Average gives the trend confirmation.
- Only end-of-day, closing prices on the Averages are considered. Intraday price movements are ignored.
- The end of a Primay Tide is confirmed only after being signalled by both Averages.
Next Time, we will give some further elaboration and insights into Dow Theory and its implementation.
How To Minimize Stock Market Risks?
Irrespective of whether you are a beginner or a seasoned stock market investor, there is one universal question that every one is trying to grapple with, ‘How to minimize stock market risks?’
This, in other words tells us that risks are inherent in stock market investments and that we cannot do anything to avoid it completely but only minimize the risk factors. Here are a few tips that will help you minimize your stock market risks.
First take time to learn the basics. When you are new to stock market investments and when you are venturing into the stock market, give yourself enough time to understand how the stock market works and what are the different problem areas, etc. Poor basics in the stock market will always keep you an amateur stock investor. You must also learn different approaches that are used by successful stock marketers.
Secondly, before you go to your desk, do your homework. Never approach your stock investments without first studying the current trends. Many people make the mistake of considering stock markets as a gamble. In gambling you will rely completely on your luck and there is no reasoning involved. Here in stock market trrading, reasoning and analysis are the key elements. So Technical Analysis should never be forgotten. You will have to start your analysis of the market from day one. You cannot wait to become an expert trader before you can start learning Technical Analysis because without trying you will never become one.
Thirdly, improve your ability to connect various happenings around your market and deduce your conclusions based on the prevailing trends. Remember, the stock market is affected by many factors. So, depending on the stocks you choose you should know the factors that affect your stocks and you should keep a close tab on such factors.
Fourthly, always make a basis for all your decisions on stock market analysis and not on your emotions. Never make hasty decisions when you are panicked. When you are panicking, your reasoning abilities will be diminished. So decisions made in such situations cannot be sound stock market decisions.
The next and most important factor is finding all the help you can get. To achieve this you should find reliable resources that you can use to make sound stock market decisions. There are number of resources available both online and offline. Try to make use of those resources prudently so that you will have a wider understanding of the stock market. Though there are many resources on the web, not all resources are equally effective in imparting you with the best information. So carefully choose your online stock market resources so that you will not be misled in any way.
By following the above basic tips you will be able to minimize your stock market risks to a great extent.
Triangles, Flags, Fans and Pennants
This is a kind of a short-worded article. Even though I truly enjoy writing, I have to stop here and let the Charts speak for themselves. In a previous post I showed a recent symmetric triangle that the S&P 500 took. Below you see a similar triangle, this time Cattle Feed Futures from the Chicago Mercantile Exchange, the CME. After you will see an example of an upwards-pointed triangle, also from the CME Cattle Feed Charts. Then you see the downwards pointed triangle, this time–yes its the CME again, but Orange Juice Futures instead.
The Flags in the 4th Chart are the present of System Flash Disk Pioneers, the Intraday Chart from sometime in 2004, in the 60 minute time-frames. All about time frames in a future lesson, there are a few things to make clear about them and I’ll save them for the near future. Last is a nice, colorful chart from about 3 weeks ago showing the USO, or US Oil Fund, an equity ETF shown here both at the daily (left) and weekly (right) charts. It shows a Fan sloping outwards as fans tend to do.
Don’t worry, the explanation of dealing with all theses object of art, and truly Technical Analysis is also an art form besides being a Science, is forthcoming. By dealing with I only mean one thing, trading based on them; or rather their breakout periods and how also to determine breakout. Meanwhile, enjoy the art show and try to see what conclusions you can draw yourselves from what you see. This is truly a homework lesson, so take it seriously—and don’t cheat.
These are, in order:
This is the way a Symmetric Triangle looks
This is the way an upwards-pointed triangle looks:
This is the way a downwards pointed Triangle looks
This is the way flags look, the pole being an extremely long Candle:
This is the way another type of symmetric triangle looks–long and thin:
This is the way Fans look, check the large one on the right side.
Like I wrote before, there is more to be said about trading using these patterns and I intend to say a lot more in future Tutorials.
Do you Know a Sure Thing When You See One?
This advanced lesson will teach you the Know Sure Thing. This happens to be an indicator that is a complex, smoothed price velocity momentum indicator. This is a price velocity indicator that shows the rate of change in the prices over a moving average and weighted to give more recent data precedence. If it is used wisely, makes investing choices easier for even the most experienced. It was developed by Martin J. Pring and described in his book Martin Pring on Market Momentum, McGraw Hill 1993. Before you go jumping to conclusions, there IS no sure thing, as Pring points out, “it’s also important to know that this approach is not a sure thing.” But since there are better indicators available to us, we continue to search for the best method.
The KST can be used as a buy signal when the oscillating lines shown below cross each other going upwards. The sell signal is indicated when the lines seem to peak and come into a horizontal position, more or less. This is my approach, it is rather simple but it can give you more than 65% chance of having a profitable investment, more so when used for long term investment.
The KST seems to work, on the Charts I’ve tried it on, and may be useful to those who can get the formula and build the indicator in MetaStock version 11.0.
If you’re interested, this is MetaStock’s code for the KST indicator:
Periods:= Input(“Enter the number of periods”, 1,9999,1);
((1*Mov(((C/Ref(C,-(9*periods)))*100),(6*periods),E)
+2*(Mov(((C/Ref(C,-(12*periods)))*100),(12*periods),E))
+3*(Mov(((C/Ref(C,-(18*periods)))*100),(6*periods),E))
+4*(Mov(((C/Ref(C,-(24*periods)))*100),(6*periods),E)))
/10)-100;Mov(
((1**(Mov(((C/Ref(C,-(9*periods)))*100),(6*periods),E)
+2*(Mov(((C/RefC,-(12*+periods)))*100),(6*periods),E))
+3*(Mov(((C/RefC,-(18*periods)))*100),(6*periods),E))
+4*(Mov(((C/RefC,-(24*periods)))*100),(9*periods),E))
)/10-100,(9*periods),E);Input(“Plot a horizontal line at “,-100,100,0);
To get this indicator working, you must type the above code in the Equis Metastock 11.0 Charting Software at the Indicator Builder Option. Below is an example of It being used on Fannie Mae. NOte that both red lines below the Chart have bowed into a horizontal position. This seems a time to sell, but never short-sell on this indicator, as that is not one of its defined uses.
produced by MetaStock(www,equis.com)
Understanding the RMO Oscillator
The Rahul Mohindar Oscillator can be used across any time frame and for any financial instrument. It is designed to work with both Bar Charts and Japanese Candlestick Charts. This indicator is a gauge as to market direction and can be a primary trend indicator in many trading systems.
The RMO is displayed as a histogram. As a bullish “buy” sign, we will look for the point at which the histogram shows movement crossing the oscillator’s zero line going upwards. If it should go down and cross the line going down, that would be our “sell” sign, or a “short-sell” sign.
The complete trading system is available through the Equis International MetaStock Charting Software. An example of the complete, 5 step method is shown in the Chart below.
This is the way the Charted RMO Trading Model looks using Apple Computers(AAPL):
published by MetaStock(www.equis.com)
The RMO Oscillator, explained above, is the green graph shown at the top window of the Chart. This indicator is the first gauge as to the market direction. Once the primary trend is determined, the second window should be observed.
The second window of the Chart contains Swing Trade 2 in pink, and Swing Trade 3, which is purple. These two indicators are designed to help us see the medium term and the long term trends. The pink histogram (Swing Trade 2) represents the medium term trend and the purple histogram (Swing Trade 3) represents the long term trend. When the histograms cross each other, it represents a change in the strength of the trend.
Moving forward past the third window for the while, we see the blue and red Bar Chart below it. The red and blue alert arrows and the color of the bars on the Bar Chart represent the crossing points of the Swing Trade 2 and Swing Trade 3 histograms. These signify a change in the strength of the trend. Blue bars are taken as bullish signals, while Red bars are bearish.
To enter a long buy or exit a short sell position, three conditions must be met:
1. The RMO is currently above zero.
2. The most recent alert arrow must be blue.
3. The price bars on the Bar Chart must have become blue at or before the examined time frame.
To enter a short-sell or exit a position, the reverse must be true on all three conditions.
Now to the third window that we skipped before. This is the exit swing indicator and gives added protection when applying stops by having us put in a trailing stop at certain situations. The rules for applying this is that first you must be invested and in a profitable position. If you are in a long position, for example, and this indicator falls below the red horizontal line demarcating the chart, consider putting a trailing stop below the trade. And if this indicator, called the exit swing indicator crosees above the blue line demarcating the chart, consider putting a trailing stop above your short sell position.
This is just one example of the many different and complex trading methods in the Science of Technical Analysis. It has a whole realm on to itself that can never be beat by any other method of Market Analysis for success rate, popularity and enthusiasm which investors using it see. This world must be examined by all who wish to invest and those who put it off or blame it for certain disasters speak from a stance of utter ignorance of the Science, for if they examined even the simplest line studies, they would know the truth.
Tips for Stock Market Beginners
Today there is an increasing interest in stock markets because they let people make good returns for their money. Though there is a certain amount of risk involved in investing money in stock markets, with the right approach, this is a great scope for increasing one’s wealth. As a beginner, you are very likely to be overwhelmed with the market trends, the rise and fall of the stock values and the volatility of the market. Very often beginners tend to get discouraged with the initial losses that they face due to the mistakes they commit and the wrong moves they make. If you are just venturing into stock market then here are some useful tips that you can use.
One of the most important things that you should take into consideration is the nature of your personal financial investment in the stock market. Are you planning to use stock market as a secondary source of income by investing a certain portion of your funds or are you planning to venture into stock market as a full-time investor? Once you know your path, you will have to make your decisions accordingly. It is best to get some additional help from experienced stock market experts. When you get such reliable help, you will be able to find the right investment opportunities in the market and invest your funds correctly.
You must spend enough time to understand the stock market trends and interpret the various happenings that normally affect the stock market. You must learn the basics of technical analysis. Your success and failure as a stock market investor lies in your ability to perform proper technical analysis. You cannot expect yourself to turn into an expert overnight. You will have to spend a considerable amount of time in the stock exchanges. You should also allow yourself some room to commit mistakes and of course learn from them. Mistakes and losses are part of stock market investments. So you should not get discouraged with initial mistakes made, but rather get reliable financial consultation. There are number of resources available today both online as well as offline. You will have to take into consideration such resources that are available online. You will also be able to find lot of useful information at our website that you can confidently put into use.
When you are making use of stock market help that is available online, you need to use your discretion in terms of finding the best help. Not everything that is posted online is based on experience. So carefully choose resources that you can consider trustworthy.
Another important factor that you should keep in mind is that you should not make hasty decisions. All your decisions should be based on sound technical analysis and not driven by your emotions.
Finding Reliable Stock Market Help
Whether you are new to stock market investments or with vast experience in personal financial investments in the stock market, everyone can benefit from reliable stock market help and consultation. There is always room for perfecting one’s strategies and improving their stock market performance.
It is not only beginners in the stock market that make mistakes; even those who have vast experience in stock market investing make mistakes. One of the crucial factors of stock market investments is stock market analysis. You will have to have acute analytical skills to make the best out of your investments. It may not be always possible for beginners to make the right decisions as they will not have experience in dealing with variety of situations that can be seen in the stock exchange.
Some of us engage in long term stock market investments while others invest in short term investments. If you are planning to go for short term investments, you will have to put in a considerable amount of time each day without which you cannot make money out of your stock market investments. The nature of the stocks that you invest will vary depending on the trading strategy you use. So you will have to choose your stocks carefully based on whether you are planning to go for long term investments or short term investments.
Experience always pays rich dividends in the stock market. Your stock market analytic abilities also get sharpened with experience. In the meanwhile, you need to find reliable financial consultation services that you can rely upon. Timing is very vital in stock market investments. In other words timing is everything with stock market investments. There are several investment opportunities but you need to know when you should invest in which stocks. Wrong timing will result in unnecessary loss.
You will be able to avoid many of the mistakes beginners make by having a clear understanding of the stock market basics. It is best to make use of resources such as ours which provide you with all the information you need for your personal financial investments. You can get all the information you need free of cost. We provide you with articles on world market. Using such online resources will enhance your stock market performance. You have nothing to lose as all this information comes free of cost. However, you need to be careful on choosing your stock market help online. You will find plenty of websites claiming to offer the best information on stock market and personal financial investments. Not all of them are reliable enough to be followed. You must choose only websites with good online reputation so that you can really benefit from the information you find there.
Trend lines
A trend is an upswing or downswing, that comes in waves, where the Japanese Candlesticks make on the upswings higher highs and higher lows on those waves. Lows and highs meaning the spiky ends of the Candlesticks, on top the high, below the low. On the downswings the waves make lower highs and lower lows. The lines are drawn at the ends of the lows on upswings and the ends of the highs on the downswings. This is usually the way to draw them, as shown on the weekly Tel Aviv 25 index below. The expertise in doing this comes with time and practice, and the benefit is knowing with a certain degree of certainty that the price is more or less likely to bounce off this line. The fact is that it IS a stronger line than a support/resistance line, to the best of my experience, no matter the significance of support/resistance lines and all that goes with that.
Sometimes the lines can be drawn on a line or closing-quotes chart. This is done at times with support/resistance lines also but the technique is used mainly for when drawing these lines is difficult on the candlestick chart or there is no line seen clearly on that chart.
Notice that there are parallel lines on the daily charts, the lower one is the most important to consider. The weekly chart is made of many mid-term lines that are each trend lines, though not strong trends.
This is to illustrate only, the true lines will come when you make them at your chosen charting software and they will get more and more useful and effective with practice.
please right-click your mouse on the Charts to get a clear view
This is the way the weekly Candlestick Chart looks:
And this is the way the daily upswing-line drawing looks:
This is the upswing Line Chart and the parallel trend lines it has:
Tokyo’s System Pro-flagging for attention
This is a really easy to write piece. Because, all you have to do is look at the chart and it explains everything. System Pro in the TSE has made 2 flag patterns, one after the other. The first one was bullish and ended, as expected, breaking out to the full height of the flag. The second one, in my opinion, may very well break out BEARISH. This also happens with flags. Which is why I always say “buy at breakout”; that is, immediately after it has finished the pattern or retested for sure the support line. In fact, since the RSI has taken a strong down trend after the 1st flag, I really do expect, with a reasonable degree of certainty, that the flag might break out bearish. Check out the chart below. Also check out the August 2009 Fannie Mae where a similar 2 flag pattern occurred and made a lot of investors from the “herd” lose their pants, or panties.
Thei is the way the Chart of System Pro looks:
This is the way Fannie Mae looked August 2009:
A guide to the perplexed
Many times is seems clearly to us that we know the direction the market is taking. Somehow we are not always successful in applying this to market orders and positions. We will concentrate here on the practical implementation of financial investments. I will propose several ideals that can serve as a foundation to start a process towards independence in investing and a reassessment of the investor’s opinions with regard to the financial markets.
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The decision-making process starts with several steps:
The Mapping of the personal assets in order to determine the relative exposure to the different financial asset types. Foreign currency or Bonds in foreign currency, cash or savings, stocks or options, commodities, etc.
Identification or exposure of the connection between the cross-linked assets that exist in the previous step. For instance, investment in equities abroad constitutes also investment in that country’s native currency, since you are paying for the financial instruments with the issuing country’s currency. If you want to benefit only from the equity, you have to protect against the possible losses from currency devaluation by hedging against that currency.
Discrimination among invested assets that are in reliable institutions and less reliable and clarification of the amount of liquidity they offer. For example, The Federal Reserve Bank is very reliable, offering its set of financial instruments of which many are liquifiable. And for example, a savings account is only cash money on the day it matures, there are fines and penalties for taking out money from closed accounts.
The definition of the capital that is free for investment and that deisgnated for independent management. For example; to possibly decide on initially investing 20% of one’s assets, and to augment the rate of exposure over time , that is, increase the rate of invested assets in the portfolio gradually over time. This usually obtains good results.
A determination of the amount of risk one is ready to take. There are the more secure, risk free opportunities with the proper amounts for investment that will enable one to sleep well at night. And if one invests more, the volatility may hurt his daily functioning. It is on each one to detect what level is good for him and follow up in his investing decisions so that he will always be able to sleep well at nights.
Target the purpose of the investment. For example, maybe what is desired is a fixed income for day-to-day use, the enlargement of capital wealth, or tuition and the like for gaining instruction towards the acquisition of a profession.
A determination of the availability and range of the investment activity. For example, a person who has regular work that is not connected to the financial framework, may not be able to take on himself the intense activity of managing a complex portfolio. Here I will emphasize a point: the larger the analytic time-frame; monthly as opposed to weekly and daily, so the chances of success is greater. If we will agree that the Technical Analysis exemplifies the psychology of the struggle between supply and demand, you will understand that a greater amount of opinions can be brought forth and analyzed at the larger time-frame, thus bringing us to a more accurate analysis. The amount of daily pointedly random news items we fix on get dwarved when we take the more maco and long-term analytic approach.