Bollinger bands are used by stock traders to determine overbought and oversold levels in the markets. Bollinger bands consist of two trading bands moving above and below a moving average. When using these bands you will see a center line which is either the exponential moving average or the simple moving average (depends upon personal preference), and two bands (price channels) that are the standard deviations of the stock that is being analyzed. Basically, when stock prices touch the upper Bollinger band repeatedly, then the prices are considered to be overbought. Conversely, when these lines touch the lower band repeatedly, stock prices are considered to be oversold.

Technical analysts use the moving average by drawing upper resistance and lower support lines to help them anticipate the price direction of a stock. They will also draw straight lines to connect tops or bottoms so that they can identify upper and lower price extremes. They also add parallel lines in order to identify the channel in which prices should be restricted to or contained within. The stock trader can be pretty confident that their stock prices are moving as they anticipate, as long as the prices do not move out of this channel that they have created using these two lines.

Bollinger bands are used in order to assign the upper and lower bands as price targets. Again, many traders will use these bands in order to determine overbought or oversold areas and will sell when the price touches the upper Bollinger band and will buy when it hits the lower Bollinger band.

Bollinger bands measure price volatility through a mathematical formula using standard deviation. This shows how the price varies from its true value enabling traders to figure out almost all of the price data that is needed between the two bands. This is a very basic explanation of Bollinger bands however it should give you the general basis for why they are used and what they are. 

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock market charts when trading stock. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

Trading volatility; an investing method typically employed in stock option trading, measures the risk of an option over time. In theory, the chances of an instrument’s price being further out from the current price increases over time. Thus, the volatility must be taken into account when selecting an option trade.

Three CBOE volatility indexes
1) The CBOE (Chicago Board Options Exchange) shows the market’s expectation of 30-day volatility under the ticker symbol; VIX. Based upon implied volatilities of S&P 500 index options it provieds a broader measure of market risk. The VIX  is also referred to as the ‘fear gauge’ as stock investors‘ reactions are visible in price movement. The VIX. (CBOE introduced the VIX in 1993 based only upon eight S&P at-the-money put and call options, and expanded to cover S&P 500 approximately ten year after)

2) The VXN displays volatility based upon the Nasdaq 100 and it is
calculated using the same system as the VIX. However, the VXN characterizes implied volatility of a theoretical 30-day option that is at-the-money.

3) VXD tracks the Dow Jones Industrial Average (DJIA) and it is a reflection of ‘anticipated’ stock market volatility for this index.

Why does trading volatility matter?
By its very definition; volatility means to change suddenly in an unpredictable or potentially dangerous manner. It only makes sense to place as  many odds in your favor when trading stock, and these indexes were devised to help stock market investors  make an educated guess about implied volatility. The higher the volatility the higher your risk for placing the trade, and the harder it becomes to profit. Just one of the many facets of how the stock market works.

The ability to measure volatility becomes extremely important in stock option trading  Not only do option traders predict future price direction, they must work against time decay during the time-frame they plan to hold their option position. Regardless of your particular trading style, all stock traders can take a look at the trading volatility indexes to measure investor sentiment.

I hope you found this brief introduction helpful and invite you to join me, Rick Saddler, every Wednesday evening at 8PM Eastern Time for my free public stock market webinar sessions. (password to join the session is displayed under Weekly Chat Session column on the right-hand side of our site)

Margin trading, also referred to as “buying on margin” is the borrowing of money from a broker in order to purchase stock, or other securities. Margin trading provides stock investors with the ability to buy more stock than he or she would normally invest through the use of a margin account. In fact, once you open this account, you can borrow up to 50% of the purchase price of a stock! The investor must open this account with a brokerage firm and there is a minimum amount that is required to open it. This amount will depend on the brokerage firm that you choose to open an account with. You of course do not have to borrow 50% but can instead borrow 10% or 20%.

Margin trading is a popular way for experienced stock traders to increase their profits but they must be careful that they understand exactly how margin trading works. First of all, it is very important to understand that when you sell the stock that you have in a margin account, the profits first goes to your broker in order to pay off the loan. You also must understand what a “margin call” is. A “margin call” occurs when your account dips below the minimum account balance that is required. This minimum amount is referred to as the maintenance margin and if your account dips below this amount, then you will be forced by your broker to deposit more funds into your account, or you can sell the stock in order to pay off your loan.

It is important to note that margin trading is mainly used for short term trading and investing. This is because the longer you hold onto an investment, the greater the return that is needed to break even. So basically, chances are slim that you will make a profit if you hold an investment on margin for a long period of time. This is because you have to pay interest on your loan and you have to pay these rates until you make payments on it. As you can imagine, this can create some debt over time as the interest charges accrue.

Remember, while you can make a lot more money trading stock on margin than you can from a strictly cash position, you can also lose a lot more money! Be sure that you clearly understand trading margin and that you have a good plan in place so that you trade responsibly.

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock market charts when trading stock. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

Paper trading is what many new investors do when they are first learning to trade. Whether they are learning to trade stocks, options, commodities, or other financial instruments, paper trading is a smart way for new investors to learn from their mistakes before losing actual money. Paper trades are trades that are tracked on paper only and there is no “real money” invested.

You learn to make decisions and see what occurs as a result of those decisions without risking your capital when paper trading. You experience the element of surprise and anxiety that occur with trading stock, or other securities, as you anxiously await the result of your trade. Rather than just learning about the different trading strategies, you can actually apply what you have learned about trading and use different technical indicators. You can utilize indicators such as the moving average, stochastics, and others and you can adjust your trading techniques accordingly.

Paper trading allows the stock trader to establish a track record, develop a trading discipline, evaluate new markets, test different trading strategies, build confidence as well as make trading career decisions. There are many more advantages to paper trading in addition to these.

Traders can also opt to practice paper trading online. There are online simulators where you can place orders just as you would when trading online for real. With some online simulators you can actually place orders during live market sessions as well as fill your orders online. You can also access your accounts and margins which are updated, as well as access reports online just as if you were operating a real live account. This is a great way to practice before you begin to trade with real money. Many investors are taking advantage of these online simulators and are finding them very beneficial.

Perhaps the only thing that these online simulators cannot do is help traders experience the true range of emotions that are experienced when trading with real money. Anxiety levels rise and various emotions are felt as you trade with real money. You may learn that how you react as you paper trade and how you react when trading with actual money are very different. Just remember, as you begin to trade with real money, that they key is to develop and follow your trading plan. Maintain discipline in your trades and fall victim to fear and greed.

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock market charts when trading stock. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

Spread trading is used in technical analysis and it is when you take a long and a short position at the same time, in order to make a profit. This profit comes from the “spread” which is the difference between the “bid” and the “ask” price. The “bid” is the offer that is made by an investor, a trader, or a dealer to buy a security. It specifies not only the price in which the buyer is willing to buy the security, but it also specifies the quantity of the security to be purchased. The “ask” price is the price that the seller is willing to accept for a security and it also specifies the price as well as the amount of the security willing to be sold.

In futures day trading, one can also practice spread trading. Futures spread trading occurs as the trader longs (buys) and shorts (sells) futures contracts at the same time, for two associated securities, or commodities. (see shorting) Futures spread trading provides traders with the potential to profit off of contract spreads rather than take positions on the market’s direction. The underlying principle for this type of trading is that as futures contracts reach maturity, the prices of the different contracts will change differently over time, therefore allowing traders to profit.

As you learn spread trading you will find that there are five different types of orders that a trader can place. These are explained below.

Market order – a market order is an order to buy or sell a security instantly at the best available current price.

Limit order – a limit order in placed to sell or to buy a certain amount of a security at a given price or better. These orders also let the investor limit the duration of time that an order can be open before it is cancelled.

Day order – a day order is only good for one trading day and if it is not filled on that day, then it is cancelled. This order is placed either with a market maker or a specialist.

Fill or Kill order – also referred to as FOK, this order must be filled ASAP and in full, or not at all.

Stop order – a stop order, also referred to as a “stop” or a “stop-loss order” is an order that applies when a security passes a certain point. This order increases the probability that the trader will enter or exit the market at a specified price in order to either lock in profit or limit his or her losses.

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis . It is the fastest way for new investors to quickly and accurately read stock market charts when trading stock. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

There are two types of separating lines that we will discuss today. These include the bullish and the bearish separating lines.

Bullish separating lines are lines that move in opposite directions and act in the exact reverse manner as the meeting lines pattern. In order to qualify there must be a significant uptrend in progress and another day must occur in the opposite color as the current trend. In other words, there should be a long bearish (black or red) candlestick on the first day. Additionally, the second day must open at the open of the previous day, and it should open on its low for the day (or extremely close to it) and it should continue to go higher. This second day’s candle should be bullish and white or green. These lines resemble the bullish kicker signal however there is no gap between the real bodies.

What does this signal indicate is occurring in the markets?
The bullish separating lines indicate that the bulls have regained assurance after a bearish day in the markets. The uptrend should continue and this is shown as the prices open above a gap on the opening price of the previous day. Furthermore the bears are able to bring the prices down below the this price.

This trend is confirmed by a bullish candlestick on the third day, a gap above opening on the third day, or a higher close on the third day. This confirmation is required.

Bearish separating lines are characterized by a white or green candlestick that occurs in a downtrend. This downtrend is quickly followed by a piercingly lower gap as the market opens the following day. It also displays an opening price that is equal to the previous day’s opening price and is also a lower closing price. In other words, a long white candlestick occurs on the first day after the market has been in a downtrend, then a black body is formed on the second day that has the same opening price as the first day’s (or it is very close). This second day’s candlestick is considered to be a black opening marubozu.

What does this signal indicate is occurring in the markets?
The bearish separating lines indicate that the bulls may in fact be regaining control over the markets. It also provides careful concern for those shorting during this downtrend. Furthermore, if the second day opens with a downward gap, and if the opening price is equal (or very close to) the previous day’s opening price, then the bears will regain their composure in the markets. Basically, the lower that day closes the more confident the bears will be that the current downtrend will continue.

Confirmation is required on the third day for this continuation pattern as well in order to validate that the downtrend is still going strong. This confirmation can be in the form of a large gap down, a black candlestick, or a lower close on the third day.

This is only one of many continuation patterns that are used in Japanese Candlesticks. Japanese Candlesticks are the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals continue to expand your expertise by learning the various secondary Candlestick Patterns. Combine these with your favorite technical analysis indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

Futures day trading is a popular form of trading but before you can begin you must have a clear understanding of “day trading” and what it means to trade futures. We discuss what it means to be a day trader as well as the different types of futures markets in today’s article.

Day trading involves the buying and selling of financial instruments such as stocks, options, currencies, and futures within one trading day. What this means is that the day trader does not keep a trade open overnight and in most cases closes out all trades by the end of the trading day. Futures day trading is similar to day trading stocks except that you don’t actually own anything when trading futures. Instead you are speculating on the future direction of the price of what you are trading. In fact, the terms “buy” and “sell” actually only indicate the direction in which you expect the futures prices will go. Day traders study and use techniques associated with technical analysis when futures day trading.

Futures contracts are used when futures day trading and they are contracts between two parties in which you have the right to buy or sell an underlying asset within a particular period of time. The majority of futures contracts don’t actually result in actual physical delivery of a commodity.

When day trading futures you can trade commodities, currencies, and indexes in interest rates. We explain these below.

Commodities – these are physical products whose value is determined mostly by supply and demand. Commodities include items such as coffee, pork bellies, grains, energy and more. They trade in a centralized market and investors attempt to predict whether or not prices will rise or fall by a determined date in time.

Currency – also known as forex, currency is traded like commodities but on a currency exchange. The price of currency is also speculated as to whether or not the price will rise or fall in the future. Foreign exchange trading, as it is often referred to, is the buying and selling of currencies. These include currencies such as the US dollar, the Japanese yen, or the British pound.

Indexes and Interest rates – one of the most highly traded index futures contracts is the S&P 500 index futures contract. Futures contracts on interest rates are also extremely popular contracts and investors use many timing strategies to trade indexes and interest rates.

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis . It is the fastest way for new investors to quickly and accurately read stock market charts when trading stock . Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

As you learn about the stock market and technical analysis you will eventually learn about the different types of stock market charts that are available to stock traders. In today’s article we discuss four different types of stock market charts including line chars, bar charts, point and figure charts, and candlestick charts.

Line Charts – the line chart is the most basic form of price display and it is created by connecting a series of data points together with a line. The only price that is used however is the closing price for a stock in each time period. Most traders don’t use line charts because they don’t think they contain enough price data while other traders like these charts because it ignores intra-period price swings. Either way it is safe to say that less and less traders are using line charts.

Bar Charts – the bar chart show movements in the price of a stock, or other financial security, over a specific amount of time. That time frame can be one hour, a day, one week, or more. On a daily chart, each bar represents the open, high, low, and close for the day. Different colors may also be used to represent rising or falling prices. Basically, the tick marks that come out fro each side of the line indicate the opening price (left), and the closing price (right) for a specific time period.

Point & Figure Charts - the point and figure chart emphasizes the closing price, and isn’t concerned with time or volume. Plotted on this chart is the price movement, otherwise known as the “unit of price.” An X is used to mark any increases in price and an O is used to mark any lower prices. The point and figure chart does not contain a time or price axis. This chart is used to spot trends and reversals but they offer little information on how long it takes to meet profit objectives.

Candlestick Charts – the candlestick chart was invented over 300 years ago in Japan was originally used to forecast the prices of rice. They are now the most widely used and popular stock market charts and they display the open, close, high, and low prices for a stock, or other financial security, each day over a specific period of time. Candlestick patterns are formed such as the bullish engulfing pattern, the morning star, and the dark cloud cover, in order to predict price movements. They are considered to be the easiest and most visually appealing of all stock market charts.

Please continue to read about Japanese Candlesticks, a trading strategy used by some of the world’s most successful traders. It is the fastest way for new investors to quickly and accurately read stock market charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

The upside gap three method is a candlestick continuation pattern that is similar to the upside tasuki gap, however the upside tasuki gap pattern is not filled on the third day. The upside gap three method occurs in a strong uptrend and it is characterized by two long white candlesticks with a gap upward in between these two candles during an uptrend. The third day of this candlestick pattern is a black candlestick which closes the gap between the first two candles.

In other words, in order to qualify as an upside gap three method the following must occur:

First, as stated previously, the market must be in an uptrend. Second, there must be two long white candlesticks with a gap between them. Third, there must be a black candlestick on the third day that opens within the body of the second day. Lastly, the third black candlestick must fill the gap between the first two days. (Again, the difference between the upside tasuki gap and the upside gap three method)

What does this signal indicate is occurring in the markets?
This pattern indicates a strong bullish market (see bull markets) and the bullish market continues for another day with a gap in the direction of the uptrend. Gaps are eventually filled and the third day opens into the body of the second day doing just that. This fact that this gap closes supports the current uptrend and investors are led to believe that the profit taking is just a pullback and the trend should resume once the gap is filled and is satisfied.

This pattern requires confirmation and this confirmation can occur in the form of a large gap up or a higher close, or in the form of a white candlestick.

This is only one of many continuation patterns that are used in Japanese Candlesticks. Japanese Candlesticks are the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, and you have learned how to read stock charts continue to expand your expertise by learning the various secondary Candlestick Patterns. Combine these with your favorite technical analysis indicators, such as the moving average, and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

Please continue your education and read about the bullish and bearish separating lines.

Swing traders use technical analysis to find stocks that have short-term price momentum, and they are not interested in the intrinsic value of stocks. They focus more on a stock’s price trends and patterns and typically don’t look at the fundamental factors affecting stocks. Swing traders differ from day traders in that they hold a certain stock for a specific period of time, typically a few days to a few weeks. Day traders almost always close out their trades by the end of the trading day.

In today’s article we will take a look at some of the technical indicators that swing traders will use such as the moving average, stochastics, and the relative strength index (RSI).

The moving average is probably one of the most often used indicators and is used with other indicators as well. There are different types of moving averages such as the simple moving average, the exponential moving average, and the moving average crossover. The purpose of this indicator is to show the average value of a security’s price over a determined period of time. It tracks the trend of a security by smoothing out daily price fluctuations or the market “noise” that confuses interpretation of the markets.

Stochastics indicates the market’s momentum through determining the relative position of its closing prices within the high-low range of a specific number of days. The assumption is that when a stock is rising it tends to close near the high. Conversely, when a stock is falling it tends to close near its low. Stochastics is a momentum oscillator that can warn an investor of strengths or weaknesses in the stock market.

The RSI (relative strength indicator) helps to identify potential overbought and oversold positions in the market as well as the trend. It is expressed as a percentage and it is the measure of price trends that indicate how a stock is performing in comparison to other stocks in the same industry. This technical indicator is a momentum oscillator as well.

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis . It is the fastest way for new investors to quickly and accurately read stock charts when trading stock . Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators, such as the moving average, and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.