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)

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.

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.

Point and Figure Charts

Point and figure charts were originally designed for long term investors but are now also used by short term traders to trade stocks, commodities, options, or other financial instruments. Point and figure charts are considered by many stock traders to be the easiest charts to use when identifying solid entry and exit points while trading stock.

The stock investors who designed these charts were interested in trend trading and trend development and they wanted to find a way to flush out the market “noise” created by the minor up and down movements of stocks. These point and figure charts helped investors to find a way to see the bigger picture in relation to the supply and demand of certain stocks.

When using these charts the key is to establish the unit of measurement of price movement that is plotted on the graph, otherwise referred to as the “unit of price.” This type of chart only contains a price axis and does not have a time axis. The day-to-day price movements are charted where rising stock prices are displayed as X’s and falling stock prices are displayed as O’s. There are a number of columns that contain the X’s and O’s and these points appear only on the chart if the price moved at least one unit of price in either direction. Again, this stock chart filters out any non-significant price movements while enabling the day trader to determine the critical support and resistance levels. Traders then place their trades when the price moves past their support and resistance levels.

When learning about P&F charts you also find that the easiest trade signals on these charts are called “double tops” and “double bottoms.”  Double tops occur with the rise of a stock, a drop, another rise to the same level (as the original), and then another drop. The high that is touched twice (hence double top) is considered to be the resistance level. Double bottoms occur with the drop of a stock, a rebound up, and then another drop to the same (original) or similar level as the original drop, and then another rebound. The low that is touched twice is considered to be the resistance level.

In addition to P&E charts please also read about Japanese Candlesticks, 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. 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.

Support and resistance are concepts that go hand-in-hand with technical analysis . Both are terms that are used by technical traders and they refer to the specific price points that have historically prevented trades from pushing the price of an underlying security, such as stock, in a specific direction.

When learning how to read stock charts , traders learn that these support and resistance lines emerge as thresholds to price patterns and these lines are the lines where stock prices stop moving up or down.

Both levels represent moments where supply and demand meet. When dealing with the financial markets, prices are driven by extreme supply and demand. As demand increases, prices will inevitably increase and as supply increases, prices will decrease. When supply and demand appears to be equal in a specific market then prices will move sideways. When learning stock market trading terms you must understand that supply is synonymous with the terms bears, bearish, and selling. You must also learn that the term demand is synonymous with the stock market definitions for bulls, bullish, and buying.

Support levels show the level at which a stock price will typically not fall below. In other words, it is referred to as the level at which most buyers tend to enter the stock. Demand is strong enough to prevent pricing from decreasing further and as a result buyers are more inclined to buy whereas sellers are less inclined to sell. Once the support level is reached it is suggested that the demand will overcome supply which will prevent the price from falling below the support level. Support levels are typically below the current price and sometimes price movements can dip below the support level briefly, particularly in volatile markets.

When discussing support and resistance levels you must also understand what the resistance level is. Resistance is the price that stock or other another financial security can trade at but that cannot exceed for a specific amount of time. In other words, it is referred to as the level at which most buyers are less inclined to buy and sellers are more inclined to sell. Once the resistance level is reached it is suggested that the supply will overcome the demand which will prevent the price from rising above the resistance level. Resistance levels are typically above the current price and sometimes price movements can rise above the resistance levels briefly, particularly in volatile markets.

In addition to support and resistance levels, 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. 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 .

Shorting Stock for Beginners

Shorting stock occurs when the investor borrows stock to sell with the expectation that the price of that stock will drop. The investor then buys the stock back to replace it at a cheaper price. Clear as mud? Let’s explain further. When an investor goes long on an investment, it means that the investor bought the stock with the expectation that the stock price will rise in the future. On the other hand, when an investor shorts a stock, he or she borrows from their broker, again with the expectation that there will be a decrease in the price of the stock. It is important to understand first how the stock market works before attempting to understand the concepts associated with short selling stock.

Let’s take a look at the process of shorting stock. When an investor short sells a stock, their broker will lend the stock to you. The stock actually comes from the broker’s own inventory, from another brokerage firm’s inventory, or from one of the firm’s other clients. The shares of stock are then sold and then the proceeds are credited to your account. At some point, the investor must buy back the same number of shares of stock to return them to the broker. If the stock price in facts drops, as you predicted, you then buy back the stock at the lower price, pay back the broker at the current market price, and make a profit. If your predictions were incorrect, and the value of the stock increases, you then again, have to buy back the stock at the higher price, pay back the broker at the higher market price, and you lose money. Keep in mind that if the stock splits while you short, you then owe twice the number of shares at half the price! It is wise for investors to set stop loss orders when shorting stock in order to limit their losses. (Terms such as stop loss and others can be found in the glossary of stock market terms in this site).

When learning about short selling and trading stock , you must also learn about buying stocks on margin, as well as other basic stock market terminology . This is the borrowing of money from a broker (as mentioned above) in order to purchase stock. It requires that you open a margin account with a brokerage firm and there is a minimum deposit that is required. This minimum deposit is typically around $2,000 but it ranges from firm to firm. This money is used as collateral so that if the value of stock works against you, then the account holder is required to deposit more cash or to sell a portion of the stock.

Please also read about Japanese Candlesticks which is another 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 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 analysis indicators, such as the moving average convergence divergence indicator , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .

Before we discuss breakout trading we must first define what a “breakout” is. A “breakout” is a stock price that moves beyond the defined support and/or resistance levels and it does so with increased volume. Day traders and other stock traders will use this form of trading as a way to take a position within a trend’s earlier stages in a way that offers limited downside risk.

Traders using this method will enter a long position after the stock price breaks above the resistance level. Conversely, traders will enter into a short position after the stock breaks below the support level. Investors find that breakouts are the markers for major price trends.

In today’s article we discuss the steps that traders must take when breakout trading.

1. Look for those stocks that have strong support or resistance levels. Watch how they move keeping in mind that the stronger the levels the better the ending result.
2. Be patient and wait until the end of the trading day on the day that the stock price breaks out. Don’t act too soon and miss out on the trade’s full potential.
3. Know your exit strategy when trading stock . Determine your point of exit and act on it when the time comes. This is true for all types of trading no matter the strategy. This strategy may ride on the fact that your pattern has failed or if your target is reached. Regardless, you must have your exit and entry points defined, and you must follow them.
4. As a stock price breaks a support level, the old support level becomes the new resistance level and vice versa. (old support becomes the new resistance) Make sure that the stock will test the level it broke after the first two days. This is a very important step and one that should not be skipped by stock investors .
5. Accept your losses if trades fail when breakout trading. After completing step four described above, you may realize that the breakout failed. You won’t win every time so take it as a learning experience.
6. Investors will often wait until market close to exit a losing trade. If you notice that the stock has stayed outside the support and resistance levels at the end of the trading day, you may want to close out of the position. There will be more opportunities in the future.
7. Have patience so that you avoid emotional investing. Follow your entry and exit strategies, accept losses, and trade objectively.

In addition to breakout trading, 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 . 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 trading stocks, currencies, commodities, or exchange traded funds .

Gap trading is a form of technical analysis used by day traders and other types of traders as well in order to trade stocks or other financial securities. Investors must learn how to read stock charts as part of their trading education. Gaps are actually areas on a chart where the price of a stock moves abruptly up or down with little to no trading in between. The key is to learn to interpret these gaps in a way that brings profits.

We see gaps occur as a result of fundamental factors such as when a company’s corporate earnings are higher than expected and their stock therefore gaps the following day. What this means is that the stock actually opened higher than it closed the previous day, hence leaving a gap. Additionally, you see gaps occur in the market as a stock breaks into a new high in a trading session.

Gaps are classified into four groups and short-term stock investors study these gaps as they learn gap trading.

Breakaway gaps – used in technical analysis, breakaway gaps represent gaps in the movement of a stock price that is supported by levels of high volume. They occur at the end of a price pattern and they signal that a new trend is beginning.

Exhaustion gaps – these gaps occur after a rapid rise in a stock’s price begins to tail off. It typically represents a falling demand for a specific stock and it occurs near the end of a price pattern. The exhaustion gap signals a final attempt to hit new lows or new highs.

Common gaps – common gaps are found on a price chart for an asset and they occur as a result of normal market forces that are very common. Visually they are represented by a non-linear jump or a drop from one point on a stock chart to another point. Common gaps cannot be placed in a price pattern, when gap trading and they represent an area where the price has “gapped.”

Continuation gaps – continuation gaps occur in the middle of a price pattern. These gaps signal buyers and sellers who share a common belief in the future direction of the underlying stock.

In addition to gap trading, 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. Candlestick signals, used in conjunction with the appearance of a gap, provide high-probability profitable trade set-ups. 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 trading stocks , currencies, commodities, or exchange traded funds .

What is a Technical Indicator?

The purpose of using a technical indicator is to predict future price levels, or the general price direction of a stock, or other security, by looking at past patterns. In other words, indicators are used in technical analysis and they do not analyze any piece of the fundamentals of a company such as earnings, revenue, and profit margins. They are typically used by active traders to analyze short-term price movements in the markets.

Below we provide a quick review of those indicators that we have discussed in previous articles.

Moving Average – The moving average is an indicator that shows the average value of a security’s price over as set period of time. It tracks the trends of a security by smoothing out daily price fluctuations, referred to as “market noise” that can dilute the interpretation of the financial markets. There are different types of moving averages including the Simple Moving Average (SMA), the Exponential Moving Average (EMA), the Weighted Moving Average (WMA), and more.

Stochastics – Stochastics help to determine when a market is overbought or oversold. The assumption, when using stochastics as a technical indicator, is that when a stock is rising it tends to close near the high and conversely, when a stock is falling, it tends to close near its lows. This indicator takes a look at the price action, which is the price at which as stock is traded throughout a daily session.

Fibonacci Numbers – Fibonacci numbers are used to predict price targets and support and resistance targets. These numbers are used as reference points in order to predict retracement versus reversal and they occur is a sequence. Each term, except for the first two terms, is the sum of the previous two terms.

Elliot Wave – The Elliot Wave theory is based on the Dow Theory, but basically it tells us that the market exists is two phases. These phases are the bull market and the bear market. Additionally, there are five waves that occur in the direction of the main trend, and there are three corrective waves. Elliot’s theory is that the movements of the stock market could be predicted through observations and identification of repetitive patterns of waves. These waves are based on cyclic laws in human behavior, also referred to as the psychology of the masses.

Please 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. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical indicator, such as the moving average convergence divergence , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .