Everything you learn about trading is like a tool that is being added to your trader’s toolbox. Your tools will make it easier for you to “build” your trading account.
Bollinger Bands
• Used to measure the market’s volatility
• They act like mini support and resistance levels
• Bollinger Bounce
o A strategy that relies on the notion that price tends to always return to the middle of the Bollinger Bands
o You buy when the price hits the lower Bollinger band
o You sell when the price hits the upper Bollinger band
o Best used in ranging markets
• Bollinger Squeeze
o A strategy that is used to catch breakouts early
o When the Bollinger bands “squeeze” the price, it means that the market is very quiet, and a breakout is eminent. Once a breakout occurs, we enter a trade on whatever side the price made its breakout.
MACD
• Used to catch trends early and can also help us spot trend reversals
• It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
• Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
• MACD’s downfall is its lag because it uses so many moving averages.
• One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.
Parabolic SAR
• This indicator is made to spot trend reversals; hence the name Parabolic Stop And Reversal (SAR)
• This is the easiest indicator to interpret because it only gives bullish and bearish signals.
• When the dots are above the candles, it is a sell signal.
• When the dots are below the candles, it is a buy signal.
• These are best used in trending markets that consist of long rallies and downturns.
Stochastics
• Used to indicate overbought and oversold conditions
• When the moving average lines are above 80, it means that the market is overbought and we should look to sell.
• When the moving average lines are below 20, it means that the market is oversold and we should look to buy.
Relative Strength Index (RSI)
• Similar to stochastics in that it indicates overbought and oversold conditions.
• When RSI is above 70, it means that the market is overbought and we should look to sell.
• When RSI is below 30, it means that the market is oversold and we should look to buy.
• RSI can also be used to confirm trend formations. If you think a trend is forming, wait for RSI to go above or below 50 (depending on if you’re looking at an uptrend or downtrend) before you enter a trade.
Each indicator has its imperfections. This is why traders combine many different indicators to “screen” each other. As you progress through your trading career, you will learn which indicators you like the best and can combine them in a way that fits your trading style.
We know this has been a very long lesson, and we do encourage you to go back and read over anything you haven’t fully understood yet. Sometimes it just takes a couple times of reading before you truly grasp something.
Once you understand the concepts of these indicators, go to a chart and start playing with them. Really study how each indicator reacts to the price movement.
When you fully understand an indicator, then it will become another tool for your trader’s toolbox. For now you should just take a break. Grab some coffee or get something to eat. We know your eyes are hurting! Let this lesson soak in, and then come back when you’re refreshed!
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How to read charts in stock trading
Learning to read tick, or candle stick charts and get it right is something every trader needs to do. Chart patterns change everyday in the movement of the stock markets.
Figuring out support and resistance levels, finding buy and sell areas, and determining strength or weakness is what you need to learn.
Knowing if the stock in is a trend and what the volume is, these are very important to your trading decisions.
To have an edge from reading charts, the trader has to be able to understand chart patterns as they are forming, and you then have to make sure the chart pattern has formed.
In the stock market especially over longer time frames the patterns will repeat. The percentages are in your favor if you understand these different patterns on the charts. It is at those chart levels that the imbalance of order show up between the buyers and sellers of different pairs in the FX or the same is true if you are trading stocks .
Many support and resistance areas are known to all the big brokers and banks that trade the stock markets. They recognize these patterns in charts and trade them accordingly. Watching the gold and oil markets are something to watch also. The currency markets can be influenced by these to commodities.
You should read numerous investment books and researching the internet for the best ways to use indicators, how to read chart patterns and technical analysis, forex newsletters are also great source to help you make educated trading decisions. If you have level II on your trading platform learn to read it. It will show where the market makers are sitting and where the support or resistance is.
This is true that stock trading involves so many risks, learning to read charts is a very good strategy can be very helpful to make you profits in your trading. Make sure that you learn charts and a trading method that will take most of the risk in both up and down markets. You wouldn’t want to end up losing your trading capitol because you failed to foresee the different trends on the stock charts.
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The foundations for volume spread analysis were laid by R.Wyckoff way back in the early 1930s. Wyckoff was supposed to have made fortunes with his principles. Wyckoff started with a premise that price / volume / Time could provide a picture of the demand and supply from smart money (he called the smart money ‘composite man’). It would be nice to look at Wyckoff methods time to time as his work is the basic one and others have built on it. Wyckoff had three basic principles:
Price and volume
Cause and Effect
Effort and Result
The current day VSA available in the market still relate to these tenets.
I know most of you are eager to get straight into the core of VSA. But let us lay some foundations before building the blocks of VSA. First thing is of course to understand a little more about working of Smart Money (hereafter we will just use the term SM to indicate Smart money).
The SM basically moves the market in four phases as follows
1. Accumulation
2. Markup
3. Distribution
4. Mark Down
Most of you may be fully aware of these. Still we will look at these phases more in details as this would help us to understand the SM operation better which in turn would give a better perspective to VSA.
There will not be any demand for something when there is plenty of it available and nobody wants it. As the availability decreases and more people want it then the demand increases. So the first thing the SM does is find something that is available a plenty and cheap. The next step is to create a scarcity of the same and get people interested in it which in turn generates the demand.
This is first phase which is Accumulation.
Accumulation
Accumulation is a process through which the SM acquires a large quantity of the stock at the lowest possible price. Accumulation is a subtle, sophisticated and sly process of cornering a huge quantity of the stock that makes the following phases possible and worthwhile. Once a large quantity has been absorbed the number of floating stock reduces and the demand increases. This makes possible the next phase Markup.
Accumulation normally takes place in congestion areas. Congestion area are mostly sideways range bound movements where the stock appears to have no interest to either move up or move down. The SM ensures that the stock is contained below a certain upper level which is the supply area. At the same time the SM also supports the prices above a certain lower line which is the support area. The stock moves within an upper resistance or supply area and a lower support area.
The congestion areas are characterized by Indecision. One of the most important characters of congestion areas is the Low Volume. When most traders are bullish or bearish the volume is high. Low volumes indicate indecision among the traders on bullishness and bearishness.
Ah.. Sounds easy…….. Well the problem is that congestion areas are seen in both accumulation areas as well as Distribution areas ……… oh , Well that is not the only problem………. There will be periods where no one seems to be interested in the stock… the pattern of price movement most of time very similar to the congestion pattern…..
So the naturally the question is how one would ascertain if the pattern is really accumulation in progress…
…How one checks if the congestion area is really an accumulation area.
There are a few things to lookout for..
• First, the indecision should be quite visible. In other words the volume should be low and quite. No huge volume upsurges. Even if the volume is relatively higher the range between up day volumes and down day volume should be narrow.
• Second, the spread of the bars (High – Low) should be narrow.
• Third, the volume should shrink near the support line and expand near the resistance line.
• Fourth, the stock should be trading in a range for some weeks if not months.
Also you may see some shakeouts in the trading range. The SM would temporarily drive down the prices below the support line in order to takeout the stop losses and panic the weak hands into selling. You will see the stock bounces back above the support line immediately. By this process the SM is shaking out the weak money from the stock. For most of us it is just a failed breakout. Sometime the stock instead of bouncing back would continue to drop if there was too much supply. So trading these breakouts could be tricky.
Also it would a good sign if the stocks trading range is much above the support line. Normally we would see some of the above signs if not all in the accumulation area. There are many other patterns which signify accumulation. Some of them are rounding bottoms, reverse head and shoulder and double bottoms (or “W”) patterns. Each could be explained in terms of SM activity. However we would go into the details now.
One thing to keep in mind when evaluating patterns is that it is very important to check the volume pattern as well.
Original Post:
Kaushik Hira
Original Link:
http://www.facebook.com/home.php?sk=group_147436708639146&view=doc&id=153475191368631
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