Prosper Newsletter: August 2007 > Stock
You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.
Basic Indicators
What is happening in the market? How do we measure what's going to happen in the market? That's what we want to do-determine where the market is going. One method you can use is indicators.
Indicators show the specific trends of momentum, price and volume over time. These values are generally collected on a daily value and plotted showing a trend over that time period. Although indicators provide an educated estimate of what will happen, indicators can be misleading. No investment strategy is foolproof.
There are some general guidelines you should follow when beginning to use indicators. These guidelines include the following:
- Practice using indicators on paper trades first
- Use charts that you are familiar with first and build upon your knowledge slowly adding indicators that will benefit you
- Use two or three complementary indicators to evaluate stocks
Indicators can help good stocks to distinguish themselves. Indicators can be like bird dogs that help you to find the right stocks for your investing strategy. The better the indicators have been trained and the more experience you have with them, the better the success you will find with them.
Finding your Bird Dog
Have you ever gone bird hunting before? The best way to bird hunt is with a dog that has been trained to find the birds and flush them out for you. Well, we want to do the same thing with the market. We want have a kind of bird dog to help us find out where things are going. The indexes, such as NASDAQ, S&P500, the Dow Jones Industrial Average, etc., can be used as bird dogs.
Stock Charts Analysis
Identify Support and Resistance Lines
- Resistance: is a price level that the stock has a hard time breaking through; if it breaks through the resistance, it can be a time to buy.
- Support: the low end; if it breaks through the support, it signals a time to sell. Previous levels of resistance can become support. (A level that the stock finds a floor and doesn't break through.)
- The market normally trades within these ranges.
RSI (Relative Strength Index)-the centerline for RSI is 50. In general, a rating above 50 indicates that average gains are higher than average losses and a rating below 50 indicates that losses are higher than average gains.
MACD (Moving Average Convergence/Divergence)-a lagging indicator.
If it is a strong trend that is going to last more than a day or two, the RSI and MACD indicators will help. But when it is a very quick momentum trade, the Support and Resistance Lines will be the indicators to watch. You obtain more detail when you look at a much shorter time frame, such as a six-month chart, versus a longer time frame of a year or more.
There is not a magic formula. It is a matter of being patient and diligent. The key is getting to know each stock that you are looking to trade and the trends of each of these stocks. For example, if the stock moves in the general direction of the S&P500, you'll also want to know what the S&P500 is doing. We want to make sure that it is not emotion driving the trade. The only way to remove the emotion is to have specific tools to look at that you have identified as "entry" or "exit" points (buy or sell points). You need to examine the inter-day chart and long-term charts for the stock and actually draw in those lines to identify those specific Resistance and Support levels.
If you cannot make at least an annual average of 20% return you should not be playing in the stock market. Perhaps you should look to invest in mutual funds instead.
Significant Gains
Mark exited his trade. He had 5 contract ARO 45 calls at 2.80 and exited at 3.10 because the chart did not look like an upward trend. So he decided to exit the trade for an 11% gain. This represents a substantial gain for the month of May; our trading account gain was $7,000--an equivalent of 56%! Thanks for the coaching! We are now making more informed decisions and are able to keep most of the money we make.
Renee and Mark B.
With the coming of Memorial Day the stock market officially kicked of the summer months. Summer months are normally volatile because the market usually doesn't have much direction. Starting in July we will get more direction with earnings season kicking off. With the volatility of the summer months here we need pay close attention to our trading. Use trailing stops and protect yourself whenever possible. After you get a profit make sure and protect it. In this type of a market it is hard to say which direction it may go from day to day.
Some hot sectors right now are the tech sector and agricultural chemicals. Pay attention to the hottest sectors and watch for any sort of news that would cause a particular sector to move, and act on it if you know your right. Remember to treat your trading as a business. Only buy into a stock when the indicators are telling you. Get out of the trade on the first sign of weakness.
