Everyone wants to offer advice, you can say it is human nature. Some people want to help and other just want to feel superior. Either way, advice about the stock market is critical. If you follow bad advice, it can literally cost you a fortune. Conversely, following good advice can set the foundation for a successful career investing in the stock market. Let’s take the high road and talk about some stock market advice that will actually help you; let’s talk about some investment basics.

What are Investment Basics?
Anything that can be considered an essential piece of information can be called an investment basic. “Buy low and sell high” would probably be an investment basic, although investing is rarely that simple. We will talk about three things that are important to every beginning investor: a stock trading plan, a stock trading system and a diversified portfolio. If you understand these three investment basics, you are well on your way to understanding life in the stock market.

Having a Stock Trading Plan
If you are traveling, a map is key to a successful journey. Without it you are simply guessing which way to go. The same is true in the stock market; if you don’t have your journey mapped out, you will struggle, not knowing which direction to go. A stock trading plan is an investment basic that gives you the map you need by defining your investment philosophy as well as your plans for reinvesting profits, minimizing losses and choosing stocks. Your stock trading plan should be a comprehensive, unemotional approach to your strategy for investing. It should be something that you can pull out each year and use to review your holdings and ensure that you have stayed on course with your financial objectives.

Having a Stock Trading System
While having a stock trading plan is important for defining your investment approach, a stock trading system is an important investment basic for defining your investment performance. Without an explanation of why bar charts are insufficient, we will just say that the Japanese Candlestick method is the trading system you need. This is a powerful tool for both charting and technical analysis, providing the investor with significant daily information on a particular stock as well as showing stock market trends and helping to define stock movements before they even occur. This is a proven, successful system and using it provides the investor with an irreplaceable tool and a valuable investment basic.

Having a Diversified Portfolio
While portfolio diversification could be considered a part of your stock trading plan, its value to an investor is so high that it should be considered an investment basic by itself. A diversified portfolio is an excellent way for an investor to protect his or her holdings, especially when those holdings include growth stocks or speculative investments. For example, if you have invested $10,000 equally between 2 companies and one of them fails, you have lost half of your investment. If you have invested the same $10,000 equally in 20 companies and one of them fails, you have only lost 5% of your investment. While this is a simple example, the result is clear; a diversified portfolio creates a shelter that will protect you by keeping your investments spread over many different companies or stock sectors. Of course you don’t have to invest equally in each company you hold; this is something that you can decide based on the investment approach that you defined in your stock trading plan.

Conclusion
These are just a few of the investment basics that you should consider with beginner stock market investing. If you spend the time to be prepared before you dive into the market, your learning curve will be much shorter. Remember that not all advice you receive is beneficial but you can take these investment basics and build the foundation for your career in stock investing.

Market Direction: Candlestick signals work more effectively on commodity trades as they do with stock trades. The reason is very simple. There are less influences on a commodity than there is in a stock. Stock prices can be influenced by the market in general, the effects of interest rates moving, earnings projections, upgrades or downgrade unexpectedly from brokerage firms, or the CEO running off with his secretary. A stock price trend can be very choppy due to all the different investor sentiment that can be applied. Commodity prices tend to be a lot smoother price pattern.

Commodity prices are influenced by only a few outside factors. The main factor is supply and demand. Usually supply and demand influences do not change drastically. Once a trend has reversed,  a  trend will usually move to the level where supply and demand become equalized. The weather can affect grain prices. The size of cattle herds can affect meat prices. Transportation can affect crude oil and natural gas prices. Each of these elements comes back to the main contributing factor, the effect they will have on supply and demand. Occasionally something will surprise a market. For example, the mad cow disease scare sent beef prices plummeting a few years back. However, surprises in the markets are relatively rare.

The Japanese Rice traders were able to develop a charting system that not only revealed effective reversal signals, but they were able to analyze what investor sentiment created those signals. This information was developed on the most simple of all commodities, Rice. The simple rules of candlestick analysis can be applied to all commodities. If specific commodities are affecting investor sentiment in the equity markets, the analysis of the stock market can be better evaluated. Crude oil prices have been a predominate factor on the markets over the past year. Being able to analyze the failure of prices at obvious resistance levels provides insights into overall investor sentiment. As observed in the June crude oil chart, prices are having a hard time breaking through the 200 day moving average, an apparent resistance level. Recently, prices bounced up off the 50 day moving average after a bullish engulfing signal appeared. A bearish Harami at the 200 day moving average provides a fast illustration that prices may be stopping once again at this level.

Crude oil

Trading commodities using candlestick signals is very easy. Trading the commodities by themselves is much more effective when able to see what investor sentiment is doing. Trading stocks becomes much easier to execute with the additional information of what outside influences might occur in investor sentiment.

Feeder cattle

When applying other technical levels to candlestick analysis, indicators such as moving averages,  trend lines, or any other technical indicator can be used to improve the analysis of a trend. As seen in the Dow,the trend has moved away from the trading line.The past couple days of indecisive trading, the doji's, made the probabilities of a profit-taking pullback towards the trading line that much better. Candlestick signals clearly illustrate normal investment processes during a trend.

DOW

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Good investing,

The Candlestickforum Team

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