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Buying on Margin

When buying on margin you can lose big, but when done correctly and carefully you have pull in big earnings. Many feel it is worth the investment risk and have incorporated it as common practice into their daily trading routines and trading strategies.

Buying stocks on margin allows you to double your buying power by borrowing up to 50% of a stockís price. You borrow this from your online broker and there are of course costs associated with this doing. You have to first open a margin account which requires a minimum deposit ranging from $2,000 to $5,000 depending on which brokerage firm you sign up with. Also, if the stock you buy goes down in value you could end up owing more that your initial investment. This is the risky part of buying on margin and it why many people opt not to do it. If this happens and your stock falls 75% below its original value, then the broker will issue what is called a margin call.

A margin call basically means that you have to put more money into the account, either by depositing money from another account or by selling stock. If you have to sell stock, this can be extra costly in that you now have to pay commission on the stock. That is why you must price stock wisely and keep a very close watch on the stock market and your stocks. Consult with your broker if need be, do the proper research and donít invest more than you can afford to lose.

While it may sound too risky, there are benefits when buying on margin. You increase your buying power when margin trading. As described above you can buy up to 50% more stock that you could have with a regular trading account. If the stock goes up, you can make twice as much, twice as fast. You are also open to new investment opportunities that you may not have otherwise been able to do. With this buying power, you now have enough cash equity to participate in trades that you couldnít before. You also have the ability to invest more money as a result of the profits you obtain from buying stock on margin.

Investing in the stock market requires a great amount of knowledge, patience, dedication and practice, particularly if you are day trading stocks. Margin trading also requires the same amount of dedication and knowledge if not more. Continue to read about and study margin trading and see if it is an option for you.



Market Direction:  Price trends can work off of reoccurring investment patterns. As illustrated in the Dow chart, profit-taking  occurred in mid August as well as at the beginning of September. The past few days of trading showed a high probability of a pullback. A Bearish Engulfing signal, followed by trading below the tee line, revealed a high probability of a pullback. The question then became whether this pullback was a full-scale reversal or merely profit-taking. There was a more clear indication the pullback was just profit-taking when using candlestick signals.

Each candlestick formation provides information about investor sentiment. Although there was the appearance of a Bearish Engulfing signal last week, the trading on Thursday and Friday had signal formations that indicated indecisive selling. Why is it important to have this information? An investor will have better clarity on what a trend is doing if they can analyze what the trend has done in the past. Observing the pullback of mid-August and the first of September indicated that any trading below the tee line was  quickly reversed. Adding that information to the analysis, the trading below the tee line at the end of last week made the trend evaluation more accurate. The indecision indicated the possibility of a downtrend terminating fairly quickly.

DOW

 

Having the ability to analyze the general market trend, with a high degree of accuracy, allows for the correct positioning of a portfolio. There will be times when it is time to take profits. This will be  indicated with candlestick sell signals. However, it also allows investors to immediately get back into closed-out positions once the uptrend continues. There are a number of high probability chart patterns in candlestick analysis.

Understanding what should occur in a chart pattern allows an investor to take advantage of entering a trade well before investor confidence builds back up. As illustrated in our recent recommendations of CHK and MBFI, a break out area became obvious.

CHK

MBFI

The same scenario can be observed now in the SAY chart. Utilizing the information built into candlestick signals and chart patterns provides the opportunity to make much bigger profits with a much higher probability. When it can be observed that a candlestick signal is being confirmed, that alone provides a strong probability of a correct trade. When a confirmed signal occurs in a price pattern that also reveals a high probability result, the upside potential becomes that much greater. Consistently placing investment funds in high probability trade situations will dramatically improve an investors returns over time.

SAY

Recognizing the high profit trade setups makes for much better option trading opportunities. Learning how to place the correct option trade on a candlestick price move is very important. Direction, time, and magnitude is what produces successful option trades. All three of those factors are built into candlestick signals.

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Good investing,

The Candlestick Forum Team


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