Trading LeverageThere are several ways to increase return on investment in stock trading. One is trading leverage. Trading leverage is a means by which traders maintain their profits in trading stocks while investing less of their own money in the process. Two common ways of gaining trading leverage are using a margin account and buying stock options. When one begins stock trading he has a fixed amount of capital to invest in the endeavor. What he will do is buy stock and sell stock with an eye on the fundamentals and skillful use of Candlestick analysis in order to gain a profit. This is basic to the process. In using trading leverage the first aspects of trading, fundamental and technical analysis, will be the same whether he uses trading leverage or not.
In order to profit in the stock market a trader needs to understand the ever changing fundamentals of the stocks which he trades. This is the fundamental analysis that looks critically at a stockfs margin or safety and at intrinsic stock value. With the fundamentals as a baseline successful traders use technical analysis with Candlestick stock charts to predict where stock prices will go next. With studious attention to fundamental and technical stock trading with the skillful use of Candlestick trading tactics the trader can profit from buying stock and selling stock. Then, how can the trader use trading leverage to multiply his profits?
Trading options, specifically buying puts and buying calls on stocks, provides the trader with two benefits. First of all the trader only needs to buy an option, and not the stock, in order to profit in buying options. Using Candlestick patterns as a guide the trader can anticipate stock price movement and buy options accordingly. The trading leverage in buying an inexpensive but well researched stock option is that the trading leverage obtained with this sort of stock trading can result in gaining a substantial return on investment. The amount gained would be no more than if the trader buys the stock or sells short but the amount invested will be substantially less. The other advantage of buying options is that the trader is under no obligation to buy or sell the stock in question should unforeseen events cause the stock price move contrary to expectations.
Trading with a margin account is another alternative in gaining trading leverage. In this case the trader borrows money from the broker in order to allow him to trade in larger amounts than he otherwise could with his available capital. The differences between trading options and using a margin account are that the trader can magnify his losses as well as his gains by trading in amount larger than his own capital and the trader pays interest on monies borrowed. On the other hand he does not pay a premium for an options contract. Although the wise trader will always follow his Candlestick pattern formations in buying and selling stocks this is doubly important when trading in a margin account because of the downside risk of a losing trade with magnified losses.
Market Direction: Taking profits for most investors is a difficult process. There are two major reasons why most investors have a hard time taking profits. Quite often when a position has a good strong profit, the enthusiasm for owning a position continues to build. As the Japanese Rice traders have pointed out over the centuries, most investors buy enthusiastically at the top. Owning a position that has been producing good profits can entrap an investor into thinking a price will continue in an upward direction forever. Candlestick signals reveal when there has been a change of investor sentiment. This will usually entail exuberant buying, a gap up in price in the over bought conditions and the appearance of a candlestick sell signal.
Both the Dow and the NASDAQ provided strong sell signals today. The Dow formed a Shooting Star while the NASDAQ formed a bearish left/right combo. This at least indicates a possible pullback to the T-lines. A major benefit of candlestick analysis is that it allows an investor to visually witness signals that illustrate a change of investor sentiment. The graphics in candlestick analysis make identifying signals very easy with the visual characteristics of each signal. Whereas most technical charting require significant confirmation, candlestick signals reveal immediately what should be occurring in the next time frame. Candlestick sell signals work with a high degree of probability or we would not be witnessing them today.
The hard part for selling a profitable position is the ego. As the price continues higher, the human mind is easily swayed into imagining the price moving continuously for bigger profits. Even when witnessing a sell signal, there is a major apprehension into siding the close a position. 'What if' after I sell, this trade continues to go higher without me? This is the thought process most investors go through. This fear is eliminating using candlestick analysis. First, the signals in the proper conditions of the stochastics will give a good high probability situation for the time to sell. The signals and candlestick formations also have the capability to show whether the sell signals have become negated. This may occur at a lower price or a higher price than where you had closed out a position. However, knowing the signal patterns allows an investor to reestablish a position once it has consolidated and turned back up. Having this strategy available now eliminates the fear of closing a position, knowing what the game plan will be based upon the action of the price movement over the next few time frames.
There are obvious times where a chart shows a clear change of investor sentiment. As seen in the SD chart, the simple rules applied to candlestick signals make taking profits relatively simple. The stochastics were in the over bought area. The price gapped open to the upside. This made placing stop losses at the appropriate levels very easy. Closing out a position becomes a calculated procedure. Taking profits at specific levels can be done with the idea of looking for a support line to turn the price back up in the trend. These techniques are what allow an investor to analyze clearly where and when they will be positioning a portfolio.
Private training session - currently there is a private training session being scheduled for the West Coast on April 31t and May 1. These training sessions take you from start to finish for learning the candlestick signals and patterns and the thought process that created the signals and patterns. This becomes very powerful information for being able to analyze and trade successfully for the rest of your life. The commonsense aspects of candlestick analysis are demonstrated by Stephen Bigalow. His manner of teaching helps an investors see the logical thought process for successful investing. Do not miss this opportunity to gain knowledge that will affect your investing for the rest of your life. This is not rocket science! Once you have seen the logical approach for analyzing investor sentiment, you will be able to trade any market successfully.
For more information please e-mail Steve@candlestickforum.com
Chat session tonight at 8 PM ET