Candlestick Trading Blog

---

In options trading traders intend to make money buying calls on stocks whose calculated market value is more than the current market price. The trader will pay a premium for the right but not the obligation to purchase stock at the current, strike, price at a later date. If the trader’s fundamental and technical analysis is correct the market price will rise to the anticipated market value resulting in a profit. For the technical analysis part of this endeavor traders will use technical analysis tools such as Candlestick patterns. Reading Candlestick pattern formations can help the trader anticipate market trends and market reversal leading to profitable stock trading or options trading.

Market value is what both traders and investors look at in order to anticipate the next market rally or stock market crashes. However, it is still the market price that investors pay or receive when stocks are bought or sold. Because market price can fluctuate traders can profit with the use of Candlestick analysis to predict stock price movement. Long term investors can also use Candlestick basics in order to increase their profits or decrease their losses when buying or selling stock.

A useful means of buying or selling at the most advantageous market price is to place limit orders when buying or selling stock. When placing limit order the investor or trader will specify a price. For standard limit orders it goes like this. Buy limit orders can only be executed at the limit price or lower, and sell limit orders can only be executed at the limit price or higher. There are also stop orders and stop limit orders. The point of using limit orders in any of their various forms is to optimize the price at which one buys or sells stock. Many investors and traders never buy or sell without the use of limit orders.

An investor may be picking stocks for the long term growth for a stock portfolio. He or she may also be researching which dividend stocks give the best dividend yield. Maybe his or her kids are heading off to college and he or she will need to sell stock to pay tuition. In this case the investor will want to pick the best time within a market cycle to sell in order maximize profit. This is, in fact, part of investing in the business cycle. Each of these will require a different type of stock market research. For good results over the long term both traders and investors will do well to be familiar with and skilled in the various types of stock market research.

Reading stock market updates is part and parcel of day trading as well as smart management of a stock portfolio. Likewise following quarterly and annual reports of stocks that one owns or commonly trades is essential to good stock investing and stock trading. The economic news is all over the headlines when things are either very good or very bad. It is the job of the serious investor or trader to read the economic news when it is not dramatic in order to understand the factors that will drive stock prices in the near and long term future. Sorting the wheat from the chaff is the old expression for finding what is important among lots of details. Routinely doing stock market research will help the trader and investor stay aware of the factors that drive the markets. It will help them recognize important economic and market changes before the rest of the world wakes up to the fact. This will allow the trader to be in the right market at the right time and the investor to either get in or out of a stock in time.

An options price is directly related to the price of the underlying stock. When traders buy call options and the price of the underlying stock goes up the option is “in the money.” In this case traders can sell the option and pocket a profit, minus the premium they paid to buy the call option. Since the option is based upon 100 shares the listed option price is multiplied by 100 to get the price of the premium. Likewise when the price of the stock goes up the increase in multiplied by 100 and that is the profit, minus premium. In order to profit from trading options traders can use Candlestick analysis to evaluate stock price patterns. The use of Candlestick chart analysis allows the trader to anticipate market trends and market reversal. A trader who correctly anticipates a market rally using technical analysis tools such as Candlestick pattern formations can buy calls on the underlying stock and profit handsomely when the stock price goes up.

An investor will pick a stock with a substantial margin of safety, excellent price to earnings ratio, and price to sales ratio. Then he or she will want to buy the stock in the most cost efficient manner. This may entail placing limit orders at a given stock price or buying call options on the stock. In either case the investor will likely not buy at market price and will likely use technical analysis tools such as Candlestick pattern formations in order to purchase stock, and eventually sell stock at the most advantageous price. For successful long term investing the first step is to learn fundamental analysis.

It is not necessary to learn fundamental analysis in all of its intricacy all at once. The investor will find that in picking stocks that he or she will develop criteria. Looking for stocks with a low price to earnings ratio is a good place to start. It is also a very good idea to start by investing in things one already knows something about. In this way the investor already has done fundamental analysis without even thinking about it. For example, a sports enthusiast who plays softball may have a preference for a certain brand of glove, bat, or ball which everyone on his team likes. Finding a good product is a good first step in fundamental analysis.

Many traders find that an efficient means of making money in the stock market is by buying options. Traders can use Candlestick analysis to anticipate movement in stock prices to improve their chances of profiting from buying options. Traders pay an option premium for buying options which gives them the option but not the obligation to buy stock or sell stock. The price at which stocks will be bought or sold is the strike price which is determined by options contracts. There are two directions to go in buying options. These are buying puts and buying calls. A put is an option to sell the stock at the strike price. A call is the right to buy the stock at the strike price. An options trader buys a put on a stock that he or she expects to fall in price. The buyer of a call option expects the stock to rise in price. In buying United States options the buyer has the right to exercise the options contract at any time before expiration. Thus, many traders do not intend to wait until expiration of the contract to profit. When the underlying stock moves sufficiently in price its option value will reflect the change in stock price.

Buying options is a means of benefitting from stock price movement with substantially less investment than by buying stocks. Paying the premium to buy a call or put option is locking in the opportunity to make money during a market rally or decline. Technical analysis of stocks helps traders in anticipating stock price movement and buying stock options at the right times. Someone who buys a stock runs the risk of losing when the price falls. Buying options is different in the trader will not exercise the options contract unless doing so will lead to a profit. The monetary risk of buying options is that if the stock does not move in price as expected the trader does not earn money. However, so long as the option has intrinsic value the trader call sell the option and regain part of the premium. In fact most traders will earn their profit in trading options by selling their contract to another trader after the stock price moves and the value of the option increases.

Every investor buys stock expecting to see stock price appreciation. Sometimes a stock price goes up because of intrinsic stock value. Long term investing is based on the concept that intrinsic value leads to stock price appreciation. Traders, especially those engaged in day trading, look for market driven stock price appreciation or a drop in stock price in order to buy stock and sell stock for short term profits. Although fundamental and technical analysis each have their place in investing and trading it is technical analysis that guides traders to profits as a stock price rises and falls over days, hours or minutes. With time honored technical analysis tools such as Candlestick analysis the old saying is that the trader lets the market tell what the market will do. Stock prices tend to move in patterns. This also applies to trading futures, trading commodities, and trading options as well as trading stocks. The front end of the pattern predicts the back end. Because price patterns repeat themselves the savvy trader can anticipate stock price appreciation and buy. He can anticipate when a stock price will fall and sell short as well.

The rationale for technical analysis of stock is that the market quickly factors in fundamentals when they are known. Stock market news is disseminated rapidly. The market corrects based on new information. However, the market may over correct. Depending upon how traders and investors interpret their stock fundamental analysis they may expect more or less stock price appreciation from the introduction of a new product, the entry into new markets, or new cost savings in production. It is through analyzing chart patterns and analyzing chart pattern reversals that the trader can anticipate further stock price appreciation or a market reversal in the short and medium term. Of course for the long term it is still an understanding of what product a company makes, how they control their costs, how well they market, and how well their R&D department converts basic research into salable products that helps the investor or trader accurately anticipate stock price appreciation.

Online Stock Market Reviews presented live via the internet by Stephen Bigalow

Long term investing is typically based upon an appraisal of stock earnings potential. Stocks that are selling at a low price to earnings ratio are usually under priced because the current earnings are considered a prediction of continued stock earnings potential. Likewise a low price to sales ratio implies a good stock earnings potential and the likelihood that the stock price will go up over time. How long a promising stock will languish with an inappropriately low price often depends upon how many analysts follow the stock and how well the analysts understand the company’s business prospects.

An example of a neglected company with good stock earnings potential would be a company that has suffered under bad management for some time. There is a change in members of the company’s board of directors. New energy is injected into management, often in the person of someone hand picked by a new board majority. Costs of operation go down, new markets are found, sales go up and so do profits. However, since the stock has languished for years analysts are not paying attention. Many won’t until the stock’s price starts to rise. By then it may be too late as those who have been paying attention, doing fundamental analysis, following technical indicators such as Candlestick pattern formations, will have bought repeatedly and driven the price up. By the time some professional analysts have caught on, traders doing Candlestick analysis will take advantage of the technical boost in the stock price and will then sell short before the stock corrects back to a reasonable price.

Stock earnings potential is part of the margin of safety that long term investors look for. It is also goes hand in hand with the intrinsic stock value. It is the forward looking earnings stream that long term investors look for when engaging in buy and hold investing. However, as with all investments, things can change. It is important to track investments as a company with good stock earnings potential may falter. In various market sectors economic factors, new and competing inventions, and loss of markets due competition can reduce stock earnings potential. When this happens, the intrinsic value of a stock is gone and a long term investor as well as a day trader will consult their Candlestick chart analysis for the best price at which to sell stock. When thinking of long term investing, it is fundamental and technical analysis that will guide the investor. When fundamentals take a turn for the worse it is technical stock analysis that guides the way to the most profitable sale.

Online Stock Market Reviews presented live via the internet by Stephen Bigalow

Those who engage in long term investing will look for a margin of safety to help protect against loss. However, they will also look for growth potential. Ideally an investment will have growth potential overlooked by the stock market in general. Thus the stock price will be lower than what the company’s earnings potential should warrant. This is an ideal example of the value of fundamental analysis in stock picking. Choosing an investment in a stock with a low price to earnings ratio, for example, will often mean that the price will catch up to the earnings and the investor will profit.

Stock portfolio diversification tends to reduce the risk of loss in stock market investing. By choosing stocks in different market sectors the investor will reduce the risk of a market disaster in one sector taking down all stock values. In addition, by investing in a larger number of promising stocks the investor will increase his or her chances of picking a really big winner. For the average investor who has a full time “day job” it makes sense to hold up to half a dozen stocks. For the full time professional a larger number is possible. This simply has to do with the ability to do at least weekly fundamental and technical analysis of the stocks that one holds.

Intrinsic stock value is what long term investors look for in a sound investment. Such stocks offer the long term investor a margin of safety over the long term. What the margin of safety does is insure that the company will have assets and value even during bad economic times. It does not always mean that the stock price will go up and provide the investor with a profit. The short term investor and especially the day trader will look for the same sort of intrinsic value in a stock but the sort of value that will shortly be reflected in the stock price. The shorter term investor or trader is less concerned, however, with the fundamentals of the stock although he or she will do both fundamental and technical analysis. The trader will follow the stock involved, looking for how the market treats it. He or she will look at stock price history and stock price volatility. When the trader sees the right trade signals that a stock trend or market reversal is imminent it is a sound investment to initiate the trade. When the stock has made its move the trader will exit the trade and pocket the trading profit.

Traders believe in trade signal reliability because it works in their hands. Economists who write papers about trade signal reliability and technical trading in general will question if these concepts work in practice. The “experts,” however, have the capacity to study any problem to death. The practical aspect of trading is to take what looks promising and try it. Keep what works and don’t use what does not work. Traders going back to the days of the Samurai in Japan recognized patterns in trading rice. Those who bought and sold after recognizing certain patterns in price prospered. If someone had asked one of these successful traders about trade signal reliability they might have indicated signs of their wealth as proof that using Candlestick basics combined with Candlestick trading tactics worked for them. As far a long term investors are concerned they typically do not use technical trading techniques for short term trading. They may be experts in what they do but they are not experts in day trading.