Candlestick Trading Blog

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Buying stocks on margin is a very high risk trading strategy that should be used only by very experienced investors. There are potentials for a very high profit, but of course with high risks for profit comes high risk for potential loss. Buying on margin is the borrowing of money from a stock broker to purchase stock.  Basically, it can be thought of as a loan from your broker. How it works is you have to open a margin account which typically requires that you set a minimum amount of equity at $2,000. This means that you have to put at least $2,000 in an account, and the broker loans this amount to you in the form of cash. This cash then must go towards the purchase of stocks. In return for the loan you have to pay interest. The loan in the account is collateral and if the value of the stock, or stock price drops sufficiently, the account holder is you are required to deposit more cash or sell a portion of the stock. Basically, when buying stocks on margin, you are investing your broker's money.

When investing in stock and buying on margin, keep in mind that you can keep you loan as long as you would like. That is as long as you fulfill your obligations. How it works is that after you first sell the stock in a margin account, the profit goes to your broker against the repayment of the loan until you have fully paid up. The deposit that you make into the account, when buying stocks on margin, is called the minimum margin and once this account is opened, you can borrow up to 50% of the purchase price of a stock. This portion of the purchase price that you deposit is known as the initial margin. Just because you can borrow up to 50% doesn't mean that you have to however. You can borrow 10% or 30%, depending on what you need to do when investing in the stock market.

Buying stock through a margin account with a brokerage firm requires that you also understand what a "maintenance call" or a "fed call" is. To understand these terms used in stock investing, you must first understand what a maintenance margin is. A maintenance margin is the minimum account balance that you must maintain before your broker will force you to deposit for funds into the account, or to sell stock to pay down your loan. If your margined securities fall below a certain level, then you, the borrower, receive a "margin call." This margin call, also known as a "maintenance call" or a "fed call" requires that the borrower sell off some assets or deposit more money since the margin account has fallen below this maintenance margin. Buying stocks on margin is risky because if the borrower cannot raise the cash, therefore forcing the broker to sell of some of their holdings, it can possibly result in short-term capital gains tax at very high rates.

Buying stocks on margin is very risky and is an investing strategy that only highly experienced investors should practice. Continue to learn about buying on margin to see if it works for you.

The moving average (MA) is a technical indicator used in technical analysis that shows the average value of a security's price over a set period of time. They come in many forms, but the general use is to track the trends of financial assets by smoothing out the price fluctuations of daily price data, otherwise referred to as "noise." The MA is a mathematical equation that results from calculating an average number of past data points. Once this average is determined, it is then plotted onto a chart that traders then use to identify trends (trend analysis). This average is also used to measure the strength of an asset's momentum and define areas of an asset's potential support and resistance.

The MA is used to identify support and resistance levels. The support level is the level at which most buyers typically enter the stock, and it reverses at the support level, or in other words, the support level is confirmed when it does not fall below its historical support price level. It the stock does fall below the historical support level then the support level is violated. The resistance level is quite the opposite. The resistance level is the stock price in which a stock can trade, but the price in which it cannot surpass for a set amount of time.

There are three types of averages that we will discuss in today's article that are used in stock market technical analysis.

Simple Moving Average (SMA)
This MA is calculated by taking the sum of all past moving prices over a set time frame and dividing the result by the number of prices used in the calculation. In other words, it is the average stock price over a certain period of time. Many investors who study stock technical analysis prefer to use other MA types because they think that the most recent data is more important than past data.

Exponential Moving Average (EMA)
This MA is calculated by applying a percentage of today's closing price to yesterday's MA value. This method puts more emphasis on recent data and less emphasis on past data than the simple MA method. This MA method is more responsive to newer information and is therefore the MA of choice of many investors.

Weighted Moving Average (WMA)
This MA is also designed as the EMA to put more emphasis on recent data and less on past data and it is calculated by multiplying each of the previous day's data by weight. This MA method is evidenced to produce better volatility estimates than the SMA.

Continue to research the MA as well as other technical analysis tools and indicators to see what works best for you. You should also study the use of technical analysis charts as well as technical analysis with candlesticks.

Stock Market Investment Basics for New Investors

As companies grow and would like to continue to expand their business they may opt to pool their money or to obtain loans in order to raise funds. The stock market investment basics tell us that they must make a choice. They can either organize their company as a sole proprietorship, a partnership, and later perhaps a corporation. Once the company chooses to incorporate, the investment risk changes and the owners are no longer personally responsible for nor are they liable for any debts of the corporation if the company fails.

What then happens is the corporation issues a stock certificate, which is basically an official document that represents ownership of the company. Each stock certificate represents a set number of shares and the total number of shares varies for each company. The corporation must then decide how many pieces of ownership they will divide the corporation into. The investment strategy behind these corporations that do this is to sell stock (of their company) to raise money that will provide additional funding for expansion of their business. They sell pieces of ownership in exchange for cash and therefore create shareholders. (Corporations are not allowed to sell shares of stock on the open market without the approval first of the Securities and Exchange Commission (SEC). The stock market investment basics behind this strategy tell us that their remaining share of stock that was not sold to the public will become more valuable as the business grows. A board of directors is established to represent the shareholders, including a president, vice president, and secretary- treasurer.

The two types of stock that are issued include common stock and preferred stock. Common stock is just standard shares issued by a corporation and most stocks that are traded are actually common stock. Preferred stock is issued without voting rights and it is a special class of stock. Preferred stock promises a fixed dividend and if the company is forced to liquidate, the preferred shareholders are the first to receive any leftover proceeds. It is for this reason, and others, that many conservative investors opt to invest in preferred stock. Those who buy stock actually own part of the company meaning that these stock holders can actually vote in annual shareholder meetings and they have a right to a share of future profits.

Stock market investment basics also tell us that a stock's price movement is a result of supply and demand. This is what directs the stock market movement everyday. The supply represents the number of shares that are offered for sale at any one moment, whereas the demand is the number of shares that investors are willing to buy at that one moment. If investors want to buy a particular stock and are willing to pay more, the price will increase, and conversely, if the investors are selling a stock at a particular price and there are not enough buyers, then the stock price will of course go down.

There is obviously a lot more to investing in the stock market, then the stock market investment basics discussed in this article, but you have to start somewhere. If you are interested in earning a living by investing in stocks, continue to learn about the ins and outs of the stock market, and about the different types of trading methods and analysis. 

Technical analysis charts display a series of prices over a set period of time. Stock charts are used along with chart patterns and these patterns are distinct formations that are used to identify current trends and trend reversals that signify to traders when to buy and sell. The theory behind using patterns and chart formations is based on the assumption history repeats itself. Certain patterns are seen over and over again and these patterns signal the probably move that the stock will take. The patterns on technical analysis charts are then used to identify potential trading opportunities. There are four types of stock charts that we will review today that are available for those investors who practice stock technical analysis.
The first and most basic of these four stockcharts is the line chart. The line chart only displays the closing prices over a specific time frame and it is formed by connecting the closing prices over that time frame. While the closing price is considered to be the most valuable piece of information on technical analysis charts, line charts do not provide a visual depiction of the trading range for the high, low and opening prices, which are very valuable pieces of information needed for day traders as well as other types of traders. 

The bar chart is an expansion of the line chart because it adds more pieces of information in addition to the closing price. The high and low for a trading period is displayed along with the closing price and it this information is represented by a vertical line to represent each data point. When short-term stock trading, using technical analysis charts, the close and the open are represented on the vertical line by a horizontal dash with the opening price located on the left side of the bar, and the close located on the right side of the vertical bar. The bar is shaded black when the when the opening price is lower than the closing price, and the bar is shaded red when the opposite occurs. A black bar indicated an increase in value for the stock, with a red bar representing a decrease in the value of the stock.

Candlestick charts are similar to bar charts but they are more visually appealing and easier to read. The only difference is that there is a formation of a wide bar on the vertical line illustrating the difference between the open and the close. There are two color constructs when candlestick charting. White or clear candlesticks both indicate when the price of the stock is up and closes above the opening trade. Red or black candlesticks indicate that the stock has traded down for a period. There is more to using these technical analysis charts and many investors feel that candlestick patterns give the investors more information regarding market sentiment, unlike any other type of chart.

The last chart we will looking at technical analysis charts is the point and figure chart. This stock chart is not used by the average investor but it has been around for a long time. This chart is not concerned with time and volume in the formation of the data points and it reflects price movements. This chart removes the noise, unlike the line and bar chart, and it attempts to neutralize the skewing effect that time has on chart analysis.

The most important part of learning about stock market technical analysis is learning how to read charts.  Every trader must be very clear on what information is shown on the chart and what that information means. Many investors, however, especially day traders, prefer the using candlestick charts above all other types of charts.

Today we will take a refresher course in common stock trading terms used by investors. Please read the stock trading terminology below and see if you learn something new!

Buy and Hold – This is an investment strategy where stocks are bought and then held for a long period of time, regardless of the market's fluctuations. This is based on the assumption that over time stock prices and the market will rise regardless of any short-term fluctuations due to inflation or other factors.

Equity – This term is the ownership interest in a corporation in the form of preferred stocks or common stocks. Stock trading terms such as this are also referred to as "net worth," "book value," or "shareholder's equity." It is also the total assets minus total liabilities and also as the value of securities in a brokerage account minus the margin requirements.

Growth Strategy – This investing strategy is based on investing in companies that are growing faster than other companies in the same industry. The goal is the generate capital gains instead of dividends.

Limit Order – This order is the maximum price that you are willing to pay for a particular stock. This order is typically used to avoid entering a position if the stock gaps up or down (gap analysis) at the opening and the investor wants to avoid entering at an extreme price. This order is often combined with other types of orders. These include stock trading terms such as "buy" or "sell on stop" orders.

Overbought/Oversold Indicator – This indicator is a technical analysis tool that tries to define when stock prices have moved too far and too fast in either direction. To calculate this technical indicator you must know the moving average and the difference between the number of advancing and declining issues over a specific period of time.

Risk Management – This is the process of analyzing exposure to risk and determining how to handle the exposure to risk. There are many other stock trading terms associated with risk management such as risk premium and risk reward ratios.

Short Selling – This strategy is the borrowing of a security or commodity futures contract from a broker and then selling it. It however must later be bought back and returned to the broker. This is one of the stock trading terms that is a technique used by investors who are trying to profit from the falling price of a stock. The profit using this technique is the difference between the price at which the stock was sold and the cost to buy it back. The investor's broker borrows the shares from a lender with the promise to return them later. In doing this strategy the investor sells the borrowed shares at the current market price. If the price of the shares drop then the investor "covers the short position" buy buying back those shares and the broker returns them to the lender.

Volatility – This is the last of the stock trading terms discussed today and it is a very important one. Stock price volatility is the rate in which the price of a security moves up or down. It is calculated by finding the annualize standard deviation of the daily change in price. If the stock price almost never moves then it has low volatility, but if it moves up and down rapidly over short time period, then it has high volatility.