Candlestick Trading Blog

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Much of stock market investing is an attempt to exploit stock market inefficiency. Market timing takes advantage of short term fluctuations in stock prices. Scalping, during periods of high trading volume and great volatility, takes advantage of market inefficiency. Trading in penny stocks and low cap stocks in general takes advantage of market inefficiency because many small cap stocks are largely unknown to investors.

A large, mostly transparent, equity market such as the New York Stock Exchange (NYSE) or NASDAQ is quite efficient at assigning accurate value to stocks. With large cap stocks and mid cap stocks it is typical that a sufficient number of analysts follow the company. A sufficient number of traders and investors buy stock and sell stock in the same company. Thus its stock price times the number of shares outstanding is an accurate reflection of the value of the company.

When there is bad economic news many investors may sell their stocks in anticipation of a widespread drop in stock prices. Many companies that are doing perfectly well will see a drop in their stock price also. This market inefficiency typically corrects itself as those who engage in value investing see that the stock is underpriced and buy, driving the stock price up. Buying when a stock is unnecessarily low in price is a good exercise of market timing and takes advantage of this type of periodic market inefficiency.

When there is news that affects the perceived value of the company, such as a new product or news of a takeover bid, the price consensus will change rapidly and, often, fluctuate before it settles in to a new price range. During this time of market fluctuation and inefficiency traders can profit by buying stock and selling stock during swings of the stock price.

Both scalping and market timing take advantage of temporary, albeit repeated, situations. The lack of information about penny stocks and many low cap stocks is a constant source of inefficiency that awaits exploitation by the wise investor or trader. Although hundreds may engage in stock analysis of Cisco, Intel, and General Mills there may not be many analysts following small companies making routers, pursuing a technology that will lead to the next generation of computer chips, or a mom and pop company making instant dinners for an ethnic market. Fortunes have been made by investors who saw the promise in a new company and bought low priced stocks before they went up a thousand fold. The inefficiency in this situation is the lack of information available to the investing public, not the fact that a company is new and unproven.

Exploitation of the periodic inefficiency of the stock market has to do with value investing in the case of market timing. It has to do with understanding technical analysis and skill in using trading software in the case of scalping. Taking advantage of market inefficiency has to do with a lot of homework in the case of penny stocks and small caps. Many startups fail. Finding winners in picking stocks is an acquired skill but it mostly has to do with lots of time spent reading reports, evaluating products, market analysis, and understanding the company’s market sectors.

What constitutes a successful stock trade? Success in trading stock is defined by making a profit. However, one stock trade, a buy or a sell, is only half of the job. The day trader needs to buy and sell, almost always on the same day. Picking stocks with low prices that seem to be on their way up may look good until a market trend reverses and the price goes down. What started out looking like a good stock trade becomes a recipe for loss. Successful stock trades come in pairs. In and out with a profit is what works.

Trend trading is when the trader assumes that a stock going up will keep going up and one going down will keep going down. The trader buys on the way up and shorts the stock on the way down. A variation of trend trading that requires very rapid execution is scalping. Scalping works on highly liquid stocks. The trader aims to take advantage of market inefficiency when volume is very high. This technique applies technical analysis and looks for stocks that are over or under bought, support and resistance zones, trend analysis and trading channels. The basis of scalping is to enter and exit the market quickly during periods of high volatility and, typically, wider trading ranges. This is trend trading on steroids. Scalping relies heavily on trading software that reads technical indicators and offers suggestions that the trader takes or not. Scalping is for experienced traders and not for someone just learning the basics of stock investing.

A way to trade stock without the second to second ulcer causing potential of scalping is options trading. The trader or investor can buy options, either put options or call options, when he or she believes that a stock will move appreciably up or down but does not have the time or expertise to execute very rapid trades to make a profit scalping. The trader or investor can trade stock options by buying a call. This gives him or her the right to buy a stock after if has gone up but at the original contract price, called the strike price. He or she then sells at the market or spot price and pockets the difference minus the premium paid to buy the option. To buy put options is to buy the right, but not the obligation, to sell a stock at the strike price if it goes down in value. The options trader then buys the stock at the lower price while selling at the higher price and is richer by the difference, minus the premium.

A successful stock trade is often the result of understanding Candlestick patterns and Candlestick trading tactics. These techniques are hundreds of years old and work as well today as when they were invented in Japan. The basis of a successful trade is understanding the stock involved as well as market sectors that come to bear on the stock. Knowing trading tools and how to use them is essential for trading to win. Whether in day trading or after hours trading a practical trading strategy, diligently applied, will help in picking stocks to trade and making successful stock trades.

Investments come in all shapes, sizes, and types. They are the dedication of current assets for a future purpose. Money put into a business is a common form of investment as is the purchase of stocks in order to build a nest egg for retirement. Market investments can include common stocks or preferred stocks, purchased options, bonds, foreign currency, bank accounts, precious metals and IRA’s. Successful investing creates wealth.

Investments of money, expertise, and time can be conservative or aggressive, very safe or very risky, and can be lucrative or bring about financial disaster. Conservative investments have historically started with buying a home. That was before sub prime mortgages artificially drove up the price of homes and then caused a near collapse of the real estate market and the devaluation of many real estate investment trusts. Another conservative investment has been to devote a portion of one’s portfolio to precious metals. Gold bullion quadrupled in price from 2000 to 2009. Keeping a reserve of cash has always been considered safe and conservative but during the runaway inflation of the late 1970’s the dollar lost a substantial amount of buying power. The stock market, over the years, has tended to outperform other investments. Buying stocks can result in multiplying an investment but picking stocks is all important as is ongoing stock analysis. Understanding return on investment and how to maximize it, without undue risk, is the key.

Success often starts with choosing which type of investments to make and them making each individual investment. For example, as a recession mends itself, the stock market typically starts to go up halfway through the recession. There will be market leaders and there will be stocks that lag. Many of the laggards will be targets for value investing. Value investing is choosing stocks with low price to earnings rations or stocks whose values are low in light of expected earnings. Famous investors such as Warren Buffett are champions of value investing.

In the depths of a recession stocks in companies that make basic consumer goods do well. The companies do not necessarily make more money. They simply continue to do business selling laundry soap, household cleaners, paper towels and the like. They become attractive because many other companies become so much less profitable. Market timing is important because the best time to invest in a basic consumer goods company is typically just before the recession starts and the best time to get out of the same stock is typically when the recession starts to mend and other stocks start to rebound. This is not so much to recommend the likes of Chlorox, Colgate, or Proctor and Gamble as to point out the advantages of market timing and stock trend analysis.

Looking to the future, investing in companies that have a good track record of turning basic research into paying products is an excellent bet. Many pharmaceutical giants got that way by reliably creating life saving and money making medicines derived from basic scientific research. Small bio tech startups often are lucrative investments but stock analysis, familiarity with the market sectors involved and the company’s competitors, and knowledge of how a drug moves through the various FDA trials to final approval is critical to this time of investment.

In searching for good investments, investors often run across stock recommendations. No one has the time to closely research the entire stock market for good stock picks, so taking advantage of someone else’s stock research can be very helpful in choosing stocks. To make the most effective use of each stock recommendation it is wise for the investor to have an investment strategy in place and to consider each recommendation in light of portfolio diversification, investment risk, and long term investing goals.

Stock recommendations come from friends, pundits on the television, and your stock broker. They come from many sources, online and in print, with their own agenda. Without being unnecessarily suspicious it is always wise to take someone else’s recommendation with a grain of salt. For example, when large brokerage firms are part of the sponsorship of an upcoming Initial Public Offering (IPO) of a stock they will benefit from purchases of the stock above and beyond the commission they will receive. Another brokerage example of a stock recommendation with an ulterior motive is when a brokerage firm has stock in house and wants to unload it as the market is going down. This practice is, at heart, a conflict of interest. For the investor the best defense against bad recommendations is to compare the stock’s attributes with the investor’s own criteria for buying or trading a stock. If the stock fits, buy it. If it doesn’t fit the investor’s research criteria don’t buy and be skeptical of the advice giver in the future. If the investor simply doesn’t know anything about the stock or market sector, such as copper futures, corn futures, or crude oil futures, it’s wise to stay away.

Sometimes the psychology of investing is what drives stock recommendations. “Everyone is buying” is a subliminal message that can get into the head of the investor. Everyone is buying stock and everyone might lose their shirt, too. The dot com bubble burst and lots of folks got hurt in the recent market crash too. Having a clear idea of what criteria to apply to a stock before buying is crucial. Young investors can typically invest in stocks in riskier market sectors as they have time to ride out the downs until they turn into ups. Older investors need to protect capital while heading into retirement and should avoid riskier investments.

Investing basics are that the goal is to make money and not to lose money. Although a good stock advice can lead to excellent financial gains, a poor stock advice can lead to a severe loss of investment capital. A useful investing strategy is to take a stock advice and look at it objectively. Take the basics of the stock and use online trading software of a discount broker to run scenarios of the investment in different time frames and circumstances. Make sure the stock in question fits current investment strategies and buy stock only if all criteria work out. Stock recommendations can be excellent and a great time saver. The key is to have a plan for how to analyze stock advice and make sure that the stock in question fits appropriately into a well thought out investment plan.

Investment in stocks can be very rewarding. Investment in stocks can build a nest egg for retirement or the money to start up a new business. Stock market investment starts with learning the basics of stock investing. What are stocks? What are bonds? What are mutual funds?

Stock picking means finding stock worth investing in. There are growth stocks that may double or triple in value in a short time and there are very stable, “stalwarts,” with a hundred years of quarterly dividend payments and steady, if slow, growth. Learning to invest includes recognizing the investment risk of growth stocks and the pros and cons of investing in dividend stocks.

It is important to learn trading terminology to capitalize on short term market moves even if the investor’s goal is primarily long term capital appreciation and security of investments. Understanding stock market trends is important but the most important factor in investment in stocks is to understand the fundamentals of the company in which stock shares represent partial ownership.

Investment in stocks gives the investor partial ownership and a vote in the company’s affairs but not a voice in direct management. Shareholders can vote their shares at the company’s annual meeting. Annual meetings are held to elect or reelect the company’s board of directors and to vote on issues important to the company. Shareholders rarely go to annual meetings. Rather, the company mails each shareholder a proxy ballot on which the shareholder votes his or her preferences. What to do with retained earnings might be one issue for a company. There may be a fight over control and direction of the company.

Reading company reports and understanding the company’s price to earnings ratio, cash flow ratios, viability of its product line, and knowing its competitors are all basic to investment in stocks. Market moves are important but, over the long term, it is the viability of the underlying business that determines the price of the stock. A strong company has competent management, good research and development as it applies to their products, and, hopefully, no dominant competitors.

Successful investment in stocks is often based upon value investing. This time honored concept teaches to invest in companies with strong fundaments and low stock prices. This often means looking for companies with low price to earnings ratios, good management, and strong product lines that the market has overlooked. Often the day to day psychology of investing becomes a herd mentality. Standing apart from the herd, doing independent market analysis, and buying the strong company that has been bypassed, makes for successful investing.

Market timing is something that the investor learns with experience. It requires a competent knowledge of the stocks and market sectors in question, attention to detail, and confidence born of study and experience. Long term investing in good stocks avoids repeatedly paying commissions. However, the stock market does fluctuate and the investor can only buy low and sell high if he or she is attentive to the fundamentals of a given company and to pertinent stock market news. In fact, only the investor that does his or her homework may understand how the news of the day will affect their stock price in the days to come. Investment in stocks is all about homework.

To learn stock investing takes study, practice, diligence, and patience. There are many books, weekly investment publications, and information on the internet that will help the potential investor learn stock investing. Stock investing starts with learning basic stock information. For example, knowing the significance of a price to earnings ratio is important. A P/E ration is the price of the stock divided by the company’s earnings per share. When a company has a high P/E ratio investors tend to avoid it and when its P/E ratio is low investors will buy stock in the company.

Once one has learned the fundamentals it is time for beginner stock market investing. This should initially be a paper exercise. Choose a stock, write down a sheet of paper what to invest, and follow the stock’s progress online each day. Make decisions as though you are investing real money and keep track of how the investment does. This sort of exercise requires diligence in tracking an investment and patience in learning what works when investing in stock and what does not. Only when you have made mistakes and corrected them on paper should you begin investing real money.

An alternative approach is to use a stock broker and watch the broker’s stock picks. Ask questions and take notes. Although there is a lot to do if one wants to learn stock investing, the task is not impossible. Watching, paying attention, and learning works. When learning to use candlestick charting, for example, one can follow a stock chosen by the broker, keeping a log of buys and sells. When the new investor can predict market moves using candlestick analysis it may well be time to invest on his/her own.

To learn stock investing, allocate and devote the time necessary to learn the fundamentals and practice buying and selling techniques. Much of stock market investing is an information game. He or she with the most information at the right time and the stamina to keep up wins in the stock market. The practice involved when one starts to learn stock investing translates into the diligence needed for successful tracking of investments. Trading and investing are easy to do. Trading and investing the right stocks at the right times typically requires at least weekly review of stocks in one portfolio and often more frequent review to do the job well. However, techniques such as buying calls on stocks, which one will only exercise if the stock in question goes up, do not necessarily require daily evaluation. Options can be exercised any time before options contracts expire. To learn stock investing is to learn techniques such as options trading where a small amount of capital can be turned into a substantial profit.

Being successful in long term investing takes a lot of knowledge and it takes patience. When investing in stock and trading stock people make mistakes. It is wise not to invest all of one’s capital in one investment to preserve capital in case of a mistake. Barring the loss of all of one’s capital, stock investors and stock traders learn from their mistakes and become more and more successful at what they do.

The best measure of smart stock investing is whether or not it is successful in the end. Successful investing strategies may be based upon value investing and successful trading strategies are often based solely upon technical analysis. In each case smart investing often includes candlestick analysis with a firm grasp of candlestick chart patterns. Successful stock investing involves knowing when to diversify and when to invest more heavily in a unique opportunity. Smart investing in stocks is based upon up to date knowledge of the stock market and buying stock or selling stock at the right time.

For an example of smart stock investing one may look at the likes of Warren Buffett. The multibillionaire continually preaches value investing. Value investing is basically buying stocks that are undervalued based on a fundamental analysis of the company and its prospects. The news is constantly full of Mr. Buffett’s acquisitions such as the recent purchase of Burlington Northern for $26 billion. For mere mortals the point is not the size of the purchase but that Mr. Buffett saw unrecognized value in the railroad and bought at what he felt was a low price. Average investors do not have to buy whole companies, only buy stock in undervalued companies in order to profit from the company’s fundamentally sound business.

Smart stock investing is buying stock when “there is blood in the streets.” This is an old saying attributed to Baron Rothschild in 1871. During a panic in the French stock market everyone was selling and Rothschild was picking up cheap deals right and left. When the market recovered he was substantially richer. During last year’s stock market meltdown smart stock investing had to do with selling stock before the market collapsed and buying stock when the market was at its lowest. Smart stock investing has to do with letting the market tell you what the market is going to do. This is what candlestick basics are all about. Market fundamentals were unstable before the market began to fall and those who used effective stock market analysis and avoided market psychology got out in time and bought into the market rally early.

Successful stock investing can include options trading or it can include buying bonds. In a bull market, a bear market or a very volatile market, buying options can be very profitable. When interest rates are very high and descending, buying bonds can be very profitable as a bond with an interest rate above the current yield will sell at a premium. Smart investors made money on bonds all through the 1980’s as rates fell.

There are two ways to evaluate stock investing. The bottom line method is to look at results. However, the learning method is to look at process. Smart stock investing comes from constantly looking for information and looking for more effective ways to invest. Whether investing in growth stocks or hedge funds, hot penny stocks or corporate bonds, smart stock investing means keeping track of how one came to a decision to buy or sell so that the process can be more successful the next time.

As the world’s economy begins to right itself, investing in oil stock is getting attention. Investing in oil stock can be done by buying shares of the largest US based oil producers, Exxon Mobile, Chevron, and ConocoPhillips. Investing in oil stock can also mean investing in stock of companies that drill for oil, ship oil, refine oil, put out oil well fires, and repair damage to deep sea oil rigs. Political instability in the Middle East tends to drive up oil prices as does rising demand from the growing economies of China and India as well as the recovering economy in the United States.

Investment opportunities in the oil industry depend upon many factors. Crude oil has risen from its recent lows as demand has increased. Anti-government demonstration in Iran and violent police response puts into question the stability of this large oil producer, driving up spot prices for oil. A rising price of oil improves the prospects of oil company common stocks as well as stocks of the support and supply companies in the industry.

Investing in oil stock and stocks related to the energy industry can be very profitable. However, a basic knowledge of what kinds of companies support the oil industry is necessary. For example, when there are hurricanes in the Gulf of Mexico there can be damage to deep sea oil rigs. Repairing these structures requires complicated machines, robots, capable of operating a great depth. Thus, when a hurricane approaches, the stock prices of companies that make these machines go up as the commodity price of oil goes up. Likewise when there is the danger of a hurricane in the Gulf of Mexico oil rigs may be purposely shut down and refineries closed. What that happens Canadian oil and natural gas producers may sell more of their products into the United States and their stock price may go up.

How do you anticipate an increase in the value of oil stocks? Anything that indicates economic recovery may predict an increase in energy demand and, thus, a rise in oil stock prices. For example, a recent report by Master Card that retail sales increased over the holiday shopping season sent traders out to buy stock in oil companies or buy options in the same. Likewise, the shares of drillers and of well operators go up as a growing economy predicts an increased use of oil. Buying stock in the extensive support network of the oil and gas industry will often be as profitable as buying the major producers.

During times of economic recovery investing in oil stock will typically lead to more profit than investing in the stock market in general. When a company discovers a new large pool of oil their stock price increases. However, developing a large oil field takes time and projections may not work out. Thus traders in the company’s stock may do as well buying puts as buying calls. Sometimes, when an oil company’s stock price is quite volatile, a long straddle is an excellent option choice. In this case the options trader will benefit from stock movement in either direction and the trader’s risk is limited to the price of the premiums on the options contracts. Option investing in oil can be quite profitable and require less capital investment than buying stock outright.

Stock investing books can broaden perspective, improve trading or investing, and help the trader or investor develop and maintain a consistently successful strategy. From a group of Wall Street Journal reporters who threw darts at the stock pages to Ben Graham, Peter Lynch, and Warren Buffet to Bigalow’s book on High Profit Candlestick Patterns there is insight in the writings of those who have studied and successfully worked at making money in the stock market.

Ask people who have read widely about stock market investment and two stock investing books are almost always at the top of the list, “The Intelligent Investor” by Ben Graham and “One Up on Wall Street” by Peter Lynch. Graham was an economist and investor who taught. He was the first to promote value stock investing and promoted a defensive style for those without the time or interest to work hard on investing versus an enterprising approach for those with time and interest. Peter Lynch was a famous fund manager who advises investors to start with what they know from their own business and life as a base for choosing stocks to invest in.

The book “A Random Walk Down Wall Street” reviews many investing styles and emphasizes the relative fairness of pricing on Wall Street. The argument is made that picking stocks randomly, providing that one picks enough stocks, will generate a steady rate of return on investment. The more valuable part of this one of our stock investing books is the review of various styles of investment in stocks. However, understanding the basis of the author’s argument about the “Random Walk” will give insight into how to exploit small cap stock investing in companies that analysts don’t really follow closely. The random walk information is useful in understanding how Lynch grew the Magellan Fund into a powerhouse.

“Security Analysis” by Ben Graham is a compendium of how to analyze investments and “High Profit Candlestick Patterns” by Bigalow is a guide to understanding and using Japanese Candlestick patterns. These stock investing books are both “how to” books that don’t dwell on picking stocks nor how to balance portfolios but get down to the nitty gritty of following a stock’s performance, buy, selling, and making a healthy profit.

One more of our list of stock investing books is Cunningham’s “The Essays of Warren Buffett.” These writings cover a wide range of business and investment topics. The information is always very practical and parts can be used as a primer for things like options trading. Many topics in this book do not deal directly with investing but the insight that one gains into the operation of successful, and unsuccessful, businesses can be invaluable in making stock trading and investment decisions. None of the stock investing books listed here require that you dutifully read them cover to cover in order to get any use out of it, although it is advised. As with many ways of gaining insight into stock market investing, one can read a little to get a feel for any of these books and then pick them up from time to time as a reference or for inspiration.