Candlestick Trading Blog

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Generalized profit taking temporarily depresses a stock price during an upward stock trend. Traders and investors take profits in order to lock in gains on an advancing stock. A famous old saying is that you don’t have a profit on a stock until you take a profit. The temporary drop in stock price from profit taking is different from a correction in which the market analysis of a stock changes, driving the price down. In fact, investors and traders often take profits when they anticipate a correction.

Taking short term profits is the heart of day trading. The point for the day trader is to buy stock and sell stock during market fluctuations throughout the day. Someone who only does long term investing will typically only engage in profit taking after a substantial run up in a stock price and when he or she believes that the stock is ready for a large correction. Long term investors will usually stay invested during swings in stock price caused by profit taking. In value investing the investor will take their profits and get out of a stock position when the stock has increased in price to where it represents normal value and not a buying opportunity.

Profit taking usually occurs after rapid advances in stock prices. The thinking is usually that the market has gotten ahead of itself and will correct. Thus many wise traders and investors “take a little off the table.” This is one of the simple stop loss strategies that help reduce investment risk. When a stock drops back with profit taking and then advances again it’s often an indication the stock is going to continue its advance.

One of the basics of stock market investing is to know how to set reasonable goals for investing in stock. There are many investors that will set a goal, based upon market analysis, of how much gain to reasonably expect from a stock before periodic profit taking turns into a substantial correction. Getting greedy and trying to milk the last two of three percent profit out of a stock too often results in the investor losing much if not most of his or her gains.

The same applies in day trading. Setting reasonable limits, getting out of a position bit by bit and taking profit may seem to be giving away profits but, over the long term, this sort of sound trading strategy is more profitable.

Many investors get irritated at the dip in a stock price as investors take profits as it, temporarily, reduces the value of their stock shares. However, this is part of what makes the stock market work. The long term value of a stock has to do with the success and prospects of the company’s business. However, no matter how attractive a company is, its stock needs to compete with others for buyers. If other opportunities arise in other market sectors, a company’s stock price may correct. Traders may take profits from a successful stock and put their money in alternative investments. It is all part of a fluid and open market which, in the end, provides the investor with the best set of investing opportunities.

The Standard and Poors 500 is a weighted stock market index of the largest 500 companies with common stocks in the United States. The S&P 500 is weighted by capitalization of the companies and is commonly followed, along with the Dow Jones Industrial average. These market indexes are considered bellwethers of the American economy. A number of mutual funds, pension funds, and exchange traded funds buy stocks in the Standard and Poors 500 in appropriate quantities so that they track the performance of the S&P 500.

The Standard and Poors company dates back to 1860 when Henry Varnum Poor began to compile comprehensive information about the operations and finances of United States Railroad Companies. Later the company added information about non railroad companies and became Standard and Poors. By 1966 Standard and Poors was bought out and became the division of the McGraw Hill Company that publishes research on bonds and stocks. Standard and Poors also is a credit rating agency for public debt and for corporate bonds. It issues long term and short term ratings for the debt of both private and public corporations. Borrowers are rated from AAA to D with multiple steps in between. S&P periodically announces possible upgrades and downgrades on the quality of corporate bonds. This guidance in turn often affects the stock price of the companies in question.

For investors interested in detailed information about a possible stock market investment, S&P publishes equity research and funds ratings as well as credit ratings. Bonds rated AAA down to BBB by S&P are considered investment grade. Non investment grade bonds are also referred to as junk bonds. These bonds carry a higher risk of default. However, investors have found that by pooling many junk bonds in an investment portfolio that it is possible to average out the investment risk involved and many junk bond portfolios have done quite well over the years.

Besides publishing the S&P 500, Standard and Poors publishes a market index on at least one stock exchange in each of several countries throughout the world. These indexes cover large and small cap stocks as well as investments such as REIT’s and preferred stocks. The S&P Small Cap Index and Mid Cap Index often provide a different view of the US economy than the S&P 500. S&P’s 48 issue a year stock market analysis is “The Outlook” and is available both online and in print version.

Information from Standard and Poors has been sought and trusted for years. However, S&P and other credit rating agencies are still heavily criticized for giving top credit ratings to the collateralized debt obligation market in 2007 before it suffered huge losses. A common criticism of S&P is that companies pay to have their debt issues rated. Many feel this practice leads to a conflict of interest and inaccurate debt ratings. Much has been said about the recent stock market meltdown. The failure of many to conduct independent and skeptical market analysis is partly to blame. The failure of many to use time honored analysis techniques such as Candlestick chart formations to obtain an accurate view of where the market was going added to bad stock picking contrary to the basics of stock investing.