Candlestick Trading Blog

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The Commodity Channel Index uses the typical price and simple moving average of a commodity to calculate a number that falls either above or below zero. Numbers between +100 and -100 indicate that a commodity (or stock) is comfortably within its trading range. This is the case between 70 and 80 percent of the time, as a rule. Buy or sell signals occur when the CCI falls above 100 or below -100. A CCI calculation outside of the -100 to +100 range implies that a stock is over or under bought. Using technical indicators like the CCI allows traders to take advantage of over or under bought commodities (or stocks and other equities as the CCI works in all markets).

Using the CCI a number above 100 implies that a commodity is under bought given its circumstances and is entering a strong upward trend. This is a buy signal. A CCI number below -100 implies that a commodity is over bought given its circumstances and is entering a downward trend. This is a sell signal. In each case, when the CCI moves back within the normal range the buy or sell position should be closed. This calculation or something similar is typically included in commodity trading software, helping commodities traders determine if a commodity is over or under bought. The CCI index can be “fine tuned” using longer or shorter periods of time for the moving average. This index helps spot price reversals and trend strength as well as price maximums and minimum.

Knowing if a stock is over or under bought fits with Candlestick analysis. This is letting the market say what the market will do. Although the fundamental information about a commodity is typically available to all traders who care to do their homework their trading strategies will differ. Looking to see if a stock is over or under bought lets the trader into the minds of other traders, giving him or her an advantage that can exploited for financial gain. Being able to understand and predict commodity prices by doing both fundamental analysis and technical analysis is the basis of commodities trading. The use of technical tools such as Candlestick charting is integral to predicting moves in the commodities markets as well as in the stock market or in options trading. It comes down to understanding a statistical analysis of group behavior and capitalizing on it.

Many who engage in buy and hold investing are successful individuals who are busy in their profession and do not have the time to follow their investments on a daily basis. Because they do not have the time for daily stock market trading, these individuals also do not develop the skills necessary for successful stock trading. Nevertheless many long term investors have an acute sense of a good long term investment, often obtained from their work, personal, or recreation experiences. A famous fund manager once noted that it was when his wife and teenage daughters dragged him out to the mall is when he discover the Gap. Wondering who ran the store where teenage girls were buying sweaters by the armload led him to make a very profitable investment in this clothing store on its way up to becoming the United States’ largest specialty apparel retailer. Using the Gap as an example we can see how long term investing can be profitable for years but often the profits come to an end and turn to losses unless the investor diligently applies both fundamental analysis and technical analysis to his or her stock market investments.

The bid price and the ask price for an equity are typically available when trading online with the right trading software. Knowing the bid ask spread as a measure of market liquidity and market volume will help the trader convert knowledge of pricing gained through Candlestick pattern formations into profits. Typically traders find that their technical analysis tools work more efficiently and precisely when the market is very liquid with a small bid ask spread. As a rule the market for high volume equities will trade in a tight enough spread that there is no reason to intervene to create bid and ask prices. However, the role of the market maker in the NASDAQ and the specialist in the NYSE is to increase market liquidity and maintain a reasonable set of bid and ask prices, especially in a rapidly falling market. Where does the money inside of the bid ask spread go? It goes to pay the commission paid the broker or specialist as well as a number of fees. The NASDAQ broker or NYSE specialist is different from the stock broker or online brokers that one will pay commissions to for trading. That is an extra commission.

Learning How Perform on the Trading Stage

If you think of trading as a performance art then everything prior to and following a trading session is practice or review. Both practice and review should be directed toward mastery of performance in the trading arena. Traders begin with innate talents such as the ability to retain large amounts of information and to handle new information and new situations quickly and efficiently. In learning to perform on the trading stage a trader will learn healthy trading patterns. An old saying has it that “90% of life is just showing up.” No matter how well steeped a trader is in Candlestick pattern formations, Candlestick trading tactics, and Candlestick basics in general it is the application that counts in the end, not the depth of knowledge when the trading software is turned off. Trading psychology is such that traders need discipline in order to apply what they know at the right time. With preparation, practice, and review the commodity trader, stock traders, the options trader, and futures trader can develop healthy and successful trading patterns in daily, live trading.

Details and Fixes

Sometimes a little coaching is in order when personal trading patterns get off track. Although we tend to bring a lot of skill to the trading table we also tend, at time, to bring excess baggage. Having a wise head to guide you during difficult times can make the difference between wallowing in despair and redeveloping successful trading patterns. When the trader experiences a series of unsuccessful trades it is time to review the process. Back testing trading results by reviewing performance as well as data can lead to insights that will improve later performance. When the trader gets lost in the detail and is not sure where to go a little coaching or education, such as Options Training with Stephen Bigelow, may be in order.

We Repeat What Works and Avoid What Doesn’t

Trading risk management starts with choosing an effective tool for technical analysis. Traders require fast and accurate technical analysis software. They also require a visual, easy to read, intuitive system. A good tool understanding price movements in trading commodities, trading stock, trading options, and trading futures is the tool used for nearly three hundred years, Candlestick chart analysis. Picking the right equity to trade and trading it effectively leads to profits and not loss.

Managing risk starts with understanding that no matter how effective your trading strategy, no matter how effective your trading tools, and no matter how diligent your execution of trades there are always losing trades! No system is fool proof. Traders can get pulled into negative trading psychology driven by greed or fear. The market can turn on a dime based upon news that surfaces a micro second after you enter a trade. Trading risk management is not investing all of your capital on one trade. It is always having a cash reserve. It is routinely and diligently back testing trading results.

Successful long term investing typically involves diversifying a stock portfolio. Traders can diversify in a sense too. Traders can operate within a number of time horizons. Not all trading need be scalping of profits on a single big equity move. There are effective middle range option trading strategies that will allow the trader to protect against big losses and provide the opportunity for substantial gains. A strategy, that some use in today’s very volatile markets, is a long straddle. A long straddle involves buying calls and buying puts on the same equity with the same contract expiration date. Because the trader buys these options he or she has the option but not the obligation to buy (call) or sell (put) the equity in question if there is sufficient price movement in the anticipated direction. The long straddle covers both upward and downward equity price movement and costs the price of two premiums.

Margin requirements are meant to protect the stock broker or clearing house that stands as counter party to trading. In margin trading or stock investing without the services of a third party the buyer or seller always has what is called counterparty risk. This means that when a contract comes due the buyer may refuse to or be unable to pay and the seller may refuse to or be unable to delivery the option, commodity, or stock in question. Trading on a stock, options, or commodities exchange that acts as a clearing house and posting cash or securities as collateral in a margin account guarantees that a contact will be settled and there will money to buy or sell the equity as promised.

Margin requirements also protect the day trader and the investor. It is always important to protect investment capital. Investment capital is essential for both the short term trading and long term investing as it is the basic tool by which traders and investors make their money. A wise trader will not risk all of his or her investment capital at once. That means that the trader will never post all of his or her assets for margin requirements in more than one trading account simultaneously in action.

The key features or steps in using a process audit for back testing trading results are as follows: Goal, process, result, review, and improvement. The obvious goal is to make money and reduce investment risk by finding profitable trading opportunities. When the trader has found these opportunities he or she will want to attack the job of trading with a well through out strategy, keep track of results, and modify strategy or execution as needed. Back testing trading results comes down to task definition, objective definition, and a tally of results. What procedures are necessary and in what sequence? What knowledge base is needed and how much practice is necessary? In the end, effective management of trading practices leads to intended results. In the end there can be a fair amount of “homework” involved in successful trading. However, the trader who does his or her “homework” is in good company. Rice traders in ancient Japan developed Candlestick chart analysis and Candlestick trading tactics. This took years of patient observation and recording of trading results. Today’s trader has the advantage of a ready made system for technical analysis of price movement. The job of today’s trader is to learn the process of trading stocks, trading commodities, trading futures or trading options. For example, if he or she is new at trading options a course such as options training with Stephen Bigelow can be an excellent choice.

Just what does investment grade mean? The term refers to bonds. Bond rating agencies, Standard and Poor’s, Moody’s, Fitch and DBRS rate the credit worthiness of borrowers. Each has a cutoff below which an investment (corporate bond, municipal bond, country’s credit rating, etc.) is considered too risky for safe investment. In general bonds that are investment grade are OK for bond investing by banks. Investment grade to Standard and Poor’s and Fitch is BBB- and above. To Moody’s it is Baa3 and above. To DBRS it is BBB and above. Investors and traders use high grade bonds to lower investment risk. A low credit rating will require that a company or country pay a higher rate of interest than a company or country with an investment grade rating. When the investor decides to buy bonds he or she will decide whether to invest in a low risk bond at a lower rate of interest or a so called junk bond offering a higher rate of return on investment. Stocks and bonds are similar in that market volatility will affect both. Traders engaging in bond trading will often opt for higher risk bonds with more volatile interest rates. As the interest rate varies so does the bond price.

Determination whether of not the investment risk of a bond is investment grade or not is a laborious process that considers all factors that will determine if a borrower might default on payment. In long term investing it is often the case that the investor will opt for the highest grade in order to protect investment capital. Learning to invest in bonds starts with understanding credit ratings. Investment grade bonds are typically found in a conservative investment portfolio. High yield bonds with less than investment grade ratings are more typically the tool of short term trading. A bond is issued at a given interest rate determined by the market. When the prevailing interest rate goes up the value of the bond goes down. When interest rates go down the value of the bond goes up. A trading strategy for bonds might be to purchase bonds in anticipation of a fall in interest rates. The trader will not hold the bonds long term but sell for a profit based upon fundamental and technical analysis of interest rates. Although a long term investor in bonds may not buy and sell bonds as frequently as a day trader he or she will often use both fundamental analysis and technical analysis to determine when the optimal time will be to sell a set of bonds in a market of slowly dropping interest rates. This was a very profitable strategy for many during the 1980’s as rates slowly but surely dropped over the decade. The use of Candlestick chart analysis can be useful in following interest rates and bond rating prospects just as it is for trading stocks, trading options, or trading commodities. In using Candlestick charts the trader will be able to track interest rates but also the company which has issued bonds. Not only will prevailing interest rates affect the price of a bond but a recovering company that borrowed money may benefit from a movement back to investment grade and find its bonds selling at a higher price.

A margin of safety is typically a concept that goes with long term investing. It has to do not so much with picking low priced stocks as stocks that are underpriced by some set of basic criteria. Looking for a margin of safety in investing is a means of managing investment risk. The long term investor is concerned with an economic downturn wiping out years of appreciation of his stock portfolio gained by diversifying a stock portfolio with a range of wise stock choices. The margin of safety provides a cushion during a recession. When the margin, the difference between intrinsic value and price, disappears, however, it is time to find a different stock.

The concept of a margin of safety can also come in handy for traders. Although the trader will not buy and stock and hold on to it for years there is always the question of how long to let a stock ride in trend stock trading. Whether the trader is using Candlestick chart analysis or some other online trading software for technical analysis there always comes a point where the odds of a market reversal increase. It is at this point that the trader needs to decide when to exit the stock trade. There is always the possibility of gaining more profit by riding the wave to the end. There is also the risk of losing part of all of the profit if the market corrects too abruptly. Building a margin of safety into such decisions may well be wise.