Technical Stock Screener www.dojispace.com - Swing

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Technical Stock Screener www.dojispace.com
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Stock Market
Winners
By: Tim Huang
Founder of http://www.dojispace.com
http://www.tradermenu.com
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Disclaimer
The information provided is not to be considered as a recommendation to
buy certain stocks and is provided solely as an information resource to help
traders make their own decisions. Past performance is no guarantee of
future success. It is important to note that no system or methodology has
ever been developed that can guarantee profits or ensure freedom from
losses. No representation or implication is being made that using Stock Market
Winner will provide information that guarantees profits or ensures freedom from
losses.
Copyright © 2005-2011. All rights reserved. No part of this book may be
reproduced or transmitted in any form or by any means, electronic or
mechanical, without written prior permission from the author.
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Part I
Introduction to
Technical Analysis
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What is Technical Analysis?
Technical analysis is the study of market action, primarily through the use of charts. The
technician believes that anything affecting the price, such as fundamentally or
psychologically, will be reflected on charts. Technicians believe that the market discounts
everything and that any news about a company is already priced into the stock. Keep in
mind that the charts do not cause market action, but rather, they reflect the actions of the
marketplace and what has already happened. However, this does not mean you should not
study fundamental analysis, since it is just as important.
Technical analysis is applied social psychology because when you analyze charts, you are
analyzing the behavior of traders. Charts reflect trades by all market participants: buyers,
sellers, and even insiders. Each price on the charts reflects the actions or lack of actions
by all the traders in the market.
Technical indicators help make our analysis more objective as it seeks to recognize trends
and changes in crowd behavior so that intelligent trading decisions can be made.
Technical analysts study charts to find out whether the bulls or bears are in control. They
look at past charts for repetitive price patterns and study to recognize the early stages of
uptrends and downtrends.
There are 2 main types of technical analysis: classical and computerized.
1. Classical analysis – This is based only on the study of charts, without using anything
more complex than a pencil and a ruler. This is mainly the focus on uptrends and
downtrends, support and resistance zones, as well as repetitive patterns, such as triangles
and rectangles. Its main drawback is its subjectivity: if you are bullish, your ruler will
tend to inch up and likewise, if you are bearish, your ruler will tend to inch down.
2. Computerized analysis – This is more of a modern approach whose signals are much
more objective. The 2 main types are trend-following indicators and oscillators. Trendfollowing indicators include moving averages, Directional System, and MACD (moving
average convergence-divergence), which all help to identify trends. Oscillators, such as
Stochastic and Relative Strength Index (RSI) help identify reversals.
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As you can observe, technical analysis is partly a science and partly an art—partly
objective and partly subjective.
Types of Technical Indicators
You can argue about trends but technical indicators are objective. Indicators are derived
from prices and the more complicated they are, the more they deviate from prices and
reality. Therefore, using simple indicators work the best.
The good technical indicators are immune to parameter changes and give useful signals at
a broad range of settings. This means that if an indicator you are using gives great signals
on a 20-day window for a certain stock but bad ones when you switch to a 15-day
window, then the indicator is not too reliable.
Technical indicators can be divided into three major groups:
1)
Trend-following- These indicators include moving averages, MACD (moving
average convergence-divergence), Directional System, among others. These indicators
help us stay long in uptrends and short in downtrends.
2)
Oscillators – These indicators include Stochastic, Rate of Change, and many more.
Oscillators help us identify turning points, or reversals, by displaying when markets are
overbought (too high and about to fall) or oversold (too low and about to rise). They
work great in trading ranges, catching upturns and downturns. The disadvantage is that
they can give premature buy signals in downtrends and sell signals in uptrends.
3)
Miscellaneous Indicators – These indicators include Bullish Consensus,
Commitments of Traders, and New High-New Lower Index, which measure the current
mood of the market.
The tricky part is that indicators from different groups often contradict one another. For
example, when markets decline, trend-following indicators turn down, signaling us to sell
but at the same time, oscillators can become oversold and signal us to buy.
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Part II
Pattern Trading
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What is Support and Resistance?
Support and resistance is a concept in technical analysis, which is essential to understand
in order to master reading price trends and pattern charts.
–> What is Resistance?
Example – Assume that Bob has been holding shares in Microsoft for 2 months and
notices that, during that time period, its price had failed to pass $25 several times.
However, he also notices the price has gotten very close to moving above $25. In this
example, the price level near $25 is a level of resistance. If the price were to rise above
$25, there would be a break in the resistance.
As you can probably assume from the example above, resistance refers to the price at
which a stock trades, but not exceed past, for a period of time. The stock stops rising and
does not break resistance because sellers start to outnumber buyers.
In other words, this resistance price level occurs when selling is sufficient enough to
disrupt or reverse an uptrend. It is represented on a chart by a horizontal line that
connects several tops, signifying that sellers are overpowering buyers. Resistance is also
regarded as a ceiling because its price level prevents the prices from moving up and past
it.
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When the price reaches the resistance level, supply is believed to be stronger than the
demand, which means that it is preventing the price from rising above the resistance.
However, resistance does not always hold and when it breaks, it signals that the bulls
have beaten the bears in that fight, creating new highs.
–> What is Support?
The support price level occurs when buying is sufficient enough to disrupt or reverse a
downtrend. It is represented on a chart by a horizontal line that connects several bottoms,
signifying that buyers are overpowering sellers. Support is also regarded as a floor
because its price level prevents the prices from falling below it.
When the price reaches the support level, demand is believed to be stronger than the
supply, which means that it is preventing the price from falling below the support.
However, support does not always hold and when it breaks, it signals that the bears have
beaten the bulls in that fight, creating new lows.
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–> Strength of Support and Resistance
The strength of support and resistance is important because it helps you determine
whether the trend is likely to continue or if it is going to reverse. Their significance can
be determined by the:
- length of time they spend in a support or resistance area (the longer the period of time,
the more significant the area is),
- volume (if a support or resistance level is formed on heavy volume, the level is regarded
as more important than if formed on low volume),
- time (the more recent the trading took place, the more important it is)
–> False Breakouts
But beware of false breakouts. For example, the market might break a price resistance
and rally, but then quickly reverses and falls. Likewise, the market can also break support
briefly just before it reverses and rallies. Professionals love false breakouts because it
provides one of the best trading opportunities.
Breakouts are similar to tails except that tails have a single wide bar, but false breakouts
can have several bars, none of which are especially tall.
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Triangle Patterns
There are basically 3 types of triangle patterns in technical analysis: symmetrical,
ascending, and descending. They usually represent continuation patterns.
Bullish Triangle Pattern
There are 2 types of bullish triangle patterns – symmetrical and ascending as
demonstrated in the following figures:
Type 1 – Bullish Symmetrical Triangle
1. A stock is in an uptrend
2. It forms a symmetrical triangle
3. It breaks out from the triangle and goes higher
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Type 2 – Bullish Ascending Triangle
1. A stock is in an uptrend
2. It forms an ascending triangle
3. It breaks out from the triangle and goes higher
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Let’s look at some examples:
The figure below shows ENTG formed a symmetrical triangle in May. Soon after that,
the stock went from 2.0 and peaked at 3.4 with a percentage gain of over 70%.
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Here’s another stock (FEED) that formed a symmetrical triangle in April. The stock
jumped from $2.5 a share to $8 in less than 3 months. That is a 220% gain in value.
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Let’s look at a stock with an ascending triangle, TSL, which is a solar company I used to
swing trade pretty often. The stock doubled in value from $14 a share to $28 in one
month right after it formed an ascending triangle in May.
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Bearish Triangle Pattern
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There are 2 types of bearish triangle patterns- symmetrical and descending as
demonstrated in the following figures:
Type 1 – Bearish Symmetrical Triangle
1. A stock is in an downtrend
2. It forms a symmetrical triangle
3. It breaks out from the triangle and goes lower
Type 2 – Bearish Descending Triangle
1. A stock is in an downtrend
2. It forms a descending triangle
3. It breaks out from the triangle and goes lower
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Here’s an example of a descending triangle. The stock LGN formed a descending triangle
pattern at the end of May. It was a declining stock and continued to drop when the pattern
was forming. It declined another 20% in less than 2 weeks after the pattern was formed.
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Flags and Pennants
Flags and pennants are common patterns in the market and are pretty similar in
appearance, both representing brief pauses before resuming its original trend. They are
very reliable continuation patterns and rarely produce a trend reversal.
1. First, there is a sharp market move, resembling almost a straight line (flagpole) on
heavy volume.
2. Prices pause for 1-3 weeks on light volume, forming a consolidation pattern.
3. Prices break out and the trend resumes in the direction prior to the flag or pennant
on heavy volume.
Both patterns usually appear in the middle of a market move and, therefore, the move
after the flag or pennant will travel the same distance of the move preceding the pattern.
The Flag
The flag is shown below, indicated by 2 parallel trendlines in the shape of a
parallelogram, which tends to slope against the trend.
The Pennant
The pennant is shown below, indicated by 2 converging trendlines, resembling a
symmetrical triangle.
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Head and Shoulders Pattern
Head and Shoulders is a bearish pattern.
In a uptrend
1. A stock rallies to a peak on heavier volume and then declines (forming a left shoulder).
2. It then rises again and moves higher than the previous peak but on lighter volume.
3. It declines again and moves below the previous peak (forming a head).
3. The stock then rises a third time on noticeably lighter volume but fails to pass the peak
of the head and declines (right shoulder).
4. If the stock goes below the neckline, a head and shoulders pattern is formed. Volume
should expand at the initial breaking of the neckline. This is a bearish pattern and
indicates that the stock might fall further. (There might also be a return move back to the
neckline, but should not exceed it, followed by new lows)
Inverse Head and Shoulders Pattern (head and shoulders bottom) is a bullish pattern,
and it looks exactly the opposite of the head and shoulders pattern.
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In a downtrend
1. A stock drops to a bottom and then goes up (left shoulder).
2. It then drops again and moves lower than the previous bottom and goes up again
(head).
3. The stock then falls another time but fails to break the previous bottom and bounces
back. (right shoulder)
4. If the stock goes above the neckline, an inverse head and shoulders pattern is formed.
This is a bullish pattern and the stock might go up further.
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Slope of Neckline
In a head and shoulders pattern, the neckline usually slants upward or stays horizontal. If
the neckline tilts downwards, it signals market weakness and is usually followed by a
weak right shoulder.
In an inverse head and shoulders pattern, the neckline slants downward or stays
horizontal. If the neckline tilts upwards, it signals market weakness.
•
Volume during a Head and Shoulders Pattern
There is lighter volume on each peak during a head and shoulders pattern. For example,
the 2nd peak (head) should have lighter volume than the 1st (left shoulder), indicating that
buying is diminishing. The 3rd peak (right shoulder) should have noticeably lighter
volume than the previous 2 peaks.
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Volume should expand on the breaking of the neckline, decline during the return move,
and expand again when the return move is over and the trend resumes.
Once prices break the neckline, they should not recross the neckline. Otherwise, this
would be a failed head and shoulders pattern if prices resume to their original trend.
Let’s look at the chart for Dow Jones, does this look like a head and shoulders pattern?
Watch out!
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Here’s a video published by Adam Hewison analyzing the S&P 500 earlier this month as
of this writing. He came to the same conclusion that S&P might be forming a head and
shoulder’s pattern. Click here to watch this video to learn more.
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What are Double Tops and Bottoms?
What are Double Tops and Bottoms?
A double top or bottom is another reversal pattern, which is common and easily
recognized.
•
Double Top Pattern
1. A prior uptrend sets a new high, usually on increased volume.
2. Then, the stock price declines on a lighter volume.
3. The price rallies again but is unable to pass the previous peak and falls again.
4. If the price breaks support, declining below the previous low, a double top pattern
has formed. (If the price does not break support, this might not be a reversal
pattern since prices could just be in a consolidation phase, just before it resumes
to its original uptrend.)
5. After a double top pattern has formed, there is a possibility of a return move to the
breakout point, but should not exceed it, before prices resume to the new
downtrend.
Volume during a Double Top Pattern
In a double top pattern, there is usually heavier volume during the first peak and lighter
volume on the second. However, when the price breaks support, signaling a reversal to a
downtrend, it usually occurs on heavier volume.
•
Double Bottom Pattern
A double bottom pattern is a mirror image of the double top.
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1. A prior downtrend sets a new low, usually on higher volume.
2. Then, the stock price rallies.
3. The price declines again but is unable to fall under the previous low and bounces
up again.
4. If the price breaks resistance, rallying above the previous peak, a double bottom
pattern has formed. (If the price does not break resistance, this might not be a
reversal pattern since prices could just be in a consolidation phase, just before it
resumes to its original downtrend.)
5. After a double bottom pattern has formed, there is a possibility of a return move
to the breakout point, but should not decline below it, before prices resume to the
new uptrend.)
Volume during a Double Bottom Pattern
In a double bottom pattern, there is usually heavier volume during the first bottom and
lighter volume on the second. However, when the price breaks resistance, signaling a
reversal to an uptrend, it is important that it occurs on heavy volume.
Example of a Double Bottom Pattern:
Citigroup’s stock just recently formed a double bottom at around $2.80 and rallied up
over $4.40, which was yesterday’s close. The stock is now trading at $4.70 so if you
bought at the second bottom and sold it now, you would have made a 68% gain!
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What are Triple Tops and Bottoms?
What are Triple Tops and Bottoms?
The triple top or bottom is another reversal pattern, which rarely occurs. It is a stronger
pattern than the double top or bottom pattern since the likelihood of a reversal is higher.
The triple top or bottom pattern is a slight variation of the head and shoulders pattern.
The main difference is that in a triple top, the three peaks are around the same level,
whereas in a head and shoulders pattern, the head is at a slightly higher peak than both of
the shoulders.
•
Triple Top Pattern
A triple top pattern is complete after both troughs have been broken on heavy volume.
Prices must close below the support levels to complete a triple top pattern, signaling the
reversal to a new downtrend. There might also be a return move to the breakout point, but
should not exceed it, before the downtrend resumes.
Volume
Similar to volume in the presence of a head and shoulders pattern, volume during a triple
top pattern tends to decline at each subsequent peak, but increases at the breakdown
point, leading to the new downtrend.
•
Triple Bottom Pattern
As you can see, a triple bottom pattern is a mirror image of the triple top.
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A triple bottom pattern is complete after both peaks have been broken on heavy volume.
Prices must close above the resistance levels to complete a triple bottom pattern,
signaling the reversal to a new uptrend. There might also be a return move to the
breakout point, but should not decline below it, before the uptrend resumes.
Volume
Similar to volume in the presence of a head and shoulders pattern, volume during a triple
bottom pattern tends to decline at each subsequent bottom, but increases at the breakout
point, leading to the new uptrend.
Example:
As you can see from the example below, the stock WMGI just formed a triple bottom
pattern. After reaching its 3rd bottom at about $13.75 per share, it rallied up to $16.50.
That’s a 20% gain!
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Part III
Technical Analysis
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Volume Indicator
The Purpose of Volume in the Financial Markets
Volume is a significant indicator in technical analysis because it provides important clues
about the intensity behind price movements. Volume can be measured by shares,
contracts, or dollars that trade hands between sellers and buyers.
Rising volume tends to confirm trends and declining volume brings doubt. If there is a
big price movement, the perceived strength of that movement is based on its volume. The
higher the volume is at the time of the price move, the more significant and stronger the
move is.
Rising volume shows that traders are still coming in, letting the trend to continue. But if
traders start to abandon the market, volume falls and the trend is less likely to continue.
Volume During an Uptrend
During an uptrend, volume confirms the price trend if the volume is heavier when the
price moves higher and lighter when the price dips. This shows that the buying pressure
is greater than the selling pressure, allowing the uptrend to continue.
Volume During a Downtrend
During a downtrend, volume confirms the price trend if the volume is heavier when the
price decreases and lighter on bounces. This shows that the selling pressure is greater
than the buying pressure, allowing the downtrend to continue.
Trading Techniques
1. When the stock price breaks out from a trading range and if there is a sudden
increase on the volume of a stock, it usually indicates the beginning of a trend.
Get in on that trend.
2. When a trend is in a well-established move and if there is a sudden increase on
the volume of a stock, it usually indicates the end of a trend. It’s probably best if
you skip or leave that trade.
3. Divergences between price and volume tend to signify turning, or reversal,
points. For example, when the price of a stock rises to a new high but volume
shrinks, it shows that the price increase did not attract much interest and a
downside reversal is likely. Likewise, if the price falls to a new low and volume
falls as well, it shows that the price decline attracted little interest and an upside
reversal is likely.
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To use more objective ratings of volume, you can study an indicator called Force Index,
which was developed by Dr. Alexander Elder, author of the books, “Trading For a
Living” and “Come Into My Trading Room.”
Simple Moving Average
Moving Average (MA) is one of the most popular and easy-to-use tools available for
technical analysts. There are two main types of moving averages: simple moving average
and exponential moving average.
How Do We Calculate Simple Moving Average?
A simple moving average is calculated by computing the average closing price of a
security over a specified number of periods. For example, a 10-day moving average is
calculated by adding the closing price for the last 10 days and dividing the result by 10.
1+2+3+4+5+6+7+8+9+10=55, 55/10 = 5.5 (Assuming that the closing prices for the 10
days are 1-10 consecutively). When you plot the moving average for each date on a
graph, it forms a curve.
Trading Signals:
- A buy signal is triggered when closing prices cross above the moving average (MA).
- A sell signal is triggered when closing prices cross below the moving average (MA).
Example:
Let’s look at the stock charts for MSFT and YGE as an example. A buy signal is
generated when prices cross above the 10 day moving average as circled in 1, 2, 3. A sell
signal is generated when price crosses below the 10 day moving average.
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Disadvantage:
The main disadvantage of a simple moving average is that it does not reflect the current
trend quickly. For example, if the stock prices in the last 10 days for a certain stock were
100, 99, 98, 45, 44, 45, 43, 42, 43, 42, the simple moving average would be 60.1. This
moving average is 50% above the current price which wouldn’t be accurate to trigger an
entry signal. In other words, if there is an extreme high or extreme low in the stock price,
it distorts the true value of the stock. For this reason, another type of moving average
called exponential moving average (EMA) was developed, giving more weight to the
most recent prices.
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Exponential Moving Average
Exponential Moving Average (EMA)
Exponential moving average is another type of moving average, which gives greater
weight to more recent data as opposed to the simple moving average. It responds to
changes faster than a simple MA. EMA is calculated by multiplying a greater percentage
to the latest data, as opposed to giving the same weight for both. Here is the formula to
calculate exponential moving average:
EMA = Ptoday* K + Emayesterday * (1-K), where
- K = 2/(N+1)
- N = the number of days in the EMA
- Ptoday = today’s closing price
- Emayesterday = yesterday’s Ema
Trading Signal:
- A buy signal is triggered when closing prices cross above the EMA.
- A sell signal is triggered when closing prices cross below the EMA.
Example:
Let’s look at the stock charts of Apple and Citigroup as examples. A buy signal is
generated when prices cross above the 9 day EMA, as circled below. A sell signal is
generated when prices cross below the 9 day EMA.
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What are Trend Lines?
Trend lines are simply lines that technical analysts draw on the chart to predict how low
can a stock go and make a trading decision whether or not to buy or sell a stock.
What are uptrends and downtrends?
Uptrend pattern:
- Each rally reaches a higher point than the preceding rally.
- Each decline reaches a higher point than the preceding decline.
(higher highs and higher lows)
Downtrend pattern:
- Each decline stops at a lower point than the preceding decline.
- Each rally stops at a lower level than the preceding rally.
(lower lows and lower highs)
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What are trendlines?
Trendlines are lines that connect nearby bottoms or nearby tops, which are used to
identify trends. The most important trait of a trendline is its angle, or slope, because it
identifies the dominant market force.
Uptrendline:
- A line that connects 2 or more nearby bottoms and slants upwards.
- Bulls are in control. Look for buying opportunities.
- If we draw a line parallel to it across the nearby tops, it will mark a trading channel.
Downtrendline:
- A line that connects 2 or more nearby tops and slants downwards.
- Bears are in control. Look for shorting opportunities.
- If we draw a parallel line across the nearby bottoms, it will mark a trading channel.
Trading range:
- The lines connecting the tops and the lines connecting the bottoms are not slanting
upwards nor downwards – the lines are close to the horizontal.
- We can either wait for a breakout to step in or trade short-term swings within that range.
(Beware of false breakouts)
- Often referred to as “trendless”
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Techniques
It is better to draw trendlines across the edges of congestion areas instead of price
extremes because extreme points reflect panic only among the weakest crowd members.
The breaking of a trendline is one of the warnings of a trend reversal.
A trendline is also more important and valid if:
1- It’s over a longer timeframe. A trendline on a weekly chart is more important than a
daily trendline.
2- The trendline is longer in length. A short trendline reveals mass behavior for only a
short period of time whereas a longer one reveals mass behavior for a longer time.
3- There is more contact between the price and trendline. A trendline that is only
beginning to form only touches 2 points. More points of contact makes the trendline more
valid.
4- Increasing Volume. When prices move in the direction of a trendline, an increase in
volume confirms that trendline.
CPST is in an uptrend and the trend lines are drawn below
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FAZ is in a downtrend and the trend line is drawn above the highs of the stock
price.
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Moving Average Convergence-Divergence (MACD)
What is Moving Average Convergence-Divergence (MACD)?
MACD is a popular technical indicator that is widely use by traders. It is created by
Gerald Appel in the 1960s. MACD consists of three exponential moving averages. It
gives a bullish signal when the two lines crossover. To create MACD:
1. Calculate a 12-day EMA of closing prices.
2. Calculate a 26-day EMA of closing prices.
3. Subtract the 26-day EMA from the 12-day EMA, and plot their difference as a solid
line. This is the fast MACD line.
4. Calculate a 9-day EMA of the fast line, and plot the result as a dashed line. This is the
slow Signal line.
– When the fast MACD line rises above the slow Signal line, it gives a bullish signal.
You don’t need to know the above calculation to trade with this technical indicator as it is
built in with most charting softwares.
How to trade with MACD?
A stock pattern is considered to be bullish when the fast MACD line is above the signal
line. When the fast MACD line cross over the signal line, it generates a great buy signal.
Let’s look at some charts.
1. AES – Notice there is a MACD crossover around 12/6, and the stock has risen since
then.
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2 YMI – Noticed again the stock keep risen after the MACD crossover was formed. If
you want to make more money on this stock, you can buy the stock when the MACD line
approaching the signal line. However, that will means you will need to take greater risk.
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My Opinion on MACD
MACD crossover works pretty well for me. However, I never trade any stock base solely
on MACD signal. I always combine it with Candlestick and Stochastic. If I see a bullish
candlestick pattern and the slow macd is about to cross the signal line, then I will watch
the stock closely and may buy it the next day.
Click here to get a list of latest stocks with a MACD crossover pattern.
What is MACD-Histogram?
MACD-Histogram derives from MACD. When it is above 0, the signal is positive and it
is negative when it goes below 0. The following shows how a MACD-Histogram is
calculated.
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MACD-Histogram = MACD line – Signal line
MACD-Histogram is created by the difference between the MACD line and the Signal
line, and plots the difference as a histogram. If the fast line is above the slow line,
MACD-Histogram is positive and plotted above the zero line. If the fast line is below the
slow line, MACD-Histogram is negative and plotted below the zero line. When the two
lines touch, MACD-Histogram equals zero.
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Overbought And Oversold Indicators
What are Overbought & Oversold?
Overbought is a term in technical analysis that describes a situation in which the stock
price of a company has risen so much where an oscillator has reached its upper bound.
There are different technical indicators that you can use to check if a stock is overbought.
Stochastic and RSI are two of the most popular one. When the stochastic rise above the
80 level or RSI cross over the 70 level, that’s when we considered a stock is overbought.
Oversold is just the opposite of Overbought. It describes a situation in which the stock
price of a company has falling so much where an oscillator has reached its lower bound.
When stochastic drop below the 20 level or RSI cross down the 30 mark, that’s when we
consider a stock is oversold.
How to use overbought and Oversold Indicator?
There are different ways that traders use to trade using overbought and oversold
indicator.
1. Some traders sell immediately when an oscillator across the overbought area, and buy
immediately when an oscillator fall to the oversold area.
2. Some traders do not sell when an oscillator across the overbought area. They will hold
their stock until the oscillator starts to fall below the overbought area. Those traders do
not buy a stock when an oscillator fall to the oversold area, they buy when the stock price
recovers a bit and the oscillator across above the oversold area again.
I personally use method 2. The reason is that some stocks will keep going higher when an
oscillator is in the overbought area. If I sell it when an oscillator reach the overbought
area, I lose out a lot of profit. There are stocks that would keep falling even when the
oscillator is already in the oversold area. It is much safer to buy when the stock recovers a
bit and shows signal of going up again or when the oscillator is crossing above the
oversold area.
For example, if you were to use approach 1, you would sell CDE on 2/14 or 2/15 base on
the stochastic indicator, and would missed out a lot profits on this stock.
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Divergence Pattern (Leading Technical Indicators)
All technical indicators such as Stochastic, MACD, CCI, RSI, Moving Averages are all
lagging indicators. They are either derived directly or indirectly from the price or volume
of a stock. However, if they formed a divergence with the price, they become leading
indicators, allowing you to buy before major trend reversals. Let’s look at the divergence
patterns.
Bullish Stochastic Divergence
There are two types of bullish divergence patterns.
Type 1
1. When a stock is in a downtrend, the price is going down and at the same time frame,
2. Stochastic is going up.
Type 2
1. When a stock is in a consolidation area and at the same time frame,
2. Stochastic is going up.
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The psychology behind this pattern is simple. The price is dropping, but the trend
becomes weaker and weaker with a bullish reversal up ahead. The Type 1 divergence is
more bullish than Type 2.
Bearish Stochastic Divergence
There are two types of bearish divergence patterns.
Type 1
1. When a stock is in an uptrend, the price is going up and at the same time frame,
2. Stochastic is going down.
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Type 2
1. When a stock is in consolidation area and at the same time frame,
2. Stochastic is going down.
The psychology behind this bearish divergence pattern is the same as the bullish one. The
price is going higher, but the trend becomes weaker and weaker with a bearish reversal
up ahead. The Type 1 divergence is more bearish than Type 2.
Let’s look at some real examples.
The figure below shows DTV formed a Stochastic divergence on Mar 9 when the stock
was still in a downtrend. Soon after the divergence pattern, the trend reversed, and the
stock price went from 19 all the way up to 25.5.
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The figure below shows two divergence patterns for the same stock. The first one was
formed back in mid April as highlighted in blue, and the stock price went from around
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9.25 to 15.5. The second one was from last week and that was one of the reasons why I
bought this stock. Let’s see how it turns out.
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Divergence is a leading technical indicator and is one of the most important indicators in
technical analysis. However, one thing to always keep in mind is, no single technical
indicator works all the time. When a pattern doesn’t work out, you must sell the stock and
look elsewhere. There are thousands of stocks out there, so don’t fall in love with any one
stock. You don’t have to be right every time to make money in the stock market. The
important thing for you is to make lots of money when you were right and get out of
trades with minimum losses as quickly as possible when you were wrong. After all, that’s
what technical analysis is all about.
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Candlestick Patterns
Candlestick is a very powerful charting pattern widely use by technical traders to predict
stock prices. Candlestick chart consists of white and red candlesticks.
The white candlestick on the left means the stock price is up for the day, and the red
candlestick on the right represents a down day for the stock. We can easily visualize the
open, close, high and low price for any stock using candlestick on a chart.
Let’s look at sample candlestick chart for DRH.
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The chart above shows that DRH stock was trading in the range of $8 to $9.8 in the
period of 09/2009 to 03/2010. On 3/3/2010, a Bullish Engulfing Pattern was formed and
the stock gone up from $8.5 to $9.5 in 2 weeks with a 11.7% gain. You don’t need to
know what bullish engulfing pattern is for now, just note that it is one of the most
bullish patterns in candlestick which signals a strong buy, I will discuss this pattern in
more detail in the next topic.
The following are some popular candlestick patterns.
Bullish Candlestick Patterns (Buy Signals)
Bullish Engulfing
Hammer
Piercing
Above the Stomach
Bullish Tri Star
Bullish Meeting Line
Bullish Belt Hold
Rising Three Method
Three Line Strike
Morning Star
Bullish Kicker
Inverted Hammer
Bullish Side By Side
Bullish Harami
Last Engulfing Top
Three White Soldier
Unique Three River Bottom
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Three Outside Up
Bearish Candlestick Patterns (Sell Signals)
Bearish Engulfing Pattern
Hanging Pattern
Dark Cloud Pattern
Bearish Kicker Pattern
Bearish Harami Pattern
Evening Star Pattern
Shooting Star Pattern
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Bullish Engulfing Pattern
Bullish Engulfing Pattern is one of the strongest patterns that generates a buying signal
in candlestick charting and is one of my favorites. The following figure shows how the
Bullish Engulfing Pattern looks like.
The following conditions must be met for a pattern to be a bullish engulfing.
1. The stock is in a downtrend (short term or long term)
2. The first candle is a red candle (down day) and the second candle must be white
(up day)
3. The body of the second candle must completely engulfs the first candle.
The following conditions strengthen the buy signal
1. The trading volume is higher than usual on the engulfing day
2. The engulfing candle engulfs multiple previous down days.
3. The stock gap up or trading higher the next day after the bullish engulfing
pattern is formed.
Stock Chart for SOLF
Let’s look at the stock chart for SOLF. The stock formed two bullish engulfing patterns
on the chart, one on 11/06/2009 and the other on 12/21/2009. The stock shot up both
times after the pattern was found.
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11/06/2009 - Bullish Engulfing Pattern
Buy signal 1: 86.4% gain
- The stock closed at $5.59 on the bullish engulfing day and gone up to $10.42 on
1/11/2010. That is a 86.4% gain in 2 months.
12/21/2009 Bullish Engulfing Pattern
Buy signal 2: 36% gain
- The stock closed at $7.66 on the pattern day and moved up to $10.42. That is a 36%
gain in less than a month.
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Stock Chart for WNC
Let’s look at a more recent stock WNC.
Buy signal: 87% gain
- The stock closed at $2.94 on 02/25/2010 and formed a bullish engulfing pattern. In less
than 10 trading days, the stock went up to $5.49 with a 87% gain.
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Please note, in reality it is not easy to buy a stock at its lowest price and sell it at its peak.
The good news is that you don’t need to sell at its peak to make a good fortune in the
stock market.
Click the following link to get a list of bullish engulfing pattern stocks for today.
Bullish Engulfing Stocks
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Bearish Engulfing Pattern
Beraish Engulfing Pattern is one of the strongest patterns that generates a selling signal
in candlestick charting and is one of my favorites when I short stocks. The following
figure shows how the Bearish Engulfing Pattern looks like.
The following conditions must be met for a pattern to be a bearish engulfing.
1. The stock is in a uptrend (short term or long term)
2. The first candle is a white candle (up day) and the second candle must be black
(down day)
3. The body of the second candle must completely engulfs the first candle.
The following conditions strengthen the sell signal
1. The trading volume is higher than usual on the engulfing day
2. The engulfing candle engulfs multiple previous down days.
3. The stock gap down or trading higher the next day after the bearish engulfing
pattern is formed.
Stock Chart for YGE
The stock formed a bearish engulfing pattern on 10/15 and another one at 11/9. The stock
lost almost 30% of value since the bearish engulfing pattern was formed. So if you were
shorting this stock, you just made 30% in a month and half.
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Please note, in reality it is not easy to sell a stock at its highest price and buy it back at its
lowest. The good news is that you don’t need to sell at its peak to make a good fortune in
the stock market.
Click the following link to get a list of bearish engulfing pattern stocks for today.
Bearish Engulfing Stocks
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Part IV
Trading System
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Trend Trading
What is Trend Trading?
Trend trading is a strategy that many traders and investors use to trade stocks. The idea
behind it is if a stock is going up with good volume, it should continue to go up until the
trend breaks. Trend trading can be applied to any type of trader. Whether you are a day
trader, a swing trader or a long term investor, you may find trend trading useful. The only
differences will be the time frame that you will use. Day traders may use 5 minutes or
even shorter time frame, swing traders may want to use daily and weekly charts, and long
term investors may use weekly and monthly charts.
Is trend trading working?
Yes, trend trading is working. It is widely use by institution traders as well as individual
traders. In order to trend trading successfully, you need to be discipline and patient.
Trend trading doesn’t occur often, however when it does occur, it is very profitable.
How does trend trading work?
Most of the traders I know use moving averages for trend trading. Weather to use simple
moving average or exponential moving average is really a personal preference. However,
I found exponential moving average to be more accurate than simple moving average
because it gives more weight to the recent stock prices.
The way to buy a trending stock is spot the lows of a stock price and draw trend lines
between them. As long as the stock price is trading above that trend line, you are safe to
buy the stock. You will not sell the stock unless the stock price drops below the trend line
which means the trend is broken. Sometimes, when a trend line is broken and a new trend
will occur and you may re-buy the stock after the new trend develops.
Buying apple stock is trend trading because it is trading above the trend line. The
following chart is provided by MarketClub. Their smart trend system indicates that Apple
stock is bullish with a score of +100. Their system first recommended to buy Apple stock
when the price was in the 90’s 2 years ago. If you bought apple back then, your money
has quadruple by now. Click here to learn more about their system.
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Is Trend trading the best strategy?
While trend trading is profitable, it is not necessary the best trading strategy. Remember,
there is more than one way to make money in the stock market. As long as you can make
consistence profit, then you are already using the best strategy. Bottom fishing is another
popular trading strategy that traders use. Bottom fishing traders tries to catch the bottom
of a stock and buy it when there are some signs of recovery. Buy stocks at around support
and sell them near resistance is one method of using bottom fishing.
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Bottom Fishing Trading Strategies
What is Bottom Fishing Trading?
Bottom fishing is another popular trading strategy that traders and investors use. The
trading concept behind it is traders trying to find the bottom of a stock and jump in when
the stock starts to recover. This differs from trending trading where traders buy stocks
while the general trend is positive where bottom fishing traders try to buy a stock while
the general trend is negative.
Is bottom fishing trading profitable?
Bottom fishing is profitable when you do it correctly. Some people think bottom fishing
is the same as catching a falling knife which is not true. There are different ways that you
can trade using bottom fishing and make good profits.
How to use bottom fishing trading strategy?
My favorite way to use bottom fishing is try to identify stocks that are falling and
approaching support, but I won’t buy the stock while it is falling. I need to see signs of
recovery or technical oscillators start to rise from the oversold area.
Let’s take a look at AUY.
AUY was in a down trend in January and hit a support on 1/20. During that time, the
stochastic technical indicator is in the oversold area (below 20). We are waiting for the
stochastic to cross over 20 before buying the stock. The stock finally bottom out on 1/25
and starts to recover, and the stochastic oscillator crossover above 20 which generates a
bullish sign. The stock then traded higher the next day which confirms the reversal trend
and that’s when you should buy the stock. The stock is now trading at $13.01 intraday
today, that’s almost a 16% gain in a month.
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When to sell the stock?
There are a few ways to sell the stock once you bought a stock at the support or bottom.
1. Set a percentage target – as soon as you reach your goal on the stock, sell it.
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2. Sell it near resistance – sell the stock as soon as the stock approach the resistance. In
the AUY case, you would have to sell the stock before 3/2.
3. Sell it after trend reverse – sell the stock when there is signs that the trend may be
reversing. The reward for this method is higher since the stock may break resistance and
go higher, but the risk is also higher as there is a very high possibility that the stock will
fail to break the resistance.
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How To Trade Gap Ups
Gap up can be very profitable if you trade it properly and it is somehow riskier than other
patterns. There are different types of gap up that traders use to trade such as exhaustion
gap up, initial gap up and gap up. What I wanted to see is if a stock gap up with good
volume regardless of the type. It is often safer to buy a stock when the volume is high
because the trend will likely to continue. If a stock gap up with low volume, yet it could
still go higher, there is a bigger chance that the stock will go down and close the gap.
Gap up is best used as a confirmation trend when you find bullish patterns the previous
day. It can be used in combination of bullish engulfing pattern (candlestick), morning star
pattern (candlestick), stochastic crossover, macd crossover, triangle patterns, hitting
support line, and so on. When you find a stock that is likely to form a triangle pattern as
follows, and the stock gap up the next day or a few days after, that is usually a good entry
point.
Example 1: Stock CFW
- The stock was in the consolidation area in the period of 2/3/2010 to 3/2/2010 and hitting
support level. On 3/5, the stock gap up and almost double in 3 weeks. (Up 92%).
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Example 2: Stock PENN
- This stock formed a bullish engulfing pattern (Candlestick Pattern) and hitting support
on 2/26/2010, and then it gap up on the next trading day (3/1/2010). It then went up from
$23.10 to $27.57 for a 19% gain.
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Macd Crossover + Stochastic Crossover = 37% Gain
The penny stock RAME made a macd crossover over and stochastic crossover on 2/23
and the stock then gapped up the next day to confirm the trend. In less than 2 weeks, the
stock is now trading at $2.45 which is over 37% gain. I don’t buy penny stock often so I
bypassed this stock.
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Let’s look at another example base on Macd Crossover + Stochastic Crossover + Gap Up
12/27/2010 – SSN formed a stochastic crossover which is a bullish signal. Some traders
buy this stock primary base on this signal. However, I like to use cautious and wait for
more signals before buying the stock.
12/28/2010 – SSN formed a MACD crossover signal which is another bullish signal, this
give me more confidence to buy this stock.
12/29/2010 – SSN gapped up this is the time I would buy the stock.
The stock then went from $1.13 to $3.77 from 12/29/2010 to 3/1/2011 which is a 234%
gain in 2 months.
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Volume Indicator + Gap Up
In technical analysis, volume is an important technical indicator that triggers a buy or sell
signal.
How to trade the volume technical indicator?
Sudden increase in the trading volume of a stock could indicate a buying or selling
pressure on the stock. For example, if trading volume for a stock goes up five times than
normal while its stock price is climbing, this indicates strong strength in the stock price
and you should buy the stock. On the other hand, if the stock price is declining while its
volume increase, then it is time to watch out as there are selling pressure on the stock.
Let’s take VGZ as an example.
The stock went up a lot on 2/25/2011 while the volume is also trading higher than usual.
This is a strong buy signal for momentum day traders. However, if you want to be
cautious, you may want to wait for a confirmation signal the next day. The confirmation
signal could be a gap up, stochastic crossover, macd crossover or whatever technical
indicators that you usually use. In this case, the stock gapped up the next day. If you
didn’t buy the stock on 2/25/2011, then you should definitely consider buying this stock
on the next day when it gapped up.
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Bullish Engulfing + Stochastic Crossover = 42% gain
HERO formed a bullish engulfing and a stochastic crossover on 12/3, and the stock has
rise over 42% since then.
UHS made a nice 9% gain in the past few days after forming a bullish engulfing signal
last week. The general stock market is down over 200 points during this time period. So it
is a relative nice stock and the trend seems positive and strong.
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When To Sell Your Stock?
There are two cases where you want to sell your stock.
1. When the stock drops and you must take a loss and exit the trade
2. When the stock goes up and you need to take profit
Case 1: When a stock drops to a certain price, you must take a loss and exit the
trade:
This case is simple, you set a stop loss and exit the trade when it hits your stop loss. Stop
loss percentage is really a personal preference. Some traders are willing to risk more
while others want to keep their loss at a minimum. Of course, the more risk you put in,
the more reward you should expect to gain from any stock you invested in. If that’s not
the case, then you should not buy the stock in the first place.
Case 2: When the stock goes up and you need to take profit
There are many different ways that trader use to sell a stock and take profit. Here are a
few selling strategies for swing traders.
a) Sell when the stock price reaches upper Bollinger Band
- Some technical traders use Bollinger Band as buying and selling signals. When stock
prices cross above the lower Bollinger Band, they buy it. They sell the stocks when their
price crossover the upper Bollinger Band.
Let’s look at the chart example for POT.
The blue curves are the upper and lower Bollinger Bands, and we see 3 buys and 3 sells
on this chart.
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b) Sell when technical indicator moves into overbought area- Many traders trigger
their sell signal when technical indicators move into overbought area. For example,
traders sell their stock when RSI move above 70 or stochastic move above 80. Let’s look
at the same stock POT using stochastic. It also has 4 buys and 4 sells.
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c) Sell only when a stock hit your stop loss
- While approach 1 and 2 are good for profit taking, they miss out huge opportunities
when a trend is strong enough that a stock keeps going higher. This is the approach that I
am currently using. I only sell it when I believe a trend is running out and a pull back is
likely or when a stock hit my stop loss.
- Let’s look at the following example, ANN stock chart.
If we used Bollinger Band or Stochastic Overbought as our selling signals, we would
miss additional gains on the stock.
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Beyond Technical Analysis
Here’s one technical analysis pattern that I never read about in any stock book and I have
never reveal to anyone yet. It is what I called the “stock performance by day of week”. I
learn about this pattern a year ago when I was trading SOLF, a solar energy company. I
was swing trading SOLF consistently and made little profit until one day I realize that the
stock kept going up every Monday, and going down every Thursday. It kept doing that
for like 3 weeks, so on the fourth week, I bought the stock near market close on Friday,
and sold it near market close on Monday and gained about 3% in profit. I kept doing that
for the next 8 weeks and here is the outcome.
Monday SOLF performance in the period of 11/09/2009 – 01/25/2010
Stock Date
SOLF 2009-11-09
SOLF 2009-11-16
SOLF 2009-11-23
SOLF 2009-11-30
SOLF 2009-12-07
SOLF 2009-12-14
SOLF 2009-12-21
SOLF 2009-12-28
SOLF 2010-01-04
SOLF 2010-01-11
SOLF 2010-01-25
SOLF 2010-02-01
Percentage Gained
3.52%
4.65%
0.45%
3.44%
6.87%
6.29%
7.28%
4.47%
4.85%
3.37%
10.45%
3.88%
The pattern finally broke on 02/08/2010 when the stock went down 3.84% and I stopped
trading this pattern for SOLF. However, I still monitor the stock in case I see the pattern
again. So how much percentage I gained from this stock? You do the math. Let’s look at
how SOLF performs on Thursdays during the same time period.
Stock
Date
SOLF
SOLF
SOLF
SOLF
SOLF
SOLF
SOLF
SOLF
SOLF
2009-11-12
2009-11-19
2009-12-03
2009-12-10
2009-12-17
2009-12-24
2009-12-31
2010-01-07
2010-01-14
Percentage Lost
-0.38
5.09
-1.29
-4.44
-2.59
-0.91
-1.55
-4.80
-5.20
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SOLF
SOLF
2010-01-21
2010-01-28
-4.40
-2.16
Trading System
Why do we need a trading system?
If you are an active trader and not making money on the stock market, it is time for you
to slow down and think about what you did wrong and investigate on the trading system
that you are using.
Building a profitable trading system requires time and patient. One trading system may
work for some people, but fail for others. It is ok if a trading system fails on you, but it is
not ok for you to move on to the next system without investigate it and find out why it
doesn’t work.
There is no trading system that will work forever. You will need to adjust or change a
trading system under different economic circumferences. If a trading system consistently
worked for you in the past and it is not working anymore, it is time to investigate it.
In this tutorial, I’m going to show you the basics on how to build your own trading
system. Following are some steps that I take.
How to build a trading system in 5 steps?
1. Make it simple – choose 1 or 2 technical indicators to start with.
2. Test it against historical data
3. Set stop loss and exit strategy
4. Backtest this method and try to break it. Add additional indicators when necessary.
5. Paper trade this trading system.
Let’s look at the trading system in detail.
Trading System Step 1 – Technical Indicators
Starts with 1 or 2 technical indicators. I will use Macd crossover and Bullish Engulfing
(Candlestick) pattern for this tutorial
Trading System Step 2 – Test the technical patterns
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Test the pattern against historical data and study stocks that match these 2 criteria. Let’s
pick a random day in the recent past. I picked 2/22/2010 which is about 20 trading days
earlier from today. To assist me finding stocks that match these 2 patterns quickly, I did a
stock screen using Dojispace’s advanced stock screener and found MPG. MPG is the
only stock that matched these 2 patterns that day. Let’s look at the chart.
2/22/10 close price: 1.64
Today (3/16/10) close price: 2.59
This is a 58% gain in 20 days.
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Trading System Step 3 – Set Stop Loss
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We must set stop loss on all trades that we enter to avoid big losses. There are people
who lost their fortune on one stock because they don’t exit a losing trade. Please note, if
you are going to buy stocks with a price less than $2, your stop loss must be greater than
usual because they are very volatile stocks. Let’s set our initial stop loss to 5%. If a trade
is going our way, we should adjust the stop loss to match the latest closing date, so that
we don’t lose all the profit when the trend reverse. Let’s look at the MPG stock data.
Date Open High Low Close Volume
Mar 16, 2010 2.52 2.68 2.46 2.59 2,115,671
Mar 15, 2010 2.60 2.68 2.50 2.51 2,541,316
Mar 12, 2010 2.44 2.55 2.36 2.47 1,425,172
Mar 11, 2010 2.38 2.49 2.21 2.40 2,090,530
Mar 10, 2010 2.54 2.69 2.30 2.43 5,019,694
Mar 9, 2010 2.12 2.57 2.05 2.47 7,795,768
Mar 8, 2010 1.89 2.25 1.88 2.16 7,372,701
Mar 5, 2010 1.83 1.90 1.76 1.86 1,922,729
Mar 4, 2010 1.80 1.84 1.73 1.78 898,551
Mar 3, 2010 1.68 1.81 1.67 1.74 1,641,841
Mar 2, 2010 1.74 1.74 1.62 1.69 2,044,427
Mar 1, 2010 1.55 1.64 1.53 1.60 1,519,886
Feb 26, 2010 1.51 1.59 1.48 1.50 1,602,606
Feb 25, 2010 1.55 1.57 1.48 1.50 1,170,756
Feb 24, 2010 1.73 1.75 1.53 1.60 1,716,731
Feb 23, 2010 1.63 1.75 1.57 1.69 1,801,794
Feb 22, 2010 1.45 1.68 1.45 1.64 1,719,168
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Notice if we bought the stock on open at $1.63 the next day (2/23) after the pattern was
formed, it would hit our 5% stop loss on the day after (2/24) and we would have a failed
trade. We have 3 options.
a) Set a bigger stop loss when trading with stocks under $2
b) Hit 5% stop loss and buy it back when the trend start to go back up.
c) Skip stocks with a price under $2 and volatile stocks completely.
Let’s look at each option in details.
a) Set a bigger stop loss
For this trade to be successful, a 9.5% stop loss is required. The stock hit a new low on
2/25 at $1.48. Let’s do the math.
Entry price: $1.63
Lowest price: $1.48
(1.63-1.48)/1.63 = 9.2%, so we must set a stop loss greater than 9.2%
I don’t like this option because a 9.5% stop loss is simply too big for a swing trade.
b) Hit 5% stop loss and buy it back when the trend start to go back up.
When this stock hit our stop loss at 5%, we sell it and buy back at a later time. So when
should we buy it back? Notice on the 2/22 when the bullish engulfing pattern is formed, I
consider the stock open ($1.45) to be a support. If the stock stays above this support
level, I will try to get back in when the stock turn positive. However, if the stock breaks
this support level, I won’t consider buying it back until the stock moves back up above
that level.
A doji is formed on the 2/26 which is a good sign. (A doji signals a reversal trend). The
stock gapped up on the next trading day on 3/1 confirming the trend reverse. This is the
day I will buy back this stock and set my stop loss to 5% again. For cautious traders, you
may want to wait until the stock break it’s resistance level at $1.69.
The stock keep moving higher after 3/1, we must adjust the stop loss on a daily basis. Our
initial stop loss was 5% from our entry price. We must reset this entry price to the latest
closing price to avoid giving back too much on a winning trade.
The stock eventually hit our stop loss on 3/10.
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Let’s calculate our profit roughly. Let’s say we invest $10,000 worth of stock each time
we trade.
Trade 1: 5% lost on $10,000 = $500
Trade 2: Entry price: $1.55 on 3/1
Exit price: around $2.35 on 3/10 ($2.35 is 5% stop loss base on 3/9’s close price of
$2.47)
(2.35 -1.55)/1.55 = 51.5% of $10,000 = $5100 (Note: we don’t subtract $500 from the
$10,000 because we
assume we invest $10,000 on each trade, not on each stock.)
Total profit = $5,100 – $500 = $4,600
c) Skip stocks with a price under $2 and volatile stocks completely
This option is obvious but I don’t like this option because I will miss out a lot of
profitable trading opportunities.
Trading System Step 4 – Backtest this method and try to break the system. Add
additional indicators when necessary.
Now let’s test our trading system against a bunch of dates in the past starting 2/23/2010
which is the day after our initial date.
2/23/2010. The only stock that matched bullish engulfing and macd crossover on that
date is CLRT. Again, this is a low price stock, so we expect it to be very volatile. The
stock hit our 5% stop loss in 3 days and again if we re-buy the stock a day later, we get a
nice profit. The stock is still rising as of today and it is sitting at $2.8. Assume if we
bought back the stock at $2.1, we are up 33% on this trade and if we subtract the 5% loss
from our previous trade, we still make a profit of 28% on this stock.
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Note 1: In both trades, we would make even more money without the stop loss or with a
bigger stop loss. However, I don’t recommend doing that because some bad trades may
keep trading lower and you will end up losing more money on those trades.
Note 2: If you didn’t re-buy the stocks, then you end up with 2 losing trades, each cost
you $500 + transaction fees. Two people may end up with totally different results using
the same trading system, one with a loss and another with a huge gain. The failed trader
then move on to the next trading system and hoping that it will work out for him, and
keep moving as there is no perfect trading system that works for everybody. That’s why it
is very important that you study why a trading system failed on you when you made a
bad trade.
Ok, let’s move on to the next day.
2/24/2010 – no stock
2/25/2010 - FSYS
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- Again this stock hit a stop loss and then rebound the next day with 28%-5% = 23% gain
in a week.
Now we started to see a pattern here. It seems that we can avoid our first 5% loss by
waiting a couple of days after the patterns are form. So we will add this restriction to our
trading system.
Restriction 1: Wait for 2 days and to see if there is a pull back so that we can get in at an
even cheaper price and make sure that the trend doesn’t break the support level. (Please
note: with this restriction, we will miss out profit if the trend is strong enough that it
doesn’t pull back.)
2/26/2010 – no stock
Anyway, I think you got the idea. Just keep testing it and add restrictions to the trading
system as necessary.
Trading System Step 5 – Paper trade this trading system
- Now we have our trading system ready and we should paper trade it for a while until we
are fully comfortable with it. This step uses the same approach as step 4 except now we
are using live data rather than past data and add restrictions to the trading system if
necessary.
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Seasonal Stocks
What are seasonal stocks?
Certain stocks tend to do better on a certain season than other seasons and they are called
seasonal stocks. For example, many retailer companies do well during holidays such as
Christmas and New Years. People buy gifts for each other and that boosts sales every
year on that season. Many gas companies do better during the winter season because
more people consume heat and they get more profits.
How to invest in seasonal stocks?
When you invest in a seasonal stocks, make sure you study the past and make sure the
pattern had repeated more than 2 times in the past in order to make a reasonable bet on a
stock. Amazon, the largest online retailer do particularly well during the week of black
Friday sale
11/17/2008 – 11/25/2008 – The stock went up from $39.69 to $42.19 for a 6% gain in 7
trading days.
11/17/2009 – 11/25/2009 – The stock went up from $131.25 to $134.03 for a 2.11% gain
in 7 trading days.
11/17/2010 – 11/24/2010 – The stock market was close on 11/25 this year so I will use
11/24 as the last day. The stock went up from $158.35 to $177.25 for a 11.93% gain.
History repeats itself, and the risk reward ratio seems to be good for this stock. Make sure
you add Amazon to your watchlist next year during this period. I would definitely buy it
if I remember unless the general market is really bad.
Page 99
How To Trade Earnings Report?
What is trading by earnings reports?
Trading by earnings reports is when you are betting on a stock to go up or down right
before a company report their quarterly earnings.
Is trading earnings report right for you?
First of all, trading earnings reports is a high risk, high reward style of trading. If you are
a beginner or if you can’t tolerate a 10% loss on a single day, I wouldn’t recommend you
trade earnings report. The reason is simple, sometimes a stock can drop more than 10%
when a company’s earning misses wall street analysts had expected. That is not to say
trading earnings is not profitable. If you do it correctly, you can make thousands in a few
days just by trading earnings report. A stock can go up over 10% in a single day when the
company reports good earnings or earnings that beats wall street exceptions.
High probability trading for earnings report
Here are a few strategies that I use to make a high probability trade using earnings
reports. Let’s say if we are going to trade Microsoft, below are some research that we
must do.
1. General Stock Market -Is the general market good? Are other companies reporting
good earnings? If the answer is no, you should stay away from trading the earnings
report.
2. Stocks within the same sectors – Is other stocks in the same sector reporting good
earnings? In the case of Microsoft, you will want to check how the technology sectors are
doing. There are companies that Microsoft do business with or their competitors that
report earnings prior to Microsoft’s earnings reports such as Intel, AMD, Apple, Oracle,
Dell and HP. If they are doing well, chances are Microsoft will do well. Microsoft is the
world’s largest software and windows maker and they use Intel chips. Please note, they
are not 100% correlated, so there is still a chance when Intel beats earnings estimate
while Microsoft misses.
3. How the stock is doing – You need to do research on the stock itself by reading their
balance sheet and analyze their stock. Are they beating earnings estimate in the
previously quarters? Are they doing well relatively to the other companies in the sector?
Page 100
4. Stock Charts – This is not as important as the previously 3, but you want to study it
anyway. Analyze the Dow, SPY and MSFT chart. Are they in an uptrend? Are the chart
bullish? If the charts are bullish, there is a good chance it will continue.
Swing Trading Rules
In order to swing trade successfully in the stock market, there are certain rules that you
must follow.
1. Control your emotions
Greed and fear are the two most common enemies to the stock market. You must learn
how to control them when swing trading.
2. Chart Reading
Chart is your friend, and be able to read and interpret stock chart is critical for swing
traders as they generate the buy and sell signals.
3. When in doubt, don’t trade
Remember the stock market is always there. If you are not 100% sure if you should buy a
stock, then you shouldn’t. There is always another stock out there that you can trade with.
4. Stop Loss
Stop Loss is necessary in swing trading. You can be right 10 times, but if you are wrong
1 time without a stop loss, you may lose all your profit or even worse turn your profit into
a loss. I wouldn’t recommend stop loss over 5%.
5. Never Double Down on a losing stock
If you are losing on a stock, you shouldn’t double down. Don’t be afraid to admit that
you are wrong and take a loss. Remember, you don’t have to be right every time to make
a good profit in the stock market.
6. Don’t be afraid to buy more shares of a winning stock
If you are winning on a stock, don’t be afraid to buy more shares of the stock.
Unfortunately, most amateurs do the exact opposite. They double down when they lose,
and are always afraid to buy more on winning stocks.
Page 101
7. Review your trades
You must have a trading journal that you can use to comment each trade. Pay close
attention to the big winners and the big losers. You want to do exact the same thing in the
future as your winners, and avoid the same mistakes as the losers.
8. Be Patient
You must have a plan every time you execute a trade. For example, when you buy a
stock, you should have an idea when do you want to sell it. You must always be patient if
the stock didn’t go in the direction that you wanted it to.
9. Never trade on expert tips
You should never execute a trade base on expert tips or tips from a friend. You should
always do your own research on the stock before you buy or sell a stock.
10. Pay attention to the market news
You should pay attention to the general stock market news and news that are related to
your stock. Earnings news is one of the most important news that will often affect the
stock price so you should pay close attention to them and learn to interpret them.
Page 102
How To Screen For Stocks?
Screening for stocks manually is a tedious task and chances are you will miss out many
potential winners. Here are two ways that I use to search for stock ideas.
1. Technical Stock Screener
- I use the advanced technical stock screener on http://www.dojispace.com to screen for
stocks. This is a technical stock screener that allows you to scan for multiple technical
indicators at the same time. For example, you can easily find stocks with a bullish
engulfing pattern + macd crossover + stochastic value cross above the oversold area. The
stock screener allows you to use any combination of technical indicators and you will get
the result in less than 30 seconds.
Page 103
Here’s a screen shot of the result page. It shows a list of stocks that matched your
searching criteria and you are able to sort the data by the symbol, open price, high, low,
close, volume or % change. In addition, you can quickly look through each chart using
the “Stock Charts Slideshow”.
Page 104
2. MarketClub Stock Screener
This is another stock screener that I use on a daily basis to get stock ideas. MarketClub
uses a triangle technology to scan the stock market and rate each stock on a scale of -100
(very bearish) to +100 (very bullish). I usually just go get the stocks with a score of +100
and study each one.
I previously published an article on how to use the MarketClub screener. Click the link
below to read it in detail.
How to use MarketClub
Click here to visit the MarketClub site for more information
Page 105
Appendix
Page 106
Stock Brokers
Before you open an online trading account and begin your trading career, the first step
you should follow is choosing an online stock broker that is right for you. There are many
different brokers and they all offer their own special services and features. So how do you
go about choosing the best one for you?
Commission fees are NOT the only thing that you must look for when you do your
research. Other factors also play significant roles in your decision such as account
minimums, trading tools, customer service, account security, and speed. There are also
many other factors that may play a role in your decision making.
After thorough research and personal experiences, here are my top 3 recommendations
for traders:
1. OptionsHouse.com
just recently switched from Zecco to Optionshouse as my online stock broker because it
offers the cheapest commission and the services seems to meet my trading requirements
and I am happy with their services so far.
Optionshouse Commissions
Optionshouse charges $3.95 per stock trade and it has the most competitive commissions
for options trading. The commission is 5 for $5 and $1/per contract over $5 or $8.50 flat
rate with +.15/contract for options.
Optionshouse offers 100 commission-free trades which is pretty cool and best of all it
offers $125 in transfer fee so I really got nothing to lose for swtiching to Optionshouse.
Virtual Trading Platform
Optionshouse offers a virtual trading platforum which is great for beginners who wants to
practice their skills before trading real stocks. Professional traders can also use the virtual
trading platform to backtest their trading methods or systems before investing with real
Page 107
money. Optionshouse’s virtual trading platform uses the same professional-level tools,
data and functionality as their live platform so it is easy for you to learn.
Optionshouse Trading Tools
Optionshouse offers a great set of tools to help traders find profitable trading
opportunities. Here are some of the tools that I find to be pretty useful.
1. Risk Viewer - is a flexible tool that can help you better understand and estimate the
potential risk in your portfolio.
2. Call Spread Investigator - scans the universe of equity options to find call spreads
with high theoretical returns.
3. Covered Call Investigator - scans the universe of equity options to find covered calls
Page 108
4. Put Spread Investigator - scans the universe of equity options to find put spreads
5. Streaming Charts & News – Streaming data is essential to making a well-informed
trade. OptionsHouse provides this data free of charge to funded accounts. Visualize the
market’s minute-by-minute movements in a customizable format.
6. Probability Calculator – The Probability Calculator enables you to enter price targets
for a given symbol and find the probability of an underlying symbol reaching these
targets on a future date.
7. Profit & Loss (P&L) Calculator - offers an educational analysis of complex option
strategies. With the P&L Calculator you can generate on-the-fly “what-if” scenarios
about potential trades.
8. Stock Screener – The Stock Screener can help identify interesting potential
investments based on your own ideas and sentiment. It gives you the ability to screen for
companies based on a range of criteria that you select.
Page 109
9. Volatility Charts – Vol (volatility) charts track changes in both implied and historic
volatility. OptionsHouse provides these charts to you as a means of analyzing volatility
trends.
Overall Review
So far I’m very statistify with the services and tools that Optionshouse offers and would
recommend Optionshouse for my friends and other traders.
Click here to visit Optionhouse
2. Zecco.com
Zecco is the online broker that I use and so far I am very satisfied with their service.
Well-known For:
- No minimum amount required to open an account.
- FREE online stock trading
- 10 free stock trades per month – No fees or commissions when you maintain a $25,000
balance or execute 25 trades each month. Otherwise, all trades are just $4.50, which is
one of the cheaper options available.
- The 25 trade qualifications include stocks, options, and ETF trades and the 10 free stock
trades count towards the 25 total. This is certainly great for swing traders.
- Low options trading costs: $4.50 + $0.50 per contract.
- No inactivity or maintenance fees. No fees to close account.
Page 110
- A variety amount of stock trading, research, and analysis tools.
- Zecco Forex- Trading Platform for foreign exchange traders which was rrecently
released.
- Excellent Customer Service
The only downside to Zecco is that in order to receive the 10 free stock trades per month,
you need a minimum of $25,000 in your trading account or you must execute at least 25
trades each month. You will not be eligible if you execute any amount below the 25
trades that is required. Anything beyond 25 trades is $4.50 per transaction and you are
not allowed to receive more than 10 free stock trades for that month even if you execute
over 25 trades. However, Zecco is still relatively cheap compared to many other online
stock brokers, charging only $4.50 per transaction, which is half of what TD Ameritrade
charges for their commission.
3. E*Trade.com
Well-known For:
- #1 online broker for 3 years straight.
- 100 free stock trades.
- Good customer support, trading tools and banking services.
Page 111
Trading Software
I use Dojispace and Marketclub to help me trade stocks.
Marketclub is a trading software that I use and which I strongly recommend for other
traders. It has some of the best trading tools available to traders, helping you to find
trending stocks. Rather than listing out all the features that this software offers, I would
like to emphasize on the ones I find the most useful, which helps us to pick trending
stocks.
1. Smart Scan Technology
MarketClub uses Smart Scan to scan the market and give recommendations on what
stocks to buy. Based on a pre-defined weighted trend formula for chart analysis, each
stock is analyzed on a scale from -100 (strong downtrend) to +100 (strong uptrend). I’ve
found many stocks in the past from MarketClub that went up over 50% in a matter of
days and I believe that I will find more of those stocks in the future. Markets that they
scanned include stock, foreign exchange, future, index and mutual funds. Also, you can
search stocks for intraday, yesterday, 3 days ago, a week ago and even a month back.
Thus, this is good for day trading, swing trading, and long term investing as well
Page 112
2. Chart Portfolio
The charting software includes over 230,000 symbols. It allows me to personalize my
portfolio for the symbols that I am following and create charts easily. Over 23 technical
indicators can be applied, including Bollinger Bands, Moving Averages, MACD,
Stochastic, Parabolis SAR and more. The charting platform can be downloaded and able
to browse data in almost any format, such as personal programs like spreadsheets.
3. Trade School
They offer audio (MP3) seminars and PDF workbooks, which will have you following
along with some of the most well known professional traders in the world like Linda
Raschke, Mark Cook, and Chuck LeBeau. These seminars cover various trading
techniques and information on foreign exchange, futures, day trading, money
management, stocks, psychology, indexes, options and more.
My Review
There are many more other features that MarketClub offers which are beneficial to me
such as trading alerts, and stock portfolios. MarketClub is suitable for any type of trader,
whether you are a short term swing trader or a longer term investor.
The system is not perfect. It sometimes gives buy signals a little late so you could miss a
portion of profits. Their charting platform is a little complicated which requires you to
spend a couple of hours to learn and take advantage of all the features.
Overall, I am very pleased with the software and encourage every trader to try out this
trading system. They offer a 30 day Risk-Free Trial.
Also, there are some pretty good stock training videos on the website that you can watch
for free.
If you want to see how I use MarketClub to pick stocks, click here to get my tips.
Page 113
Traders & Investors Forum
http://www.tradermenu.com
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Stock Forums for NYSE, NASDAQ, AMEX
Penny Stocks (Stocks under $2)
Forex Trading Strategies
Stock market for beginners
Free videos for traders and investors
Free trials, CD-Roms, and eBooks for traders and investors
Weekly stock picking challenge - win a Dojispace premier membership
Options
Futures and Commodities Trading
Exchange-Traded Funds (ETF)
Page 114
Recommended Readings
The Definitive Guide to Swing Trading Stocks Review
I’ve read a lot of trading books and e-books in the past few years, and frankly over half of
them were bad. Among the books that I found to be good, such as Trading For a Living,
High Probability Trading, and Profitable Candlestick Trading, I’ve also come across a
few e-books that were really helpful, especially “The Definitive Guide to Swing
Trading Stock“, written by Kevin Brown. Kevin has been swing trading for more than
15 years and has compiled his personal experiences in his e-book.
In his e-book, he reveals his own unique swing trading method that work for him, along
with other traders. Most importantly, he explains the reasons why these strategies work.
He also discusses other factors that are important for stock selection such as position size,
stop-loss strategy, profit taking, portfolio balancing, trading statistics, and many more.
Why is Swing Trading a Preferred Approach?
Swing trading offers the best, easiest, and most efficient method to make money in the
stock market. You don’t have to wait for long periods for your investments to move in
any anticipated direction because more profits would be made if you traded the up and
down swings vs. if you just bought and held the stock for a long period of time.
Swing trading is also more efficient than day trading because the cost of doing business is
significantly lower due to commissions not being generated on a daily basis. Hence,
swing trading stocks generates more money in less time and less cost than other trading
methods. The Definitive Guide to Swing Trading Stocks provides details on how you can
take optimize success in your swing trading career by learning how you can spot and take
advantage of the price swings in the stock market.
How Will It Help You?
Whether you are a stock market beginner or an expert, you will learn a lot new ideas from
this book. It helps you identify trending stocks so that you can maximize your portfolio
and reduce risk. He does not just provide stock trading entry methods like most authors,
but also includes details on how to use his favorite methods for the entire trading cycle.
Was it Worth my Money?
This E-book also comes with a
1. Trading calculator – a software program that calculates position size according to a
range of money management models and project profits based on earning methods.
2. Trade planner – documents each trade that you execute
Page 115
3. Trading simulator – generates multiple equity curves.
4. 8 other e-books
- Dynamic Analysis; 2 books in 1. A Basic Trading Course & Advanced Concepts & Tool
- 7 Habits of a Highly Successful Trader
- Trading the 10 O’clock Bulls
- The 1-2-3 Trading Signal
- The Penny Stock Trading System
- Ultimate Trading Systems
- Day Trading Mind
- The Pocket Book of Economic Indicators
- The E-Book of Technical Market Indicators
At a price that is now $97, this has to be the internet bargain of the year.
If you want to learn more about Kevin’s
swing trading strategy, you can visit his
swing trading site where you can
download some sample chapters.
Page 116
Free Trading Videos
You may Subscribe here for FREE to receive updates when new videos become available. An
email address is all it requires.
- What’s ahead for crude oil?
- Is gold stuck between a rock and a hard place
- The Perfect “R” Portfolio
- Crude Oil – The New World Currency
- Play (and NEVER miss) a short term pop
- Fibonacci -a tool that can make you rich.
- Properly trade the trend…with the Dow
- What is the Lipstick Indicator?
- A Classic Gold Chart Pattern Analyzed
- The #1 Account Killer: Emotion
- Q1 Trade Triangle Results
- Where should YOU be in the S&P 500?
- Gold, Silver, Platinum…W.T.F.?
- It’s Official Silly Season for Gold
- The #1 Reason Why Gold Collapsed
- 5 Ways to Tackle Gold Webinar
- This Reliable Formation In The S&P 500 Could Make You Money
- Intra-day charts for low risk entry points
- Charts that can help improve your trading
- Double Tops and Pivot Points explained!
- Cramer – “Fundamentals vs Technicals”
- How to spot winning trades in 2009
- Important Trend of three major markets
- How to find winning trades!
- Learn how to use the Fibonacci tool?
- Is the Dow in trouble?
- Is the NASDAQ Running Out of Steam?
- Crude Oil: Lower Levels Ahead?
- Has the dollar bottomed out?
- Is S&P 500 Getting Ready to Skyrocket or Collapse?
- Let’s Take a Fresh Look at Crude Oil
- Finding the trend in the foreign exchange markets
- Two Major Forces Collide in the Index Markets
- How long will Dow stay Bullish?
- As the Dow Goes, So Goes the Country
- A Major Market Leader Falters
- SP500 Update – Trend Change
- Has Gold Topped Out for the Year?
- Is Gold Taking a Breather?
- A Quick Update on the Crude Oil Market
Page 117
- Has the S&P broken final support?
- How Did a Dead Mathematician Nail Two Major Markets
Yesterday?
- One Indicator The Government Can’t Ignore
- Are You Laughing or Crying About Markets?
- The Decoupling of Gold
- Gold … game on!
- 5 ETFs That You Need to Look at Right Now
- Has the S&P Index Topped Out for the Year?
- Is the NASDAQ Now in Thin Air?
- An Alternative to Gold That You May Find
Interesting
- Research In Motion Ltd. (RIMM) Buyback
- Do You Understand How Divergences Work in the
Market?
- Straight Lines Lead Straight to Profits in Crude Oil
- Is a divergence building in Apple?
- Gold, It’s All Falling Into Place
- The Dollar Makes a Major Low in Q4 of 2011
- The Reason Why Gold Hasn’t Skyrocketed
- How to get rich slowly in forex.
- Two Major Technical Forces Are About to Collide in the S&P - Important US Dollar Index Video Update
500
- Nasdaq Market Update and Direction
- 17 Moneymaking Candlestick Formations You Can Use
Today
- The Achilles Heel of a Market
- Imagine not having access to any financial news
- Major signal for the Nasdaq
- What happened to the gold market?
- Has the ‘Gold Bull’ finally arrived?
- Why weekly charts are so important in the Forex
- Predicting the height of the S&P
- How you SHOULD have traded Goldman (New
- Revisiting and reanalyzing the USD/JPY(New Video)
- What’s the best strategy for USO?
- 100% Returns on a CANADIAN STOCK
- The cyclic pattern of gold!
- Pre Earnings Apple Analysis
- How To Spot Winning Futures
market
Video)
You may Subscribe here for FREE to receive updates when new videos become available. An
email address is all it requires.
Page 118
Tim Sykes penny millionaire program is now open
Great news: Tim Sykes penny millionaire program is officially open, and
you can check it out at this link: Get all the details here
I expect it's going to sell like crazy ?so if you want in on it, don't delay. Tim is saying he'll
probably have to limit membership because its new.
Click here for all the details
I'm not surprised the response has been so strong. After all, over the last 12 years, Tim has piled
up a track record that makes 99% of the investment gurus out there green with envy.
Remember, this guy turned $12,415 into $1.65 million before he even graduated from college -all by investing in microcaps.
The microcap hedge fund he ran from 2003 to 2006 -- was Barclay Rating's #1 ranked short bias
hedge fund all three years.
In 2007, he was named one of Trader Monthly's "Top 30 Traders under 30," when he was just
26.
He's been #1 out of 50,000+ traders on covestor.com for the past four years in a row by trading
microcaps exclusively.
And over the last three years, he's racked up returns of 197% in 2008... 141% in 2009... and 55%
in 2010.
Those are the kind of returns that can let you turn $25,000 into $277,360 in three years and
$3,077,152 in six!
In other words, this guy is the real deal. You owe it to yourself to at least check out his new
microcap millionaire program.
Get all the details here
P.S. One of the things I like the most about Tim Sykes is how transparent he is. He readily shares
his entire track record on the internet, and he talks about his past blunders as openly as his
successes. That's largely because he'' determined to build a
reputation based on his rock solid track record -- not on sales and marketing hype. And, as you
saw above, he's got one of the best track records around.
Bottom line: Tim Sykes can make you a lot of money -- and if you want to take your portfolio to
new profit heights in 2011, you simply must check out his new program:
Click here for all the details
Page 119

Technical Stock Screener www.dojispace.com - Swing

Transcription

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