STOCK MARKET FOR BEGINNER | Stock & Option Guide

As you know from my Three Rules page, setting stops is really important to me. But people ask me all the time “where do I set my stop?”

The unsatisfying but truthful answer is: it depends on the chart. Simply stated, you should set a stop at the price point which, if reached, indicates that your conclusion about a chart’s projected price movement was wrong. Putting it a different price, if, at a certain price, your chart pattern is invalidated, it’s time to get out at once.

I tend to trade bearishly, so these will be short positions, but you can just mentally flip the chart upside down to get the same idea. But here are a few examples:

The chart below shows an instance – which is quite common – where you need to decide how conservative your stop is going to be. The red circled price indicates the more conservative stop, since at the first sign of trouble (specifically, the series of lower highs being broken) you get out of the position. A looser stop – and thus one which exposes you to larger losses – is circled in green. That shows the lifetime high on the stock, plus a double stop. A price above this level would obviously be very bad for a bear in this position (keep in mind, a bearish position is assumed for all these examples).

The next chart is similar in the respect that the red circle shows the tighter, more conservative stop, whereas the green shows the looser stop. In this case, I would be strongly inclined to set the stop price in red, since the basis for the trade is very plainly the series of lower lows.

Sometimes the stop price is quite obvious, such as with a horizontal line. If resistance is broken (for bearish positions) or support is broken (for bullish positions), it’s time to get out. In the example below, simply by mousing over the horizontal line, ProphetCharts shows the precise dollar amount which, if exceeded, indicates it’s time to exit the short position.

If you take a bearish position on a stock which is otherwise quite a bullish pattern (like in the chart below, which frankly has no bearish configuration to it), setting the stop at the high price is the only way to go. It’s quite likely that a new high price will be made, and if it is, you don’t want to sit around to see just how high this price gets.

Trades based on Fibonacci patterns are, similar to horizontal lines, easy for stop-setting. In this case, you want to set the stop at the price just above the next Fibonacci level above (or, for bullish positions, the next one below). So in this example, the next line up is at $157.60, so any price above this level indicates an exit signal.

One final example is with a broken trendline. Here, the red circle shows a price level that would be discouraging for a bearish position, since it would indicate enough strength on the stock’s part to muscle its way to the other side of that trendline. Simply stated, if the basis for the trade (in this instance, a broken trendline) is negated, then the likelihood of a profitable trade is diminished too.

So the seeming cop-out of “it depends on the chart” is, as you can see, quite true. But I hope this gives you the general idea.

[Powered by Prophet Gutenberg]

Articles, Basic Knowledge Miscellaneous, stock, Technical Analysis

If you trade for a while, you will see a lot of rules lists. These are guidelines put together by individuals so they can attempt to, bluntly stated, avoid screwing up like they have in the past.

There is a lot of overlap among rule lists, and most of these lists aren’t worth much, particularly in cases where they comprise dozens of different rules. On reading these, one can conclude the writer of the list has made a glittering variety of errors that he believes he can circumvent if only he has a lengthy-enough document to follow.

I’ve got my own list, but it is short and sweet. Like all rules writers, I ignore some of them from time to time, and virtually every time I do, I regret it.

It has cost me a huge amount of money to formulate these “trading laws”, and I offer them up – as I do everything on this blog – for free, with the hope that it will help some of you. If one day I can follow these rules absolutely consistently, I’ll be a much richer trader for it. Behold:

Opening Bell - no new positions should be initiated in the first 30 minutes of any trading session. There are an astonishing number of pre-opening orders, and in my experience, I have found it better to let all the open bell excitement die away before getting into any new positions.

Advantage - only enter into a position which provides you a significant advantage of reward versus risk.

Sizing - position sizing must be consistent among instrument types irrespective of anticipated opportunity.

Stops - a stop price must be in place at all times for all positions.

Freshness - positions should be regularly updated for the sake of updated stops.

Exits - the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes.

Emotional Awareness - use emotional awareness to your advantage, understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions. My state of mind, when trading, will be carefree and fearless, and my total focus will be technical considerations and I will only trade what I see.

Following these rules consistently isn’t easy. But every year I get a little better at it, and every year I do better in my trading. I urge you to consider making these rules an important part of your trading life.

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I think something like this:

What I’ve scribbled out above is an S&P which free-falls again to March’s lows (plus or minus a little bit). How would the different camps react to this?

• The bears would, of course, be delighted at first, but here’s the clincher – - I think the bears have been so battered for the past 7 weeks, that the moment the S&P gets anywhere close to the 780-800 range, they’re going to close out everything and engage in a big group hug. 780 is the number everyone is talking about. If the market simply keeps falling, the bears are going to be furious (and feel mighty cheated), since the easy and obvious take-profits point didn’t matter much. My point is that the bears will leave almost all the potential profits on the table.
• The bulls would be equally furious, too, because all their easy profits from the past 7 weeks – - - especially from the high-flying momentum stocks - – would go up in smoke. Their relief would come with a double-bottom, but frankly I think newer bulls would feel so betrayed by the market (again) that they would not be as enthusiastic to re-enter.

[by Tim Knight]

Articles, Technical Analysis option, stock, Technical Analysis

New High for AD Line

Articles, Recommendation, Technical Analysis stock, Technical Analysis

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter “verbal” bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist’s job is to match buy and sell orders using open outcry. 

If a spread exists, no trade immediately takes place–in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the “tape” and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called “program trading”.

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell ‘their’ stock. 
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. 

Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the ‘active’ exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant[citation needed].

Now that computers have eliminated the need for trading floors like the Big Board’s, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed].

Basic Knowledge option, stock