One of which would be the Triangles, they are actually some of the most familiar chart patterns that are being used within the technical analysis  of today. There are three kinds of triangles which are the ascending triangle, descending triangle, and lastly the symmetrical triangle. While the forms of these triangles are notable of having greater significance in pointing the direction that the market would move and when it would break out of the triangle.

The shape of the triangle is somewhat significant but the direction is even more significant.  The ascending triangle is formed from the market making higher lows and the same level of highs.  The descending triangle is formed from lower highs and the same level of lows.  This type of pattern will usually be seen as a downward trend.  The last type, the symmetrical pattern is formed from lower highs and higher lows.

The main reason behind why these patterns are so infamous would be the ease that you would make out as well as the reliability of the market indicators. The technical stock traders should show caution in utilizing them in advance. However, the use of triangle patterns is not 100% accurate but rather it can be closer to 75% reliable. On the other hand, this is important for a trader to place a stop loss.

Related posts:

1. Patterns in Charts – Flags and Pennants
2. Patterns on a Chart
3. Patterns in Charts – Head and Shoulders

Asset allocation is the best strategy when diversifying a portfolio. With the asset allocation method you will find a diversified mixture of investments that will balance out your level of risk tolerance to the financial goals that you want to reach. This is important because not all asset classes perform the same from year to year. One great benefit of diversification using asset allocation is that investors will avoid the temptation of timing the market. When investors try and time the market they may only invest in those assets that are performing the best, or even worse they are investing only in the assets that are doing the worst thinking that over time the prices must go up. These mistakes can make you jump in and out of the market and therefore missing some time frames where the investments were increasing tremendously; so now you are paying the premium price to get back into those better performing assets.

If you are unsure of your diversification needs then you may try either speaking with a financial adviser or checking online with a reputable stock investment company. If you prefer the face to face conversation then a financial adviser would be the best route. This way you will get a personal look at who is controlling your money and if they accurately understand what you want to do with your investments. You will first be asked general questions regarding to age, income, withdrawals, retirement and investment experience. All of these factors contribute to correctly diversifying your portfolio. Not everyone has the same financial needs or desires; therefore each diversification process is unique and individual. There are many financial circumstances that will tell the adviser whether you are a conservative, moderate, or aggressive investor. If you are more conservative you will be places into investments with more bonds than stocks and other volatile investments that people trade with foreign currency trading software. If you are more moderate you will have an equal balance between all investments or anywhere around sixty percent stocks forty percent bonds etc. If you are an aggressive investor you will be given somewhere around eighty percent stocks twenty percent bonds so that there will be excessive potential for growth in the investment. Only serious investors should diversify aggressively, because although there is the potential for rapid growth there is also the potential for a great decline as well.

Online stock investment companies are also a great way to diversify your portfolio. Choose a reputable company such as Scott Trade, Forex, or TDAMERITRADE to make sure you are getting the quality for the money. They can also provide you with some stock software. These companies will go along with the same guidelines that the financial advisor would, so be sure to state your risk tolerance in the beginning. Some investors may find investing online a quicker and easier task that trying to track down and stay in touch with a financial advisor. You will automatically have up to date stock information and can buy, trade, or sell stocks as needed. Having the ability to diversify your portfolio is how millionaires and born and great sums of money are made. Give it a try and see for yourself why diversification is the key to successful investing.

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• Moving Average Bound – Often the price of a stock will get trapped between a short term moving average and a long term moving average.  There is often a dynamic between the traders with a short term mentality and those fundamentalist who are following the long term path of the stock, or whole economy.  The common choice is watching between the 50 day simple moving average and the 200 day simple moving average.  However, the ideal choice will vary from stock to stock or market to market.  You’ll have to experiment.
• Fibonacci Bound – Another set of support and resistance lines which were used as the basis for the Elliot Wave Theory are fibonacci ratios.  I’ll leave the details (and coolness) of the number sequences for it’s own writing, but the basics are you’ll look for is after a big move the ups and downs of the market start get smaller.  When the market is in this mindset look for retracements of 38%, 50% and 62% from the previous high from the previous hard low.  These waves will shrink smaller and smaller within the support lines until the next big break out.  It may be difficult to tell which way the breakout will happen but you can trade within the retracement range for awhile.
• Range Bound (Squeeze) – This is a chart players favorite, and they’ll name all kinds of shapes into it.  Essentially what you are looking for is a consistent support line (price or trend of price) and lower and lower highs.  When you see this you know (or at least have a better chance) that the stock price is going to continue to trade in that range until there is almost no difference between the highs and the lows and either the bulls or bears win out.

A trading stock market is no place for complacency.  You’ll have to stay on top of your trades more until a strong direction is developed again.

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Anyways back to the post – there is two main reasons where the MACD indicator may not be your best friend and I want you to at least know about them so you can think about it in your trading strategy. 

The first one is the whip-saw affect.  The whipsaw happens when the oscillator shows bounces back and forth from buy and sell quickly.  This generally happens when the stock price is held in a range.  The MACD indicator is a lagging indicator so most of the tiny move is over before the indicator tells you about it.  The best plan to deal with whip-sawing is have a secondary driver for your buy and sell decisions agree, know when your in a ranged price in which I would use the MACD indicator, and know how the MACD acts specific to the equity you are trading.  Your last option would be to step into your trade so if you get whipsawed out you only lose a smaller amount, but as the trade turns favorable you add more to your position.  Whipsawing can eat you up in commissions and small losses quickly and need to be considered.

The second major problem is you can’t compare one MACD oscillator of one equity to another.  It is simply a subtraction of two moving averages and therefore has know comparison between different charts.  If you want to do this you should look into the percentage price oscillator which I’ll hopefully write about tomorrow.

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First let’s look at a 50 – 50 win/loss trade strategy plan with at 20% average win and a 10% average loss of the portfolio.  With a 50/50 chance you have about a 1 in a 1000 chance of a 10 loss losing streak.  If you trade twice a day it is likely to happen every other year!  What would this do to your account?  After ten losses you’d be down about 66%.  This may be fine by the numbers because you know you’ll win in the long run, but could you handle it in the heat of the moment?  Also, if you have to live off a percentage of your trading account could you live with the year you’re down 66% to pay the bills?

Now say you have a 50 – 50 win loss where you average win is 5% and your average loss is 2%.  You’ll gain slower over time, but you’re draw down is only 20%.  The ride won’t be so bumpy and you can depend on your portfolio a little better at any given time.

The choice is yours – some like high probabitlity little wins, others perfer low losses low percentage wins that are large to carry the balance.  Figure out who you are and pick a strategy you can live with, even if you go 10, or even 20 losses in a row.

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Money for Stock Market – If you’re long term buy and holding than I recommend you put into your IRA or 401K first.  If you’re using you’re 401k don’t worry about the minimum amount because you’re usually paying on the percent of assets you have invested.  If you’re investing in your own account or an IRA than I primarily would watch out for commissions.  I don’t like to pay more than 1% on my investments in buying trade commissions. 

% of investments = commission / total purchase price * 100

I pay $7 per trade so in my example 1 = $7 / total purchase price * 100

or (remember your algebra?) total purchase price = $7 * 100 / 1 = $700

Therefore, unless I have $700 I’ll wait to invest because I don’t want to give too much away to the brokerage.

Money Stock Trading- If you are actively trading your account you have to also watch for the draw down on your accounts.  The only way to know this is to test, test, test.  Say, your trading strategy wins 50% of the time.  This is not that unusual, many trade systems have lower win percentages than this.  With a 50% win-loss ratio you can expect one string in every 1000 trades to be 10 losses in a row.  Can your portfolio handle 10 losses in a row?  If on average you lose 10% on a trade and you’re leverage 2:1 you’ve lost 20% on the trade.  If you trade 30% of your account on every trade then you’ve lost 6% of your account on the trade.  Do this 10 times in a row and your down 46% from your high.  Can your system handle this every trade?  Can your emotions?  We didn’t even factor in commission costs yet. 

You can tweak for your own system, but a good general rule of thumb is not to lose more than 2% of your account on any trade plus you still don’t want to burn more than 1- 2% of your trade on commissions. 

So if you have $10,000 dollars and your max loss is 5% per trade and you leverage 2:1 You can trade about 17% of your portfolio per trade ($1700) where the commission will eat 0.8% (assuming $14 round trip commission). 

Whoa, I know lots of thinking, but if you want to venture into trading if you have to get a handle on your money management before you can make money stock market trading.

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What is the Penny Stock Market?

When I speak of penny stocks or penny shares I’m referring to any stock traded outside the major exchanges like the NASDAQ, NYSE, AMEX or other large national exchanges.  Some of these small exchanges often referred to as “over the counter” are pink sheets and OTCBB.  These stocks generally have low, or at least sporadic, volume; their market capitalization is small – often less than $100 million; or  their per share prices is less than $1.

How is Trading in Penny Shares Different than Regular Stocks?

The biggest differences the trader needs to know are:

• Larger Spread - The bid/ask price on penny stocks tend to be a much larger percentage than on regular stocks. This is due to the low volume and minimum variation between prices. 5 cents of a $10 stock is only 0.5% versus 5% of a $1 stock.
• More Easily Manipulated – You may have worked a good system out, unfortunately unscrupulous people can more easily manipulated a small cap stock. With low volume a small surge of money can change the price quickly without reason – or even clever marketing schemes.
• More Volatility – The above reasons create a wilder ride that may make it difficult to find a method that is consistent. It also just may be too emotionally hard to maintain your system.

For the investor the lack of media coverage and government regulation makes it difficult to trust information you come across. Without meaningful information (inside knowledge) I would strongly suggest fundamental investors to stay clear of the penny stock market.

For the trader who still thinks his millions are in the penny stock market I say “Go for it!” However, please spend your time in the trenches learning on regular stocks, options, and commodities first. Feel free to paper trade the pink sheets on the side, but the knowledge you’ll gain from the regular markets first will greatly increase your chance at the 100% per week system! Don’t feel tempted to jump on one of those purchased systems unless you designed it, and definitely don’t take your chances with a random email or forum posting.

The penny stocks are the wild west and I just want you to have your six shooter ready before you venture out.

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1. Both patterns start with a strong volume move.  This creates the flagpole.  If it’s not on higher than average volume than it lowers your chances the pattern will hold true.
2. Flags form when a short term change of direction occurs on lower volume.  The highs and lows of the new price channel run parallel to each other.
3. Pennants form when the prices gets locked on low volume with the lows getting higher and the highs getting lower until the two meet.
4. The price then breaks out on volume again usually with a similar slope to the flagpole.

The psychology is after a big move some people will begin to take profits.  As the true price gets settled out without any real price action the volume slowly dies.  After the volume dies and the price hasn’t fallen hard a new confidence in the original direction is born and the interest moves the low volume stock more easily and the momentum brings in more interest.

Remember to verify your chart pattern against some other indicator that isn’t related to the pattern you are looking at.  When non correlated indications align you improve your odds of a succesful trade.

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1. Patterns in Charts – Head and Shoulders
2. Using Triangle Patterns For Technical Analysis
3. Patterns in Charts – Double Bottoms

What you want to see in your head and shoulder pattern is a higher volume on the left shoulder rise and the head rise with lower volume on the right shoulder.  The neckline is the low of the left shoulder connected to the low of the right shoulder.  You also want to verify the low of the right shoulder is lower then the high of the left shoulder.  If this isn’t true it’s often just a pull back before continuing in the same stock price direction. 

Once the price has fallen below the neckline with increasing volume on the down side of the right shoulder the chart pattern is confirmed.  Use your choice of independent verification to verify your price reversal.

There is an inverted head and shoulders chart pattern indicating a change from downward pricing to upward momentum though I find this pattern less reliable in this direction.

Head and Shoulder patterns can also be found in oscillators like your MACD.

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The price has to touch the same low twice (usually within 3%) with a significant retracement in between.  If the price isn’t exactly the same make sure the price isn’t say 4% lower than the first bottom, lean to the high side for trend reversals.  Staggering lower prices may be a confirmation of a trend continuation.  Also, the two bottoms can not be too close together in time or else it’s just normal volatility.  Unfortunately the exact numbers for retracement and time frame vary from stock equities, commodities, options and within each sector.  So working out these details for your trade option of choice can give you an edge. 

The best test for the double bottom pattern is a price breakout on increased volume after the second bottom higher than the in between retracement.  Huh?  I think I just confused myself, it must be picture time!

There I think that should help clear that up.  The line is the point of the retracement.  If the price moves above this line AFTER the second bottom with a “significant” time frame between the two bottoms you have a very high chance of a price reversal.  I’d say in the 80% range.

It’s good to remember what the chart pattern actually represents – people making trades.  As a price gets lower some generally people think it’s worth less that’s what makes the price go down.  At some point a group of people will now think the stock is a deal and buy in.  Some of those people will sell on the retracement or “take profits” and the sellers who wish they had sold earlier will use that as an opportunity to sell again.  When the price reverses again at the same point it indicates to the market there is a reason why the entity being traded is worth buying at the point and a trend reversal can begin.

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