Category: Technical Analysis


Trading Stock Market – Ups and Downs

Filed Under: Technical Analysis by Bill — Comments Off
July 15, 2009

A trading stock market or a range bound market is when the price of the market (or individual stock) is trapped between two prices or a trend of prices.  This happens when there is lots of reasons for both the bears and the bulls to be right in their assumptions.  There a couple of fairly well known clues to fiding trading ranges and trying to take advantage of them.

  • 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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MACD Indicator Issues

Filed Under: Technical Analysis by Bill — 1 Comment
January 14, 2009

I talked about MACD Indicators in a previous post highlighting the basics of stock trading with the MACD.  I’ve just about wrapped up a MACD excel spread sheet which lets you play with different moving average scenarios to see what fits your style on a specific stock or index.  If anyone is interested in this MACD excel sheet just give an email at bspohnholtz {AT} gmail dot com or leave a comment below. 

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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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Trading Money Management

Filed Under: Forex, Investment Strategy, Technical Analysis by Bill — 1 Comment
January 12, 2009

This is a bit of a continuation from yesterday’s conversation on how much money is needed to invest or trade.  Today I want to talk about trading money management.  First, unless you can come up with a 100% win ratio trade strategy you’ll have to have a trading money management plan.  First you’ll have to look at your win to loss ratio and your average win compared to your average loss.

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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Want to Make Money Stock Market Trading? Then You Need Money to Stock Market Trade

Filed Under: Forex, Fundamental, Investment Strategy, Technical Analysis by Bill — 3 Comments
January 11, 2009

Often you’ll hear how you have to start investing and there is no better day to invest than today.  I tend to think that’s a pretty broad statement and I can’t possibly know every one’s situation.  Today I want to talk about just how much money is required so trading commissions and spreads don’t eat up your hard earned dollars.

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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