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.Candlestick ChartsCandlestick charts are popular with many traders because they show so much information, including the psychology of the market at any given time.Many traders believe that understanding the emotionsof the mar-ket is helpful in determining future trends.(A 17th-century rice broker in Japan created the candlestick chart to help him trade rice.As it turned out, his charting methods enabled him to make afortune in the Japanese rice markets.)Figure 11-3 is an example of a Candlestick chart.As you can see, candlestick charts use two-dimensional bodies to show the range between the opening and closing prices of a stock during any period.Thehigh and low prices are plotted as single lines and are referred to as wicks (or shadows).The price range between the open and the close is plotted as a narrow rectangle and is referred to as the body.If thestock price ended the day above the opening price, the body of the rectangle is white or clear.If the stock price ended the day below the opening price, the body is black or solid.Trend Linesfile:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (49 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmYou could say that one of the main purposes of charting is to spot a trend in its early stages.A trend is simply the direction in which a stock is moving over a specific period.A stock usually doesn t movein a straight line, which is why spotting the trend direction is so important.There are actually three types of trends: uptrend, downtrend, and sideways trend.The goal is to participate in uptrends while avoiding downtrends.A saying that technicians repeat is, The trend is yourfriend (until it ends). The idea is to ride a trend for as long as possible until it runs out of steam.MillionsDowntrendA stock that is in a downtrend is moving lower and has been for a while.To create a downtrend, draw a line along the top of the chart in such a way that you connect at least two points.If a stock is in adown-trend with high volume (meaning that a lot of people are selling), the stock could be in trouble.Figure 11-4 shows an example of a stock in a downtrend.If a stock is in a downtrend and has been for a while, you have to be pretty brave to buy the stock.A few years ago, people used to buy stocks when they were in a downtrend because they assumed that thetrend was only temporary.This aggressive strategy actually worked until the 2000 bear market arrived.At that point, instead of there being a temporary dip, most stocks kept going down, wiping out theaccounts of many investors.No matter what you think of technical analysis, it is a mistake to ignore what you see on a stock chart.Figure 11-5 is a weekly chart of the Dow Jones Industrial Average.As you can see, although the index didn t move up in a straight line, the trend is still up.This is obviously a very positive sign if you area buyer.The challenge, of course, is determining how long the uptrend will continue.Given this chart, since there are signs that the uptrendA stock that is moving higher and has been for a while is in an uptrend.To create an uptrend, draw a line along the bottom of the chart in such a way that you connect at least two points.Many short-termtraders like to buy stocks that are trending higher.(Instead of buying low and sell-ing high, traders might buy high and sell higher.) Just as in a down-trend, traders will look at volume to help determinewhether the stock is a good buy.After all, if a stock is moving higher on increasing vol-ume, a lot of people are buying it.Figure 11-5 shows a stock index inMillionsfile:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (50 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmUptrendan uptrend.has ended at $89, short-term traders may sell their long positions or sell short.file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (51 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmSideways TrendThere is really nothing more frustrating than watching a stock go up and down but end up in the same place where it began.This is what we call a sideways trend.A stock in a sideways trend is moving upand down like a bouncing ball but is so disorganized that it s hard to know which direction it s going.If you are a trader, you generally avoid get-ting involved with stocks that are trading sideways.By theway, the vol-ume in a sideways pattern is often very low.Figure 11-6 shows a stock in a sideways trend.Although trading stocks that are in a sideways trend is difficult, sometimes the sweetest profits come when a stock that is trading sideways for a while (traders will say that the stock is consolidating)suddenly breaks violently up or down.The difficult part, however, is figuring out when the sideways pattern will finally end.It would be dangerous for a short-term trader to buy the stock in Figure 11-6In Figure 11-7, the index QQQ was clearly in a downtrend in early September.By the end of the month, however, it had suddenly reversed direction, and it continued to move higher.A short-term traderisn t especially concerned about why the stock reversed direction only that it did.Identifying this trend reversal and buying it during the early stages could be very profitable for a trader.In this case,holding theOne of the challenges of technical analysis is to determine when the current stock trend will run out of steam and reverse direction.In fact, technicians are constantly on the lookout for the breaking ofthe trend line, which signifies a trend reversal.Figure 11-7 gives an example ofbecause it is so unpredictable.It could easily move in either direction.MillionsTrend Reversala stock index that has reversed direction.Millionsfile:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (52 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmstock for a month or longer (until there was another trend reversal) would have brought the most profits.The challenge is to identify a trend reversal before it happens.If you do identify a trend reversal, it s essential you use other technical indicators to confirm that it s real and not just a temporary reversal.Also, just because a trend has continued for a long time doesn t mean that it s in any danger of a reversal.Long trend lines are very common.Support and ResistanceSupport: Buyers Win the BattleIf you understand support and resistance, you will have a better idea of when to buy or sell a stock.Support and resistance keep appearing on stock charts no matter what method of technical analysis youuse.Ifidentify support and resistance on a stock chart.you want to be a successful trader, you will need to understand how toWhen a stock price is falling, there will be certain places on the way down when buyers will step in and prevent the stock from falling further.Support is the price level at which a stock s price has stoppedfalling and either is moving sideways or has reversed direction [ Pobierz całość w formacie PDF ]
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.Candlestick ChartsCandlestick charts are popular with many traders because they show so much information, including the psychology of the market at any given time.Many traders believe that understanding the emotionsof the mar-ket is helpful in determining future trends.(A 17th-century rice broker in Japan created the candlestick chart to help him trade rice.As it turned out, his charting methods enabled him to make afortune in the Japanese rice markets.)Figure 11-3 is an example of a Candlestick chart.As you can see, candlestick charts use two-dimensional bodies to show the range between the opening and closing prices of a stock during any period.Thehigh and low prices are plotted as single lines and are referred to as wicks (or shadows).The price range between the open and the close is plotted as a narrow rectangle and is referred to as the body.If thestock price ended the day above the opening price, the body of the rectangle is white or clear.If the stock price ended the day below the opening price, the body is black or solid.Trend Linesfile:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (49 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmYou could say that one of the main purposes of charting is to spot a trend in its early stages.A trend is simply the direction in which a stock is moving over a specific period.A stock usually doesn t movein a straight line, which is why spotting the trend direction is so important.There are actually three types of trends: uptrend, downtrend, and sideways trend.The goal is to participate in uptrends while avoiding downtrends.A saying that technicians repeat is, The trend is yourfriend (until it ends). The idea is to ride a trend for as long as possible until it runs out of steam.MillionsDowntrendA stock that is in a downtrend is moving lower and has been for a while.To create a downtrend, draw a line along the top of the chart in such a way that you connect at least two points.If a stock is in adown-trend with high volume (meaning that a lot of people are selling), the stock could be in trouble.Figure 11-4 shows an example of a stock in a downtrend.If a stock is in a downtrend and has been for a while, you have to be pretty brave to buy the stock.A few years ago, people used to buy stocks when they were in a downtrend because they assumed that thetrend was only temporary.This aggressive strategy actually worked until the 2000 bear market arrived.At that point, instead of there being a temporary dip, most stocks kept going down, wiping out theaccounts of many investors.No matter what you think of technical analysis, it is a mistake to ignore what you see on a stock chart.Figure 11-5 is a weekly chart of the Dow Jones Industrial Average.As you can see, although the index didn t move up in a straight line, the trend is still up.This is obviously a very positive sign if you area buyer.The challenge, of course, is determining how long the uptrend will continue.Given this chart, since there are signs that the uptrendA stock that is moving higher and has been for a while is in an uptrend.To create an uptrend, draw a line along the bottom of the chart in such a way that you connect at least two points.Many short-termtraders like to buy stocks that are trending higher.(Instead of buying low and sell-ing high, traders might buy high and sell higher.) Just as in a down-trend, traders will look at volume to help determinewhether the stock is a good buy.After all, if a stock is moving higher on increasing vol-ume, a lot of people are buying it.Figure 11-5 shows a stock index inMillionsfile:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (50 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmUptrendan uptrend.has ended at $89, short-term traders may sell their long positions or sell short.file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (51 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmSideways TrendThere is really nothing more frustrating than watching a stock go up and down but end up in the same place where it began.This is what we call a sideways trend.A stock in a sideways trend is moving upand down like a bouncing ball but is so disorganized that it s hard to know which direction it s going.If you are a trader, you generally avoid get-ting involved with stocks that are trading sideways.By theway, the vol-ume in a sideways pattern is often very low.Figure 11-6 shows a stock in a sideways trend.Although trading stocks that are in a sideways trend is difficult, sometimes the sweetest profits come when a stock that is trading sideways for a while (traders will say that the stock is consolidating)suddenly breaks violently up or down.The difficult part, however, is figuring out when the sideways pattern will finally end.It would be dangerous for a short-term trader to buy the stock in Figure 11-6In Figure 11-7, the index QQQ was clearly in a downtrend in early September.By the end of the month, however, it had suddenly reversed direction, and it continued to move higher.A short-term traderisn t especially concerned about why the stock reversed direction only that it did.Identifying this trend reversal and buying it during the early stages could be very profitable for a trader.In this case,holding theOne of the challenges of technical analysis is to determine when the current stock trend will run out of steam and reverse direction.In fact, technicians are constantly on the lookout for the breaking ofthe trend line, which signifies a trend reversal.Figure 11-7 gives an example ofbecause it is so unpredictable.It could easily move in either direction.MillionsTrend Reversala stock index that has reversed direction.Millionsfile:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htm (52 of 91)10/29/2006 2:46:25 PM file:///D|/Ebooks/Business/Stock/Understandingstocks/Understanding%20Stocks.htmstock for a month or longer (until there was another trend reversal) would have brought the most profits.The challenge is to identify a trend reversal before it happens.If you do identify a trend reversal, it s essential you use other technical indicators to confirm that it s real and not just a temporary reversal.Also, just because a trend has continued for a long time doesn t mean that it s in any danger of a reversal.Long trend lines are very common.Support and ResistanceSupport: Buyers Win the BattleIf you understand support and resistance, you will have a better idea of when to buy or sell a stock.Support and resistance keep appearing on stock charts no matter what method of technical analysis youuse.Ifidentify support and resistance on a stock chart.you want to be a successful trader, you will need to understand how toWhen a stock price is falling, there will be certain places on the way down when buyers will step in and prevent the stock from falling further.Support is the price level at which a stock s price has stoppedfalling and either is moving sideways or has reversed direction [ Pobierz całość w formacie PDF ]