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Candlestick chart patterns - Bullish Engulfing

As you can see on a picture above, bullish engulfing occurs when one candle surrounds or engulfs the previous one after a downtrend. The bullish engulfing represents a reversal of supply and demand. At first there was a downtrend, the stock, commodity or index has been selling off. But suddenly strong buying interest comes in and turns the market around. The larger the bullish candle in relationship with previous candles, the more significant the possible reversal.


Candlestick signals - The Doji

The doji is candlestick chart pattern consisting of one candle line. The ideal doji occurs when in a trading session the opening and closing prices are the same, but this rule is sometimes relative and you can consider candle line as a doji even when the opening and closing prices are few points or ticks away from each other. For example this is especially true in the forex market due to slightly different data from each platform. In charting software it looks like a cross.



Similarly like spinning top, the doji indicates market in complete balance and indecision between supply and demand. When the doji appears after an uptrend, it can signal market reversal. Probability of this signal is much higher when it's at a level of prior resistance. Altough a doji's appearance in a rally might signal a market top, but in a downtrend it may not signal a bottom, because indecision in an oversold market can be a staid place for a continuing downtrend.

The doji has it's power when it is alone or even greater when it's included in a two or three candle pattern. There are also more types of doji, depending on the position of the open and close price in candle line, but the main interpretation is similar.

Candlestick chart patterns - Spinning tops

From start, I will focus on single candle lines. Here belong also spinning tops. Some candle patterns consist of more candle lines, but we can get valuable information also from single candle line. Candlesticks help us visualize market psychology. They portray the battle between the bulls and bears. The essence of market move is in real body. Real body is part of candle line between opening and closing. And spinning top is term for a candle with a small real body. And it's not important if it's black or white (or red or green). Spinning top can but doesn't have to have lower or upper shadow. Only important factor is a small real body. One picture is worth more than tousand words:



Spinning top shows that neither the bulls or bears have dominant power. The main interpretation is that the market is in confusion and indecision. Spinning tops are also parts of many candle patterns that indicate market reversal.

Option Greeks-Introduction

If you have ever traded options, maybe this scenario is familiar to you: you bought a call when you thought a stock was going to go up but that call lose value when the stock did go up and you didn't know why? It is because the price of option is not affected only by change in price of underlying asset but also by the effects of time and volatility. Many of us can relate to this situation. The problem here is that an options price relies on more than one factor. With stock, you always make money when stock goes in desired direction, so this is one from the most important differences between stock and option.


The Greeks are the name given to a group of statistical references that describe and quantify risks to the variables that can effect the price of options. They describe how the price of options will change in different scenarios. I think that to know what risk you take is very important with every investment you make, it will help with making decisions whether or not to choose any given option.


Option Greeks are delta, theta, gamma, rho, vega, and omega. Each one of them measures some aspect of an option position's market risk-reward profile. This definition is true whether the position is a simple one involving one or perhaps a few different options or a more complicated position. I will explain the most important option Greeks for option trading later in my posts.

Introduction to Candlestick Charts

What are candlestick charts? If you know something more about technical analysis, you probably know, that candlestick chart is type of chart used to describe price movement of an equity over time. In technical analysis in western world are more popular classic bar-charts than candlestick charts. Differences between these two I will show and describe later. One from reasons that candlesticks are not so popular between traders in western world is in my opinion that candlestick charts were introduced to them only roughly 20 years ago.

Candlestick charts have been developed in the 18th century by Japanese rice traders, that were trying to predict future prices of rice. Charts illustrated price movement based on open, high, low, and close market prices over a certain time period. You can see differences between bar charts and candlestick charts in the pictures bellow.







One from the main points of using candlestick charts is that they have their own chart patterns, that would be not so obvious in other types of charts. These chart patterns are tested by centuries of their using, what I think is enough solid proof of credibility of this method. The amount of data displayed in candlesticks is exactly the same as in bar charts, but the difference is in visual presentation and interpretation. Candlestick charts can be used for all trading time frames and with all investment vehicles like stocks, forex, commodities or options. Repeating patterns are not 100 percent accurate, but for profitable trading they don't have to be and many fortunes have been made by using this methodology.

The Stock Market and Financial Crises that We Live In

As you probably realize, we live in financial times, like one advertisement says. We realize this now more than ever, mainly because of recent news in the stock market and financial industry. Even big banks with long history like Lehman Brothers have serious financial problems and the whole financial sector has bad times.

Stock Market has record drops since 9/11 and majority of people are scared from this events and are afraid about their investments, retirement and future. I saw the biggest rush in the stock market in my trading career. For majority of people are events like these disquieting. However the best traders and investors know how to make money in every market, regardless if market goes up or down or how fast it goes. In this market, few days ago I had my the most profitable trade ever. I was profiting from stock, that price was going down. I used put option, that enables me to profit even if the price of underlying stock goes down.

So what's my solution for traders or investors that want to survive or benefit in every market? If you want to prosper and benefit from situations like this you must have right knowledge that will give you advantage. The right knowledge is the key that makes risk much smaller.

How Does the Stock Market Work?

In order to properly answer the question how does the the stock market work, first I have to explain what is the stock market. The stock market is a place where stocks are traded. And as for every market, there must be buyers and sellers. Buyers represent demand and sellers represent supply.

The price of any stock is determined by relationship between supply and demand, by market participants willing to buy or sell at a certain price. If demand exceeds supply, price should rise. If supply exceeds demand, price should fall. This economic principle applies to every market.

From this results that for a deeper understanding of what makes the price of a stock change, it is necessary to know what influences supply and demand. There is a lot of factors that determine price movement and their effect is relative because only buyers and sellers know why they bought or sold any given stock. Between these factors belongs news about company, industry or the whole economy. If good news comes out on a company, the price and demand for the stock mostly go up. When bad news occurs, the price and demand mostly go down. Next factor is information about company's performance like sales growth, earnings, production and so on, next element is the market psychology, what is topic itself, and generally there is countless amount of other factors that influence opinions of market participants.

Nowadays these stock trades are very organized and performed electronically by computers in stock exchanges like New York Stock Exchange (NYSE). Stock trading is very popular and everybody with little capital and phone or computer with internet connection can be part of the stock market.

Example of One from My Last Option Trades - Call Option on ESI

In this post I want to show you example of one from my last actual option trades with call option on stock ITT Educational Services(ESI) with exact option name ESI GP. I don't want go into more depth, but only to show you how can option trade look like. In the picture below you can see chart of ESI(as underlying stock of this option) with enter and exit of the trade and other circumstances.




With use of technical analysis I saw chart pattern on the chart of ESI called channel breakout. Very important factor was also that volume was much higher in comparison with other days. So I decided to buy call option ESI GP with strike price $80, expiring July 19, 2008 for $2.70 per share, what is $270 for 1 option contract. Price went up and after few days it created line of resistance and did not go up so I decided exit from the trade and take my profit. I sold this option for $3.80 what is 40% profit. This is one example how can option trade look like.

Technical Analysis of Stocks - part 2

Technical analysis is based on principle that history repeats itself. Behind this principle is human psychology. Charts reflect psychology of the market. Chart patterns have been studied and categorized over one hundred years. Some of these patterns have worked well in the past, so it is assumed that they will continue to work well in the future. These are based on study of human psychology, which tends not to change.

Next very important premise of technical analysis is that everything what can influence the price like fundamental, psychological, political, or other factor is actually reflected in the price of that market. And how is the price created? From technical point of view price movements reflect relation between supply and demand. If demand exceeds supply, price should rise. If supply exceeds demand, price should fall. This is basic economic principle. Behind demand are buyers and behind supply are sellers. Behavior of buyers and sellers is what drives the market. These willing buyers and sellers come to an agreement of price but are in disagreement as to value.

From all this results that analyzing price and it's history is indirect analyzing of fundamental and other factors that influence market behavior. Although this argument is quite controversial, most of technicians would agree. The question of this post is - what is all this analyzing for? The purpose of studying price charts and supporting technical indicators is to show trader which way is the market most likely to go. This last sentence is very important and notice that technical analysis is not for predicting future actions as a sure thing. Technical analysis uses term probability. When graphical picture of change of price in chart is in some pattern there is some probability that price will go in certain direction. This claim is based on research and analyzing price movements in the past.

Oftentimes happens that some traders who are new to technical analysis are little disappointed when some of their trades doesn't go well even though according to the chart analysis it should. Well, it's not magic. And it doesn't have to be. Technical analysis helps many traders and institutional investors to make very profitable trades, so
it doesn't have to prove it's value.

One of the main objectives of chart analysis is to determine the trend of prices. The key concept and discovery in technical analysis is that prices move in trends. A trend represents a consistent change in prices in some direction. The most of trading techniques are based on determining trends and trading in the direction of those trends.

One of the most interesting facts about technical analysis is it's adaptability. First is the adaptability to different time dimensions. Chart analysis is used in day trading and also in longer term investing. Next is the adaptability to various trading mediums. Charts are analyzed in trading with stocks, commodities, foreign currencies, and so on. This is because the same principles are so widely applicable. This is a big advantage against fundamental analysis where traders are more specialized.

The bottom line is that the same data like open, high, low, and closing price are available to all traders, but how they analyze, interpret, and act on the information available is one from factors that differentiate one trader from others.

Technical Analysis of Stocks

For some of you who don't know what is technical analysis and how it works, I will try to explain it to you what it is about. Technical analysis is trading and investing tool that involves the study of past share prices or indices and is helpful in showing you when to enter and exit the trade. For technical analysis are needed charts. One example of chart you can see in the picture below. It's chart of Apple.




The dedicated technician analyses the charts and indicators to forecast future share price and index movements. There are traders whose trade decisions are based strictly on price and volume movement and there are traders who also use other tools like fundamental analysis to support their decisions and I belong to this second group. But technical analysis is essential for my trading.

In future posts I will go into more depth and I will write about charts, indicators, chart patterns, etc.

Paper trading - ground school for traders

What is paper trading? It's trading without real money - trading only on the paper. And without money means without real risk of losing real money. As pilots are learning to fly first on the simulator so should do traders (to simulate trade). On simulators pilots don't risk loss of their life or destroying plane (and traders losing money). But they are improving their skills. I hope that this analogy can help you better understand reasons and benefits of paper trading.


I think and recommend that before putting real money into real trades beginners should first test their skills on the paper. With paper trading you can test your strategy without risking losing money. The factor that you are not using real money can have big impact on trading psychology - you are not under preasure of losing money and you can make more rational decisions without being influenced by emotions. By the time your trading skills are getting better and you gain confidence in your trading actions. When your skills will be on desired level you can then start real trading with real money.


As a good example of trading or investing simulator in my opinion I would like to recommend Investopedia Simulator that I personally use. It offers a lot of features, real data and a lot of informations mainly about stocks.


As I said before with paper trading you can trade without risk of losing money and still you can gain skills and experience. That's the main point of paper trading as I see it.

Benefits of Stock Options

Stock options are wonderful financial instrument and tool. Maybe you heard famous saying that options are risky. Sure it's true when you know nothing about them. I think that not enough knowledge is the only serious reason why not to trade options, because benefits of options trading can easily outweight any obstacles. This is list of some benefits.

  • Leverage. One from the most important words in wealth creation. The basic definition of leverage is the ability to do more with less effort. How this applies to stock options? We can control more assets with less money. One option contract controls 100 shares. With fraction of cost we would pay for equivalent number of shares, we control and profit from change of price of all underlying shares.
  • Big profits even in short time. Because options are very sensitive to the underlying stock's price movements and costs for buying options is low in comparison with shares, percentage returns can be very big.
  • Profit even from declining stocks. Based on what strategy we will use we can profit in every situation. We can use puts when stock goes down or calls when stock goes up. We can even profit when stock goes sideways.
  • Reducing or eliminating risk. Options can protect us from some unwanted scenarios when for example price movement of stock doesn't go in direction we would want. Also risk from point of amount of money we put to options trade is much less then with comparison with shares.

A word about risk

Trading and investing and no matter in what - be it stocks, real estate, oil or stock options has associated risk. In every aspect of life there is a risk. When you go to shop you have some probability that you will have a car accident. When you approach someone you don't know you risk that you can be rejected. Risk is part of life. We must face it. Life does not offer a money-back guarantee - and stocks or options are no different.

What we can do about risk is that we can lower it by gaining knowledge, experiences and researching and analysing what we put money in. But there still will be some risk. It's not possible to be always right. Trading is not about being 100% right. It's about being profitable in the long run. Losing is part of winning. The point is that profits from winning trades should outweight loses from losing trades.

Major Stock Exchanges

To recognize on what stock exchange a symbol is traded use the following rule :
Amex 2 to 3 Letter symbol
NYSE 1 to 3 Letter symbol
Nasdaq 4 Letter symbol

AMEX (American Stock Exchange) New York

Trades small to mid-size stocks. The AMEX is known to have more liberal policies concerning company listing, as most of its companies are generally smaller compared to the NYSE and NASDAQ.

NYSE (New York Stock Exchange) New York

The New York Stock Exchange, also known as the "Big Board", is a New York City-based stock exchange. It is the largest stock exchange in the world by dollar volume and the second largest by number of companies listed.


The NASDAQ (National Association of Securities Dealers Automated Quotations system)

Nasdaq was the world's first electronic stock market. It is the largest electronic screen-based equity securities market in the United States. With approximately 3,200 companies, it lists more companies and on average trades more shares per day than any other U.S. market. Nasdaq became very popular in the 1990s because most of emerging high-tech companies are listed here.

The Psychology of Trading

The basic principle of trading psychology is that trading should be based on rational decisions and not on emotional reactions. Emotions are not wanted in trading. Emotional control from large part determines trading success. Why?

Because you could do everething good and other factors(I will takl about them later in this blog) can show that it's time to close your position and that greed pig inside your head tells you to wait for price to go up next few dollars and even the best trade can turn to losing trade. And all this because you made this decision based on your emotions.

I don't doubt about importance of emotions. I believe we have them for some reason . And I like good emotions like joy, love, etc. But when you trade you should clear your mind. I know about some traders that don't even trade when they are upset or they are not in mental harmony.

Two most common emotions in trading are greed and fear. They can turn profitable trade to losing trade. They can turn sleep into nightmare. They can be reason for ending up with trading. It's important to develop your trading style that best suites your personality. I hope that I emphasized enought how important is mental and emotional control.

Options trading for beginners

When you buy a stock you purchase partial ownership in the company. An option is a contract that gives the owner the right but not the obligation to either buy or sell the underlying financial instrument on wich it is based. Value of the stock option is in part based on, or derived from, the value of its underlying stock. I will try to explain this later in this post on one example.


There are two types of options on stocks: call options and put options.


Call option gives the owner the right, not an obligation, to purchase 100 shares of the underlying stock at a specific price per share (strike price) on or before the date of expiration. Call options are in common used when expecting the price of underlying stock to go up.


Put option gives the owner the right, not an obligation, to sell 100 shares of the underlying stock at a specific price per share on or before expiration date. Put options are in common used when expecting the price of the underlying stock to go down.


Example:

Let’s say that the value of XYZ company is $10. Trader thinks that the value of company will go up. He buys 10 call option contracts(controls 1000 shares) for $0.50 per share(that’s $500 for this trade) at strike price $11. Supposing that 1 month later the value of company is $12. Trader can use his options and purchase 100 XYZ shares for $11.000 and sell them for $12.000 or he can sell his option contracts for let’s say $1000. His gain would be $500 because he purchased options for $500 and sold for $1000. That’s 100% profit!

Why do I trade stocks and options?

As probably everything what we do has some motivation my trading also has some deeper reasons. One from main reasons I like about stock and option trading are big profits. With stocks you can have common profits in tens of percent in time period of few months and with stock options are common gains even in hundreds of percent in few days or weeks.

Next reason is my freedom. In trading I am my own boss. I can trade when I want, how much I want, how long I want.

Very little time is required. I spend no more than one hour per day in trading.

Very little money is needed to start this kind of trading in comparison with starting up any other business that comes to mind. It costs more to start selling ice cream than it does to begin trading.

No employees.

No selling of products.

You can work from any place where a computer and an internet connection is available.

These are my main reasons for trading. I think that this list of pros can shut down any obstacles. With trading I can achieve my goals and dreams much faster. And also trading with stocks and options is my big passion.

Stock and Option Trading

Stock and Option Trading


This is my first post so forehand I would like to welcome you in my blog. My intention is to share my knowledge and personal experience with you. At start I will talk about stock and option basics and later I will move on to more advanced informations. I will talk about stock market, option trading strategies, trading psychology, money management, fundamental and technical analysis, trading tools and other topics belonging to stock and option trading.

For some of you it can be stock and option trading course but the main purpose of this site is to share valuable informations about stock and option trading. From part it will reflect my journey from beginner to more experienced trader.

I think one of the biggest mistake that a lot of people do is that they put their hard-earned money to some stock they know almost nothing about and they pray and hope that price of stock will go up. Thats stupid. They should spend some time learning and researching. And this rule applies to everything you put money in.