Lessons for Beginners

Primarily intended to guide the reader to understanding technical analysis of the stock market in order to make educated predictions of future stock prices and thereby trade profitably.

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Tom Supergan
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Lessons for Beginners

Post by Tom Supergan » Thu, Jun 18 2009 3:22 pm

There are many sites on the web that give you information about the stock market. It is recommended you avoid biased sites (such as news sites) and stick to sites that provide charting tools as their primary service. Your goal should be to remain objective using measurable facts and avoid emotions such as fear and greed.

Another mindset you should develop is what time frame you want to hold positions. "Buy & Hold" strategies may be great for mutual fund managers because their pay may be based on how much money the fund has taken in, not by how much profit they make for fund holders. So consider making at least two trades a year in order to lock in profits and get in at better prices.

It is also a good idea to diversify your portfolio--not just in the stock market, but other markets as well, such as real estate and other tangible assets. Within your stock trading allocation, you may consider not putting more than 10% into any one trade, and not more than 30% into any single sector or industry. This is called "Asset Allocation" but is a more advanced topic.

One of the easier charting tools to learn and use is prophet.net java charts. Make sure to register (free and no spam) so that your chart settings and portfolio will be saved. Use that charting tool as you go through these forums and classes so you can quickly check out more details on an interactive chart.

To begin your education of technical analysis, follow the links at the chart school, clicking on each topic from top to bottom in order. If you read it all, you will end up knowing more than most traders ever will. Knowledge is power, and in this case, profitable.
Last edited by Tom Supergan on Thu, Jun 18 2009 9:25 pm, edited 1 time in total.
Reason: Added prophet chart link.
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Moving Averages: Spotting Trends

Post by Tom Supergan » Thu, Jun 18 2009 7:06 pm

Chart of Dow index.

Image
This chart shows medium-term trend changes. It ended an uptrend in June, 2007 by trading in a wide range between 14,200 and 12,600 over the next six months. Then a downtrend began in January, 2008.

For purposes of this discussion. let's assume you had a long position begun in 2006. Since it is a chart of an index, simple moving averages are used instead of exponential moving averages.

The first indicator of note is the stock price breaking through its uptrend and the 50dMA at the end of February, 2007. However, it remained above the 200dMA and recovered its price. Then in July, when it was much higher, it again fell below the 50dMA and briefly fell through the 200dMA. Again it recovered its price and rose higher.

But in November, 2008, the price fell below the 50dMA and closed below the 200dMA. Closing prices have much stronger weight than brief, intraday extremes. So these are very significant bearish indicators with sell signals at 13,200.

Finally, in January 2008, the final major signal is the 50dMA crossing under the 200dMA and the price closing below both averages with increased volume.

In May, 2008 the price was above the 50dMA and crossing intraday over the 200dMA, but these are not buy signals since the 50dMA is still far below the 200dMA.

Now take a step back and just look at the relationship between the red and blue moving average lines. At a glance, you can see that the blue line above the read line is bullish on the left side of the chart (buy, long), and the blue line under the red line on the right side of the chart is bearish telling you to sell.

Within this range there are also shorter time frames that can be chosen to trade during the shorter trends, so a 15dMA can be used as a signal when it crosses the 50dMA. This can be taken all the way down to minutes within a day, like checking the 15 minute moving average versus the 50 minute moving average.

There are other indicators that can help strengthen these signals in confirmation of the trend reversals, or may tell you they are false signals. Volume is very helpful in this respect. Check the very low volume at the end of 2007 when the price was rapidly rising and breaking above the moving averages. Volume trumps other indicators, so if prices are rising on declining volume, expect a drop in prices very soon. High volume strengthens trends, low volume indicates an impending reversal of trend.

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