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Disclaimer The information provided is not to be considered as a recommendation to buy certain stocks and is provided solely as an information resource to help traders make their own decisions. Past performance is no guarantee of future success. It is important to note that no system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using Stock Market Winner will provide information that guarantees profits or ensures freedom from losses. Copyright 2005-2011. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, without written prior permission from the author. Technical Stock Screener www.dojispace.com Page 2
Part I Introduction to Technical Analysis Technical Stock Screener www.dojispace.com Page 3
What is Technical Analysis? Technical analysis is the study of market action, primarily through the use of charts. The technician believes that anything affecting the price, such as fundamentally or psychologically, will be reflected on charts. Technicians believe that the market discounts everything and that any news about a company is already priced into the stock. Keep in mind that the charts do not cause market action, but rather, they reflect the actions of the marketplace and what has already happened. However, this does not mean you should not study fundamental analysis, since it is just as important. Technical analysis is applied social psychology because when you analyze charts, you are analyzing the behavior of traders. Charts reflect trades by all market participants: buyers, sellers, and even insiders. Each price on the charts reflects the actions or lack of actions by all the traders in the market. Technical indicators help make our analysis more objective as it seeks to recognize trends and changes in crowd behavior so that intelligent trading decisions can be made. Technical analysts study charts to find out whether the bulls or bears are in control. They look at past charts for repetitive price patterns and study to recognize the early stages of uptrends and downtrends. There are 2 main types of technical analysis: classical and computerized. 1. Classical analysis This is based only on the study of charts, without using anything more complex than a pencil and a ruler. This is mainly the focus on uptrends and downtrends, support and resistance zones, as well as repetitive patterns, such as triangles and rectangles. Its main drawback is its subjectivity: if you are bullish, your ruler will tend to inch up and likewise, if you are bearish, your ruler will tend to inch down. 2. Computerized analysis This is more of a modern approach whose signals are much more objective. The 2 main types are trend-following indicators and oscillators. Trendfollowing indicators include moving averages, Directional System, and MACD (moving average convergence-divergence), which all help to identify trends. Oscillators, such as Stochastic and Relative Strength Index (RSI) help identify reversals. As you can observe, technical analysis is partly a science and partly an art partly objective and partly subjective. Technical Stock Screener www.dojispace.com Page 4
Types of Technical Indicators You can argue about trends but technical indicators are objective. Indicators are derived from prices and the more complicated they are, the more they deviate from prices and reality. Therefore, using simple indicators work the best. The good technical indicators are immune to parameter changes and give useful signals at a broad range of settings. This means that if an indicator you are using gives great signals on a 20-day window for a certain stock but bad ones when you switch to a 15-day window, then the indicator is not too reliable. Technical indicators can be divided into three major groups: 1) Trend-following- These indicators include moving averages, MACD (moving average convergence-divergence), Directional System, among others. These indicators help us stay long in uptrends and short in downtrends. 2) Oscillators These indicators include Stochastic, Rate of Change, and many more. Oscillators help us identify turning points, or reversals, by displaying when markets are overbought (too high and about to fall) or oversold (too low and about to rise). They work great in trading ranges, catching upturns and downturns. The disadvantage is that they can give premature buy signals in downtrends and sell signals in uptrends. 3) Miscellaneous Indicators These indicators include Bullish Consensus, Commitments of Traders, and New High-New Lower Index, which measure the current mood of the market. The tricky part is that indicators from different groups often contradict one another. For example, when markets decline, trend-following indicators turn down, signaling us to sell but at the same time, oscillators can become oversold and signal us to buy. Technical Stock Screener www.dojispace.com Page 5
Part II Pattern Trading Technical Stock Screener www.dojispace.com Page 6
What is Support and Resistance? Support and resistance is a concept in technical analysis, which is essential to understand in order to master reading price trends and pattern charts. > What is Resistance? Example Assume that Bob has been holding shares in Microsoft for 2 months and notices that, during that time period, its price had failed to pass $25 several times. However, he also notices the price has gotten very close to moving above $25. In this example, the price level near $25 is a level of resistance. If the price were to rise above $25, there would be a break in the resistance. As you can probably assume from the example above, resistance refers to the price at which a stock trades, but not exceed past, for a period of time. The stock stops rising and does not break resistance because sellers start to outnumber buyers. In other words, this resistance price level occurs when selling is sufficient enough to disrupt or reverse an uptrend. It is represented on a chart by a horizontal line that connects several tops, signifying that sellers are overpowering buyers. Resistance is also regarded as a ceiling because its price level prevents the prices from moving up and past it. When the price reaches the resistance level, supply is believed to be stronger than the demand, which means that it is preventing the price from rising above the resistance. However, resistance does not always hold and when it breaks, it signals that the bulls have beaten the bears in that fight, creating new highs. > What is Support? The support price level occurs when buying is sufficient enough to disrupt or reverse a downtrend. It is represented on a chart by a horizontal line that connects several bottoms, Technical Stock Screener www.dojispace.com Page 7
signifying that buyers are overpowering sellers. Support is also regarded as a floor because its price level prevents the prices from falling below it. When the price reaches the support level, demand is believed to be stronger than the supply, which means that it is preventing the price from falling below the support. However, support does not always hold and when it breaks, it signals that the bears have beaten the bulls in that fight, creating new lows. Technical Stock Screener www.dojispace.com Page 8
> Strength of Support and Resistance The strength of support and resistance is important because it helps you determine whether the trend is likely to continue or if it is going to reverse. Their significance can be determined by the: - length of time they spend in a support or resistance area (the longer the period of time, the more significant the area is), - volume (if a support or resistance level is formed on heavy volume, the level is regarded as more important than if formed on low volume), - time (the more recent the trading took place, the more important it is) > False Breakouts But beware of false breakouts. For example, the market might break a price resistance and rally, but then quickly reverses and falls. Likewise, the market can also break support briefly just before it reverses and rallies. Professionals love false breakouts because it provides one of the best trading opportunities. Breakouts are similar to tails except that tails have a single wide bar, but false breakouts can have several bars, none of which are especially tall. Technical Stock Screener www.dojispace.com Page 9
Triangle Patterns There are basically 3 types of triangle patterns in technical analysis: symmetrical, ascending, and descending. They usually represent continuation patterns. Bullish Triangle Pattern There are 2 types of bullish triangle patterns symmetrical and ascending as demonstrated in the following figures: Type 1 Bullish Symmetrical Triangle 1. A stock is in an uptrend 2. It forms a symmetrical triangle 3. It breaks out from the triangle and goes higher Technical Stock Screener www.dojispace.com Page 10
Type 2 Bullish Ascending Triangle 1. A stock is in an uptrend 2. It forms an ascending triangle 3. It breaks out from the triangle and goes higher Let s look at some examples: The figure below shows ENTG formed a symmetrical triangle in May. Soon after that, the stock went from 2.0 and peaked at 3.4 with a percentage gain of over 70%. Technical Stock Screener www.dojispace.com Page 11
Here s another stock (FEED) that formed a symmetrical triangle in April. The stock jumped from $2.5 a share to $8 in less than 3 months. That is a 220% gain in value. Technical Stock Screener www.dojispace.com Page 12
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Let s look at a stock with an ascending triangle, TSL, which is a solar company I used to swing trade pretty often. The stock doubled in value from $14 a share to $28 in one month right after it formed an ascending triangle in May. Technical Stock Screener www.dojispace.com Page 14
Bearish Triangle Pattern Technical Stock Screener www.dojispace.com Page 15
There are 2 types of bearish triangle patterns- symmetrical and descending as demonstrated in the following figures: Type 1 Bearish Symmetrical Triangle 1. A stock is in an downtrend 2. It forms a symmetrical triangle 3. It breaks out from the triangle and goes lower Type 2 Bearish Descending Triangle 1. A stock is in an downtrend 2. It forms a descending triangle 3. It breaks out from the triangle and goes lower Technical Stock Screener www.dojispace.com Page 16
Here s an example of a descending triangle. The stock LGN formed a descending triangle pattern at the end of May. It was a declining stock and continued to drop when the pattern was forming. It declined another 20% in less than 2 weeks after the pattern was formed. Technical Stock Screener www.dojispace.com Page 17
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Flags and Pennants Flags and pennants are common patterns in the market and are pretty similar in appearance, both representing brief pauses before resuming its original trend. They are very reliable continuation patterns and rarely produce a trend reversal. 1. First, there is a sharp market move, resembling almost a straight line (flagpole) on heavy volume. 2. Prices pause for 1-3 weeks on light volume, forming a consolidation pattern. 3. Prices break out and the trend resumes in the direction prior to the flag or pennant on heavy volume. Both patterns usually appear in the middle of a market move and, therefore, the move after the flag or pennant will travel the same distance of the move preceding the pattern. The Flag The flag is shown below, indicated by 2 parallel trendlines in the shape of a parallelogram, which tends to slope against the trend. The Pennant Technical Stock Screener www.dojispace.com Page 19
The pennant is shown below, indicated by 2 converging trendlines, resembling a symmetrical triangle. Technical Stock Screener www.dojispace.com Page 20
Head and Shoulders Pattern Head and Shoulders is a bearish pattern. In a uptrend 1. A stock rallies to a peak on heavier volume and then declines (forming a left shoulder). 2. It then rises again and moves higher than the previous peak but on lighter volume. 3. It declines again and moves below the previous peak (forming a head). 3. The stock then rises a third time on noticeably lighter volume but fails to pass the peak of the head and declines (right shoulder). 4. If the stock goes below the neckline, a head and shoulders pattern is formed. Volume should expand at the initial breaking of the neckline. This is a bearish pattern and indicates that the stock might fall further. (There might also be a return move back to the neckline, but should not exceed it, followed by new lows) Inverse Head and Shoulders Pattern (head and shoulders bottom) is a bullish pattern, and it looks exactly the opposite of the head and shoulders pattern. Technical Stock Screener www.dojispace.com Page 21
In a downtrend 1. A stock drops to a bottom and then goes up (left shoulder). 2. It then drops again and moves lower than the previous bottom and goes up again (head). 3. The stock then falls another time but fails to break the previous bottom and bounces back. (right shoulder) 4. If the stock goes above the neckline, an inverse head and shoulders pattern is formed. This is a bullish pattern and the stock might go up further. Slope of Neckline In a head and shoulders pattern, the neckline usually slants upward or stays horizontal. If the neckline tilts downwards, it signals market weakness and is usually followed by a weak right shoulder. In an inverse head and shoulders pattern, the neckline slants downward or stays horizontal. If the neckline tilts upwards, it signals market weakness. Volume during a Head and Shoulders Pattern There is lighter volume on each peak during a head and shoulders pattern. For example, the 2 nd peak (head) should have lighter volume than the 1 st (left shoulder), indicating that buying is diminishing. The 3 rd peak (right shoulder) should have noticeably lighter volume than the previous 2 peaks. Technical Stock Screener www.dojispace.com Page 22
Volume should expand on the breaking of the neckline, decline during the return move, and expand again when the return move is over and the trend resumes. Once prices break the neckline, they should not recross the neckline. Otherwise, this would be a failed head and shoulders pattern if prices resume to their original trend. Let s look at the chart for Dow Jones, does this look like a head and shoulders pattern? Watch out! Technical Stock Screener www.dojispace.com Page 23
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Here s a video published by Adam Hewison analyzing the S&P 500 earlier this month as of this writing. He came to the same conclusion that S&P might be forming a head and shoulder s pattern. Click here to watch this video to learn more. Technical Stock Screener www.dojispace.com Page 25
What are Double Tops and Bottoms? What are Double Tops and Bottoms? A double top or bottom is another reversal pattern, which is common and easily recognized. Double Top Pattern 1. A prior uptrend sets a new high, usually on increased volume. 2. Then, the stock price declines on a lighter volume. 3. The price rallies again but is unable to pass the previous peak and falls again. 4. If the price breaks support, declining below the previous low, a double top pattern has formed. (If the price does not break support, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original uptrend.) 5. After a double top pattern has formed, there is a possibility of a return move to the breakout point, but should not exceed it, before prices resume to the new downtrend. Volume during a Double Top Pattern Technical Stock Screener www.dojispace.com Page 26
In a double top pattern, there is usually heavier volume during the first peak and lighter volume on the second. However, when the price breaks support, signaling a reversal to a downtrend, it usually occurs on heavier volume. Double Bottom Pattern A double bottom pattern is a mirror image of the double top. 1. A prior downtrend sets a new low, usually on higher volume. 2. Then, the stock price rallies. 3. The price declines again but is unable to fall under the previous low and bounces up again. 4. If the price breaks resistance, rallying above the previous peak, a double bottom pattern has formed. (If the price does not break resistance, this might not be a reversal pattern since prices could just be in a consolidation phase, just before it resumes to its original downtrend.) 5. After a double bottom pattern has formed, there is a possibility of a return move to the breakout point, but should not decline below it, before prices resume to the new uptrend.) Volume during a Double Bottom Pattern In a double bottom pattern, there is usually heavier volume during the first bottom and lighter volume on the second. However, when the price breaks resistance, signaling a reversal to an uptrend, it is important that it occurs on heavy volume. Example of a Double Bottom Pattern: Citigroup s stock just recently formed a double bottom at around $2.80 and rallied up Technical Stock Screener www.dojispace.com Page 27
over $4.40, which was yesterday s close. The stock is now trading at $4.70 so if you bought at the second bottom and sold it now, you would have made a 68% gain! Technical Stock Screener www.dojispace.com Page 28
What are Triple Tops and Bottoms? What are Triple Tops and Bottoms? The triple top or bottom is another reversal pattern, which rarely occurs. It is a stronger pattern than the double top or bottom pattern since the likelihood of a reversal is higher. The triple top or bottom pattern is a slight variation of the head and shoulders pattern. The main difference is that in a triple top, the three peaks are around the same level, whereas in a head and shoulders pattern, the head is at a slightly higher peak than both of the shoulders. Triple Top Pattern A triple top pattern is complete after both troughs have been broken on heavy volume. Prices must close below the support levels to complete a triple top pattern, signaling the reversal to a new downtrend. There might also be a return move to the breakout point, but should not exceed it, before the downtrend resumes. Volume Similar to volume in the presence of a head and shoulders pattern, volume during a triple top pattern tends to decline at each subsequent peak, but increases at the breakdown point, leading to the new downtrend. Triple Bottom Pattern As you can see, a triple bottom pattern is a mirror image of the triple top. Technical Stock Screener www.dojispace.com Page 29
A triple bottom pattern is complete after both peaks have been broken on heavy volume. Prices must close above the resistance levels to complete a triple bottom pattern, signaling the reversal to a new uptrend. There might also be a return move to the breakout point, but should not decline below it, before the uptrend resumes. Volume Similar to volume in the presence of a head and shoulders pattern, volume during a triple bottom pattern tends to decline at each subsequent bottom, but increases at the breakout point, leading to the new uptrend. Example: As you can see from the example below, the stock WMGI just formed a triple bottom pattern. After reaching its 3rd bottom at about $13.75 per share, it rallied up to $16.50. That s a 20% gain! Technical Stock Screener www.dojispace.com Page 30
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Part III Technical Analysis Technical Stock Screener www.dojispace.com Page 32
Volume Indicator The Purpose of Volume in the Financial Markets Volume is a significant indicator in technical analysis because it provides important clues about the intensity behind price movements. Volume can be measured by shares, contracts, or dollars that trade hands between sellers and buyers. Rising volume tends to confirm trends and declining volume brings doubt. If there is a big price movement, the perceived strength of that movement is based on its volume. The higher the volume is at the time of the price move, the more significant and stronger the move is. Rising volume shows that traders are still coming in, letting the trend to continue. But if traders start to abandon the market, volume falls and the trend is less likely to continue. Volume During an Uptrend During an uptrend, volume confirms the price trend if the volume is heavier when the price moves higher and lighter when the price dips. This shows that the buying pressure is greater than the selling pressure, allowing the uptrend to continue. Volume During a Downtrend During a downtrend, volume confirms the price trend if the volume is heavier when the price decreases and lighter on bounces. This shows that the selling pressure is greater than the buying pressure, allowing the downtrend to continue. Trading Techniques 1. When the stock price breaks out from a trading range and if there is a sudden increase on the volume of a stock, it usually indicates the beginning of a trend. Get in on that trend. 2. When a trend is in a well-established move and if there is a sudden increase on the volume of a stock, it usually indicates the end of a trend. It s probably best if you skip or leave that trade. 3. Divergences between price and volume tend to signify turning, or reversal, points. For example, when the price of a stock rises to a new high but volume shrinks, it shows that the price increase did not attract much interest and a downside reversal is likely. Likewise, if the price falls to a new low and volume Technical Stock Screener www.dojispace.com Page 33
falls as well, it shows that the price decline attracted little interest and an upside reversal is likely. To use more objective ratings of volume, you can study an indicator called Force Index, which was developed by Dr. Alexander Elder, author of the books, Trading For a Living and Come Into My Trading Room. Simple Moving Average Moving Average (MA) is one of the most popular and easy-to-use tools available for technical analysts. There are two main types of moving averages: simple moving average and exponential moving average. How Do We Calculate Simple Moving Average? A simple moving average is calculated by computing the average closing price of a security over a specified number of periods. For example, a 10-day moving average is calculated by adding the closing price for the last 10 days and dividing the result by 10. 1+2+3+4+5+6+7+8+9+10=55, 55/10 = 5.5 (Assuming that the closing prices for the 10 days are 1-10 consecutively). When you plot the moving average for each date on a graph, it forms a curve. Trading Signals: - A buy signal is triggered when closing prices cross above the moving average (MA). - A sell signal is triggered when closing prices cross below the moving average (MA). Example: Let s look at the stock charts for MSFT and YGE as an example. A buy signal is generated when prices cross above the 10 day moving average as circled in 1, 2, 3. A sell signal is generated when price crosses below the 10 day moving average. Technical Stock Screener www.dojispace.com Page 34
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Disadvantage: The main disadvantage of a simple moving average is that it does not reflect the current trend quickly. For example, if the stock prices in the last 10 days for a certain stock were 100, 99, 98, 45, 44, 45, 43, 42, 43, 42, the simple moving average would be 60.1. This moving average is 50% above the current price which wouldn t be accurate to trigger an entry signal. In other words, if there is an extreme high or extreme low in the stock price, it distorts the true value of the stock. For this reason, another type of moving average called exponential moving average (EMA) was developed, giving more weight to the most recent prices. Technical Stock Screener www.dojispace.com Page 36
Exponential Moving Average Exponential Moving Average (EMA) Exponential moving average is another type of moving average, which gives greater weight to more recent data as opposed to the simple moving average. It responds to changes faster than a simple MA. EMA is calculated by multiplying a greater percentage to the latest data, as opposed to giving the same weight for both. Here is the formula to calculate exponential moving average: EMA = Ptoday* K + Emayesterday * (1-K), where - K = 2/(N+1) - N = the number of days in the EMA - Ptoday = today s closing price - Emayesterday = yesterday s Ema Trading Signal: - A buy signal is triggered when closing prices cross above the EMA. - A sell signal is triggered when closing prices cross below the EMA. Example: Let s look at the stock charts of Apple and Citigroup as examples. A buy signal is generated when prices cross above the 9 day EMA, as circled below. A sell signal is generated when prices cross below the 9 day EMA. Technical Stock Screener www.dojispace.com Page 37
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What are Trend Lines? Trend lines are simply lines that technical analysts draw on the chart to predict how low can a stock go and make a trading decision whether or not to buy or sell a stock. What are uptrends and downtrends? Uptrend pattern: - Each rally reaches a higher point than the preceding rally. - Each decline reaches a higher point than the preceding decline. (higher highs and higher lows) Downtrend pattern: - Each decline stops at a lower point than the preceding decline. - Each rally stops at a lower level than the preceding rally. (lower lows and lower highs) Technical Stock Screener www.dojispace.com Page 40
What are trendlines? Trendlines are lines that connect nearby bottoms or nearby tops, which are used to identify trends. The most important trait of a trendline is its angle, or slope, because it identifies the dominant market force. Uptrendline: - A line that connects 2 or more nearby bottoms and slants upwards. - Bulls are in control. Look for buying opportunities. - If we draw a line parallel to it across the nearby tops, it will mark a trading channel. Downtrendline: - A line that connects 2 or more nearby tops and slants downwards. - Bears are in control. Look for shorting opportunities. - If we draw a parallel line across the nearby bottoms, it will mark a trading channel. Trading range: - The lines connecting the tops and the lines connecting the bottoms are not slanting upwards nor downwards the lines are close to the horizontal. - We can either wait for a breakout to step in or trade short-term swings within that range. (Beware of false breakouts) - Often referred to as trendless Technical Stock Screener www.dojispace.com Page 41
Techniques It is better to draw trendlines across the edges of congestion areas instead of price extremes because extreme points reflect panic only among the weakest crowd members. The breaking of a trendline is one of the warnings of a trend reversal. A trendline is also more important and valid if: 1- It s over a longer timeframe. A trendline on a weekly chart is more important than a daily trendline. 2- The trendline is longer in length. A short trendline reveals mass behavior for only a short period of time whereas a longer one reveals mass behavior for a longer time. 3- There is more contact between the price and trendline. A trendline that is only beginning to form only touches 2 points. More points of contact makes the trendline more valid. 4- Increasing Volume. When prices move in the direction of a trendline, an increase in volume confirms that trendline. CPST is in an uptrend and the trend lines are drawn below Technical Stock Screener www.dojispace.com Page 42
FAZ is in a downtrend and the trend line is drawn above the highs of the stock price. Technical Stock Screener www.dojispace.com Page 43
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Moving Average Convergence-Divergence (MACD) What is Moving Average Convergence-Divergence (MACD)? MACD is a popular technical indicator that is widely use by traders. It is created by Gerald Appel in the 1960s. MACD consists of three exponential moving averages. It gives a bullish signal when the two lines crossover. To create MACD: 1. Calculate a 12-day EMA of closing prices. 2. Calculate a 26-day EMA of closing prices. 3. Subtract the 26-day EMA from the 12-day EMA, and plot their difference as a solid line. This is the fast MACD line. 4. Calculate a 9-day EMA of the fast line, and plot the result as a dashed line. This is the slow Signal line. When the fast MACD line rises above the slow Signal line, it gives a bullish signal. You don t need to know the above calculation to trade with this technical indicator as it is built in with most charting softwares. How to trade with MACD? A stock pattern is considered to be bullish when the fast MACD line is above the signal line. When the fast MACD line cross over the signal line, it generates a great buy signal. Let s look at some charts. 1. AES Notice there is a MACD crossover around 12/6, and the stock has risen since then. Technical Stock Screener www.dojispace.com Page 45
2 YMI Noticed again the stock keep risen after the MACD crossover was formed. If you want to make more money on this stock, you can buy the stock when the MACD line approaching the signal line. However, that will means you will need to take greater risk. Technical Stock Screener www.dojispace.com Page 46
My Opinion on MACD MACD crossover works pretty well for me. However, I never trade any stock base solely on MACD signal. I always combine it with Candlestick and Stochastic. If I see a bullish candlestick pattern and the slow macd is about to cross the signal line, then I will watch the stock closely and may buy it the next day. Click here to get a list of latest stocks with a MACD crossover pattern. Technical Stock Screener www.dojispace.com Page 47
What is MACD-Histogram? MACD-Histogram derives from MACD. When it is above 0, the signal is positive and it is negative when it goes below 0. The following shows how a MACD-Histogram is calculated. MACD-Histogram = MACD line Signal line MACD-Histogram is created by the difference between the MACD line and the Signal line, and plots the difference as a histogram. If the fast line is above the slow line, MACD-Histogram is positive and plotted above the zero line. If the fast line is below the slow line, MACD-Histogram is negative and plotted below the zero line. When the two lines touch, MACD-Histogram equals zero. Technical Stock Screener www.dojispace.com Page 48
Overbought And Oversold Indicators What are Overbought & Oversold? Overbought is a term in technical analysis that describes a situation in which the stock price of a company has risen so much where an oscillator has reached its upper bound. There are different technical indicators that you can use to check if a stock is overbought. Stochastic and RSI are two of the most popular one. When the stochastic rise above the 80 level or RSI cross over the 70 level, that s when we considered a stock is overbought. Oversold is just the opposite of Overbought. It describes a situation in which the stock price of a company has falling so much where an oscillator has reached its lower bound. When stochastic drop below the 20 level or RSI cross down the 30 mark, that s when we consider a stock is oversold. How to use overbought and Oversold Indicator? There are different ways that traders use to trade using overbought and oversold indicator. 1. Some traders sell immediately when an oscillator across the overbought area, and buy immediately when an oscillator fall to the oversold area. 2. Some traders do not sell when an oscillator across the overbought area. They will hold their stock until the oscillator starts to fall below the overbought area. Those traders do not buy a stock when an oscillator fall to the oversold area, they buy when the stock price recovers a bit and the oscillator across above the oversold area again. I personally use method 2. The reason is that some stocks will keep going higher when an oscillator is in the overbought area. If I sell it when an oscillator reach the overbought area, I lose out a lot of profit. There are stocks that would keep falling even when the oscillator is already in the oversold area. It is much safer to buy when the stock recovers a bit and shows signal of going up again or when the oscillator is crossing above the oversold area. For example, if you were to use approach 1, you would sell CDE on 2/14 or 2/15 base on the stochastic indicator, and would missed out a lot profits on this stock. Technical Stock Screener www.dojispace.com Page 49
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Divergence Pattern (Leading Technical Indicators) All technical indicators such as Stochastic, MACD, CCI, RSI, Moving Averages are all lagging indicators. They are either derived directly or indirectly from the price or volume of a stock. However, if they formed a divergence with the price, they become leading indicators, allowing you to buy before major trend reversals. Let s look at the divergence patterns. Bullish Stochastic Divergence There are two types of bullish divergence patterns. Type 1 1. When a stock is in a downtrend, the price is going down and at the same time frame, 2. Stochastic is going up. Type 2 1. When a stock is in a consolidation area and at the same time frame, 2. Stochastic is going up. Technical Stock Screener www.dojispace.com Page 51
The psychology behind this pattern is simple. The price is dropping, but the trend becomes weaker and weaker with a bullish reversal up ahead. The Type 1 divergence is more bullish than Type 2. Bearish Stochastic Divergence There are two types of bearish divergence patterns. Type 1 1. When a stock is in an uptrend, the price is going up and at the same time frame, 2. Stochastic is going down. Technical Stock Screener www.dojispace.com Page 52
Type 2 1. When a stock is in consolidation area and at the same time frame, 2. Stochastic is going down. The psychology behind this bearish divergence pattern is the same as the bullish one. The price is going higher, but the trend becomes weaker and weaker with a bearish reversal up ahead. The Type 1 divergence is more bearish than Type 2. Let s look at some real examples. Technical Stock Screener www.dojispace.com Page 53
The figure below shows DTV formed a Stochastic divergence on Mar 9 when the stock was still in a downtrend. Soon after the divergence pattern, the trend reversed, and the stock price went from 19 all the way up to 25.5. Technical Stock Screener www.dojispace.com Page 54
The figure below shows two divergence patterns for the same stock. The first one was formed back in mid April as highlighted in blue, and the stock price went from around Technical Stock Screener www.dojispace.com Page 55
9.25 to 15.5. The second one was from last week and that was one of the reasons why I bought this stock. Let s see how it turns out. Technical Stock Screener www.dojispace.com Page 56
Divergence is a leading technical indicator and is one of the most important indicators in technical analysis. However, one thing to always keep in mind is, no single technical indicator works all the time. When a pattern doesn t work out, you must sell the stock and look elsewhere. There are thousands of stocks out there, so don t fall in love with any one stock. You don t have to be right every time to make money in the stock market. The important thing for you is to make lots of money when you were right and get out of trades with minimum losses as quickly as possible when you were wrong. After all, that s what technical analysis is all about. Technical Stock Screener www.dojispace.com Page 57
Candlestick Patterns Candlestick is a very powerful charting pattern widely use by technical traders to predict stock prices. Candlestick chart consists of white and red candlesticks. The white candlestick on the left means the stock price is up for the day, and the red candlestick on the right represents a down day for the stock. We can easily visualize the open, close, high and low price for any stock using candlestick on a chart. Let s look at sample candlestick chart for DRH. Technical Stock Screener www.dojispace.com Page 58
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The chart above shows that DRH stock was trading in the range of $8 to $9.8 in the period of 09/2009 to 03/2010. On 3/3/2010, a Bullish Engulfing Pattern was formed and the stock gone up from $8.5 to $9.5 in 2 weeks with a 11.7% gain. You don t need to know what bullish engulfing pattern is for now, just note that it is one of the most bullish patterns in candlestick which signals a strong buy, I will discuss this pattern in more detail in the next topic. The following are some popular candlestick patterns. Bullish Candlestick Patterns (Buy Signals) Bullish Engulfing Hammer Piercing Above the Stomach Bullish Tri Star Bullish Meeting Line Bullish Belt Hold Rising Three Method Three Line Strike Morning Star Bullish Kicker Inverted Hammer Bullish Side By Side Bullish Harami Last Engulfing Top Three White Soldier Unique Three River Bottom Technical Stock Screener www.dojispace.com Page 60
Three Outside Up Bearish Candlestick Patterns (Sell Signals) Bearish Engulfing Pattern Hanging Pattern Dark Cloud Pattern Bearish Kicker Pattern Bearish Harami Pattern Evening Star Pattern Shooting Star Pattern Technical Stock Screener www.dojispace.com Page 61
Bullish Engulfing Pattern Bullish Engulfing Pattern is one of the strongest patterns that generates a buying signal in candlestick charting and is one of my favorites. The following figure shows how the Bullish Engulfing Pattern looks like. The following conditions must be met for a pattern to be a bullish engulfing. 1. The stock is in a downtrend (short term or long term) 2. The first candle is a red candle (down day) and the second candle must be white (up day) 3. The body of the second candle must completely engulfs the first candle. The following conditions strengthen the buy signal 1. The trading volume is higher than usual on the engulfing day 2. The engulfing candle engulfs multiple previous down days. 3. The stock gap up or trading higher the next day after the bullish engulfing pattern is formed. Stock Chart for SOLF Let s look at the stock chart for SOLF. The stock formed two bullish engulfing patterns on the chart, one on 11/06/2009 and the other on 12/21/2009. The stock shot up both times after the pattern was found. Technical Stock Screener www.dojispace.com Page 62
11/06/2009 - Bullish Engulfing Pattern Buy signal 1: 86.4% gain - The stock closed at $5.59 on the bullish engulfing day and gone up to $10.42 on 1/11/2010. That is a 86.4% gain in 2 months. 12/21/2009 Bullish Engulfing Pattern Buy signal 2: 36% gain - The stock closed at $7.66 on the pattern day and moved up to $10.42. That is a 36% gain in less than a month. Technical Stock Screener www.dojispace.com Page 63
Stock Chart for WNC Let s look at a more recent stock WNC. Buy signal: 87% gain - The stock closed at $2.94 on 02/25/2010 and formed a bullish engulfing pattern. In less than 10 trading days, the stock went up to $5.49 with a 87% gain. Technical Stock Screener www.dojispace.com Page 64
Please note, in reality it is not easy to buy a stock at its lowest price and sell it at its peak. The good news is that you don t need to sell at its peak to make a good fortune in the stock market. Click the following link to get a list of bullish engulfing pattern stocks for today. Bullish Engulfing Stocks Technical Stock Screener www.dojispace.com Page 65
Bearish Engulfing Pattern Beraish Engulfing Pattern is one of the strongest patterns that generates a selling signal in candlestick charting and is one of my favorites when I short stocks. The following figure shows how the Bearish Engulfing Pattern looks like. The following conditions must be met for a pattern to be a bearish engulfing. 1. The stock is in a uptrend (short term or long term) 2. The first candle is a white candle (up day) and the second candle must be black (down day) 3. The body of the second candle must completely engulfs the first candle. The following conditions strengthen the sell signal 1. The trading volume is higher than usual on the engulfing day 2. The engulfing candle engulfs multiple previous down days. 3. The stock gap down or trading higher the next day after the bearish engulfing pattern is formed. Stock Chart for YGE The stock formed a bearish engulfing pattern on 10/15 and another one at 11/9. The stock lost almost 30% of value since the bearish engulfing pattern was formed. So if you were shorting this stock, you just made 30% in a month and half. Technical Stock Screener www.dojispace.com Page 66
Please note, in reality it is not easy to sell a stock at its highest price and buy it back at its lowest. The good news is that you don t need to sell at its peak to make a good fortune in the stock market. Click the following link to get a list of bearish engulfing pattern stocks for today. Technical Stock Screener www.dojispace.com Page 67
Bearish Engulfing Stocks Part IV Trading System Technical Stock Screener www.dojispace.com Page 68
Trend Trading What is Trend Trading? Trend trading is a strategy that many traders and investors use to trade stocks. The idea behind it is if a stock is going up with good volume, it should continue to go up until the trend breaks. Trend trading can be applied to any type of trader. Whether you are a day trader, a swing trader or a long term investor, you may find trend trading useful. The only differences will be the time frame that you will use. Day traders may use 5 minutes or even shorter time frame, swing traders may want to use daily and weekly charts, and long term investors may use weekly and monthly charts. Is trend trading working? Yes, trend trading is working. It is widely use by institution traders as well as individual traders. In order to trend trading successfully, you need to be discipline and patient. Trend trading doesn t occur often, however when it does occur, it is very profitable. How does trend trading work? Most of the traders I know use moving averages for trend trading. Weather to use simple moving average or exponential moving average is really a personal preference. However, I found exponential moving average to be more accurate than simple moving average because it gives more weight to the recent stock prices. The way to buy a trending stock is spot the lows of a stock price and draw trend lines between them. As long as the stock price is trading above that trend line, you are safe to buy the stock. You will not sell the stock unless the stock price drops below the trend line which means the trend is broken. Sometimes, when a trend line is broken and a new trend will occur and you may re-buy the stock after the new trend develops. Buying apple stock is trend trading because it is trading above the trend line. The following chart is provided by MarketClub. Their smart trend system indicates that Apple stock is bullish with a score of +100. Their system first recommended to buy Apple stock when the price was in the 90 s 2 years ago. If you bought apple back then, your money has quadruple by now. Click here to learn more about their system. Technical Stock Screener www.dojispace.com Page 69
Is Trend trading the best strategy? While trend trading is profitable, it is not necessary the best trading strategy. Remember, there is more than one way to make money in the stock market. As long as you can make consistence profit, then you are already using the best strategy. Bottom fishing is another popular trading strategy that traders use. Bottom fishing traders tries to catch the bottom of a stock and buy it when there are some signs of recovery. Buy stocks at around support and sell them near resistance is one method of using bottom fishing. Technical Stock Screener www.dojispace.com Page 70
Bottom Fishing Trading Strategies What is Bottom Fishing Trading? Bottom fishing is another popular trading strategy that traders and investors use. The trading concept behind it is traders trying to find the bottom of a stock and jump in when the stock starts to recover. This differs from trending trading where traders buy stocks while the general trend is positive where bottom fishing traders try to buy a stock while the general trend is negative. Is bottom fishing trading profitable? Bottom fishing is profitable when you do it correctly. Some people think bottom fishing is the same as catching a falling knife which is not true. There are different ways that you can trade using bottom fishing and make good profits. How to use bottom fishing trading strategy? My favorite way to use bottom fishing is try to identify stocks that are falling and approaching support, but I won t buy the stock while it is falling. I need to see signs of recovery or technical oscillators start to rise from the oversold area. Let s take a look at AUY. AUY was in a down trend in January and hit a support on 1/20. During that time, the stochastic technical indicator is in the oversold area (below 20). We are waiting for the stochastic to cross over 20 before buying the stock. The stock finally bottom out on 1/25 and starts to recover, and the stochastic oscillator crossover above 20 which generates a bullish sign. The stock then traded higher the next day which confirms the reversal trend and that s when you should buy the stock. The stock is now trading at $13.01 intraday today, that s almost a 16% gain in a month. Technical Stock Screener www.dojispace.com Page 71
When to sell the stock? There are a few ways to sell the stock once you bought a stock at the support or bottom. 1. Set a percentage target as soon as you reach your goal on the stock, sell it. Technical Stock Screener www.dojispace.com Page 72
2. Sell it near resistance sell the stock as soon as the stock approach the resistance. In the AUY case, you would have to sell the stock before 3/2. 3. Sell it after trend reverse sell the stock when there is signs that the trend may be reversing. The reward for this method is higher since the stock may break resistance and go higher, but the risk is also higher as there is a very high possibility that the stock will fail to break the resistance. Technical Stock Screener www.dojispace.com Page 73
How To Trade Gap Ups Gap up can be very profitable if you trade it properly and it is somehow riskier than other patterns. There are different types of gap up that traders use to trade such as exhaustion gap up, initial gap up and gap up. What I wanted to see is if a stock gap up with good volume regardless of the type. It is often safer to buy a stock when the volume is high because the trend will likely to continue. If a stock gap up with low volume, yet it could still go higher, there is a bigger chance that the stock will go down and close the gap. Gap up is best used as a confirmation trend when you find bullish patterns the previous day. It can be used in combination of bullish engulfing pattern (candlestick), morning star pattern (candlestick), stochastic crossover, macd crossover, triangle patterns, hitting support line, and so on. When you find a stock that is likely to form a triangle pattern as follows, and the stock gap up the next day or a few days after, that is usually a good entry point. Example 1: Stock CFW - The stock was in the consolidation area in the period of 2/3/2010 to 3/2/2010 and hitting support level. On 3/5, the stock gap up and almost double in 3 weeks. (Up 92%). Technical Stock Screener www.dojispace.com Page 74
Example 2: Stock PENN - This stock formed a bullish engulfing pattern (Candlestick Pattern) and hitting support on 2/26/2010, and then it gap up on the next trading day (3/1/2010). It then went up from $23.10 to $27.57 for a 19% gain. Technical Stock Screener www.dojispace.com Page 75
Technical Stock Screener www.dojispace.com Page 76
Macd Crossover + Stochastic Crossover = 37% Gain The penny stock RAME made a macd crossover over and stochastic crossover on 2/23 and the stock then gapped up the next day to confirm the trend. In less than 2 weeks, the stock is now trading at $2.45 which is over 37% gain. I don t buy penny stock often so I bypassed this stock. Technical Stock Screener www.dojispace.com Page 77
Let s look at another example base on Macd Crossover + Stochastic Crossover + Gap Up 12/27/2010 SSN formed a stochastic crossover which is a bullish signal. Some traders buy this stock primary base on this signal. However, I like to use cautious and wait for more signals before buying the stock. 12/28/2010 SSN formed a MACD crossover signal which is another bullish signal, this give me more confidence to buy this stock. 12/29/2010 SSN gapped up this is the time I would buy the stock. The stock then went from $1.13 to $3.77 from 12/29/2010 to 3/1/2011 which is a 234% gain in 2 months. Technical Stock Screener www.dojispace.com Page 78
Technical Stock Screener www.dojispace.com Page 79
Volume Indicator + Gap Up In technical analysis, volume is an important technical indicator that triggers a buy or sell signal. How to trade the volume technical indicator? Sudden increase in the trading volume of a stock could indicate a buying or selling pressure on the stock. For example, if trading volume for a stock goes up five times than normal while its stock price is climbing, this indicates strong strength in the stock price and you should buy the stock. On the other hand, if the stock price is declining while its volume increase, then it is time to watch out as there are selling pressure on the stock. Let s take VGZ as an example. The stock went up a lot on 2/25/2011 while the volume is also trading higher than usual. This is a strong buy signal for momentum day traders. However, if you want to be cautious, you may want to wait for a confirmation signal the next day. The confirmation signal could be a gap up, stochastic crossover, macd crossover or whatever technical indicators that you usually use. In this case, the stock gapped up the next day. If you didn t buy the stock on 2/25/2011, then you should definitely consider buying this stock on the next day when it gapped up. Technical Stock Screener www.dojispace.com Page 80
Technical Stock Screener www.dojispace.com Page 81
Bullish Engulfing + Stochastic Crossover = 42% gain HERO formed a bullish engulfing and a stochastic crossover on 12/3, and the stock has rise over 42% since then. UHS made a nice 9% gain in the past few days after forming a bullish engulfing signal last week. The general stock market is down over 200 points during this time period. So it is a relative nice stock and the trend seems positive and strong. Technical Stock Screener www.dojispace.com Page 82
Technical Stock Screener www.dojispace.com Page 83
When To Sell Your Stock? There are two cases where you want to sell your stock. 1. When the stock drops and you must take a loss and exit the trade 2. When the stock goes up and you need to take profit Case 1: When a stock drops to a certain price, you must take a loss and exit the trade: This case is simple, you set a stop loss and exit the trade when it hits your stop loss. Stop loss percentage is really a personal preference. Some traders are willing to risk more while others want to keep their loss at a minimum. Of course, the more risk you put in, the more reward you should expect to gain from any stock you invested in. If that s not the case, then you should not buy the stock in the first place. Case 2: When the stock goes up and you need to take profit There are many different ways that trader use to sell a stock and take profit. Here are a few selling strategies for swing traders. a) Sell when the stock price reaches upper Bollinger Band - Some technical traders use Bollinger Band as buying and selling signals. When stock prices cross above the lower Bollinger Band, they buy it. They sell the stocks when their price crossover the upper Bollinger Band. Let s look at the chart example for POT. The blue curves are the upper and lower Bollinger Bands, and we see 3 buys and 3 sells on this chart. Technical Stock Screener www.dojispace.com Page 84
b) Sell when technical indicator moves into overbought area- Many traders trigger their sell signal when technical indicators move into overbought area. For example, traders sell their stock when RSI move above 70 or stochastic move above 80. Let s look at the same stock POT using stochastic. It also has 4 buys and 4 sells. Technical Stock Screener www.dojispace.com Page 85
c) Sell only when a stock hit your stop loss - While approach 1 and 2 are good for profit taking, they miss out huge opportunities when a trend is strong enough that a stock keeps going higher. This is the approach that I am currently using. I only sell it when I believe a trend is running out and a pull back is likely or when a stock hit my stop loss. - Let s look at the following example, ANN stock chart. If we used Bollinger Band or Stochastic Overbought as our selling signals, we would miss additional gains on the stock. Technical Stock Screener www.dojispace.com Page 86
Technical Stock Screener www.dojispace.com Page 87
Beyond Technical Analysis Here s one technical analysis pattern that I never read about in any stock book and I have never reveal to anyone yet. It is what I called the stock performance by day of week. I learn about this pattern a year ago when I was trading SOLF, a solar energy company. I was swing trading SOLF consistently and made little profit until one day I realize that the stock kept going up every Monday, and going down every Thursday. It kept doing that for like 3 weeks, so on the fourth week, I bought the stock near market close on Friday, and sold it near market close on Monday and gained about 3% in profit. I kept doing that for the next 8 weeks and here is the outcome. Monday SOLF performance in the period of 11/09/2009 01/25/2010 Stock Date Percentage Gained SOLF 2009-11-09 3.52% SOLF 2009-11-16 4.65% SOLF 2009-11-23 0.45% SOLF 2009-11-30 3.44% SOLF 2009-12-07 6.87% SOLF 2009-12-14 6.29% SOLF 2009-12-21 7.28% SOLF 2009-12-28 4.47% SOLF 2010-01-04 4.85% SOLF 2010-01-11 3.37% SOLF 2010-01-25 10.45% SOLF 2010-02-01 3.88% The pattern finally broke on 02/08/2010 when the stock went down 3.84% and I stopped trading this pattern for SOLF. However, I still monitor the stock in case I see the pattern again. So how much percentage I gained from this stock? You do the math. Let s look at how SOLF performs on Thursdays during the same time period. Stock Date Percentage Lost SOLF 2009-11-12-0.38 SOLF 2009-11-19 5.09 SOLF 2009-12-03-1.29 SOLF 2009-12-10-4.44 SOLF 2009-12-17-2.59 SOLF 2009-12-24-0.91 SOLF 2009-12-31-1.55 SOLF 2010-01-07-4.80 SOLF 2010-01-14-5.20 Technical Stock Screener www.dojispace.com Page 88
SOLF 2010-01-21-4.40 SOLF 2010-01-28-2.16 Trading System Why do we need a trading system? If you are an active trader and not making money on the stock market, it is time for you to slow down and think about what you did wrong and investigate on the trading system that you are using. Building a profitable trading system requires time and patient. One trading system may work for some people, but fail for others. It is ok if a trading system fails on you, but it is not ok for you to move on to the next system without investigate it and find out why it doesn t work. There is no trading system that will work forever. You will need to adjust or change a trading system under different economic circumferences. If a trading system consistently worked for you in the past and it is not working anymore, it is time to investigate it. In this tutorial, I m going to show you the basics on how to build your own trading system. Following are some steps that I take. How to build a trading system in 5 steps? 1. Make it simple choose 1 or 2 technical indicators to start with. 2. Test it against historical data 3. Set stop loss and exit strategy 4. Backtest this method and try to break it. Add additional indicators when necessary. 5. Paper trade this trading system. Let s look at the trading system in detail. Trading System Step 1 Technical Indicators Starts with 1 or 2 technical indicators. I will use Macd crossover and Bullish Engulfing (Candlestick) pattern for this tutorial Trading System Step 2 Test the technical patterns Technical Stock Screener www.dojispace.com Page 89
Test the pattern against historical data and study stocks that match these 2 criteria. Let s pick a random day in the recent past. I picked 2/22/2010 which is about 20 trading days earlier from today. To assist me finding stocks that match these 2 patterns quickly, I did a stock screen using Dojispace s advanced stock screener and found MPG. MPG is the only stock that matched these 2 patterns that day. Let s look at the chart. 2/22/10 close price: 1.64 Today (3/16/10) close price: 2.59 This is a 58% gain in 20 days. Technical Stock Screener www.dojispace.com Page 90
Technical Stock Screener www.dojispace.com Page 91
Trading System Step 3 Set Stop Loss We must set stop loss on all trades that we enter to avoid big losses. There are people who lost their fortune on one stock because they don t exit a losing trade. Please note, if you are going to buy stocks with a price less than $2, your stop loss must be greater than usual because they are very volatile stocks. Let s set our initial stop loss to 5%. If a trade is going our way, we should adjust the stop loss to match the latest closing date, so that we don t lose all the profit when the trend reverse. Let s look at the MPG stock data. Date Open High Low Close Volume Mar 16, 2010 2.52 2.68 2.46 2.59 2,115,671 Mar 15, 2010 2.60 2.68 2.50 2.51 2,541,316 Mar 12, 2010 2.44 2.55 2.36 2.47 1,425,172 Mar 11, 2010 2.38 2.49 2.21 2.40 2,090,530 Mar 10, 2010 2.54 2.69 2.30 2.43 5,019,694 Mar 9, 2010 2.12 2.57 2.05 2.47 7,795,768 Mar 8, 2010 1.89 2.25 1.88 2.16 7,372,701 Mar 5, 2010 1.83 1.90 1.76 1.86 1,922,729 Mar 4, 2010 1.80 1.84 1.73 1.78 898,551 Mar 3, 2010 1.68 1.81 1.67 1.74 1,641,841 Mar 2, 2010 1.74 1.74 1.62 1.69 2,044,427 Mar 1, 2010 1.55 1.64 1.53 1.60 1,519,886 Feb 26, 2010 1.51 1.59 1.48 1.50 1,602,606 Feb 25, 2010 1.55 1.57 1.48 1.50 1,170,756 Feb 24, 2010 1.73 1.75 1.53 1.60 1,716,731 Feb 23, 2010 1.63 1.75 1.57 1.69 1,801,794 Feb 22, 2010 1.45 1.68 1.45 1.64 1,719,168 Technical Stock Screener www.dojispace.com Page 92
Notice if we bought the stock on open at $1.63 the next day (2/23) after the pattern was formed, it would hit our 5% stop loss on the day after (2/24) and we would have a failed trade. We have 3 options. a) Set a bigger stop loss when trading with stocks under $2 b) Hit 5% stop loss and buy it back when the trend start to go back up. c) Skip stocks with a price under $2 and volatile stocks completely. Let s look at each option in details. a) Set a bigger stop loss For this trade to be successful, a 9.5% stop loss is required. The stock hit a new low on 2/25 at $1.48. Let s do the math. Entry price: $1.63 Lowest price: $1.48 (1.63-1.48)/1.63 = 9.2%, so we must set a stop loss greater than 9.2% I don t like this option because a 9.5% stop loss is simply too big for a swing trade. b) Hit 5% stop loss and buy it back when the trend start to go back up. When this stock hit our stop loss at 5%, we sell it and buy back at a later time. So when should we buy it back? Notice on the 2/22 when the bullish engulfing pattern is formed, I consider the stock open ($1.45) to be a support. If the stock stays above this support level, I will try to get back in when the stock turn positive. However, if the stock breaks this support level, I won t consider buying it back until the stock moves back up above that level. A doji is formed on the 2/26 which is a good sign. (A doji signals a reversal trend). The stock gapped up on the next trading day on 3/1 confirming the trend reverse. This is the day I will buy back this stock and set my stop loss to 5% again. For cautious traders, you may want to wait until the stock break it s resistance level at $1.69. The stock keep moving higher after 3/1, we must adjust the stop loss on a daily basis. Our initial stop loss was 5% from our entry price. We must reset this entry price to the latest closing price to avoid giving back too much on a winning trade. The stock eventually hit our stop loss on 3/10. Technical Stock Screener www.dojispace.com Page 93
Let s calculate our profit roughly. Let s say we invest $10,000 worth of stock each time we trade. Trade 1: 5% lost on $10,000 = $500 Trade 2: Entry price: $1.55 on 3/1 Exit price: around $2.35 on 3/10 ($2.35 is 5% stop loss base on 3/9 s close price of $2.47) (2.35-1.55)/1.55 = 51.5% of $10,000 = $5100 (Note: we don t subtract $500 from the $10,000 because we assume we invest $10,000 on each trade, not on each stock.) Total profit = $5,100 $500 = $4,600 c) Skip stocks with a price under $2 and volatile stocks completely This option is obvious but I don t like this option because I will miss out a lot of profitable trading opportunities. Trading System Step 4 Backtest this method and try to break the system. Add additional indicators when necessary. Now let s test our trading system against a bunch of dates in the past starting 2/23/2010 which is the day after our initial date. 2/23/2010. The only stock that matched bullish engulfing and macd crossover on that date is CLRT. Again, this is a low price stock, so we expect it to be very volatile. The stock hit our 5% stop loss in 3 days and again if we re-buy the stock a day later, we get a nice profit. The stock is still rising as of today and it is sitting at $2.8. Assume if we bought back the stock at $2.1, we are up 33% on this trade and if we subtract the 5% loss from our previous trade, we still make a profit of 28% on this stock. Technical Stock Screener www.dojispace.com Page 94
Technical Stock Screener www.dojispace.com Page 95
Note 1: In both trades, we would make even more money without the stop loss or with a bigger stop loss. However, I don t recommend doing that because some bad trades may keep trading lower and you will end up losing more money on those trades. Note 2: If you didn t re-buy the stocks, then you end up with 2 losing trades, each cost you $500 + transaction fees. Two people may end up with totally different results using the same trading system, one with a loss and another with a huge gain. The failed trader then move on to the next trading system and hoping that it will work out for him, and keep moving as there is no perfect trading system that works for everybody. That s why it is very important that you study why a trading system failed on you when you made a bad trade. Ok, let s move on to the next day. 2/24/2010 no stock 2/25/2010 - FSYS Technical Stock Screener www.dojispace.com Page 96
Technical Stock Screener www.dojispace.com Page 97
- Again this stock hit a stop loss and then rebound the next day with 28%-5% = 23% gain in a week. Now we started to see a pattern here. It seems that we can avoid our first 5% loss by waiting a couple of days after the patterns are form. So we will add this restriction to our trading system. Restriction 1: Wait for 2 days and to see if there is a pull back so that we can get in at an even cheaper price and make sure that the trend doesn t break the support level. (Please note: with this restriction, we will miss out profit if the trend is strong enough that it doesn t pull back.) 2/26/2010 no stock Anyway, I think you got the idea. Just keep testing it and add restrictions to the trading system as necessary. Trading System Step 5 Paper trade this trading system - Now we have our trading system ready and we should paper trade it for a while until we are fully comfortable with it. This step uses the same approach as step 4 except now we are using live data rather than past data and add restrictions to the trading system if necessary. Technical Stock Screener www.dojispace.com Page 98
Seasonal Stocks What are seasonal stocks? Certain stocks tend to do better on a certain season than other seasons and they are called seasonal stocks. For example, many retailer companies do well during holidays such as Christmas and New Years. People buy gifts for each other and that boosts sales every year on that season. Many gas companies do better during the winter season because more people consume heat and they get more profits. How to invest in seasonal stocks? When you invest in a seasonal stocks, make sure you study the past and make sure the pattern had repeated more than 2 times in the past in order to make a reasonable bet on a stock. Amazon, the largest online retailer do particularly well during the week of black Friday sale 11/17/2008 11/25/2008 The stock went up from $39.69 to $42.19 for a 6% gain in 7 trading days. 11/17/2009 11/25/2009 The stock went up from $131.25 to $134.03 for a 2.11% gain in 7 trading days. 11/17/2010 11/24/2010 The stock market was close on 11/25 this year so I will use 11/24 as the last day. The stock went up from $158.35 to $177.25 for a 11.93% gain. History repeats itself, and the risk reward ratio seems to be good for this stock. Make sure you add Amazon to your watchlist next year during this period. I would definitely buy it if I remember unless the general market is really bad. Technical Stock Screener www.dojispace.com Page 99
How To Trade Earnings Report? What is trading by earnings reports? Trading by earnings reports is when you are betting on a stock to go up or down right before a company report their quarterly earnings. Is trading earnings report right for you? First of all, trading earnings reports is a high risk, high reward style of trading. If you are a beginner or if you can t tolerate a 10% loss on a single day, I wouldn t recommend you trade earnings report. The reason is simple, sometimes a stock can drop more than 10% when a company s earning misses wall street analysts had expected. That is not to say trading earnings is not profitable. If you do it correctly, you can make thousands in a few days just by trading earnings report. A stock can go up over 10% in a single day when the company reports good earnings or earnings that beats wall street exceptions. High probability trading for earnings report Here are a few strategies that I use to make a high probability trade using earnings reports. Let s say if we are going to trade Microsoft, below are some research that we must do. 1. General Stock Market -Is the general market good? Are other companies reporting good earnings? If the answer is no, you should stay away from trading the earnings report. 2. Stocks within the same sectors Is other stocks in the same sector reporting good earnings? In the case of Microsoft, you will want to check how the technology sectors are doing. There are companies that Microsoft do business with or their competitors that report earnings prior to Microsoft s earnings reports such as Intel, AMD, Apple, Oracle, Dell and HP. If they are doing well, chances are Microsoft will do well. Microsoft is the world s largest software and windows maker and they use Intel chips. Please note, they are not 100% correlated, so there is still a chance when Intel beats earnings estimate while Microsoft misses. 3. How the stock is doing You need to do research on the stock itself by reading their balance sheet and analyze their stock. Are they beating earnings estimate in the previously quarters? Are they doing well relatively to the other companies in the sector? 4. Stock Charts This is not as important as the previously 3, but you want to study it anyway. Analyze the Dow, SPY and MSFT chart. Are they in an uptrend? Are the chart bullish? If the charts are bullish, there is a good chance it will continue. Technical Stock Screener www.dojispace.com Page 100
Swing Trading Rules In order to swing trade successfully in the stock market, there are certain rules that you must follow. 1. Control your emotions Greed and fear are the two most common enemies to the stock market. You must learn how to control them when swing trading. 2. Chart Reading Chart is your friend, and be able to read and interpret stock chart is critical for swing traders as they generate the buy and sell signals. 3. When in doubt, don t trade Remember the stock market is always there. If you are not 100% sure if you should buy a stock, then you shouldn t. There is always another stock out there that you can trade with. 4. Stop Loss Stop Loss is necessary in swing trading. You can be right 10 times, but if you are wrong 1 time without a stop loss, you may lose all your profit or even worse turn your profit into a loss. I wouldn t recommend stop loss over 5%. 5. Never Double Down on a losing stock If you are losing on a stock, you shouldn t double down. Don t be afraid to admit that you are wrong and take a loss. Remember, you don t have to be right every time to make a good profit in the stock market. 6. Don t be afraid to buy more shares of a winning stock If you are winning on a stock, don t be afraid to buy more shares of the stock. Unfortunately, most amateurs do the exact opposite. They double down when they lose, and are always afraid to buy more on winning stocks. 7. Review your trades Technical Stock Screener www.dojispace.com Page 101
You must have a trading journal that you can use to comment each trade. Pay close attention to the big winners and the big losers. You want to do exact the same thing in the future as your winners, and avoid the same mistakes as the losers. 8. Be Patient You must have a plan every time you execute a trade. For example, when you buy a stock, you should have an idea when do you want to sell it. You must always be patient if the stock didn t go in the direction that you wanted it to. 9. Never trade on expert tips You should never execute a trade base on expert tips or tips from a friend. You should always do your own research on the stock before you buy or sell a stock. 10. Pay attention to the market news You should pay attention to the general stock market news and news that are related to your stock. Earnings news is one of the most important news that will often affect the stock price so you should pay close attention to them and learn to interpret them. Technical Stock Screener www.dojispace.com Page 102
How To Screen For Stocks? Screening for stocks manually is a tedious task and chances are you will miss out many potential winners. Here are two ways that I use to search for stock ideas. 1. Technical Stock Screener - I use the advanced technical stock screener on http://www.dojispace.com to screen for stocks. This is a technical stock screener that allows you to scan for multiple technical indicators at the same time. For example, you can easily find stocks with a bullish engulfing pattern + macd crossover + stochastic value cross above the oversold area. The stock screener allows you to use any combination of technical indicators and you will get the result in less than 30 seconds. Technical Stock Screener www.dojispace.com Page 103
Here s a screen shot of the result page. It shows a list of stocks that matched your searching criteria and you are able to sort the data by the symbol, open price, high, low, close, volume or % change. In addition, you can quickly look through each chart using the Stock Charts Slideshow. Technical Stock Screener www.dojispace.com Page 104
2. MarketClub Stock Screener This is another stock screener that I use on a daily basis to get stock ideas. MarketClub uses a triangle technology to scan the stock market and rate each stock on a scale of -100 (very bearish) to +100 (very bullish). I usually just go get the stocks with a score of +100 and study each one. I previously published an article on how to use the MarketClub screener. Click the link below to read it in detail. How to use MarketClub Click here to visit the MarketClub site for more information Technical Stock Screener www.dojispace.com Page 105
Trading Software I use Dojispace and Marketclub to help me trade stocks. Marketclub is a trading software that I use and which I strongly recommend for other traders. It has some of the best trading tools available to traders, helping you to find trending stocks. Rather than listing out all the features that this software offers, I would like to emphasize on the ones I find the most useful, which helps us to pick trending stocks. 1. Smart Scan Technology MarketClub uses Smart Scan to scan the market and give recommendations on what stocks to buy. Based on a pre-defined weighted trend formula for chart analysis, each stock is analyzed on a scale from -100 (strong downtrend) to +100 (strong uptrend). I ve found many stocks in the past from MarketClub that went up over 50% in a matter of days and I believe that I will find more of those stocks in the future. Markets that they scanned include stock, foreign exchange, future, index and mutual funds. Also, you can search stocks for intraday, yesterday, 3 days ago, a week ago and even a month back. Thus, this is good for day trading, swing trading, and long term investing as well Technical Stock Screener www.dojispace.com Page 106
2. Chart Portfolio The charting software includes over 230,000 symbols. It allows me to personalize my portfolio for the symbols that I am following and create charts easily. Over 23 technical indicators can be applied, including Bollinger Bands, Moving Averages, MACD, Stochastic, Parabolis SAR and more. The charting platform can be downloaded and able to browse data in almost any format, such as personal programs like spreadsheets. 3. Trade School They offer audio (MP3) seminars and PDF workbooks, which will have you following along with some of the most well known professional traders in the world like Linda Raschke, Mark Cook, and Chuck LeBeau. These seminars cover various trading techniques and information on foreign exchange, futures, day trading, money management, stocks, psychology, indexes, options and more. My Review There are many more other features that MarketClub offers which are beneficial to me such as trading alerts, and stock portfolios. MarketClub is suitable for any type of trader, whether you are a short term swing trader or a longer term investor. The system is not perfect. It sometimes gives buy signals a little late so you could miss a portion of profits. Their charting platform is a little complicated which requires you to spend a couple of hours to learn and take advantage of all the features. Overall, I am very pleased with the software and encourage every trader to try out this trading system. They offer a 30 day Risk-Free Trial. Also, there are some pretty good stock training videos on the website that you can watch for free. If you want to see how I use MarketClub to pick stocks, click here to get my tips. Technical Stock Screener www.dojispace.com Page 107
The Winning Trade System If you are interested in trading options, make you check out this great options course. It is a course consists of 16 training videos that teachs you all you needed to know to make money money trading options. Click here to learn more about this course. Technical Stock Screener www.dojispace.com Page 108