Archive for April, 2008:
Finding Chart Patterns That Can Lead To Big Profits
Professional traders have their own set of patterns and indices they use to predict the markets. Profitable traders are aware enough to generate a profit in nearly every market. Sideways trends, up-trends, and even down-trends can all be profitable with the proper tools and investment strategy. Creative techniques will help you preserve trading capital while generating huge profits. To master day trading, you must first understand the basic chart patterns.
The Double Top and Bottom
The best and easiest chart pattern to recognize is the double top or double bottom. It is marked by two consecutive peaks or dips in price to about the same level. This chart pattern works because the first movement tests new boundaries, and then investors take profit and push the price down. Then investors re-enter and push the market again to test its new area, while the market again corrects - although this time, there is usually plenty of buying or selling interest that is removed by the large price movements, and the price either tops or bottoms. When the price moves to a position twice, it encounters plenty of orders that were left at the last peak. On a double top, seller sentiment is extremely high, and investors are looking to short the stock hard. Very rarely do people buy when they see a double top, further compounding the move.
Flagging Trendlines
Pennant flags are also a very identifiable charting pattern. A pennant flag is a sideways trend that forms where two trendlines meet. When two trendlines touch, buying and selling pressure battle each other out and usually end in a huge downtrend or uptrend immediately following the breakout. Professional traders have developed very popular strategies such as “straddling” a position, or placing a short order below the pennant and a long order above the pennant. When the breakout does happen, in either direction, a trader will automatically enter a position and profit from the breakout.
Head And Shoulders are Important
Head and shoulder patterns are also very popular with professional traders. A head and shoulder formation is created when the stock makes a three topped chart, with one high peak in the middle surrounded by two lower peaks on each side. These usually mark a downtrend at the top of a chart and an uptrend when found upside down at the bottom of a chart. The head and shoulders shows large buying strength that eventually tapers off as investors take a profit.
Reading charts are important in finding profitable opportunities in the market. Developing your ability to recognize patterns is key to growing a portfolio.
About the Author:
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a distinguished provider of educational trading products and services that are available worldwide. Trading EveryDay also has many articles with unique perspectives on day trading.
Article Source: http://EzineArticles.com/?expert=Leroy_Rushing
How Options Are Priced
Understanding how options are priced can greatly help you profit in today’s stock market. One of the biggest misconceptions about options is that they are 100% related to the stock’s price. This is not true, it is possible to buy a call option on a stock, the stock’s price goes up and the options price goes down.
That is because there are 2 different parts of an option. The first is called intrinsic value. This is simply the difference between the stock’s price and the options price. So if we buy a $90 call on a stock that is trading at $98 the intrinsic value is $8.
It would make sense for that option to be priced at $8. What you will find however, is that the option will be priced above its intrinsic value. The call might cost $9.5. The other $1.5 is the time value of an option.
This value gets its price based on how many days are left before the option expires. The downside of this is that as time goes by the lower the time value will go.
So, if that stock stays at $98 for a month the option price will have gone down even thought the stock’s price hasn’t changed. The time value will have probably gone down a lot by that time.
To make money on an option the stock must go up faster than the time value decays. Slowing down the decay of an options time value is just as important as finding a stock that is heading up. There are a few ways to do this.
1. Buy more time. Obviously an option 3 months away will decay at a slower rate than an option that will expire next week. Most professional traders will buy more time than they think they need to avoid time decay.
2. Buy an option with a lower strike price. The further in the money you buy an option the less time value and more intrinsic value it will have. Unfortunately the more in the money your option is the more you will pay for this option. But It helps to lessen time decay.
For more information on trading the stock market visit http://www.stocks-simplified.com
Article Source: http://EzineArticles.com/?expert=Shaun_Rosenberg