Understanding the Double Top Chart Pattern

December 4th, 2012

What Is the Double Top Reversal Pattern?

  • You need a prior trend that is positive in order for it to be a reversal
  • There are usually two points that force a stock to reverse
  • As the stock climbs upward, it hits the first top, the stock goes down (sentiment is saying the stock is too high),  the stock isolates, and eventually creates a second top
  • Remember that it creates an "M"
  • More tops create more resistance
  • The stock can break through the support line
  • If you are trying to enter this on the short side, you want to be careful because there is an area of confluence beneath the support line. Make sure the stock clears the support line before entering.
  • Usually the double top is shorter and takes less time to develop than the double bottom.

How to Trade a Double Top Reversal Pattern

  • Take the distance between the resistance and support lines (one distance level) and bring it down under the support line.
  • That is your ideal goal for where the stock may head.

Similarities and Differences Between Stocks and Options

December 3rd, 2012

Stocks v. Options

Similarities

  • Both are trade-able securities.
  • Both have bid and ask prices and a bid-ask spread
  • Listed on the same exchanges

Differences

  • Options have expiration dates, stocks do not
  • There is no set number of options
  • With stocks, you own a piece of the company and you have voting rights
  • With options, you do not own a piece of the company

Trading the Cup and Handle Chart Pattern

December 1st, 2012

Cup and Handle Pattern

  • It is a continuation pattern.
  • Discovered in 1988 by William O’Neil. I recommend his book How to Make Money in Stocks.
  • You need a previous trend in order to have a continuation pattern.
  •  When the pattern trickles down the “handle” the volume will be slowly declining.
  • Once it breaks the “handle,” the volume needs to be very high.
  • Remember that the “cup” of the pattern needs to be a “U” shape and not a “V” shape. A “V” shape is likely to be a Double Bottom or a Double Top.
  • The “cup” is gradual, it is about a 1/3 retracement from the previous uptrend, and goes back down to re-calibrate itself.
  • You want to enter or add to your position when it breaks the “handle.”

Basic Look at Stock Options: LEAPS

November 30th, 2012

  • LEAPS = Long Term Equities Anticipated Securities
  • Stock options that are longer than one year
  • Buying out option premium on a longer term horizon
  • Bought a year or more in advance
  • Options that expire and many of them decay over time much slower than shorter term options
  • LEAPS allow you to have more time within the contact
  • Can also be used to purchase protection for your stock

Stock Market Charts: Head and Shoulders Pattern

November 29th, 2012

What is the Head and Shoulders Reversal Pattern?

  • The stock bounces off of the support line three times, making a head and shoulders pattern
  • On the first shoulder, the volume is high
  • The volume is lower on the uptrend that creates the head
  • People are not voting for the stock to go up. This low volume creates the head
  • Important to understand: If the stock bounces and hits the support line again (after the last shoulder), the line becomes a resistance line. You want to make sure it doesn't bounce down again because that would mean the stock is going below the resistance line.
  • A three month pattern is healthier than a two day chart pattern

How to Trade on the Pattern

  • Typically, people wait to trade until the stock breaks the neck line region and they trade on the down side (if there is enough volume)

Stock Chart Patterns Explained: Double Bottom

November 28th, 2012

The double bottom reversal pattern is similar to the double top reversal pattern, but it goes in the opposite direction.

What Is the Double Bottom Reversal Pattern?

  • It's a reversal pattern or bullish pattern
  • Begins with a downward pattern and typically ends with an upward pattern
  • There can be double tops or triple tops between the double bottom
  • Double bottoms take longer to develop than double tops
  • Even if there  is a double top between the double bottom, it is more important that there is a double bottom because it spans a longer period of time than the double top

How to Trade a Double Bottom Reversal Pattern

  • Enter the stock somewhere off the second bottom
  • Ideally, you should enter it after it crosses the resistance line (from the two tops that occurred earlier)

The Basics of Calls and Puts

November 27th, 2012

Call v. Put

Call

  • Allows you to buy stock
  • If you have one call that means you are able to buy that stock at your set price
  • It has to reach the set price on or before your contract's expiration
  • If it doesn't reach the set price, your contract deteriorates in value and you lose your option premium
  • You buy it in hopes of stock going up
  • As the stock price goes up, the call increases in value
  • Similar to going long within stocks

Put

  • Allows you to sell stock (it gives you the right, but not the obligation)
  • For example: you own 100 shares of Microsoft at $25 and you own a put of Microsoft at $20
  • If the stock declines to $10/share and you have the put for that year, you can put somebody the stock at the $20 range
  • You buy it in hopes of stock going down
  • As the stock price goes down, the put increases in value
  • You are hoping to sell the contract later at higher value
  • Similar to short-selling

Stock Trading Mistake: Trying to Avoid Missed Opportunities

November 26th, 2012

Rushing trades can destroy your account, especially if you're making this mistake often.

Example

  • If a stock goes up and down several times and you've missed opportunities to sell when it peaked, you may get "ants in your pants"
  • This can cause you to buy before the stock begins to ascend again, and it may actually decrease instead
  • You'll take a loss simply because you were rushing
  • The past doesn't always equal the future and patterns don't always repeat themselves
  • Wait for volume confirmations: for it to gain volume or to drop and break the support line
  • Be disciplined and patient in order to avoid this mistake

Stock Fundamental Analysis: Two Methods

November 23rd, 2012

There are two ways to evaluate the fundamental analysis: top-down and bottom-up.

Fundamental Analysis Breakdown

  1. Health of Economy
  2. Industry
  3. Earnings

Top-Down Analysis

  • Checking the health of the economy, followed by the industry, followed by company earnings. If the company earnings are good, this is when you may decide to buy the stock.

Bottom-Up Analysis

  • Checking the earnings, followed by the industry, followed by the health of the economy.

Stock Market Chart Patterns: Channels

November 21st, 2012

Types of Channels

  • Horizontal
  • Ascending
  • Descending
  • They don't have to be symmetrical
  • You want to enter when the stock breaks the channel marker (either up or down)
  • You want to wait for volume confirmation
  • The longer the stock stays in a channel, the healthier it is

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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