Friday, October 31, 2008

Leadership stocks and lagging stocks

Leadership stocks and lagging stocks are two things you can look at when trading the market. These are stocks that are performing above average and below average.

A leadership stock is a stock that has done better then the market average for a set period of time. This period depends on your time frame. If you are long term you might look at a year or longer, if you are a short term trader you might only look at the day.

The lagging stocks are stocks that have done worse than the market for a given time frame, either a day or longer.

It is important to pay attention to this because comparing how a stock did to the market average can tell you a lot. If the S&P went up 2% today but stock XYZ only went up .5% it can tell you that this stock does not have that much buying pressure.

In addition it can tell you that the stock probably only went up because the market as a whole went up. If the market stays flat or goes down stock XYZ will be more likely to crash then other stocks. If you are trading a stock that severely under performs you may want to consider moving your stop up.

I never exit stocks that are severely under performing just because they are under performing but it can cause me to move my stop up.

However if the S&P goes up 2% and the stock ABC goes up 5% that could be a sign that stock ABC has a lot of buying pressure and will continue to outperform the market in the short term. I never enter a stock just because it is outperforming the market, but if it has just broken through resistance or bounced off of support in addition to beating the market in the short term that can be a good sign.

Determining whether a stock is leading or following the market can be interesting and help you gain confidence, but it should be used alongside other indicators.

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Wednesday, October 29, 2008

Market Turning Point

In this market everyone is looking for the market turning point. The point where investors come in and say, stocks have been crushed enough, everything is on sale, it is time to buy. But how can you tell when that time has come? Is there some magical device that will give you the exact bottom or top?

The Japanese like to think so. The candlestick patterns that were first discovered in Japan are widely used today to find the tops and bottoms. They do have success and have been tested over 400 years.

However these candlestick patterns are not the ultimate answer. They normally only give off signals for short term trends. If you were looking to catch a short spike up that last a couple of days candlestick patterns can be helpful.

But if you are looking for a longer term trend reversal that will last years it will not come so suddenly. A trend does not change overnight; the markets do not suddenly go from a downtrend to an uptrend in an instance.

What normally happens at market tops and bottoms is the market tends to trade sideways for a little while. This little while could stretch anywhere from a few months to a year. That allows investors to feel like the stocks have stabilized and stop falling.

It gives everyone the feeling that the risk is gone. You can buy stocks at a big discount without having to worry about losing your shirt. Finally after months of trading sideways the markets break into new short term high and everyone starts to buy creating another bulls market.

That pattern forms time and time again when the markets start to change. Changing takes time. If you are trying to buy cheap stocks right now don’t assume that they will automatically shoot up in the next week. Some plays could take years to work out.

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Tuesday, October 28, 2008

Line chart, bar chart, or candlesticks

With all the different ways to view stock charts today it can get kind of confusing. Figuring out whether to use a line chart, bar chart, or candlestick chart is the first step.

Let’s compare them. Bar charts and candlesticks give you much more information than the simple line chart. They tell you the open and closing price along with the high and low of the day.

Even though they both give off the same information I prefer the candlestick because it is much easier to read. If you get use to the bar charts it will probably be just as easy. But for new traders the candlestick charts are much easier to read.

The line chart is much different than the other two. It plots the closing price of each day and then just connects the dots. This type of chart weeds out all of the noise that you get from both bar and candlestick graphs.

Line charts make it easier to identify support and resistance along with chart patterns. Because of this they make it easier to make quick decisions on whether the stock is bullish or bearish.

But for all of these advantages line charts make it harder to determine where to set stops. For instance you find a stock that has just hit support and you expect it to come up.

Looking at your line chart you buy it and place a stop 1% below support. However with a candlestick chart you are able to see the highs and lows of each day. You can determine how wide the daily trading range is.

Maybe the stock is very volatile during the day. In this case you may want to set your stop 2 or 3% below support so you do not get kicked out of a trade too early.

The daily trading ranges can be important to determine where to pace your stops. That is something very important that the line chart does not provide.
In the end it is up to each individual trader to determine what type of chart fits them best.

For more information about stock chart settings visit

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Monday, October 27, 2008

Never Move Your Stops Down

It is very tempting to move your stops down during times of panic. It becomes even harder when you believe the market is overreacting to bad news. But holding your ground is absolutely critical when trading.

When you buy a stock you need to have a stop level. This is a level that is the most you are willing to lose on that one trade. It is the point where you say if the stock reaches this level I am pulling the plug and getting out with my losses.

Following through with that level is very important. Only by managing your risk and cutting your losses short can you be able to last in the stock market. If you only lose 2-5% of your account on 1 trade it will not affect you too much. You will still be able to come back without too much difficulty.

Ok, but stocks pull back and recover right? This type of thinking is what causes new investors to stay in a trade too long and watch their accounts go down. The fact is stocks can fall for a while. Strong stocks normally don’t just fall for 10 or 20% before they start to turn around.

Many stocks can fall 50%, 60%, or more before they start to turn around. And some stocks might never turn around. The last thing you want to do is hold a stock through a 50% decline.

On the other hand if you do not move your stop level lower you can exit the trade for a smaller loss and can look for better opportunity elsewhere. There is always opportunity to make money in the stock market so holding your stock through a 50% decline can be useless.

Remember the stock market is a battle field, holding your ground when it comes to following your rules is a must.

For more information about the stock market visit

Saturday, October 25, 2008

Exiting losing trades fast

Exiting short term trades at the best possible time is always the goal if you are trying to catch the little up and downs of a stock. It is something everyone needs to work at and can greatly improve your profits.

The first step to always exiting your trades at the best possible time is to set targets. Setting target can give you an idea of where to exit a trade and also how much you expect to make. Remember these targets should be reasonable and based on technical indicators. Do not buy a stock at $5 and say ok my target is $300.

Chances are the stock will never reach that and if it does it will not be for 60 or 70 years. It is much more reasonable to enter a trade when it is at $5 and set a target for $7 in the near term.

In addition to targets every trade should have a stop to allow you to exit out of your losers quickly and with less pain. This should be the most you are willing to risk on the trade and should be decided before you trade.

NEVER, move a stop down. Sometimes it is tempting to move a stop down when a stock starts heading against you. This only leads to larger losses which can work against you in the long run. It is ok to move your stop higher as the stock goes higher but you should have a set amount you are willing to move it.

When setting a stop you need to let your stock have room to move. Don’t buy a stock at $50 and put a stop at $49.99 because you will sell it for a loss 99% of the time.

The last thing you should consider is exiting a no-performer early. Most short term traders will have some point where they just decide to exit a stock. If the stock has not been making the short term move you were expecting it for many days in a row it may be time to exit the trade early and find a better opportunity.

For more information about the stock market visit

Thursday, October 23, 2008

Trading With the trend

No matter how many times you have heard it, it is worth hearing it again. You must trade with the trend and not against it if you ever plan on being successful in the stock market.

It can be difficult to trade in the same direction as the market especially when prices have fallen so much. You will find times when the average stock is trading at 70 or 60% of what they were a year ago. That makes it extremely hard to assume they will keep falling.

It builds up the urge to go and buy all these stocks at a discount and wait for the rally to start. But you cannot do that. If the market is down trending it is likely going to keep down trending.

The worst losses I ever experienced was when I though the market had to start turning around. On the other side the best profits I ever experienced was when I traded with the trend even when I thought it would turn around.

There are too many people out there trying to buy at the bottom and sell at the top and getting burnt. The reality is that there is no way of telling where the bottom or top are.

If a stock has fallen 50% there is always room to fall. I’ve seen plenty of stocks fall 90% in a year. They harmed every bottom picker who entered them. I have also seen many companies that “Aren’t going anywhere” file for bankruptcy after falling.
On the other hand stocks that are trading at 2, 3 or 4 times what they should be trading at do not necessarily have to fall. Who knows the stock could be on the verge of making the biggest rally it has ever seen.

In short stay with the trends, don’t every try to fight it and you will be much better off.

For more information about a stocks trend visit

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Wednesday, October 22, 2008

The Holy Grail of Stock Trading

Everyone always searches for the infamous holy grail of stock trading. The magical trading system that will make them rich and allow them to never lose money again.

So does it exist? Is there a trading system or oscillator that will allow them to never lose money again? No, there is no magical system out there that will make you an instant stock market millionaire.

Yet so many people pay thousands of dollars looking for that one special system. They go to seminars after seminars or buy systems after systems. All of this to find the famous holy grail of trading, a system that will not fail to make them money.

There is no such thing. Many people who try to find the best system just switch from Stock market program to stock market program. Getting nowhere and spending a lot of money doing it.

But there has to be a way to trade right? There are many people who consistently make money in the stock market after all. There are a few things all stock market professionals have in common.

1. All traders have a system or multiple systems. Remember there is no holy grail that will make you right every time but there are systems that are right more than they are wrong.

2. All traders manage their risk. If you lost 10% of your account on 1 stock you are not managing your risk. No single trade should set you back more then 2-5% of your total account value. This way a loss will not hurt you too much and it can easily make it up on your next trade.

3. No traders will get their stock picks from the news. All successful traders are able to weed out everything they are hearing on the news and make rational decisions based on technical analysis.

4. All traders control their emotions and make rational decisions based off of their own trading plan.

So there you have it. The Holy Grail, build a system and follow it, control your emotions, and minimize your risk. If you can do those things you can succeed in the markets.

For more information about the stock market visit

Tuesday, October 21, 2008

Reacting to the Market

Reacting to the market is a lesson every trader should learn. It is much simpler and much more profitable then to just react to the market then to try to understand it.

Too many traders try to explain a big move. For instance most people will say that stocks fell because of the unemployment numbers that just came out, or the interest rates that were announced or some other important news factor that came out today.

And they may be right, there could be hundreds of reasons why the market falls on any given day, but is it really worth it to find out. In most cases the answer is no.

Stocks fall because of panic, more sellers than buyers. Stocks shoot up because of greed, more buyers than sellers. Many times it can actually help you to weed out all the noise that comes from Wall Street and make decisions based on what you see.

If you are a technical trader that is what you should do. Don’t concern yourself with the fact that everyone says we are in the worst depression since whenever. Concentrate on the basics, is the market up trending? Is it down trending? Has it broken support? Any Chart patterns forming?

The basics will help you to stay calm and look at the market with a clear mind rather than looking at it with hundreds of news reports running through your head. Perhaps the most important reason for just reacting to the market is that it helps to eliminate bias.

You can listen to the news and hear all the reasons why a given stock is going to go up. The problem is when it comes time to see how the stock is actually performing you will have a bias to the upside. Even if the stock is in a strong downtrend you can always find some news out there that can justify buying it.

But justifying your buying isn’t always enough. If a stock is clearly trending down and breaking through support there is no reason for you to buy it. In fact you may even want to short it.

Basically it does not help you to try to explain or rationalize things by looking at the short term news reports. It can help you much more to weed all the useless junk out and concentrate on your own specific trading rules.

For more information about the stock market visit

Monday, October 20, 2008

Focus on the trading Process

Focusing on the trading process can help you become more profitable when trading. It has many advantages then focusing on your profit.

Focusing on your profit can actually hurt your trading account. It makes it harder to make rational decisions and is what separates the professional trader from the average Joe. When you focus on your profits and losses you can make bad decisions.

It can cause you to exit a trade far too early. Once you make a profit, especially a large profit it is tempting to exit early. This leads you to exit for a $100 profit when you would have actually made you $1000 if you had followed your rules. I have made these mistakes many times, everyone does. That is one of the dangers of looking at your profit and losses while you are in a trade.

Another reason why focusing on your profits and losses can be bad is it can cause you to stay in a bad trade for too long. In which case you to hold onto the trades and try and turn a loss into a profit. The idea behind this is “You don’t lose money until you sell”.

The bad part about that is it actually works against you. Stocks tend to trend, if a stock starts to turn against you if can fall for a very long time causing you to hold onto the stock for years hoping that you will eventually break even.

What you should be doing instead of focusing on your profits and losses, is focus on your game plan. It is much better to concentrate on how you are going to open or close a position. Develop your own rules to trading, when will you get in, when will you get out.

Developing a strategy and sticking with it can cause you to be much more profitable in the stock market then you could have imagined.

For more information about the stock market visit

Thursday, October 9, 2008

Critical trading account levels

Crossing critical trading account levels are never easy. It is emotionally draining to cross below a critical trading account level and it is the best feeling in the world to cross above one.

What I mean by critical levels are levels at which you feel are important. For instance you finally make it over the $100,000. It felt great. The only problem is now you do not want to trade anymore, why? Because you are afraid of your account going below $100,000.

These levels can make you stop trading or get out of your trades too early just so you can stay above them. Because of this they can be one of the biggest psychological hurdles to overcome. And even the best of traders will have a problem with it.

That is why you should not count your money while you are in a trade. Kenny Rogers once said “You never count your money when you’re sitting on the table.” That is as true in the stock market as it is with anything else. So how can you avoid counting your money?

1. Hide your balance. Some brokers allow you to hide your balance when you are in your account. It is definitely beneficial to block out the number so you will not be able to see it, and therefore you will not use your account balance to make exiting decisions.

2. Check your account 5 minutes a day. Checking your account balance for only 5 minutes a day can help you stay calm and let you keep your sanity. If you are constantly checking your account balance you will undoubtedly make decisions based solely on how much money you have.

3. Take trading breaks. If you trade too much you will be burnt out mentally. Taking a break here and there help you to come back fully recharged and able to better decisions.

For more information about the stock market visit