Trailing Stop

Trailing Stop

Trailing Stop - A Little Insurance For Your Profits

In today’s world, you buy insurance for everything. You have a policy that insures your next cruise in case of hurricanes, you spend a small fortune for health insurance, and you even have a policy that protects your coffee maker! Well, if that $40 coffee maker needs a little protection, what about your stock portfolio? In this article we’re going to talk about something that will not only save you money in the stock market, it can even help you make more money. We’re going to discuss Trailing Stop Orders.

First, the definition; a Trailing Stop Order is a percentage-based stop loss strategy. Stop Loss Orders are defensive strategies that protect a stock if the price drops below a certain point. A Trailing Stop Order is different from a typical Stop Loss Order in that it does not rely on a target price, but rather a target percentage to implement a sell. A Stop Loss only prevents you from dropping below a target stock price that you determine; a Trailing Stop follows a stock as its price rises. By doing this, a Trailing Stop Order not only protects against a fall, but it also allows for additional profits. Here’s how it works:

Many stop loss strategies & techniques offer you this protection. You identify a bottom for your stock and say, “If my stock drops to X, I want to sell immediately.” In the case of a Trailing Stop, you don’t identify an exact dollar amount, but a percentage instead. This is the insurance for your original investment. Assuming your stock has risen while you have owned it, you can set your Trailing Stop percentage such that it doesn’t fall below your original price. Remember that if you’re protecting your original return on investment, it now includes the cost of both buying and selling your shares. If you’re happy with simply not losing, place a Stop Loss Order and relax at this point; if you want more, let’s do something else.

Ok, you could have just insured your stock against a bad loss; it’s good stock market advice, but your stock charting indicates a rising trend on this company. Are you willing to only protect your investment or do you want something more? That’s what I thought, you want more. I have the answer for you. The difference in a Trailing Stop Order is that since it’s a percentage, it moves with your stock price. When your stock was at $25 per share, your 20% Trailing Stop would implement a sell if the price dropped to $20 per share. Well now that your stock has soared to $50 per share, you want to protect your profit, right? That’s why you have a Trailing Stop; a 20% stop order won’t sell your stock unless it drops to $40 per share. Because the Trailing Stop can move as the stock increases, your profit is protected against an unexpected fall. That insurance just allowed you to make and protect an additional $20 per share and that money will look real nice in your pocket and it just made you a successful trader as well!

Trailing Stop Orders are a helpful way to not only protect what you have, but to protect what you might gain as well. When used as part of an overall stock trading system, it can be a valuable piece of insurance for your portfolio. You have insurance for everything; it’s time to have it for your portfolio as well!

Market Direction:

The consolidation continues. The Doji's, last week in the Dow, indicated the potential short-term reversal. The stochastics were in the overbought condition and prices were moving up towards the top of the trading channel. In the following days, a few more Doji's appeared. This was occurring as the stochastics started to roll over. As was consistent with the current uptrend, a pullback to the 20 day moving average in the Dow and the 50 day moving average and the NASDAQ was a logical target.

DOW

NAS

The weekly oscillations make it hard for traders. Trades either need to be very short-term or very long term. But that comes under the conclusion of analyzing what the market is providing. "Let the market tell you what the market is doing." That is the advice of the Japanese Rice traders. The successful trading strategy under these conditions should be holding positions for only one or two days at a time for the short-term trader. The longer term trader would be using the trend channels as the guide for staying in positions. The Candlestick analyst has the advantage of identifying what the market is providing very quickly.

Today's trading brought the indexes back to the major averages that have been acting as support levels during this uptrend. Although the stochastics indicate more downside, being able to identify the formations at these levels will give a clear indication of whether the moving averages are going to continue to act as support or whether prices are going to continue to move lower. Many positions were stopped out over the past day or so with slight gains or flat.

How do you position your portfolio in these market conditions? Despite the fact the up trend has been obvious; the pullbacks have to be viewed as probable profit taking. However, there is never any assurance that a pullback isn't the start of a full-scale reversal. Although the probabilities favor the uptrend continuing, it does not hurt to establish some short positions when the top of the markets trend channels are showing weakness. There will always be stocks/sectors that are starting to turnover. At the same time, the overall uptrend will have individual chart patterns maintaining relatively good strength even during the profit taking pullbacks.

The advantage of candlestick analysis is to differentiate the pullback in uptrend versus a reversal. Adding a few short positions offsets the possible full-scale reversal caused by an unforeseen event. A profit-taking pullback could turn into a full-scale reversal if something negative happened in world events that would continue selling through the previously observed support levels. On the other hand, the lack of major selling at the support levels, the appearance of indecisive signals, allows the candlestick investor to quickly close out short positions that might be ready to move back to the upside. This is a very simple strategy. No high-level analytical processes are needed when utilizing what the candlesticks are illustrated in individual stocks/sectors.

CAKE

As illustrated in the Cheesecake Factory Inc. chart, a major candlestick signal occurring at a major moving average becomes a stimulant for shorting the stock. The signal, combined with the fact that the market indexes in general were starting to get toppy, makes this a viable trade. Are the markets going to pullback to the major moving averages and turn around at those support levels? Probably, but we do not know for sure. Adding short positions to the portfolio that fit the right criteria, major sell signals at major moving averages, produces a high probability profitable trade. Covering the short positions becomes a function of what the markets are doing once they reach the potential support level and what candlestick formations appear in the individual short positions at the same time. Click here for the candlestick training CD 'Candlestick Trades at Major Moving Averages'.

Are there times to be 100% long? Are there times to be 100% short? Are there times when a combination of long positions and short positions is the most prudent portfolio mix? The answer is yes to all these questions. The candlestick signals make it much easier to analyze when each of those occurrences should be happening.

Market Technicians Association - This past week, Mr. Bigalow was attending the MTA annual meeting in Miami Florida. These meetings are very instructive. It brings to light technical analysis methods that others have improved upon. Presentations and conversations with well respected technical analysts such as John Bollinger and Ralph Acampora easily stimulates the enthusiasm for specific technical analysis methods. This meeting provided interesting insights into seasonality. Mr. Bigalow had experimented with these techniques approximately a decade ago. The improvements of computer analytical tools since that time has produced some interesting potential return improvements. The application of candlestick signals to stocks/sectors moving at seasonally indicated times creates a very strong trading concept. These statistics will become available to the Candlestick Forum members in the very near future.

Basic Stock Information - Going Back To The Basics

Basic Stock Information - Going Back To The Basics
The first step to understanding the stock market is to understand basic stock information. By knowing what a share of stock is, it is easier to understand the workings of the entire stock market. Before you begin investing in the stock market, it’s time to get your basic stock information.
Among the stock market basics, the share is the smallest unit of ownership in a company. The size of a share varies from company to company. It can even vary within one company as it issues more shares or buys back shares that were previously issued. If you own a share of stock in a company, you are a part-owner of that company. The sum total of all your stock holdings is called your stock portfolio. If a company issues dividends, or profits, to the shareholders, you will likely receive money based on the number of shares you own. Each year, companies issues corporate results and basic stock information for their shareholders to review.
One of the stock investing basics of stock ownership is the concept of limited liability. If Ford loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock becomes worthless. This is basic stock information, but important to know; creditors can’t come after your personal assets. Whether as the result of a lawsuit or creditors, the worst losses you will experience investing in companies are losses on struggling stocks.
In the terms of basic stock information, the two types of stocks are:
• Common stock – This is the type of stock held by most individuals. Those holding common stock have voting rights as well as the right to receive dividends. Whenever you hear that a stock is going up or down, the reference is being made to common stock. While not all publicly traded companies have preferred stocks, all publicly traded companies have common stocks.
• Preferred stock – In spite its name, preferred stock has fewer rights than common stock, except with regards to dividends. Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call on dividends over common stock. Investors buy preferred stock for its current income from dividends, so look for companies that make big profits to use preferred stock to return some of those profits via dividends.
Liquidity
Another piece of basic stock information is that common stocks can easily be bought or sold, or they are highly liquid. Not all companies are traded daily but most of the larger companies appear daily on the stock market, giving investors the opportunity to buy or sell shares.
Conclusion
Learning how to invest in stocks is really a product of learning basic stock information and learning to understand to dynamics of a fascinating market. After learning basic stock information, forming a stock trading plan, and understanding technical analysis, a trader can begin to enjoy the hectic world of the stock market.
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Market Direction: What is the market telling us now? Stochastics for both the Dow and the NASDAQ are in the overbought condition. The Dow formed a Doji. The NASDAQ saw a gap down in price on the open. This was done after a small Spinning Top formation yesterday. What does all this imply? Witnessing indecisive trading in the overbought condition creates a high probability of a short-term sell off. Is this a major reversal? Not necessarily! The indecisive signals are being formed with very slow profit taking indications.
DOW

The trend channel remains a predominate factor. Prices moving toward the top end of the trading channel in the Dow makes the analysis more compelling. The indecisive trading at these levels now requires watching. Weakness from these levels in the Dow would be confirming the weakness illustrated in the NASDAQ. Short-term traders should be prepared to close out long positions that are starting to show potential sell signals.
NAS

The Wynn resorts Ltd. chart is a clear illustration of when to buy and when to sell. A Doji followed by a Bullish Engulfing signal in late December made for the opportune buy situation. The stochastics were confirming also. A gap up in price following a Bullish Engulfing signal conveys some important information. Not only has a reversal occurred, but the new buying is being done with enthusiasm. This is the exact scenario for an investor to be looking for. Don't we all want to find the price move that is going to produce strong profits? The candlestick buy signal in oversold condition, followed by exuberant buying, is exactly the scenario to be placing funds. Does this guarantee a strong price trend? No, but it is the set up that has been witnessed for hundreds of years that creates the 'probabilities' of being in a high profit trend potential.
WYNN

Buying a price trend on an opportune signal allows an investor to utilize stock positioning or option strategies. What was the upside potential of this trade? That was not a clear answer. When utilizing options, the price move, as well as the time to expiration, become primary factors. The January 95 calls were bought at $4.70 on the day the Candlestick Forum recommended the stock. Many times a price target can be established if trend lines or moving averages produce the upside potential target. The WYNN chart did not demonstrate an upside target. In that case, a candlestick sell signal becomes the criteria for taking profits.
Upon the purchase of calls, the time remaining until expiration becomes one of the factors. If a reasonable price target can be established during the time frame until the option expiration, straddle strategies can be put in place. When no upside target is visible, a candlestick 'sell' signal occurring before expiration is a logical profit taking point. This strategy is illustrated in the WYNN chart.
The stochastics are in the overbought condition. This should make the candlestick investor more diligent in watching for a candlestick 'sell' signal. Where do most investors buy? Exuberantly at the top! Witnessing a large bullish candle in the overbought condition becomes more stimulus for watching for a candlestick sell signal. A Bearish Harami becomes the signal to indicate that it is time to take profits. A Bearish Harami tells us that the buying has stopped. This signal, occurring two days before option expiration, becomes the probable place to take profits.
Buying the stock at $93 and selling three weeks later $106 makes for a good 15% profit. Buying the January 95 calls at $4.70 and selling at $11 produces a 135% profit. Would this be considered a home run for option trade? Not necessarily, but producing these type of returns on a consistent basis utilizing candlestick buy and sell signals creates a tremendous compounding effect. The major advantage of candlestick signals is providing high probability areas to buy and the high probability areas to sell.

Earnings Per Share - Where The Rubber Meets The Road

It’s a classic saying. Simply put, it says that the proof is the result. It’s the same with investing in the stock market. It is possible to have the best stock trading plan, but the measurement of all your wisdom is found in one place; it all comes down to the bottom line, which is to say earnings per share.

Obviously that statement has a couple of different interpretations. One is the measurement of an investor’s performance; the other is a method of stock technical analysis which can help you to determine if a company’s stock price accurately reflects its worth. Once you are able to determine a stock’s value, you have a better understanding of whether the stock price is high, low or just right. There are a number of sources and techniques for evaluating stocks but it is generally agreed that the best method is earnings per share.

For the typical investor, stock evaluation is based on the company’s earnings. This becomes the central source of information and everything else adds to, or takes away from, the earnings report. Earnings are nothing more than a company’s profit and a reflection of how much money a company made during a certain period. And while it is normal to look for a positive earnings statement, it is not necessarily true that a small or rapidly growing company with negative earnings should be ignored. All technical analysis tools should be kept in their proper context and earnings per share can help to do that.

As can be seen in any given day on the stock market, established companies are expected to have positive earnings. If a giant like General Motors has a low quarter, the stock will likely fall as well unless there is a reason that explains the problem as a one-time event. A new company might go for years with negative earnings and still have favor with the market if investors believe in the future of the company. As a result, actual earnings are linked to expected earnings. Even if a company has actual earnings in a quarter but they fall short of expectations, it is common to see their stocks drop. Earnings, or a steady movement towards earnings, indicates the health of a company and if the stock will pay dividends or realize higher stock prices.

The most common metric of earnings is earnings per share. This calculation simply divides the earnings by the number of outstanding shares. For example, a company that realizes $10 million in earnings and has 5 million shares of stock has an earnings per share of $2.00. Earnings per share is important because it is difficult to compare companies of vastly sizes. Two companies that both earn $10 million dollars look the same, but when one company has 10 million shares and the other has 2 million, it is easy to see the difference. Looking at earnings per share can make the difference betweens successful trading and investing mistakes.

Earnings per share can be performed in one of three time frames: against the past, in the present or against future earnings. Each measurement has a different emphasis and the results imply different conclusions. It is important for a successful investor to review a number of different variables when selecting stocks and earnings per share can be valuable stock market trading tools in this analysis.

When analyzing a company for a potential stock purchase, earnings per share are always “where the rubber meets the road”. The earnings per share ratio is one of the best technical analysis tools for identifying a company’s success at the bottom line.

Market Direction: How do you analyze what a trend should be doing? Easy! What are the candlestick signals revealing? That is the first analysis. If the candlestick signals are not showing anything definite, what are the next most revealing indicators? As can be seen in this current uptrend, the 20 day moving average has acted as a definite support level. When that can be ascertained, what candlestick formations occur at that level become more informational.

The weakness in the Dow at the end of last week demonstrated that the 20 day moving average was an important factor. When trying to figure out the direction of the market, being able to analyze what the investor sentiment is doing at technical levels that have previously shown some influence becomes important. Witnessing indecisive signals at a major moving average reveals the lack of selling conviction. This can be seen in the Dow chart.

Dow

The NASDAQ has demonstrated that it does not want to close below the 20 day moving average. The sideways action of the NASDAQ while the Dow was showing some weakness produces a simple analysis. Selling sentiment has not taken control of the markets. What becomes the obvious predominant factor? The trend in general!

Nasdaq

"The market will tell you what the market is doing." That is what the Japanese Rice traders profess. The candlestick signals are the 'pieces' that fine tune the understanding of what the markets are telling you. Learn the candlestick signals. Not learning proper interpretation being conveyed in candlestick signals dramatically reduces an investors potential of being in the right trends at the right times.

The simplicity of what occurs in investor sentiment can produce high probability profits. Investor sentiment produces reoccurring patterns that have occurred since the beginning of investing. The candlestick signals encapsulate simple rules. Candlestick analysis is a very easy and simple investment method for identifying when to be in a trade and when to be out.

BRLC is a recent recommendation on the Candlestick Forum. Stochastics in the oversold condition with a Doji being confirmed right at the 50 day moving average makes for a high probability trade. The stock has been in a long uptrend. It has reasonably pulled back to the 50 day moving average. This is an excellent set up for another 'buy' situation. The stop loss procedures are simple when using candlestick analysis. The potential target/targets are simple when using candlestick analysis. Establishing the proper exit points is very simple when using candlestick analysis.

BRLC


Most investors learn how to invest backwards. They are advised to find companies that have good balance sheets and earnings growth. Through the years, they discover that criteria doesn't work well. The best performing companies may not move for a long time until somebody else discovers the reasons for being in that position. Candlestick signals circumvent that process. Candlestick signals are formed by the cumulative knowledge everybody buying or selling during a specific time period. Understanding what the candlestick signals reveal incorporates the knowledge that other investors have done the research required for making an investment buy or sell decision. Utilizing that information produces a huge advantage for the candlestick investor. It not only indicates what the buyers and sellers are doing, it shows when they are doing it. Click here for more information on how to learn about candlesticks signals.

Seven Questions For Stock Market Success

Stock Portfolio - Seven Questions For Stock Market Success

Any time an investor is looking at companies for stock portfolio diversification; there is a list of seven questions that should come to mind before buying. These questions will help successful traders to discover the strengths and weaknesses of a company, as well as helping to understand the business economics and market position of the company. Such an investigation of a company would fall in the category of fundamental analysis and is important to making a wise decision on the purchase of a company’s shares and to understand the stock portfolio advice that you might receive.
Where does the company get its cash flow?
The value of any asset is the net value of its discounted cash flows. A trader can’t even evaluate a company or give stock portfolio advice unless he or she knows how the company is generating its cash. This is critical and needs to be specific and void of assumptions. Domino’s Pizza is a perfect example of such a need for understanding cash flow. Millions of people recognize the brand for Domino’s. It’s easy to assume that the company generates their revenue from their pizza sales. While Domino’s does make pizzas, many of the actual stores are franchises, separately owned and making products according to the ingredients and recipes of the parent company. In other words, Domino’s creates the pizza and other products that its franchises make. After making this connection, it is easy to see how important the relationship between Domino’s and its franchises is to the company’s value in the stock market.
How much cash does the company generate and how quickly?
After identifying where a company gets its cash flow, the investor need to understand approximately how much income it generates and the timing of the cash flows before giving stock portfolio advice about the company. Because of the time value of money, a company that makes a million dollars today is worth more than a company that makes two million over the next twenty years. Making such connections between cash flow and time is critical to implementing a successful stock market strategy.

Can the company sustain its cash flows?
In a time that many traders can still remember, the American steel industry was considered a blue chip stock and countless analysts advised adding it to a stock portfolio. An extended stock price history of profitability led many investors and analysts to believe that this business would always be strong investment. The past, however, is of little value in projecting future cash flows. One way to evaluate whether a company can sustain its cash flows is to look at the barriers of entry for the industry sector in which the company operates. A new pharmaceutical manufacturer will no doubt struggle trying to enter that sector due to industry giants and oppressive costs of dealing with the Food and Drug Administration. Because of this, such a company might not prove to be a successful investment and its purchase might end up being a bad stock portfolio investment option.
How costly is a business to operate?
Some companies require a great deal of capital to make their profits, while others can operate successfully on very little revenue. A utility company needs billions of dollars each time it opens a new power plant, yet an Internet company can survive on a small amount of ad revenue while it develops its product. The less money it takes to run a business, the more attractive it will be for someone investing in the stock market and the more desirable it is to give investors the advice to add it to their stock portfolio.
Does the company managed in a shareholder-friendly manner?
The approach of a management team towards the shareholders is extremely important in the company’s success. A company that looks at its own investment options, such as repurchasing shares when the stock prices have fallen rather than invest in another company is more likely to create wealth than a one only looking to build its “kingdom”. A company’s own actions can usually be the best stock market investing advice.
Is the management team true to its word?
A big part of learning how to play the stock market is learning to decipher the difference between a company’s public statements and its actions. An investor's stock portfolio will suffer if a company is included that doesn’t operate honestly is not a good investment.
Is the price attractive?
Simply put, price is the single most important technical analysis tool. The most common metrics for stock technical analysis are found because of the share price. A $20 per share company that earns $6 per share has a yield of 30%, but a $100 per share stock that returns the same $6 only turned a 6% yield, hardly anything that will excite investors or cause a company to be included in anyone’s stock portfolio.
The best investment advice happens to also be the best stock portfolio advice; follow the money flow. If a company is successful at making and sharing its money, it will be a company that has strong investment potential.
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Market Direction: The end of the year is an excellent time to evaluate your investing. Not so much the prospects for the coming year, but what could have been improved during the past year. Most investors optimistically project that they will do better the coming year. But they spent little time analyzing what they could have improved upon from the previous year. That is a function of not having an accountable investment program. Did you buy some stocks because some of analysts said that was going to be a strong industry? Did you buy some stocks because the price of gold/crude oil/corn was going to go higher? Did you buy some stocks that were going to improve in price as trade improved with China? There is a multitude of reasons for adding stock positions to a portfolio. Unfortunately, the results of most investment decisions do not have a basis for analyzing whether those decisions were correct.
Candlestick analysis contains one very basic element. The results of specific candlestick reversal signals and patterns can be visually analyzed. Did prices move in the proper manner after the appearance of a specific signal? What was the quantitative result of the returns coming out of a specific candlestick pattern? What other market conditions were occurring that might have made the results of a signal/pattern successful or unsuccessful? The huge advantage for using candlestick analysis is exploiting high probability results based upon centuries of actual experience. Using that information correctly dramatically improves an investor's potential return.
Candlestick signals are merely the graphic depiction of investor sentiment. Investor sentiment has not changed since the beginning of mankind. Investor psychology is directly influenced by emotions. Fear and greed, involved when investors have their equity on the line, will dictate how prices move. Prices will move in an expected manner based upon historical data, the reoccurring thought processes of investors. Candlestick signals are merely the graphic depiction of that data. Learning how to analyze what the result should be after the appearance of candlestick signals/patterns is a very simple but valuable educational process.
"The markets will tell you what the markets are doing." This is one of the first lessons Japanese Rice traders conveyed. Are you just learning how to use candlestick signals? Then go back through your trades from this past year. Analyze each position that was established. Did it work as expected? What were the confirming indicators doing? What were the market/sector indices revealing at the time? Did you come out of a trade too early? Why? Did you stay in a trade too long? Why? It is one thing to analyze charts to learn when to enter or exit trades. It is a much more valuable process to analyze the trade you actually established. Reviewing your trades from the previous year produces a much greater learning process. The analysis can be done with one major factor included. You can dramatically reinforce your investment abilities by recognizing what you have done correctly or incorrectly in the past AND remember what your emotions were doing at the time you were participating in the trade.
What makes a seasoned investor successful? Investing in proven situations that were successful in the past, without the emotional element. That is what the candlestick investor benefits from when using candlestick signals. Nobody is entitled to profits. Profits are the results of buying and selling at the correct times. That has to be learned. The signals, occurring in the proper conditions, produce high probabilities of producing profits. Learn how to utilize candlestick analysis.

"The markets will tell you what the markets are doing." This may seem like a very simplistic statement. But what are all investors searching for? The indicators that show where the profits can be made! The first of the year is a time that most investors reflect upon the previous year and analyze where they want to put their investment funds in the coming year. The holidays are a time when extra time and effort is put into the analytical projections for the coming year. The last two weeks of any year becomes a period where analysis becomes highly concentrated going in the next year. What is the result of that extensive analysis? This information is clearly conveyed through candlestick signals.
Remember the first day of trading for 2006? Specific sectors revealed very strong candlestick buy signals. The oil industry, mining stocks, and the biotech industry came out of the chute last year on the first day of trading. Those signals reviewed immediately what sectors the big money was buying going into 2006.
ATI


Whether a technical investor or a fundamental investor, the signals immediately reveal what investor sentiment is doing. Being able to identify where the strong buying is coming into the markets produces a number of benefits. The technical trader can immediately take advantage of a strong price move. The fundamental investor can pinpoint their research analysis to investigate why a specific sector is picking up strength. The candlestick signals are the accumulative knowledge of everybody that was buying or selling during a specific time frame. When a strong candlestick buy signal occurs, this becomes a valuable alert to start researching why a stock/commodity is being bought.
When does the smart money buy? At the bottoms! A strong candlestick buy signal in an oversold condition reveals that somebody has decided that the future has potential. Most investors do not understand what that potential is until the price has moved substantially. The candlestick investor has the advantage of recognizing when to start looking into the fundamental aspects of a company well before the masses. Learn how to use the candlestick signals and patterns correctly. The powerful information conveyed in the signals will dramatically improve your investment analysis.

Return On Investment - Do You Know Your Numbers?

Return On Investment - Do You Know Your Numbers?
You’ve been following your stock trading plan to the letter. You’ve integrated portfolio diversification, implemented a plan for stock technical analysis and started using Japanese Candlesticks for your stock trading system. You have even executed Strangle Buys and even Bear Call Spreads. But since the most important thing is the bottom line, have you graded your results? What exactly is your Return on Investment?

It is quite important to know and understand your Return on Investment. This calculation reflects your performance in the stock market. First, every investor needs to know how well he or she has performed against their stock investing system. If the results are good, the trading plan is working. If the results are poor, changes to the trading plan may be necessary. A diversified portfolio is great, but if it isn’t generating a return, something needs to change. Second, calculating Return on Investment is good, but do you know how to do it in a meaningful way?
There are several calculations that will give you an idea as to whether you are a successful trader. Some are more complicated than others, but none are above conquering with a standard calculator. Several of the calculations you can use to help you understand your Return on Investment are:

Total Return

This stock analysis calculation is actually simple; it contains a reminder that it is necessary to include dividends (where appropriate) when figuring the return of a stock. The calculation is as follows: (Value of investment at the end of the year – Value of investment at beginning of the year) + Dividends / Value of investment at beginning of the year = Total Return. For example, if you bought a stock for $10,000 and now it is worth $12,000, you have an unrealized gain of $2,000. During this particular year, you also received dividends of $500. What is the total return? ($12,000 - $10,000) + $500 / $2,500 = 25% Total Return. Since it is not based on actually sales, you can use this calculation for any time period but it will not reflect a growth rate for long term investing.

Simple Return

Simple Return is similar to Total Return; however it is used to calculate your return on an investment only after you have sold it. The calculation is as follows: Net Proceeds + Dividends / Cost Basis – 1. For example, you bought a stock for $2,000 and paid a $12 commission. Your cost basis is $2,012. You sell the stock for $3,000 and there is another $12 commission, so your net proceeds are $2,988. Dividends amounted to $250. ($2,988 + $250 / $2,012) - 1 = 61% Simple Return. Like the Total Return calculation, the Simple Return tells you nothing about how long the investment was held only if it was a successful trade or not.

Compound Annual Growth Rate

For investments held more than one year, it could be this calculation could be more of an accurate reflection because it shows the time value of a Return on Investment. This is important because 25% Return on Investment in one year is impressive, but a 25% Return on Investment in ten years is not exactly stealing from the stock market. For example, after making a $1,000 investment two years ago, it is now worth $1,500. To calculate the CAGR for this example, you take the nth root of the total return, where "n" is the number of years you held the investment. In this example, you take the square root (because your investment was for two years) of 50% (the total return for the period) and get a CAGR of 22.5%.

Understanding a Return on Investment is important for an investor who wants to make money investing in stock. By understanding the Return on Investment, a trader can know what is working in his or her trading plan and what is not working. The bottom line defines the investor and Return on Investment is that bottom line.
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Market Direction

What is the market telling us? Today's trading showed the Dow down just slightly. The NASDAQ, however was down significantly. In that scenario, evaluation of the previous trading of the past few weeks produces a relatively simple analysis. Although the market is in a very slow uptrend, it does not indicate any hurry to get anywhere. As can be seen in the NASDAQ chart, the sideways movement has been obvious since late November. That was evident in today's Evening Star type formation in the NASDAQ. The Dow would reveal the same sideways evaluation, other then the strong move last Thursday. With this knowledge, an investor can make better analytical decisions.

There have been stocks/sectors moving very well during the sideways market movement. There have been other stocks/sectors that have sold off during the sideways movement. In these market conditions, it becomes very important to be able to analyze which sectors are exhibiting bullish tendencies and which sectors are moving in a bearish direction.
Simple sectors scans, using the candlestick signals, pinpoint which stocks to be buying and which stocks to be selling when the market in general is not providing any directional indicators. When a number of stocks in a particular sector starts revealing strong buy signals, that sector should be given more attention. As can be seen in the BUCY chart, the gap up on strong volume following a Doji/hammer signal illustrates extremely strong buyer sentiment. The price moving up through all the major moving averages is another indication that the buyers wanted into the stock without any hesitation.

When the strength of that stock move is confirmed with other stocks in that sector, it can be assumed the big money is coming into those stocks across-the-board. The candlestick signals illustrate that change of investor sentiment. Buying stocks that have strong buy signals throughout the sector dramatically reduces the possibility of buying a renegade bullish signal in a stock that is otherwise in a declining sector. This analysis puts the probabilities of being in the right sector/stock at the right time. Being able to recognize the strong candlestick buy signals makes evaluating the best potential positions for the next day or the next week very easy to implement. Click here for the Holiday specials
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Good investing,

The Candlestick Forum Staff

Price To Earnings Ratio - How Does It Affect Your Bottom Line?

When it comes to investing in the stock market, one measurement stands out above the rest; how much did the investor earn at the bottom line and in turn, how does that earning compare to the price. Traders use many tools to help determine their stock trading plan, but the most common tool for assisting an investor is price to earnings ratio, or P/E ratio. Price to earnings ratio is an example of stock fundamental analysis; this is the method of examining businesses at the most essential levels. This process of review evaluates many key ratios of a business to attempt to determine the stability and financial health of a company and to determine the value of its stock.

It is safe to say that the number one ratio investors cite when discussing fundamental analysis is price to earnings ratio. This number is raised aloft like it possesses an authority above all others. It is, in fact, only one of many examples of fundamental analysis that successful traders should use before implementing trades. The price to earnings ratio evaluates the relationship between the price of a stock and the company’s earnings; it is the most widely used metric in fundamental analysis but far from being the only one that a trader should use. When reviewing the price to earnings ratio, it is wise for the investor to consider other ratios as well as using a stock trading system to search for the most complete information on a stock and its trends.

Simply put, to calculate price to earnings ratio, divide the share price by the company’s earnings per share (EPS). For example, if a company has a share price of $50 and an EPS of 10, the price to earnings ratio is 5. While a higher P/E ratio is generally considered a good thing, to some investors it signals an overpriced stock. It is very important that the trader views the P/E ratio only as a stock market trading tool to help draw an overall conclusion. Using a method such as candlestick analysis, an investor is better able to understand the dynamics of a stock before deciding to purchase or not.

So what does the price to earnings ratio tell the investor? It gives an idea of what the stock market is willing to pay for a company’s earnings. While it is generally accepted that a high P/E ratio is favorable and a low P/E ratio isn’t, even that conclusion isn’t accepted by all investors; therefore, it is wise to view the price to earnings ratio as a tool for helping to identify a potential stock purchase. When used with a stock investing system and other analysis ratios, it can help the investor to determine the best stock market investing strategy possible.

As always, the ultimate number an investor can analyze is his or her bottom line. Does the investor consistently make money investing in stock? Have the principles contained in the stock trading plan been successful? Success in the market depends on making good judgments and making good judgments depends on using good fundamental and technical analysis tools and practices. The price to earnings ratio is one of the tools that can help lead a trader down the road to successful trading and investing.

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Market Direction: The Bullish Harami/Spinning Top, formed on Friday in the Dow, revealed significant information. After the Dow came down and touched the 20 day moving average, it formed a bullish signal. The Bullish Harami indicated that the selling had stopped. The fact the Dow bounced off the 20 day moving average gave more evidence the 20 day moving average was going to act as a support level. Could it have been analyzed that the balance off the 20 day moving average be acting as support without candlestick signals? Obviously yes, however the information provided by the candlestick signals makes the analysis easier to evaluate.

Investors not using candlestick analysis would have the prospect of the Dow supported on the 20 day moving average. Using the typical bar chart, those investors would usually have to wait for confirmation. The candlestick signal formed on the same day that prices just touch the 20 day moving average produces much more immediate information. The bullish harami also revealed that the selling had stopped. This information, combined with the bounce off the 20 day moving average, made for the opportunity to start investing in bullish positions without the two or three day delay the other technical investors would require. The candlestick investor knows immediately what should occur after a bullish harami. Positive trading, when that occurs, the candlestick investor would already have been prepared for placing long positions.

DOW

Being prepared for what should happen after particular candlestick signals makes participating in high profit situations occur with a much greater percentage probability. As illustrated in the New River Pharmaceuticals Inc. chart, a strong bullish day after a series of Doji's provide the setup for a strong trend move. This is not potluck! Understanding what occurred to the investor sentiment after a series of indecisive trading days permits an investor to be in the right place at the right time.

NRPH

Being able to time a trade creates huge advantages for putting on successful option trades. When the signals reveal that the price is moving, option strategies become highly successful.

The analysis of fundamentals does not mean much if a stock price does not have favorable investment sentiment. Most investors are taught to find companies with strong fundamentals. Many companies have strong fundamentals. However, it is the future potential of the fundamentals that will move a stock price. Learning how to use candlestick analysis is much more powerful for projecting future price moves. Reading "Profitable Candlestick Trading" and "High Profit Candlestick Patterns" are two books that have completely altered many investors' perceptions. Use the holiday season as an opportunity to provide young investors with investment education that they will be able to use for the rest of their life. Click here for holiday specials

Chat session tonight for members at 8 pm ET tonight

Good Investing,

The Candlestick Forum Staff