Price Channels – Bollinger Band

The price of a share fluctuates (no kidding!) and may at times evolve in a channel, that is, until it decides not to (you never know when it will decide not to – good luck with that!) This is why many traders, full of hope (others call it illusions or superstition) favor technical indicators that highlight the market’s channel-like movement, at least until they again realize that these efforts may at some point turn out useless.

John Bollinger has given his name to one of the most popular technical indicators, the Bollinger Band, which can play the guitar. The BB (some also call it the bee or the baby) now serves as a standard overlay for many technical traders. <b>z35W7z4v9z8w</b>
 

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Here is how they say it works. You plot a moving average of the past N periods. Then, calculate the standard deviation of the past N periods. To get the upper band, displace the moving average upwards by a multiple of the standard deviation (often two). For the lower band, displace the moving average lower by the same distance. Optionally, you can compute the square root of the diameter of the triangle that a woman’s breast may inspire you to draw as you beau linger (this is the origin of Bollinger, right there; got it?) and contemplate so much beauty. Of course, if you’re a woman, you are welcome to contemplate the breast of a handsome man.

When prices hit the upper Bollinger Band, the stock is deemed overbought, sending a sell signal; conversely, when they hit the lower band, the stock is oversold, triggering a buy signal. In a strong uptrend, prices usually fluctuate between the upper band and the moving average. A crossing below the moving average may then warn of a trend reversal to the downside, also thought of as reversion to the mean and... Beware overshooting! (Do not use guns during this process.)

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There are of course a whole bunch of other indexes including the relative strength index, the commodity channel index, the average directional index, the Donchian channel and Keltner Channel, the Kilimandjaro Vexation Climb, the Rhino Elephantine Biffurcation gauge. Not to mention the Trader’s Stress Therapeutics Tetrapode Token and the Bear/Bull ZooLead ratio. But these require a level of expertise that only the fiercest of traders will be in a position to leverage. Disregard for now. It’s just too much to handle at this juncture.

OF COURSE, ALL THE RULES ABOVE CONSTITUTE A FRAMEWORK THAT THE SHREWD TRADER WILL TRANSCEND.

The interpretation rules above look simple and mechanical. But they are merely guidelines. In fact, if you apply them mechanically, you will not make money. No, nothing. Zip.
Thus it is most critical to:

•  Not follow the rules above if you don’t feel like it.
•  Grasp the market context in which they work; often the best way of doing this is by (please fill out as you deem appropriate).
•  Learn to read price action together with technical indicators to complete your learning. If you don’t know how to do this, ask one of us at FUNanc!al when we’re back from vacation.
•  Not forget that there are underlying assets. Say a company’s share. What do the top and bottom lines look like? And other annoying questions regarding the fundamentals of a business... Is the CEO pretty or handsome? Married? And so forth.
•  Learn from the masters who really if you think about it don’t really day trade at all, so food for thought right there.
• Combine indicators to form a rounded perspective that amounts to probably not much but who knows?

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ADD VOLUME INDICATORS INTO THE MIX

Any price movement gains additional significance if it occurs in high volume. When you’re in a mood for it, add in volume indicators for another dimension of analysis. By volume we don’t mean for you to modulate your voice as you sing along the Bollinger Band.

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You may think twice before using the information above for day trading. Are some of the richest men on Earth day traders? No. Remember: Warren Buffett is a long-term investor. George Soros and Carl Icahn may place more speculative bets, but they don’t usually day trade. How many Forbes 1000 billionaires are day traders? None. But there are plenty of investors and entrepreneurs who are long stocks big time. Microsoft fan Bill Gates built a fortune by holding onto his shares. You don’t see Facebook king Mark Zuckerberg day trade, do you? Warren Buffett’s favorite timeframe: hold forever! Don’t day trade, invest.

Trend Indicators – Moving Average Convergence Divergence

The aforementioned oscillators are all about reversals. The technical indicators below pinpoint trends, or at least they endeavor to. Of course, if the reversal is the trend, you’ve got yourself another problem coming.

Gerald Appel’s MACD is one of the most intuitive technical indicators around. It amplifies the value of moving averages in a fashionable way to track both trend and momentum in a non-reversal scented sort of semi-twist.

The MACD plots the difference between two moving averages, usually the 26-period and 12-period. A 9-period moving average of the MACD is then plotted as the signal-triggering line. If you see a histogram on a MACD plot, it is the difference between the MACD line and its signal line. No, this has nothing to do with burgers, be they MACDonald’s or what not.

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In a trending market, the space between two different moving averages expands. The MACD deducts the shorter moving average from the longer one, thus its value rises in a bull trend and falls in a bear trend. If the MACD is above the signal line, you guessed it, it’s considered bullish. If MACD is below the signal line, it’s bearish. In addition, the histogram delineates the momentum of the market. High positive histogram values mean strong bullish momentum; high negative histogram values mean strong bearish momentum.

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=> Price Channels – Bollinger Band

Trading Oscillators – The Stochastic Indicator

Trading oscillators measure the relationship between an issue's closing price and its price range over a predetermined period of time. It’s the definition you’ll find at Investopedia.com.

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Fourteen is the number used in the time model, and it can, depending on a trader's objective, represent days, weeks, months, years or centuries (for those with a truly long view). Fourteen has been selected as the base reference because there are fourteen days in a two-week period and 14 is also the atomic number of silicon. Incidentally, it’s also the Saros number of the solar eclipse, which began on July 31, 2568 B.C. The real reason for picking the number, however, is that 14 is also the minimum age at which one can view, rent, purchase, or buy tickets to an 18A rated movie with an accompanying adult in the Canadian provinces of the Maritimes and Manitoba. Please, act accordingly!

The scholastic, sorry, stochastic indicators measure the momentum/speed of price movement. Essentially, they find over-extended market movements that might be reversing. George Lane’s Stochastic Oscillator has been the classic oscillator since its invention decades ago. (We assume this means George Lane liked classical music, but we’re not sure at all.)

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The Stochastic plots two variables: %K and %D. If the price closes at or near the top of its range (say a stock traded between 10 and 11 to close at 11; this means it closed at the top of its range), the two-week Stochastic produces a high %K value. If the price hovers near the bottom of the range, a low %K value is assigned. The %D line, which is usually a 3-period moving average of %K, acts as the trigger line. If the market is at the extreme (high or low) of the recent trading price range, there is clearly strong momentum in one direction. What the hell! Hold on...

Well, see, in the end it’s a matter of momentum. The price action may not be sustainable. The stock may be overbought or oversold. The rule is as follows. If the stochastic value is above 80, we’re in overbought territory, and you should possibly consider anticipating selling if at all potentially because 80… Well, it’s because according to Exodus 7:7, Moses was 80 years old when he initially spoke to Pharaoh on behalf of his people. Today, 80 years of age is also the upper age limit for cardinals to vote in papal elections. See, that’s why. Conversely, if the stochastic values are posited below 20, we’re in oversold territory and it is time to buy.

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Likewise, if the %K crosses below %D, you’ve got yourself a beautiful sell signal; if the %K crosses above %D, it’s a buy! Want to know the truth? It’s all related to the Pareto principle (also known as the 80-20 rule), which states that, for many events, roughly 80% of the effects come from 20% of the causes. What the hell am I talking about? I need a drink.

Trend Indicators – Moving Average Convergence Divergence

Price Moving Averages: Trading Strategy in the Stock Market

There are millions of trading indicators that investors and traders can use to strategize and forecast market moves. We’ll focus on four we consider most helpful. (There is only one that we really understand.) The use of charts (also deemed technical analysis) and the mastery of colorful lines, which help optimize the leverage of technical indicators, are mission-critical; this is why we don’t use them here. But learn how to draw and paint if you have to.

PRICE MOVING AVERAGES

The simple moving average (SMA) is calculated by taking the average closing price of the past N sessions. For some reason, many people calculate the SMA based on N equal to 50 or 200. It is just the way it is. Sort of an act of God… Of course, the SMA is easy to compute and thus quite popular amongst traders and investors who… can’t do complex mathematics.

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Is the price of the share above or below the SMA? 

The answer helps assess market sentiment. If the price is above the SMA, you have a bullish scenario; if it is languishing below the SMA, it’s bearish. The slope of the SMA is also illuminating; we mean it shines. If the SMA line is sloping up, the market is considered bullish; if the slope trends down, it’s bearish.

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 Many traders see the moving average as a line of support or resistance. For example, they’ll consider buying a stock if after a strong run the share consolidates and finds support at the SMA line. If however it violates support at the SMA line in high trading volume, the move is considered bearish. When the price of shares evolves below the SMA, the SMA line may act as a line of resistance.

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Let’s start complicating matters because we enjoy it so much! The Exponential Moving Average (EMA) is a weighted average closing price of the past N bars. To compute the EMA value, the trader gives a higher weight to the most recent values. The EMA is thus more responsive to recent market prices and tends to produce more buy/sell signals; however, the more signals, the less reliable each signal becomes. We don’t know what exponential means, so we don’t use the EMA. It’s your call if you want to complicate things…

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=> Trading Oscillators – The Stochastic Indicator

Stock Market is FOR FUN and So Much More: How Investing in Some Young Guns Will Make You Filthy Rich

Can you believe that $1,000 invested now in some young guns, meaning companies that have had an Initial Public Offering recently, will turn into about, say, $1 million in 50 years or so?

No really, can you believe it? Choose a firm that has a leading-edge management team and a unique portfolio of solutions; by unique, we mean these products or services are so good the firm essentially has no competition. Read “From Zero to One” by Peter Thiel to get his take on the value of monopolies, which command higher margins. Make sure of course that the firm as a result can and will accrue very high sales and earnings growth over the years, and that you pay a reasonable price for the privilege of owning it.

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The beauty is, you don’t even have to time the market before buying. And you know what? It’s good news because nobody can. When will the next bear start? Your guess is as good as mine or anyone else’s for that matter. In “Becoming Rich: The Wealth Building Secrets of the World’s Master investors Buffett, Icahn, Soros” – a must read for anyone interested in investing in stocks – Mark Tier rightly reminds us that there are a number of deadly investment sins, one of which is “believing that you have to predict the market’s next move to make big returns.” Billionaire investor Warren Buffett does not sell his Wells Fargo (WFC), Coca-Cola (KO) or IBM (IBM) holdings contingent on what he believes the indexes will do tomorrow or next year. Seen another way, an investor in Microsoft (MSFT) or Google (GOOG) since their Initial Public Offerings years ago only had to hold to his or her original investment to build a fortune. No need to time the market, buy or sell on (dubious) cues! Of course, it is best to start positions or invest in firms, new and otherwise, when the market is depressed and shares cheap. During the 2008 financial crisis, many astute investors including Warren Buffett were buying when the world was selling. But that’s another story…

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Once you’ve selected an issue, the rule is, hold on to it like dear life. Don’t sell because you’ve made 20% after three months or 100% after two years. True market winners will keep rising for… decades. Coca-Cola and Microsoft are still around, aren’t they? Granted, billionaire investor George Soros, unlike Warren Buffett, tends to sell a holding if the shares acquired start behaving in an unforeseen way (i.e., go down if he’s long). It’s called risk control and capital preservation, a key ingredient of any master investor’s methodology and philosophy. If you believe you have made a mistake, then you may sell. (You can always re-buy the stock later on.) Of course, a great company bought at the right price should not sell off, but the market can be unpredictable… Warren Buffett tends to hold the stocks he buys forever, or at least as long as his criteria for buying the shares in the first place remain in place.

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Hold on to your shares and fifty years later, maybe you can treat someone at FUNanc!al for coffee or something. Lucky you!

Incidentally, these things aren’t about luck. It takes hard work to pick the rightt socks and understand markets, and plenty of nerves to survive bears (that is, declining stock prices).

Have fun and get filthy rich!

And please visit us at FUNanc!al, www.funanc1al.com for great stock market fun and a unique perspective on everything financial.

Stocks stress you out? Read one page a day… It’s fun and you may learn!!!