TRADING TIPS AND CHEAT SHEET FOR BEGINNERS

TRADING TIPS AND CHEAT SHEET FOR BEGINNERS Disclaimer: Trading and investing involves risk You alone are responsible for any losses that may occur It is highly suggested that you learn the material, study and paper trade first DO NOT live trade until you feel that you are ready and have an understanding of the market I am not responsible for the actions that YOU take Trade responsibly and NEVER risk what you cannot afford to lose!!!! Chart Indicators RSI (Relative Strength Index) – This is a momentum indicator that compares the magnitude of gains and losses over a period of time Although the RSI can be used for conformation in various chart patterns, the primary function is to determine if a stock is Overbought or Oversold The RSI ranges from 0-100 If the RSI is at or above 70, it is considered to be Overbought, and shows that a bearish reversal may be coming Holders of a stock that is overbought will begin to sell off their stock and take profit Shorts will begin to move into position If the RSI is at or below 30, it is considered to be oversold and may indicate that a bullish reversal is coming Shorts will have to cover their positions and buyers will begin getting into position for a buy Although the RSI is a great tool for determining oversold and overbought, not rely on RSI alone A stock could remain on either side for a long period of time See Chart On Next Page For RSI Example: On the first blue line you see a textbook oversold pattern The RSI hits 30 (30 being oversold), and begins the bullish reversal The Second blue line you see, the RSI falls below 30, begins to pull back, but then hits oversold again On the second bounce, the bulls take over and the price moves up This is a perfect example on why you don’t rely just the RSI On the red line you see the RSI falling towards oversold but does not quite reach it However, other signals indicate a bullish reversal and the price goes up You will learn these other bullish signals later on MACD (Moving Average Convergence Divergence) – I am going to keep this short and simple There is a bit of technical formula that goes into this, but the most important thing is understanding the movement It is a great tool, if used along with the RSI, can give you a good idea of how the market is moving It is a momentum indicator that shows movement between two Exponential Moving Averages (EMA) It is calculated by subtracting the 26 day EMA from the 12 day EMA Don’t get freaked out with all the equations This is just so when you see the chart, you understand what you are looking at There are parts to the MACD: The MACD line, explained above (12 period EMA minus 26 day EMA) This line also helps indicate who has control of the market The MACD Signal – period EMA of the MACD (again don’t worry about the math, this is just for you to identify the lines.) MACD Histogram – MACD minus Signal Line Zero Line – Just as it sounds, a line on the chart that represents Image taken from Wikipedia Notice the blue (MACD) crossing the red ling (Signal Line) to the upside With that you see the Histogram crossing the Zero line to the upside This is an indicator that the bears lost control and the bullish reversal is on If you line this up with an oversold indicator from the RSI, now you have a pretty good buy signal The same is true for the opposite Notice the areas where the MACD is beginning to turn down, crossing the Signal Line On the Histogram you see it turning down and falling below the Zero Line This is showing the bullish run is at an end and the bears have now taken over Compare both of those signals with the candlestick chart and you can see how the MACD is moving with the chart Lets see an example of this below: In this chart the MACD line is black and the Signal Line is red: On the first blue line you see the Chart is at its peak Up until then you see the MACD line in an up trend and above the Signal Line The Histogram is trending above the Zero line Then you can clearly see the reversal signals The MACD begins to turn down starting to cross the Signal Line The Histogram begins to fall below the Zero Line Now if you compare that with the RSI, you see that it is Overbought This signals confirm each other and the bears take control Now look at the other blue lines I drew on the chart and begin to compare the indicators with the chart You should now start to see the patterns and reversal points Start going through charts on your own and put this to practice Paper trade on this and write down your results Chart and Candlestick Patterns Support levels – Area of the chart where the stock bottoms before moving back up Resistance levels – Area of the chart where stock peaks before turning back down It is important to identify your support and resistance levels so you can begin to watch for entry and exit points Always confirm your support and resistance with other signals such as the RSI and MACD If one of the levels is broken, the other level then takes over If support is broken, it now becomes resistance If resistance is broken, it now becomes support Wait for conformation before you determine if the levels are broken When to enter a trade - So you have identified a stock that is showing a bullish reversal You read your RSI and MACD indicators and the signal is strong It is important to wait for conformation on the signal We are not trying to capture the full run, only part of the run Remember, the goal is 5-10% gain on a swing trade On a swing you are only holding 1-4 days You keep your stop losses at a 3% loss Not every trade you make will be a success If you stick to this basic rule, you will prevent yourself from hitting those huge losses How to confirm your entry – Looking on a day chart, you see a bullish candle after a previous bearish trend You are waiting for the next days candle to open above the previous days close That is your conformation to buy This is known as the “Candle Over Candle.” If you enter and have to take a stop loss, don’t sweat it You can always reenter if the stock does continue to trend up OR, rinse, repeat and move onto the next stock If you stick to the 3% loss and 5-10% gain rule, you only need to be correct 60% of the time to profit Our goal is 79% success Candlestick Patterns REMEMBER Do not rely on one indicator The Patterns you see below are a great starting point, just like the RSI and MACD When you see a signal, you want to compare it to the other indicators to see if you in fact have a strong buy signal Confirm your entry and make your decisions Basic Doji Candlestick A Doji represents a struggle between the bulls and bears The market opens and closes at or near the same point The Doji looks like a cross, inverted cross, plus sign, or a “T” The shadows can vary in length This could indicate both a continuation signal or a reversal signal Below will be different examples of Doji’s and how to trade them Abandoned Baby: This is a reversal pattern that is a rare find, but if found can be a profitable signal This occurs at the end of a price run The doji gaps the candle of the previous day and next day, leaving obvoius distance between the gap How to trade this: Wait for the next days candle to open above the Doji, with a bullish candle Make sure there is a clear gap on both sides Harami Cross: This is a reversal point that can occur in both a bullish and bearish reversal The entire Doji sits within the real body of the previous candlestick How to Trade This: Wait for the next candle to show bullish and place your buy above the upper shadow of the cross, confirming the bullish reversal Dragonfly Doji: This can be a very powerful indicator showing that greater moves are coming This usually appears at reversal points and can be both a bearish or bullish reversal As great of an indicator that this could be, it can also be tricky There are times where the Dragonfly will appear but continue its current trend Wait for conformation for the buy How to trade this: Wait for conformation that the reversal is on Place your buy at or above the upper shadow of the dragonfly Morning Star Doji: This is one of my favorite set ups I have made several winning trades off this and in my opinion is second best to the Abandoned Baby pattern This is usually a good indication of a bullish reversal There will be an obvious down trend, followed by a Doji The next day’s candle should close above the candle before the Doji How to Trade This: There are a couple options for entry on this trade The safest way and recommended way is to buy in at the next day candle, following the Morning Star set up (as you see illustrated above by the blue lines) Option is set up a test entry, buying in at half of what you would normally buy Your test entry should be above the open of the candle before the Doji This is when you see the set up of the Morning Star in progress and you want to catch an early run up If you test enter and the stock does run up, you can add to your position by filling the other half of your buy Evening Star Doji: This is the exact same thing as the Morning Star Doji, except it is a bearish reversal Take the Morning Star Doji chart, flip it upside down and you got the Evening Star Doji How to Trad This: Here you are looking to take profit If you entered earlier in the uptrend, now is your time to sell Again, you have a couple options You can sell all and secure your profit The other is, sell half and if the set up fails you can let the other half continue to ride up If the set up is successful you sell the other half for your total profit The safe and recommended way is to sell and secure your profit Gravestone Doji (AKA Reverse Dragonfly) This usually indicates a bearish reversal or can be used to determine the continuation of a downtrend The upper shadow is long in length and the body opens and closes at or near the same point If a chart is showing bullish reversal signals but you see a Gravestone Doji, it is important to wait to make sure the bears don’t still have control How to Trade This: You WAIT! On the left you see what typically happens with a Gravestone Doji The Bulls fight hard and drive the price way up, but in the end the bears conquer and continue the bearish trend On the right you see the bulls ultimately come out on top Wait for your signals to line up, look for a candle over candle, then get ready for the buy If you see the Gravestone Doji after an uptrend, it may be a good time to take profit and sell That ends the basic Doji patterns Next, I will show you Short Body Candles Short Body Candles: Evening Star This is just like the Evening start set up in the Doji patterns, except is has a short body This is the same reversal set up Refer to the Doji Evening Star on how to trade it Morning Star Again, this plays just like the Morning Star Doji The only difference it the Doji v the Short body Refer to the Morning Star Doji on how to trade it Same set up and play Hammer This is a candle that you will be looking for during a down trend or near the bottom of the trend It’s a good indicator that a bullish reversal is coming How to Trade This: Line this up with your signals along with other reversal points Wait for conformation and position for your entry Do this and you could have a strong buy signal Inverted Hammer This is when happens when the price shoots up after the open and closes significantly lower then the high It forms the hammer but inverted This could be the sign of a bullish reversal How to trade this: Watch for the Inverted Hammer to be at the bottom of a downtrend Wait for conformation on the next candle to open or go above the close of the inverted hammer Position for entry MORE PATTERNS COMING SOON  ... bullish candle after a previous bearish trend You are waiting for the next days candle to open above the previous days close That is your conformation to buy This is known as the “Candle Over Candle.”... day’s candle should close above the candle before the Doji How to Trade This: There are a couple options for entry on this trade The safest way and recommended way is to buy in at the next day candle,... points Wait for conformation and position for your entry Do this and you could have a strong buy signal Inverted Hammer This is when happens when the price shoots up after the open and closes