Your Ad Here

The No Fuss Guide to Bonds (Part One)

 Guides  No Responses »
Jun 082009
 

What is a Bond?

A bond is usually the least risky investment availible. It is also the investment with the lowest returns. Most people look to bonds as a instrument which gives modest but reliable returns. Bonds in the simplest sense are loans that individuals give to companies and governments. Therefore, the amount of risk and reward is linked to the credibility of the bond seller. If GM were to sell bonds at 18% interest the day before the bankruptcy, it is unlikely anyone would buy them despite the large returns. When a bond seller cannot repay a bond that has matured, the holder of the bond loses the entire investment.

 Posted by at 9:32 pm  Tagged with:

Morning and Evening Star (Japanese Candlestick Patterns)

 Guides  1 Response »
Jun 022009
 

Today there are several patterns which are to be discussed. These patterns all belong to the same family. I will be covering the entire “star” family of candlestick patterns, except for one which will be covered later. Anyways, on with what will be this blogs biggest post to date.

The pattern that we are going to cover first is known as the Morning Star. This pattern shows up at the bottom of downward trends. It works because it shocks the market with a sudden change in direction. The Morning Star, and it’s counterpart the Evening Star have three candles that make up the formation.

1. A long candle that is in the direction of the trend. Large red candle in the case of the morning star.

2. A gap in the direction of the trend and a candle with a small body (Spinning Top).

3. A gap against the trend and a long candle that is against the current trend which pushes well into the first candles territory.

If my descriptions are too confusing fear not, as always I have prepared pictures. Below is an example of the Morning Star candlestick pattern.
morning-star-example

As previously explained, the morning star pattern occurs during a down trend, and is strongest when the last candle is accompanied by heavy volume. Large gaps between the real bodies of the pattern also help to increase the likelihood of a reversal.

evening-star-exampleThe picture above shows the ideal Evening Star candlestick pattern. This pattern, like the Morning Star pattern is situational. The Evening Star pattern should appear during a strong up trend. Another factor which can strengthen the pattern is if the second candle is also a hanging man or hammer.

Here are two charts that show the Morning Star and Evening Star in use.

Morning Star Chart

morning-star-chart-example

Evening Star Chart

evening-star-chart-example

Variations of the Morning/Evening Star

Several variations of the Morning Star and Evening Star patterns exist. These variations are stronger and rarer than the original candlestick pattern. The first variation is the Morning Doji Star and the Evening Doji Star. This candlestick pattern is exactly the same as the original except that the second day is a Doji instead of a small bodied candlestick.

Below is a diagram which clearly shows the difference between the original and the Doji variation.

morning-and-evening-doji-star-examplesAs shown above, this pattern involves a Doji which strengthens the pattern because the Doji by itself is considered a reversal pattern.

Morning Doji Star Chart

morning-doji-star-chart-exampleEvening Doji Star Chart

evening-doji-star-chart-exampleAbandoned Baby Top and Abandoned Baby Bottom

The next variation of the Morning Star candlestick pattern is the Abandoned Baby pattern. This pattern is the strongest of all the Star patterns and it is also the most rare. This pattern involves very large gaps between the second day and the other two candlesticks. This candlestick pattern demands serious attention and consideration whenever it occurs, it is very rare for this pattern to fail.

Below is a diagram which show what the Abandoned Baby Top and Bottom look like.

abandoned-baby-top-and-bottom-exampleAs illustrated the most important trait of the abandoned baby is the large gap that must occur. The shadows of the second candles cannot overlap the shadows of the other two, otherwise it becomes the Doji Star pattern instead. It is also important to not that the second day does NOT have to be a Doji to validate the pattern.

Abandoned Baby Top Chart

abandoned-baby-top-chart-exampleAbandoned Baby Bottom Chart

abandoned-baby-bottom-chart-exampleI hope you have gained some insight about the use of the Star type patterns by reading this article. Always remember to use stop losses and trade responsibly.

All pictures are credited to Steve Nison, author of Japanese Candlestick Charting Techniques 2nd Ed.

 Posted by at 7:24 pm  Tagged with: , , , , , , ,

The Engulfing Candlestick Pattern

 Guides  1 Response »
May 292009
 

The Engulfing Pattern is a Japanese candlestick pattern that appears after a bull rally or a steep decline. It signals a trend reversal by shocking the trend with a sudden opposite movement. The Engulfing pattern involves two candlesticks; in general, the more candlesticks that are involved in a pattern, the more powerful it tends to be. Below are some sample pictures of what an Engulfing pattern looks like when charted.

engulfing-pattern-example

As you can see, the first day of a bearish engulfing pattern is an up day. Then in the second day, a large upward gap is undone as the candle drops below the first day’s opening price. The same thing is true for the bullish version, except that it occurs during a bear rally instead.This pattern is made stronger or weaker by several factors.

1. High volume on the second day of the pattern strengthens the pattern.

2. A small real body on the first day and large real body on the second day strengthens the pattern.

3.When the engulfing pattern appears after fast (as in steep) or extended (as in long lasting) trend, it is strengthened.

Below is a chart showing the engulfing pattern amongst other candlesticks.

engulfing-pattern-chart-example

The engulfing pattern can also be used to set stops and to identify areas of resistance in price. The diagram below shows exactly where to place support, resistance, and stops for all types of engulfing patterns.

engulfing-pattern-resistances

The engulfing pattern requires no confirmation. As soon as the pattern is complete, it validates the trade. However, it is important that you keep in mind where your stop loss is and how much you stand to lose if the trade goes sour. Proper money management is a trait all successful traders share.

All pictures are credited to Steve Nison, author of Japanese Candlestick Charting Techniques 2nd Ed.

 Posted by at 9:02 pm  Tagged with: , , ,

Why Interest Rates are Important

 Guides  No Responses »
May 252009
 

Most people think that they understand interest rates, when in reality they do not. The interest rates you receive at a bank is more than just a number. They are extremely important, and without interest rates our economy would be more of a roller coaster than it already is. In economic terms, the interest rate is the cost of holding money.

Now your probably thinking…”It doesn’t cost me anything to hold my money! Look its here in my wallet safe and sound!”

WRONG!

Because the money is in your wallet, it is not in your bank account. That means it is not earning interest. You are willingly sacrificing that interest to hold the money in your wallet. Now, this isn’t a big deal when interest rates are 1%, but if interest rates are higher, people will think twice about making big investments or loans.

Putting it All Together

Interest rates pay an important role in controlling the economy. The Fed can turn interest rates up or down in order to control the amount of money invested. By turning interest rates up, they slow investment because the opportunity cost of not investing shrinks. Confused? Let me try an example.

Suppose you are an investor who has 100000 dollars and a yearly return on investment of 15%. These investments are relatively safe but there is a chance of failure. Also suppose that banks are paying 3% interest on a high yield savings account. This means that in one year, you would make 15000 dollars investing or 3000 dollars from the savings account.

That difference of 12000 dollars is enough to make most people risk their money investing.

However, what if the Fed wanted to slow down investing and raised interest rates to 8%? Then the savings account would net you 8000 dollars, while your investments still only net you 15000. Now the difference between the two is only 7000 dollars. Less people would be willing to invest at this new, higher interest rate. The opposite is said to be true when the Fed decreases interest rates.

Why Would the Fed Want to Slow the Economy Down?

The most basic answer is to control inflation and market cycles. When an economy is left alone during good times, money can move around so fast that inflation becomes an issue. In this case, raising interest rates can help keep money in bank accounts instead of being spent.

Why isn’t Obama’s Spending Spree Causing Inflation?

Normally, such an influx of money would cause severe inflation. However, in this case although money is being pumped into the economy it isn’t moving around. Most people are using the extra money to pay off thier loans and bills instead of spending it on goods. This means that the money from the stimulus package went straight back to the banks. The inflation is still there but it is on hold. This concept is what economists call the velocity of money. Don’t worry inflationists your time will come.

 Posted by at 11:29 pm  Tagged with: , , ,

The Hanging Man (Japanese Candlestick Pattern)

 Guides  No Responses »
May 212009
 

Today’s Japanese candlestick pattern is called the “Hanging Man”. It is a reversal pattern that is often found at the peak of an upward trend.

hanging-manA hanging man must be found during an up trend in order to be meaningful. A hanging man is defined by a small real body, long lower wick, and short or nonexistent upper wick. The more defined these characteristics, the stronger the signal. As a general rule, the lower wick should be about twice as long as the body or longer. The hanging man also needs a confirmation signal, which is given if the next trading day closes below the real body of the hanging man candle. Volume is also very important for the hanging man. High volume on the hanging man day means that traders who bought that day will be stuck with losing trades if the signal is confirmed the next day. Your stop loss in this case can be set at the open or high of the hanging man. Therefore, the difference between the stop loss and the opening price of the trade is the possible loss. If you are not comfortable with this loss then you must either adjust your trades’ size or wait for a retrace that may or may not occur.

Here is a chart which belongs to UNG (United States Natural Gas Fund).

Can you spot the hanging man and the confirmation? What is the stop loss?

ung-hangingman-candlesticks-6month-may212009

Hanging man picture is credited to Steve Nison, author of Japanese Candlestick Charting Techniques 2nd Ed.

 Posted by at 7:28 pm  Tagged with: , , , , , ,

How to Read Japanese Candlesticks

 Guides  No Responses »
May 202009
 

The most important thing to know about Japanese candlesticks is how to read them. Japanese Candlesticks usually come in two different colors. One color which represents an up day, and a second color which represents a down day. Most trading programs allow you to change the color of your bull and bear candles at will. Below are two different colored candles, in this example the black candle represents a down day and the white one an up day.

candlestick-basic-formation

As you can see in a black candle’s real body, the open is above the close. This means that the market opened higher than it closed in price. Traders call these candles bear candles, or bearish candles. The white candle is the exact opposite with the open way above the close representing a rise in price for that instrument. Both candles also have lines drawn above and below them, which represent the highs and lows for the trading period.

Now for an example of Japanese candlesticks in use. Examine this unlabeled chart and see if you can spot any patterns.

sample-chart-no-lables

All pictures in this post are credited to Steve Nison, author of Japanese Candlestick Charting Techniques 2nd Ed.

 Posted by at 1:02 pm  Tagged with: , ,

Five Reasons to Use Japanese Candlesticks

 Guides  No Responses »
May 202009
 

1.Candlesticks do not lag behind like many indicators do. They give you up to the minute date about the financial instrument you are examining.

2.Candlesticks use patterns which are easy to spot if you know to spot them.Wise traders often take advantage of candlesticks in order to get in earlier on trades.

3.Candlesticks are a great money management tools. Many candlestick patterns come equipped with their own stop losses.

4.Candlesticks give more information than line graphs. A line graph is calculated using only one set of date. Japanese candlesticks use four sets of data for their formation.

5. Japanese Candlesticks are easier to read than bar charts. The wider body of the candlestick makes it easier to make split-second decisions.

 Posted by at 12:33 pm  Tagged with: ,

Five Fundamental Economic Questions

 Guides  2 Responses »
May 202009
 

An updated version of this article can be found at my new blog HERE.

Every economic system has to answer the following five questions.

1.What does the economy produce? Whatever people are willing to buy.

2.How does the economy produce it? The most efficient/cheapest way.

3.Who gets the goods? Whoever wants it and can afford it.

4.How do we promote change? Through self-interested innovators and inventors.

5.How do we promote progress? Through self-interested entrepreneurs and politicians.

 Posted by at 12:16 am  Tagged with:

Macroeconomics Test #1 Review Ch 2 and 3

 Guides  No Responses »
May 192009
 

My first Macroeconomics test is coming up on the 21st. I need to cover all of chapter 2 and 3 today. As well as start on the extra credit. My professor says that the class will need it. I also missed the first day of class due to jury duty, now I have to email him a scan of my juror badge and certificate of attendance.

Anyways, time for a Macroeconomics lesson. The book I will be using is called Macroeconomics by McConnell Brue and is published by McGraw-Hill.

Chapter 2 is titled The Market System and the Circular Flow.This chapter outlines the types of economic systems that exist as well as the process by which goods are produced, sold, and priced.

Warning! I live in America, so this book is more than a tad biased towards capitalism and the Market System.Also these writings are NOT directly quoted from the book I am using because I like to cut out all the useless filler.

An economic system is a particular set of institutional arrangements and a coordinating mechanism which work together to respond to the economizing problem.

An economic system has to determine what goods are produced, how they are produced, who gets them, how to accommodate change, and how to produce technological progress in society.

The first economic system introduced is the command system also known as socialism or communism. In this system the government owns most property resources and economic decisions are made using a central economic plan. The government has absolute control over all aspects of the economy in the command system.

The second economic system is called the market system also known as capitalism. In this system almost all resources are privately owned, and the use of resources is governed by market activity. People living in this system act on self-interest. In a purely capitalistic (laissez-faire)  society there would be no government intervention, however, that is impractical for many reasons. Capitalism practiced in the United States and other countries tend to have a moderate amount of government regulation.

The market system is characterized by freedom of enterprise, freedom of choice, self-interest, competition, markets and prices, technology, specialization, use of money, and limited government intervention. Most of these are self explanatory.

Freedom of enterprise means that anyone can start a business and use resources if they can purchase them.

Freedom of Choice allows the owners of a business to run it however they see fit as long as it does not break the law.

Competition is the main vehicle by which the best product is obtained at the lowest possible cost. This is possible because many different vendors can enter the industry according to their self-interest. If there are many vendors, no one vendor can dictate the price of a good.

Markets and prices are set by the supply and demand in the market. If no one wants rocket powered pogo sticks, then society will not attempt to produce them. If research shows that carrots cure cancer, farmers will produce more carrot due to a change in consumer tastes.

Technology in the market system progresses because of self-interest. In the market system, successful inventors and innovators are rewarded.

Specialization is the use of  resources to produce a small number of goods and services. These goods and services are then exchanged for whatever the provider wants. Most consumers in the market system consume very little of what they themselves have the ability to produce.

Division of Labor is another name for human specialization. This means that people in society provide the services that they are best at. A person who is great at English becomes a writer and not a mathematician.

All economic systems use money as a medium of exchange. Money is used to trade when there is not a coincidence of wants between two individuals. Money is also used as a store of value and as a unit of account.]

Government intervention in the market system is very limited. The government only intervenes when it needs to iron out what are called “Market Failures”. Market Failures are inherent shortcomings of the market system.

Phew I need a break.

 Posted by at 7:01 pm  Tagged with:

Macroeconomics

 Guides  No Responses »
May 192009
 

Taking a Macroeconomics course over the summer. It’s a six week course, so I expect it be very fast paced. Already did my first current event paper one week into the class. If your interested, here is the paper I had to write it on.

This class will definitely pay off when it comes to changing the way i think about the economy and stock prices. The biggest issue about managing the economy is the fact that humans have nearly unlimited wants and a fixed amount of producing power and purchasing power.

My first test covers four chapters and is the week after the class starts. I am taking it on the 21st of May. I took Advanced Placement Macro in high school, so hopefully that will help me out a bit. Expect me to post a chapter review very shortly. I also want to try and get ahead of the curve before I start working in June by studying ahead of the class a few chapters.

Here are some definitions from Chapter One of my Macro book.

-Positive Economics focuses on facts and cause-and-effect relationships.

-Normative Economics incorporates value judgments about what the economy should be like or what particular policy actions should be taken to get there.

-Macroeconomics examines the economy as a whole or its basic subdivisions or aggregates.

This chapter also covers the basic economic charts like the budget line and the production possibilities curve.

In other news, I found this amazing song. A country version of Snoop Dog’s Drop it like its Hot. There are very few country or rap songs that I like, this song manages to combine the two genres. I like it. You can listen to it here.

 Posted by at 3:41 am  Tagged with: ,
 Newer Entries
© 2012 The Box Pie Suffusion theme by Sayontan Sinha