Technical Analysis 101 (TA101)

[4Godnwv]

Market Sentiment (Part 3) Volume -

Following the crowd to catch the "bandwagon" effect is one of the best lessons a trader can learn. Another one is "When the wagon is full...be the first one off!"

When everyone is bullish or bearish, it's time to stop following the crowd. Crowds are great until they go to extremes. And there are a number of indicators that can help the technician to recognize when the crowd has reached the extreme!

Ever heard the expression "the trend is your friend"? Let me add something to that. " The END of the trend is your friend too."

A turn in the road is just a turn in the road unless you fail to make it, then it becomes the scene of an accident!

Volume itself is probably one of the most important indicators because it registers trader participation. The raw data alone can be extremely effective, but when we manipulate that data by applying mathmatical formulas and averages, it can be quite powerful.

Market sentiment can be expressed in two words, bullish and bearish. The price of a stock is either going up or down. The harder it runs up and the farther it runs up the more bullish the crowd becomes. The farther it falls off and the sharper it falls off the more bearish the crowd becomes.

A bullish crowd can run the pps (price per share) of a stock up fast and far. A bearish crowd can cause a stock to plummet at a nauseating clip.

The interesting thing is that there is a point at which the crowd realizes that they have gone to extremes, and like a light switch, they turn the other way. That point is called the "PIVOT POINT" or a "reversal point". Sometimes this can take place in one day. In other cases it can occur over a period of days or even weeks.

The problem is that the little light often glows dimly for awhile and most folk aren't even sure if the switch has been flipped. In fact many traders are blind and cannot really tell the difference. They trade by "hearing" only and won't react until many people are talking about the change. One thing is certain, when the crowd has reached the point of extreme emotion it is almost always wrong, and it's time to reverse course!

The market needs certain things in order to move. One of these things is liquidity. More people being involved in a stock brings more liquidity. If people are dis-interested in trading a stock it causes a condition called illiquidity. One of the reasons that trading smaller 'penny' stocks can be difficult is because there are a limited number of players in the game. The more traders involved, the more buyers and sellers willing to exchange funds, the more liquid the stock is.

This is important to the technician because stocks with little liquidity can move erratically. That makes them difficut to trade. What the technician is looking for is a stock with enough liquidity to move the pps strongly in one direction or another as players oscillate between bullish and bearish.

[4Godnwv]

Hey, I enjoy it - nighters /e

[Susie924]

I look forward to reading it!

I'm off to dreamland now.......Monday mornings are not fun!

Have a good night and thanks again for all of your help!

[4Godnwv]

Remember - NO indicator works ALL the time - and NO indicator works for every stock -

I have an article I'm writing on 'backtesting' - I believe it's gonna save a lot of folk a lot of time and trouble with their T/A

[Susie924]

Get outta Dodge! LOL........I am learning that part at least!

[4Godnwv]

I'm gonna post some more stuff on 'sentiment' soon - been working on it - just been kinda busy lately -

[4Godnwv]

Not really - well, my current pardigm is that T/A is a graphic representation of market sentiment.

So.... T/A just graphs how people reacted to the news -

In that case they got fired up and then fizzled - the chart tells you that - gotta read the signs -

Also gotta learn to admit you misinterpreted the signs and get outta Dodge lol

[Susie924]

But I think that also had to do with that webcast that was done. When something like that happens or unexpected good news happens, doesn't it kinda throw TA out the window for a bit?

[4Godnwv]

lol - remember back on May 8th - when I went long GZFX and got hammered a few days later?

Look at the SAR - Sometimes it can fool ya! But also look at how it jumped up ABOVE the price and told me to get OUT!

[Susie924]

It's below the pps, so I should buy? Please tell me NO!!!! LOL

[4Godnwv]

OK - another clue - how close is it to the pps? - the closer it is - the clsoer you are to getting stopped out - make sense?

Also, you might have a lot of stocks that you SHOULD be long on -

Try GZFX

[Susie924]

I was just adding it to my charts and it looks like I should go long on ALL of them so far.

That can't be right!

[4Godnwv]

you're getting it -now pull up a chart - take off all the junk -

MA's everything - CLEAN chart -

add a SAR

play with the numbers -raise them lower them double them triple them

find out what would have worked in the past for that stock -

it can be different for different stocks - thats why folk have trouble with T/A -

they try to use a hammer on EVERYTHING - sometimes you need a screw driver - different sizes too

[Susie924]

That sounds easy enough!

[Susie924]

I missed that the first time. I see it now

[4Godnwv]

lol - its a stop! - if its BELOW the pps - you should be long

if its ABOVE the pps - you should be short

theorectically!!!!!!!!!

[4Godnwv]

as to your question to the step and max step settings - see my note in the bottom left corner of the chart?

[Susie924]

I think it's telling me to take an aspirin for my headache!

[Susie924]

Ok thanks again. I will start paying more attention to them to see if I really can get the hang of it.

You are very patient with me and I appreciate it!

[4Godnwv]

haha -You tell me!

[4Godnwv]

sometimes - like all indicators, it throws false signals - gotta combine it with other things -

SARS work better in a TREND!

[Susie924]

I think so. But it's easier to see after the fact.

What is it saying to do right now?

[Susie924]

It sure looks like it would have worked too!

[4Godnwv]

see where it flips again and goes BELOW the price channel?

THAT tells you to go long again -

Got it?

[4Godnwv]

that's telling you to GO SHORT the Q's - it will 'follow' or 'trail' the pps down until a STOP occurs - which will tell you to cover and tell the guy who wants to go long, to go LONG again.

[Susie924]

Yes

[4Godnwv]

move TWO days - may 11th - see the blue dot - "SAR point" ABOVE that candle?

[Susie924]

Yes I see it

[4Godnwv]

look at the right side of the chart -

May the 9th, the 1st red candle - it's a doji see it?

[4Godnwv]

we'll get to that in a minute -

[Susie924]

When I add the Parabolic Sar to my charts it defaults to .02,.20

Is .04, 40 a better choice?

[4Godnwv]

now lets look at the right side of the chart -

May the 9th, the 1st red candle - it's a doji see it?

[4Godnwv]

eggsactly

[Susie924]

Ok but if you didn't put in trailing stops and were just doing it mentally in your mind, that little dot would tell you to sell?

[4Godnwv]

on days 8 and 9 the stock falls off - but does NOT trigger your stop order - see that?

Then, on day 10 (the 17th) the pps falls far enough to trigger the stop order - and the little blue dot moves ABOVE the pps

YOU got stopped out!

see that?

[Susie924]

Ok I see that

[4Godnwv]

OK - so now the stock runs up for 7 days to 43.279 -

the "SAR points" (the little blue dots) are your trailing stop orders - they keep moving up with the price -

see that?

[Susie924]

Yes I see that

[4Godnwv]

Let's take it one step at a time - say you bot the Q's on Jan 1st 2006 @ 40.132 - see that?

[4Godnwv]

haha - maybe I'm not the best teacher -

[Susie924]

It's very colorful!

I will have to study it for a bit.

I'm slow, what can I tell ya!

[4Godnwv]

Let's see if this post explains it any better -

http://investorshub.com/boards/read_msg.asp?message_id=11430711

[4Godnwv]

a trailing stop just uses a number or percentage that 'trails' the pps - instead of a fixed sell limit -

[Susie924]

I definitely understand stop orders but I'm not 100% sure about trailing stops

[4Godnwv]

Parabolic SAR Chart:

The Parabolic SAR is an indicator that acts as a visual trailing stop for long or short positions. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.

The Parabolic "Stop and Reversal" can be used as a trailing stop for either long or short positions. It can also act as a BUY or SELL signal, i.e. when the short position gets stopped out, it would also be a signal to go long and vice versa.

[4Godnwv]

No - you can't use stops at all with pennies - [well not with most brokers anyway] -

Do you understand the use of stop orders and how they work?

[Susie924]

No I haven't. I don't think you can do that with pennies can you?

My "normal" stocks are pretty much long term and I don't watch them from day to day or minute to minute.

[4Godnwv]

Hmmm.. you ever use trailing stops? /e

[Susie924]

Ok, I've read it twice and it hasn't sunk in yet but I will keep on trying!

[4Godnwv]

Susie re: Parabolic SAR -

The simple explaination is found in the acronymn.

SAR stands for stop-and-reversal

Have you ever used trailing stops?
---------------------------------------------

Rather than a fixed point "sell at $2.35", they use a moving number "sell at .15 below the point at which this stock stops going up".

Before trailing stops if you owned a stock that had a pps of $2.00 and wanted to protect against a loss, you had to pick a sell point - let's say a .15 loss or $1.85 - even if that stock ran to $2.50 it would have to then fall back to $1.85 before triggering your sell order.

With a trailing stop if you have a stock that the current pps is at $2.00 you could put in a trailing stop @ .15 and as long as the pps continued to run it would NOT be triggered. It could run to $2.50 and then fall off - when it reached $2.35 it would trigger your .15 trailing stop order.

You can also do this with a percentage - "sell anytime this stock falls 7%"
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The Parabolic SAR is an indicator that acts as a visual trailing stop for long or short positions.

If the trend is up, buy when the indicator moves below the price.

If the trend is down, sell when the indicator moves above the price.