Burn Level
This is a concept where you have to have a job at the offset where you have REPLACEABLE MONEY at the drop of a hat at the beginning of your trading. Replaceable money at the point where you will not sweat replenshing your beginning funds over and over again...at a level that is confortable to you. When you start off and the money becomes burned for whatever reason you lost it, you will be able to easily replace the funds and fire away again.
This accomplishes two things. 1) Things will be shaky with your trading and even with instruction you are going to make a few mistakes, hit the wrong button, misinterprit something and you are going to torch the segment you happen to be using as you are learning. Know this is going to happen. 2) Having an acceptable Burn Level prepares you for the likeyhood of possible loss, thus FREEING you from giving a shit. This lets you trade with confidence. If you know you have other soilders (money packets) waiting behind the lines to take the place of thier fallen comrades you will trade more correctly and with confidence leaving fear behind. Without fear of loss, you will be more apt to trade correctly in the correct contrarian style and weather out the pressure to sell when everyone else is selling and instead hold or buy more like you are supposed to (depending on the situation of course, I will go into this later.)This will allow your profits to accumliate and continue.
What the proper Burn Level is depends on your income and your bills. Someone with a 100 dollar burn levels is someone who can throw around 100 dollar starts in your trading account, have the 100 burn up on a bad trade and then throw another 100 dollars down the next day and trying again the day after that, would be someone that makes about 35,000/yr. That is pretty much the base amount for this trading system. If you make anything like 25,000 a year, you better have a part time job as well in the evenings bartending or something to compensate. Of course, as your salary increases up the scale, so does your burn level. Someone making 250,000 a year because they own thier own business or are a high flying MBA has a burn level of say 700-1000 dollars. A person like this can drop 1500 without breaking a sweat knowing that they can replace it pretty easily the next day if they torch it.
Now this does not imply that this system Im going to show you has holes in it, it is pretty solid. There will be the beginning period where you need to build up your trading confidence and there will be that occational chaotic period when down is up and up is down in your trading 2-3 times a year where you are going to have a good estalished burn level so that you can absorb your losses financially and most importantly emotionally, so you can accept it and immediatly keep going onwards to profit.
In any positive expectation upward growth on a chart weather it be a business, trading, or a professional positive expectation poker player, there will be statistical dips and eddys and temporary losses. This is simple statistical math. Look at any upward chart, very rarely will things go straight up. There are downperiods, dips, etc. Your Burn Level allows you to deal with this, knowing that in the long run you will always be making the money back and then some as things continue to advance. Pick up Artists in a way have a burn level. They know that by flirting out of 10 women will result in 2 dates. Out of all the dates, 2 in 20 will end up in the sack. Its all numbers, the pickup artist knows what the long term gains are, and doesnt let the rejection deter or stop him. In the long run he will always win.
Replaceable money is the key here. That is the backbone on Burn Level. Scared money never wins. Have your initail measured supply and have your backup ready. At a certain point you will be able to fly full time, but not until then. Dont quit your job yet. Finance your endevours and keep your supply present while you fine tune your trading abilities. Determine what your burn level is and go from there. Think: While I am learning, What level of money can I constantly resupply with fresh incoming funds? This allows you to trade true with confidence.
As an aside, a lot of people that got started in business or trading lost everything, several times. Then they found thier stride and picked it up and excelled. If you want to succeed in the market you have to be obsessive about the dedication that you put into studying it. Like me. I spent 15 years studying the market and finding out what works and what didnt work. So now you have all my information that I learned the hard way in this book that you can now begin to use.
You will be starting with Part 1, or the option bounce trading method. Unless you have 4 piles of 5,000 dollars apiece to begin with...then you can go right straight to part 2. If you dont have this money, then this burn level section applies to you as you will be using part 1 to get your account up to snuff so you can begin with Part 2. Burn level applies to those people who will be trading using Part 1 of the system.
Create a list:
This Burn Level information applys to Part 1 of the stock trading bounce method. With the proceeds from the first part you will fund the second part. If there is a mistake or loss from the second part, you will return to the first part and resupply the funds for the second part.
With your burn level money create a list. Lets say you start with 2000 dollars and you are at the 100 dollar burn level. That is you are going into option trades with 100 dollar trades. With that 1900 you have left, thats 19 more 100 trades. Each trade you do write down the date, the stock and the price you got in at and the price you got out at. In the collumn next to it have a collumn with an area to write why the trade worked or why it didnt. Hindsight can greatly benifit your future trading. This allows you to track if you are doing something wrong. This will also allow me to track what you are doing wrong. Later in this ebook I will give you instructions on how to send this list of yours to me so that I can evaluate your trading and help you adjust correctly to a profitable trading pattern.
How to Predict which way the Market will go 1-2 days in the future, or techincal Indicators
MACD
The Macd is a trailing indicator that is a strong indicator of trend. You can find the Macd on
www.stockcharts.com . When the solid blackline crosses over the solid red line, that is a buy signal. When the red line crosses over the solid black line so the red line is on top, that is a buy signal. Usually you want verification...there should be a space of 6 units between the black and red line before you commit and follow the signals after the red and black lines cross over each other signifying a trend reversal.
However, sometimes the red and black line will start going back and forth in a touchy or non committed market (choppy market) where the bulls and the bears are fighting each other. In this case, if the black and the red line touch each other TWICE in a ONE MONTH period, automatically this means reversal and you should trade accordingly.
Its a really good idea to look at the weekly chart for the MACD before making a trade. While the daily chart is the one you will be mostly consulting, you dont want to go against the market trend in the long direction. For example, if you are only going to be in for a few days, just stick with the daily. But if you are trading ETFs and writing covered calls that go by a month by month basis, youll want to also check the weekly in case a reversal is immenent that will go against your trade.
RSI
This is another trend indicator. What it is useful for besides showing the trend is how powerful the trend is and how LONG IT WILL LIKELY LAST. Most people can see the direction of the trend but do not know how to use it to gauge a strengh of a trend. Lets look at an example of both of the above for the RSI and the MACD below...this screen shot was pulled on December 15th. You can see that it covers the beginning of sept to the middle of december. It gives you a snapshot of the stock market Nasdaq.
Lets look at the beginning of this chart, Sept 8th. The way you read this chart is this:
Go to where it says Sept 8th. NOW. See the chart below it, the MACD? And see the chart above it, the RSI? Both of these charts correlate with the big chart in the middle. See each candle on the main chart in the middle? Each candle stands for a day of trading in the stock market. Look at Where is says sept 8. You can see there is a line that comes straight up from the 8 through a pink bar right above it. See the pink long bar immediately above the 8? That is a volume bar, or how many shares of this particular stock ( this is the qqqq, or the nasdaq composite) has traded for the day. Immediatlly to the left see the numbers on the left? 200 M, 400M 600M and 800M? This stands for 200 million shares traded, 400 million, 600 million or 800 million. So the bars right there above the dates are a histogram which tells you how many shares or the volume that was traded that day.
Now look at the dates again, look at Sept 8th. See how there is a faint grey line that goes straight up from the 8th (of sept) that goes straight up through the red histogram bar I just decribed? And then even when the histogram volume bar ends (at about 600 Million) the light grey line keeps going up. Follow it all the way up...see how it goes right up into the word that says 'Volume', or more exactly into the u in the word 'volume'? Well that word volume isnt supposed to be there in the chart itself, but it would have gone up into a candlestick like in the other candlesicks that are on this chart. For example. Look at October 13. Follow it right up into the white candlesick above it. That candlestick represents the price of the qqqq stock for that day...its open price and its closing price. See right next to that white candlestick the next trading day, oct 14 is a red candlestick? And the day next to that, Oct 15th is another red candlestick, but a little bit lower. This is three trading days in a row. Each day has it corresponding candlestick above it showing the price of the open and close.
This same fient grey line that goes through everything also follows straight up into the RSI and straight down into the MACD likewise signifying that one day in the points of all the graphs.
What do I mean? Lets put it all together. Lets check out November 24th. You can see that on the 24th there was a jump up from the previous day. The candlestick says the market opened at about 27 (see where the bottom of the candlestick is, and trace it to the right along the price numbers on the right side of the panel graph, or the x axis) because thats where the bottom of the white candle is. Now look at the top of that white candle, you can see it is near the top at about 28 and a half. By the way, if the candle is red, you read it the opposite. The TOP of the red candle is where the opening price is and the BOTTOM of the candle is the closing price. Again its the reverse of this for a white candle.
What this generally means is a white candle is a bullish signal, indicating strength and the stock market going up, and red candles are generally bearish, or signals that the stock market or that stock is going down.
Technical Indicators
There are several technical indicators out there that I use that tell me if the market is oversold or undersold. Basically what these indicators do is act like street signs, or roadmaps as to which way the market will likely go. Here are three indicators that I use and you will be using. You can find these indicators on the website stockcharts.com.
MACD
The Macd is a trailing indicator that is a strong indicator of trend. You can find the Macd on
www.stockcharts.com . When the solid blackline crosses over the solid red line, that is a buy signal. When the red line crosses over the solid black line so the red line is on top, that is a sell signal. Usually you want verification...there should be a space of 6 units between the black and red line before you commit and follow the signals after the red and black lines cross over each other signifying a trend reversal.
However, sometimes the red and black line will start going back and forth in a touchy or non committed market (choppy market) where the bulls and the bears are fighting each other. In this case, if the black and the red line touch each other TWICE in a ONE MONTH period, automatically this means reversal!!! So whatever way the market had been going and the black line and the red line touch each other in the space of less than 1month, perferrably in less than 3 weeks, you will plan for the market to begin going the other way and trade accordingly.
RSI
This is another trend indicator. What it is useful for besides showing the trend is how powerful the trend is and how LONG IT WILL LIKELY LAST. Most people can see the direction of the trend but do not know how to use it to gauge a strengh of a trend. Lets look at an example of both of the above for the RSI and the MACD below...this screen shot was pulled on April 25th.. You can see that it covers the beginning of sept to the middle of december. It gives you a snapshot of the stock market Nasdaq.
One thing....if you see that the RSI is going in one direction, and the stock is going in another direction, this is something called divergence. Almost always this means that the stock is going to turn around and suddenly follow the direction that the RSI has been travelling in. Below is an example of Divergence...
Sometimes the RSI alone isnt even enough. A stock will be roaring up and the RSI will be maxed out on the cieling and will hang at the top like smoke in a room. Sure, the RSI says overbought and time to sell but you have to check out the other indicators as well. For example, if the MACD at the same time says you are in a strong uptrend, the stock can keep going up with the RSI maxed out on the ceiling for another week or two. Ive see it. Or if a stock just keeps dropping, the RSI can stay on the floor for quite a while. The point is that the RSI is a general guide to if a stock is overbought or oversold, but the MACD is pretty much the final word along with the candlesticks. But if a stock is trending hard in one direction, do not make the mistake of picking some of it up or shorting some of it just because the RSI is maxed at 70+ or below 30. You have to check the other indicators for the big picture.
Lets look at the beginning of this chart, Nov 14th.. The way you read this chart is this:
Now looking at the screen shot above, go to where it says Nov 17th. See the chart below it, the MACD? And see the chart above it, the RSI? Both of these charts correlate with the big chart in the middle. See each candle on the main chart in the middle? Each candle stands for a day of trading in the stock market. Look at Where is says Nov 17th. You can see there is a line that comes straight up from the 17th through a pink bar right above it. See the pink bar immediately above the 17th? That is a volume bar, or how many shares of this particular stock ( this is the qqqq, or the nasdaq composite) has traded for the day. Immediately to the left see the numbers on the left? 200 M, 400M 600M and 800M? This stands for 200 million shares traded, 400 million, 600 million or 800 million. So the bars right there above the dates are a histogram which tells you how many shares or the volume that was traded that day.
Here's the big overall picture. The chart in the middle with the candlesticks, the MACD below it and the RSI chart above it all go forward in time at the same rate all together. Sort of like an EKG or EEG. Pick any day on the main middle chart, each represented by a candlestick and look straight up and or down at its exact correlating point and that day or candlestick you picked to look at will match up with that point on the MACD or the RSI, straight up and down at that exact vertical point. Let me make it simpler. If you printed that page with the stock prices candlesticks and the Macd and the RSI if you laid a ruler on the page straight up and down, so that the top of the ruler would be at 12 o'clock and the bottom of the ruler would be at 6 o'clock.
Candlesticks
A rice trader in Japan in the late 1600s started to see patterns in opening and closing prices in relation to the future price of the price of rice. When he started to chart this, he found patterns developing over and over again. He used these price patterns to chart or forecast what was going to happen in the next several days. After a while, he was making a fortune and began to refine his system. Candlesticks today are a result of this traders system.
The underlying basics for candlesticks are market forces that are repeatable based on crowd psychology, stock strength and price, and strength and weakness in the stock and market as a whole.
There are several patterns that I will get into here that are a great way to spot check your stock and see with a fairly high degree of probability what the stock will do in the next three days. But first, more on candles themselves.
A stock opens at a certain price, and closes at a certain price and in between that open and close price, does what it does throughout the day. This information constructs a candlestick.
If the price is lower than the open,or if the price is lower during the day than the open, the candlestick is red. If the price closes higher than the open, or during the day is higher than the open, the candlestick is white. The shape that the candle is in, if it has a short body with a long or short tail or what combination of candles compromise the last 2-3 days tells us what the stock is likely to do in the upcoming next few days.
Throw a baseball straight up into air. As the ball approaches the top of its projectile path it will decelerate to a speed of zero, and then reverse downward picking up speed as it approaches the ground. Now imagine yourself drilling into a piece of wood. You suddenly hit a hard spot in the wood at which time bear down with all of your might to overcome the temporary resistance created by the knot in the wood. When you penetrate the knot you surge forward and quickly poke through to the other side. These are two analogies to help explain the patterns of stocks as they transition between one move and the next move. When a stock is completing a move, it experiences a period of deceleration, which is referred to by chartist as price consolidation. Consolidation is one of the most important signals that a stock is about to begin a new move. The move can be a continuation in the same direction, or it can be a reversal in the opposite direction. The area of consolidation represents a battle zone where the bears are at war with the bulls. The outcome of the battle often defines the direction of the next move. As short-term traders, it is important to identify these areas of consolidation and enter a trade just as the new move is beginning. During the consolidation period or 'battle zone', traders, both long and short are patiently waiting on the sidelines watching to learn the outcome of the battle. As these winners emerge, there is often a scramble of traders jumping in with the winning team. The candlestick patterns gives the trader excellent clues on when this move is about to take place, and helps the trader time his entry so that he can get in at the very beginning.
Tommorrow....
The MACD, RSI and more on candlesticks...
Until then,
Tradinginsider
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