Posts Tagged ‘trading’

Using Bullish Candlestick Patterns to Buy Stocks

Written by admin. Posted in Technical Analysis

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Candlestick charts are a type of financial chart for tracking the movement of securities. They have their origins in the centuries-old Japanese rice trade and have made their way into modern-day price charting. Some investors find them more visually appealing than the standard bar charts and the price actions easier to interpret.

Candlesticks are so named because the rectangular shape and lines on either end resemble a candle with wicks. Each candlestick usually represents one day’s worth of price data about a stock. Over time, the candlesticks group into recognizable patterns that investors can use to make buying and selling decisions.

Key Takeaways

  • Candlestick charts are useful for technical day traders to identify patterns and make trading decisions.
  • Bullish candlesticks indicate entry points for long trades, and can help predict when a downtrend is about to turn around to the upside.
  • Here, we go over several examples of bullish candlestick patterns to look out for.

Click Play to Learn How to Use Bullish Candlestick Patterns to Buy Stock

How to Read a Single Candlestick

Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price. The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher.

A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure.

The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day, and the lower shadow shows the lowest price for the day.

Image by Julie Bang © Investopedia 2020


Bullish Candlestick Patterns

Over time, groups of daily candlesticks fall into recognizable patterns with descriptive names like three white soldiers, dark cloud cover, hammer, morning star, and abandoned baby, to name just a few. Patterns form over a period of one to four weeks and are a source of valuable insight into a stock’s future price action. Before we delve into individual bullish candlestick patterns, note the following two principles:

  1. Bullish reversal patterns should form within a downtrend. Otherwise, it’s not a bullish pattern, but a continuation pattern.
  2. Most bullish reversal patterns require bullish confirmation. In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern.

The bullish reversal patterns can further be confirmed through other means of traditional technical analysis—like trend lines, momentum, oscillators, or volume indicators—to reaffirm buying pressure. There are a great many candlestick patterns that indicate an opportunity to buy. We will focus on five bullish candlestick patterns that give the strongest reversal signal.

1. The Hammer or the Inverted Hammer

Image by Julie Bang © Investopedia 2021


  • The Hammer is a bullish reversal pattern, which signals that a stock is nearing the bottom in a downtrend.
  • The body of the candle is short with a longer lower shadow. This is a sign of sellers driving prices lower during the trading session, only to be followed by strong buying pressure to end the session on a higher close.
  • Before we jump in on the bullish reversal action, however, we must confirm the upward trend by watching it closely for the next few days.
  • The reversal must also be validated through the rise in the trading volume.

Image by Julie Bang © Investopedia 2021


The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support.

  • It’s identical to the Hammer except for the longer upper shadow, which indicates buying pressure after the opening price.
  • This is followed by considerable selling pressure, which wasn’t enough to bring the price down below its opening value.

Again, bullish confirmation is required, and it can come in the form of a long hollow candlestick or a gap up, accompanied by a heavy trading volume.

2. The Bullish Engulfing

Image by Julie Bang © Investopedia 2020

The Bullish Engulfing pattern is a two-candle reversal pattern.

  • The Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle.
  • The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows.
  • On the second day of the pattern, the price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers.

It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed.

3. The Piercing Line

Image by Julie Bang © Investopedia 2020

Similar to the engulfing pattern, the Piercing Line is a two-candle bullish reversal pattern, also occurring in downtrends.

  • The first long black candle is followed by a white candle that opens lower than the previous close.
  • Soon thereafter, the buying pressure pushes the price up halfway or more (preferably two-thirds of the way) into the real body of the black candle.

4. The Morning Star

Image by Julie Bang © Investopedia 2020

As the name indicates, the Morning Star is a sign of hope and a new beginning in a gloomy downtrend.

  • The pattern consists of three candles: one short-bodied candle (called a doji or a spinning top) between a preceding long black candle and a succeeding long white one.
  • The color of the real body of the short candle can be either white or black, and there is no overlap between its body and that of the black candle before. It shows that the selling pressure that was there the day before is now subsiding.
  • The third white candle overlaps with the body of the black candle and shows renewed buyer pressure and a start of a bullish reversal, especially if confirmed by the higher volume.

5. The Three White Soldiers

Image by Julie Bang © Investopedia 2021


This pattern is usually observed after a period of downtrend or in price consolidation.

  • It consists of three long white candles that close progressively higher on each subsequent trading day.
  • Each candle opens higher than the previous open and closes near the high of the day, showing a steady advance of buying pressure.
  • Investors should exercise caution when white candles appear to be too long as that may attract short sellers and push the price of the stock further down. 

While there are some ways to predict markets, technical analysis is not always a perfect indication of performance. Either way, to invest you’ll need a broker account. You can check out Investopedia’s list of the best online stock brokers to get an idea of the top choices in the industry.

Putting It All Together

The chart below for Enbridge, Inc. (ENB) shows three of the bullish reversal patterns discussed above: the Inverted Hammer, the Piercing Line, and the Hammer.

The chart for Pacific DataVision, Inc. (PDVW) shows the Three White Soldiers pattern. Note how the reversal in downtrend is confirmed by the sharp increase in the trading volume.

What Is the Most Bullish Candlestick Pattern?

The bullish engulfing pattern and the ascending triangle pattern are considered among the most favorable candlestick patterns. As with other forms of technical analysis, it is important to look for bullish confirmation and understand that there are no guaranteed results.

What Is a Spinning Top Candlestick Pattern?

A spinning top, or doji, is a candlestick with a short body and two long shadows, indicating that prices fluctuated over the course of a trading period before ultimately closing near the opening price. In technical analysis, this indicates that neither buyers or sellers have the upper hand.

What Is a Bullish Belt Hold Candlestick Pattern?

A bullish belt hold is a pattern of declining prices, followed by a trading period of significant gains. In technical analysis, this is considered a sign of reversal after a downtrend. As with other forms of technical analysis, traders should be careful to wait for bullish confirmation. Even with confirmation, there is no guarantee that a pattern will play out.

The Bottom Line

Investors should use candlestick charts like any other technical analysis tool (i.e., to study the psychology of market participants in the context of stock trading). They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions.

We looked at five of the more popular candlestick chart patterns that signal buying opportunities. They can help identify a change in trader sentiment where buyer pressure overcomes seller pressure. Such a downtrend reversal can be accompanied by a potential for long gains. That said, the patterns themselves do not guarantee that the trend will reverse. Investors should always confirm reversal by the subsequent price action before initiating a trade. 

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What Is a Paper Trade? Definition, Meaning, and How to Trade

Written by admin. Posted in Technical Analysis

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What Is Paper Trade?

A paper trade is a simulated trade that allows an investor to practice buying and selling without risking real money. The term dates back to a time when (before the proliferation of online trading platforms) aspiring traders would practice on paper before risking money in live markets. While learning, a paper trader records all trades by hand to keep track of hypothetical trading positions, portfolios, and profits or losses. Today, most practice trading involves the use of an electronic stock market simulator, which looks and feels like an actual trading platform.

Key Takeaways

  • Paper trading is simulated trading that allows investors to practice buying and selling securities.
  • Paper trading can test a new investment strategy before employing it in a live account.
  • Many online brokers offer clients paper trade accounts.
  • Paper trades teach novices how to navigate platforms and make trades, but may not represent the true emotions that occur during real market conditions.

What Does Paper Trading Tell You?

The development of online trading platforms and software has increased the ease and popularity of paper trading. Today’s simulators allow investors to trade live markets without the commitment of actual capital and the process can help to gauge whether investment ideas have merit. Online brokers such as TradeStation, Fidelity, and TD Ameritrade’s thinkorswim offer clients paper trading simulators.

For example, TD Ameritrade’s paperMoney® is designed to help customers try options and different investment strategies without the worry of losing any money. Nearly everything about the simulator is the same as their feature-rich thinkorswim trading platform, except the investor is not trading real money. Investopedia provides a free simulator for trading stocks.

To get the most benefits from paper trading, an investment decision and the placing of trades should follow real trading practices and objectives. The paper investor should consider the same risk-return objectives, investment constraints, and trading horizon as they would use with a live account. For example, it would make little sense for a risk-averse long-term investor to practice numerous short-term trades like a day trader.

Also, paper transactions can be applied to many market conditions. As an example, a trade placed in a market characterized by high levels of market volatility is likely to result in higher slippage costs due to wider spreads compared to a market that is moving in an orderly manner. Slippage occurs when a trader obtains a different price than expected from the time the trade is initiated to the time the trade is made.

Investors and traders can use simulated trading to familiarize themselves with various order types such as stop-loss, limit orders, and market orders. Charts, quotes, and news feeds are available on many platforms as well.

Paper Trade Accounts vs. Live Accounts

Paper trading may provide a false sense of security and often results in distorted investment returns. In other words, nonconformity with the real market happens because paper trading does not involve the risk of real genuine capital. Also, paper trading allows for basic investment strategies—such as buying low and selling high—which are more challenging to adhere to in real life, but are relatively easy to achieve while paper trading.

The fact is that investors and traders are likely to exhibit different emotions and judgment when risking real money, which may lead them to different behavior when operating a live account. For example, consider a real trade by a new foreign exchange trader who enters into a long position with the euro against the U.S. dollar ahead of nonfarm payrolls data. If the report is much better than expected and the euro drops sharply, then the trader may double down in an attempt to recoup losses in a paper trade, as opposed to taking the loss as would be advisable in a real trade.

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What They Are, and What They Tell Investors

Written by admin. Posted in Technical Analysis

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A Bollinger Band® is a technical analysis tool defined by a set of trendlines. They are plotted as two standard deviations, both positively and negatively, away from a simple moving average (SMA) of a security’s price and can be adjusted to user preferences.

Bollinger Bands® was developed by technical trader John Bollinger and designed to give investors a higher probability of identifying when an asset is oversold or overbought.

Key Takeaways

  • Bollinger Bands® is a technical analysis tool to generate oversold or overbought signals and was developed by John Bollinger.
  • Three lines compose Bollinger Bands: A simple moving average, or the middle band, and an upper and lower band.
  • The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average and can be modified.
  • When the price continually touches the upper Bollinger Band, it can indicate an overbought signal.
  • If the price continually touches the lower band it can indicate an oversold signal.

Understanding Bollinger Bands

How to Calculate Bollinger Bands®

The first step in calculating Bollinger Bands® is to compute the simple moving average (SMA) of the security, typically using a 20-day SMA. A 20-day SMA averages the closing prices for the first 20 days as the first data point.

The next data point drops the earliest price, adds the price on day 21 and takes the average, and so on. Next, the standard deviation of the security price will be obtained. Standard deviation is a mathematical measurement of average variance and features prominently in statistics, economics, accounting, and finance.

For a given data set, the standard deviation measures how far numbers are from an average value. Standard deviation can be calculated by taking the square root of the variance, which itself is the average of the squared differences of the mean.

Next, multiply that standard deviation value by two and both add and subtract that amount from each point along the SMA. Those produce the upper and lower bands.

Here is this Bollinger Band® formula:


BOLU = MA ( TP , n ) + m σ [ TP , n ] BOLD = MA ( TP , n ) m σ [ TP , n ] where: BOLU = Upper Bollinger Band BOLD = Lower Bollinger Band MA = Moving average TP (typical price) = ( High + Low + Close ) ÷ 3 n = Number of days in smoothing period (typically 20) m = Number of standard deviations (typically 2) σ [ TP , n ] = Standard Deviation over last  n  periods of TP \begin{aligned} &\text{BOLU} = \text {MA} ( \text {TP}, n ) + m * \sigma [ \text {TP}, n ] \\ &\text{BOLD} = \text {MA} ( \text {TP}, n ) – m * \sigma [ \text {TP}, n ] \\ &\textbf{where:} \\ &\text {BOLU} = \text {Upper Bollinger Band} \\ &\text {BOLD} = \text {Lower Bollinger Band} \\ &\text {MA} = \text {Moving average} \\ &\text {TP (typical price)} = ( \text{High} + \text{Low} + \text{Close} ) \div 3 \\ &n = \text {Number of days in smoothing period (typically 20)} \\ &m = \text {Number of standard deviations (typically 2)} \\ &\sigma [ \text {TP}, n ] = \text {Standard Deviation over last } n \text{ periods of TP} \\ \end{aligned}
BOLU=MA(TP,n)+mσ[TP,n]BOLD=MA(TP,n)mσ[TP,n]where:BOLU=Upper Bollinger BandBOLD=Lower Bollinger BandMA=Moving averageTP (typical price)=(High+Low+Close)÷3n=Number of days in smoothing period (typically 20)m=Number of standard deviations (typically 2)σ[TP,n]=Standard Deviation over last n periods of TP

What Do Bollinger Bands® Tell You?

Bollinger Bands® is a popular technique. Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. John Bollinger has a set of 22 rules to follow when using the bands as a trading system.

The Squeeze

The “squeeze” is the central concept of Bollinger Bands®. When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities.

Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade. These conditions are not trading signals. The bands do not indicate when the change may take place or in which direction the price could move.

Breakouts

Approximately 90% of price action occurs between the two bands. Any breakout above or below the bands is significant. The breakout is not a trading signal and many investors mistake that when the price hits or exceeds one of the bands as a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement.

Example of Bollinger Bands®

In the chart below, Bollinger Bands® bracket the 20-day SMA of the stock with an upper and lower band along with the daily movements of the stock’s price. Because standard deviation is a measure of volatility, when the markets become more volatile the bands widen; during less volatile periods, the bands’ contract.

Image by Sabrina Jiang © Investopedia 2021


Limitations of Bollinger Bands®

Bollinger Bands® is not a standalone trading system but just one indicator designed to provide traders with information regarding price volatility. John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals and indicators based on different types of data. Some of his favored technical techniques are moving average divergence/convergence (MACD), on-balance volume, and relative strength index (RSI).

Because Bollinger Bands® are computed from a simple moving average, they weigh older price data the same as the most recent, meaning that new information may be diluted by outdated data. Also, the use of 20-day SMA and 2 standard deviations is a bit arbitrary and may not work for everyone in every situation. Traders should adjust their SMA and standard deviation assumptions accordingly and monitor them.

What Do Bollinger Bands® Tell You?

Bollinger Bands® gives traders an idea of where the market is moving based on prices. It involves the use of three bands—one for the upper level, another for the lower level, and the third for the moving average. When prices move closer to the upper band, it indicates that the market may be overbought. Conversely, the market may be oversold when prices end up moving closer to the lower or bottom band.

Which Indicators Work Best with Bollinger Bands®?

Many technical indicators work best in conjunction with other ones. Bollinger Bands® are often used along with the relative strength indicator (RSI) as well as the BandWidth indicator, which is the measure of the width of the bands relative to the middle band. Traders use BandWidth to find Bollinger Squeezes.

How Accurate Are Bollinger Bands®?

Since Bollinger Bands® are set two use +/- two standard deviations around an SMA, we should expect that approximately 95% of the time, the observed price action will fall within these bands.

What Time Frame Is Best Used With Bollinger Bands®?

Bollinger Bands® typically use a 20-day moving average.

The Bottom Line

Bollinger Bands® can be a useful tool for traders for assessing the relative level of over- or under-sold position of a stock and provides them with insight on when to enter and exit a position. Certain aspects of Bollinger Bands®, such as the squeeze, work well for currency trading. Buying when stock prices cross below the lower Bollinger Band® often helps traders take advantage of oversold conditions and profit when the stock price moves back up toward the center moving-average line.

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Strategies & Applications Behind The 50-Day EMA (INTC, AAPL)

Written by admin. Posted in Technical Analysis

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The 50-day moving average marks a line in the sand for traders holding positions through inevitable drawdowns. The strategy we employ when price nears this inflection point often decides whether we walk away with a well-earned profit or a frustrating loss. Considering the consequences, it makes sense to improve our understanding about this price level, as well as finding new ways to manage risk when it comes into play.

The most common formula takes the last 50 price bars and divides by the total. This yields the 50-day simple moving average (SMA) used by technicians for many decades. The calculation has been tweaked in many ways over the years as market players try to build a better mousetrap. The 50-day exponential moving average (EMA) offers the most popular variation, responding to price movement more quickly than its simple minded cousin. This extra speed in signal production defines a clear advantage over the slower version, making it a superior choice.

The 50-day EMA gives technicians a seat at the 50-yard line, the perfect location to watch the entire playing field for mid-term opportunities and natural counterswings after active trends, higher or lower. It’s also neutral ground when price action is often misinterpreted by the majority. And as our contrary market proves over and over again, the most reliable signals tend to erupt when the majority is sitting on the wrong side of the action.

There are dozens of ways to use the 50-day EMA in market strategies. It works as a reality check when a position hits the magic line after a rally or selloff. It has equal benefit in lower and higher time frames, applying the indicator to intraday charts or tracking long term trends with the 50-week or 50-month version. Or play a game of pinball, trading oscillations between the 50-day EMA and longer term 200-day EMA. It even works in the arcane world of market voodoo, with 50/200 day crossovers signaling bullish golden crosses or bearish death crosses.

Pullbacks

The 50-day EMA most often comes into play when you’re positioned in a trend that turns against you in a natural counterswing, or in reaction to an impulse that’s dragging thousands of financial instruments along for the ride. It makes sense to place a stop just across the moving average because it represents intermediate support (resistance in a downtrend) that should hold under normal tape conditions. The problem with this reasoning is it doesn’t work as intended in our volatile modern markets.

The 50 and 200-day EMAs have morphed from narrow lines into broad zones in the last two decades due to aggressive stop hunting. You need to consider how deep these violations will go before placing a stop or timing an entry at or near the moving average. Patience is key in these circumstances because testing at the 50-day EMA usually resolves within three to four price bars. The trick is to stay out of the way until a) the reversal kicks in or b) the level breaks, yielding a price thrust against your position.

Image by Sabrina Jiang © Investopedia 2020

The risk of getting it wrong will hurt your wallet, so how long should you stick around when price tests the 50-day EMA? While there’s no perfect way to avoid whipsaws, examining other technicals often pinpoints the exact extension of a reversal. For example, Intel (INTC) returned to the January high in April and sold off to the 50-day EMA. It broke support, dropped to the .386 Fibonacci rally retracement and bounced back to the moving average in the next session. The stock regained support on the third day and entered a recovery, completing a cup and handle breakout pattern.

50-Day Fractals

The moving average works just as well in lower and higher time frames. As a result, day traders will find benefit in placing 50-bar EMAs on 15 and 60 minute charts because they define natural end points for intraday oscillations. Just keep in mind that noise increases as time frame decreases, lowering its value on 5 and 1 minute charts. On the flip side, the indicator shows excellent reliability on weekly and monthly charts, often pinpointing exact turning points in corrections and long term trends.

This makes sense when considering that the 50-week EMA defines mean reversion over an entire year while the 50-month EMA tracks more than four years of market activity, approaching the average length of a typical business cycle. Market timers can use these long-term moving averages to establish profitable positions lasting for months or years while violations offer perfect levels to take profits and reallocate capital into other long term instruments.

Image by Sabrina Jiang © Investopedia 2020

Apple (AAPL) set up excellent buying opportunities at the 50-month EMA in 2009 and 2013. It broke moving average support in September 2008 and spent 5 months grinding sideways before remounting that level in April 2009, issuing a “failure of a failure buy signal that yielded more than 80 points over three years. It tested the moving average a second time in 2013, spending four months building a double bottom that triggered a 100 percent rally into 2014. Note how the lows matched support perfectly, offering an incredible low risk entry for patient market players.

50-200 Day Pinball

Fast trends in both directions tend to increase the separation between the 50 and 200-day EMAs. Once a countertrend breaks one of these averages, it often carries into the other average, setting up a few rounds of the 50-200 “pinball” strategy. Swing traders are natural beneficiaries of this two-sided technique, going long and then short until one side of the box gives way to a more active trend impulse.

Image by Sabrina Jiang © Investopedia 2020 

Biogen (BIIB) hit a new high in March after a long uptrend and entered a steep correction that broke the 50-day EMA a few days later. Price action then entered a two month game of 50-200 pinball, traversing more than 75 points between new resistance at the 50-day EMA and long term support at the 200-day EMA. Swing reversals took place close to target numbers, allowing easy entry and relatively tight stops for a triple digit stock.

Bullish and Bearish Crossovers

The downward crossover of the 50-day EMA through the 200-day EMA signals a death cross that many technicians believe marks the end of an uptrend. An upward crossover or golden cross is alleged to possess similar magic properties in establishing a new uptrend. In reality, numerous crisscrosses can print in the life cycle of an uptrend or downtrend and these classic signals show little reliability. 

Image by Sabrina Jiang © Investopedia 2020

It’s a different story with the 50 and 200-week EMAs. SPDR S&P Trust (SPY) shows four valid cross signals going back 15 years, two in each direction. More importantly, there were no false signals during this time, which included three bull markets and two bear markets. Looking at historic Dow Industrial data, the last invalid cross occurred more than 30 years ago, in 1982. This tells us that golden and death crosses deserve a respected place in market analysis.

The Bottom Line

The 50-day EMA identifies a natural mean reversion level for the intermediate time frame. It has numerous applications in price prediction, position choice and strategy building. Traders, market timers and investors all benefit from 50-day EMA study, making it an indispensable ingredient in your technical market analysis.

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