Fundamentals of Technical Analysis

Technical analysis was truly an arcane art before the internet boom. Chartists perform technical analysis in their secret rooms with data that was carefully collected from professional sources. Those were the times when stock prices and data did not have a medium through which to be readily available to the public and be ran through publicly available software to produce the charts that are available today.

Today, with internet in almost every household, technical analysis became an art anyone could practice. Complex charts, technical indicators and analysis that was once the sole domain of a few highly paid wallstreet analysts are now available to anyone who wants it, often for free.

Technical analysis also became linked to short term aggressive trading instruments such as stock options and futures because of its excellent short term predictive nature.

With technical analysis this popular, I feel obligated to teach you once and for all everything you need to know about how to conduct proper technical analysis before you start looking at your first chart. A lot of amateurs fail at technical analysis simply because they didn't have the necessary basic knowledge to understand how to interpret technical indications properly in the first place. With the knowledge in this article, you will definite experience more success at technical analysis.

Summary of Technical Analysis Basics

2 Principles of Technical Analysis: Significance, Prudence

2 Key Tools: Charts, Indicators

2 Key Components: Price, Volume

5 Key Concepts: Resistance, Support, Trend, Patterns, Setups

2 Principles of Technical Analysis: Significance, Prudence

The two principles of technical analysis are the most important foundation in understanding technical analysis and interpreting technical analysis properly. Too many amateurs misinterpret technical indications simply because they did not understand these two simple principles. This is also the only part in this tutorial that addresses the mental aspect of technical analysis and should be clearly understood before moving on. The two principles of technical analysis are Significance and Prudence.

Principle #1: Significance

Significance refers to the degree that a technical indication is true. Take breakout and reversal signals for example. Does a 0.5% close above a resistance level indicate a breakout? Does a 1% reversal in a bearish stock that has fallen more than 40% indicate a reversal? No. The degree of significance for both cases is just too weak. Most technical analysis beginners who do not understand the principle of significance would take a small fake out as a breakout and then act on the wrong stocks. The judgment of significance is, however, a matter of experience. How much of a breakout represents a significant breakout? How much of a reversal represents a significant reversal and how big a candle represents a strong morning star signal? The judgment of significance is something you need to acquire and refine as you put more years behind your ears.

Principle #2: Prudence

Prudence refers to the ability to say "No" when in doubt. Technical analysis is more of an art than a science. This is because even though technical indications are scientifically generated, the interpretation of technical indications is highly subjective. You are going to experience many marginal or doubtful moments in technical analysis. Technical signals that "almost made it" as well as technical signals that are "neither here nor there". Those are the times to exercise the technical analysis principle of Prudence and to make the most conservative interpretation. When a signal is marginal, you should always exercise prudence by giving benefit of the doubt to disqualifying the signal. When a significant breakout signal is produced after a huge drawdown, you should exercise prudence by waiting for further confirmation or enter the position gradually over a few days.

2 Key Tools: Charts, Indicators

Key Tool #1: Charts

Chart reading is the most fundamental tool in technical analysis and is also why technical analysis is frequently referred to as "Chartology". Before the popularization of the internet, during the age where analysts still read tapes, technical analysts have to obtain stock quotes from "secret sources" and then plot them down on huge chart papers in their secret rooms. What then is a chart? A chart is simply a plot of the stock prices made into a curve. A chart's basic function is to show the TREND of a stock's price action. Without a chart, a stock closing at a price of $50 has no meaning at all. With a chart, you can clearly see the price action trend down from $100 to $50, giving investors the first indication of where the future price action of that stock might be. In the beginning, charts are plotted merely as a single line joining the prices together. Recently, with more and more powerful computers and software, more innovative and informative plotting methods like candlesticks, bar charts and point and figure charts are developed and made easily available through the internet. No matter what type of chart you look at, the only aim is to provide an indication of where the future movement of the stock might be. Another important aspect of charts is "Chart Patterns". Different types of charting method can produce easily recognizable patterns and formations that can be associated with certain future expectations. Popular chart patterns include "morning stars" in candlestick charting, "double top breakout" in point and figure charting and "double bottom" formation.

Key Tool #2: Indicators

Technical Indicators are the other key tool in technical analysis. Technical indicators are graphical representations of various mathematical formulas based on the stock price and transaction volume. The are literally thousands of technical indicators out there and more are being developed daily as new finance theories are translated into mathematical formulas every day. Technical indicators' main function is to tell when a stock is considered oversold or overbought and when a stock is considered weak or strong relative to its past action. There are literally endless amount of formulas that can be used to provide those indications, hence the endless number of technical indicators. Because there are so many different technical indicators out there, beginners should start with a few well known and widely used ones as those tends to be used by institutional investors as well. It can be argued that the effectiveness of a technical indicator lies in its popularity. The more investors acting on the same indicator, the stronger the predictive nature of the indicator becomes. A self fulfilling prophecy? Maybe.

2 Key Components: Price, Volume

Surprisingly, so many different charting methods and technical indicators used in technical analysis all stems from the same 2 key components, Price and Volume. The price and volume of a stock are the only two publicly available information pertaining to that stock. Out of its price and volume, stock charts and technical indicators are created. Candlestick and bar charts are constructed out of the opening price, closing price as well as high and low prices. Relative Strength Index is created out of the price as well as volume of a stock compared against its historical data.

5 Key Concepts: Resistance, Support, Trend, Patterns, Setups

The 5 key concepts of technical analysis are the 5 most important analytical methods in technical analysis. Understanding all 5 are critical to the mastery of technical analysis. All 5 key concepts work together to help technical analysts predict future stock movement and know when to buy or sell a stock. Of particular importance is the ability to tell when to buy or sell a stock. This is the kind of information that fundamental analysis will not provide.

Key Concept #1: Resistance Level

A resistance level is a price level at which most investors sells a particular stock at, resulting in the stock falling every time that price level is hit. It acts almost like a brick ceiling from which the stock falls down every time it hits its head on it. Resistance levels are identified from reading price charts, particularly point and figure charts. It is a level which you might want to at least take some profit off the table. Even though resistance levels make excellent selling points, a breakout of a resistance level does spur a stock strongly to upside, creating an excellent buying opportunity. When anticipating resistance level breakouts, it is important to apply the 2 key principles of technical analysis outlined above.

Key Concept #2: Support Level

A support level is a price level at which most investors BUYS a particular stock at, resulting in the stock rising every time that price level is hit. Support levels are the reverse of resistance levels and acts almost like a trampoline on which the stock rebounds every time it lands on it. Support levels are also identified from reading price charts and is a level where you might consider buying a stock at, especially when a stock hits a correction. Even though support levels make excellent buying points, a breakdown of a support level does spur a stock down a lot more. This is why the 2 key principles of technical analysis are important when timing an entry using support levels.

Key Concept #3: Trend

The main objective of looking at the trend of a stock through price charts is the anticipation that the trend is going to continue going in the same direction generally. It is like buying fashion that conforms to the current trend. If no other information is available, an investor looking at a price chart would always have a better feel of where a stock is going than an investor looking merely at a closing price, right? Of course, no trends go on and on forever. This is where technical indicators come in to provide an indication of how strong or weak a trend is.

Key Concept #4: Patterns

Chart Patterns are shapes formed by price charts. Some popular chart patterns are "Double Bottoms" and "Head and Shoulder Formation". They are so named based on the shape formed by a price chart. These easily recognizable patterns provide an interpretation on what investors are expecting the stock price to head towards. Double Bottoms typically indicate a reversal and head and shoulder formations typically indicate a switch to a bear trend. There are a ton of chart patterns out there and all needs to be interpreted in conjunction with the right technical indicators while applying the 2 key principles of technical analysis.

Key Concept #5: Setups

Setups are specific patterns formed by using different charting methods. A morning star setup using candlesticks charting may not show up as a buying signal in a point and figure chart. This is why different charting methods need to be used to cross check buying or selling setups produced by one charting method. A setup is a lot more specific than a chart pattern. A chart patterns tells you where a stock might be heading and a setup tells you when you can buy or sell a stock. Setups need to be interpreted together with the other key concepts while applying the technical analysis principles. A buying setup occurring at support levels or a selling setup occurring at resistance levels makes the setups more convincing.
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Forex Market Buzz - March 19

Micro Loan Investing - More Than Just Charity

Micro loan investing is not just a way for rich philanthropists to help the needy and make themselves feel good about themselves, while still making a buck or two out of the poor.

The micro loan industry is no longer reserved to the very poor in developing countries in Africa, South America or Asia. Recently such programs have come into existence which operate within the developed nations such as the US and the UK. They have come about to service the needs of those trying to set up or establish their own business who for one reason or another are unable to obtain credit via the normal routes.

Typically the loans available small and range from a few hundred dollars up to a few thousand dollars and the terms of loans are often relatively short, usually around 5 years.

There are a number of charities and non-profit organisations that offer micro loan programs. In addition there is a small number of more traditional investment funds now offering these loans and advertising them as a form of ethical investment for potential investors.

Micro loans are typically available to only those that cannot obtain credit through the usual means. Perhaps the person is homeless, recently come out of prison or for one reason or another has a very poor credit history. In such circumstance the loan originator will perform a credit check on the applicant however much of the appraisal will be based on interviews with the applicant and assessment of their business plan.

As well as providing the money to start or help a small business many originators also offer a mentoring service that will provide advice and support to the loan holder, giving their business a greater chance of success and increasing the potential returns for any micro loan investors.

Understanding Investment Risks

Without a thorough understanding of the risk, investment planning is almost impossible. In an investment, there always exists a return / risk tradeoff. This means that, greater the acceptance of the risk, greater is the potential return as the reward for the commitment of ones funds to an uncertain outcome. Generally, with the rise in the level of risks, the rate of return also needs to increase and vice versa.

Before discussing the risks in detail, it is necessary for investors to know as to how to handle, perceive and define the risk in various ways. The best way to handle risk is by avoiding it. This occurs when an investor chooses to avoid the activity associated with the risk. Typical instance is the risk of injury while driving on an automobile. A person can altogether avoid such risks by choosing not to drive.

In the world of investment, avoidance of some risk is possible through the act of investing in the risk free investments. Usually, short term maturity U.S. government bonds equate with risk free rates of returns. Investors can completely avoid risks associated with stock markets by deferring from investing in equity securities.

Risk Transfer:

Risk transfer is the other method of handling the risk. The concept of insurance is an easy to understand instance of risk transfer. In case, an individual has the risk of becoming severely ill, then the most advisable option is to go for health insurance. Health insurance is advisable for people having the risk of becoming severely ill. An insurance firm allows the transfer of risk of large medical bills to the individuals, in lieu of a fee known as an insurance premium.

The firm knows that statistically, if they have a large enough pool of insured people, they can easily pay the cost of the minority requiring extensive medical treatment and can have enough amounts for recording profits.

Apart from insurance, risk transfer also happens in investing. For instance, an individual can purchase an insured municipal bond or purchase a put option on their stock. This would permit that person to sell or put their stocks to someone at a set price, irrespective of how lower the prices drop. There are plenty of such instances of risk transfer in the field of investing.

Influence of Time on the Risk:

In terms of risk, investors need to have a thought on the time in their investment plans. The objectives pursued can require a policy statement pertaining to certain planning horizons.

For individual investors, it is for a year or two in the anticipation of down payment on the home purchase, or the lifetime planning for retirement. Generally, the longer the time horizon, the more is the incorporation of risk in the financial planning.

While analyzing the risk of ownership of fixed income securities such as bonds, time has a different effect. As compared to a short term, there is more risk associated with the long term holding of a bond.

By considering all these factors, short term investment is the best option for investors looking for quick and smart gains.
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Getting A Grip On Hedge Fund Investments

When it comes to the term hedge fund, you will find that it cannot be easily defined, and that not always does it imply that a hedging technique has been used. A large number of the hedge funds that one can invest in today will use a variety of different strategies.

Most of the hedge funds that are available today are usually structured as a partnership, where the general partner is the one that manages the portfolio. It is this partner who is the one who will make the decisions with regards to hedge fund investing, whereas the rest of the partners in the partnership will be the ones who are actually making the investment. This financial market does not have nearly as much of the red tape and regulatory restrictions that similar investments, such as mutual funds have.

As the manager of the hedge fund portfolio, the general partner aims to produce targeted returns or absolute performance from the investments they make, no matter how the rest of the financial market is doing. As mentioned previously these people will employ several different techniques or strategies to help them achieve their goals. Whereas some prefer to use equity, fixed-income or CTA portfolio strategies, there are some hedge fund managers who prefer to use mathematical algorithms in order to make the right sorts of returns for their investors.

Just like any other kinds of investments, those who manage a hedge fund are subject to the same financial rules and regulations, as are other traders. However, when it comes to the strategies that they employ you will find that these kinds are not so easily accessible to others who manage regulated investments such as mutual funds, so there is a higher amount of risk to the investment a person makes, although the rewards are also greater.

In order for a hedge fund manager to achieve an absolute return on their investment, they need to be flexible. As previously mentioned they also need to employ and incorporate a number of different strategies and techniques to achieve the above. Below we look at what some of these strategies are.

1. Short Selling - A hedge fund manager will select to sell a security that they do not actually own in order for them to then purchase it back at a later time for a price less than what it was originally sold for. If they do this properly, they could end up making a considerable profit on the initial investment that they made.

2. Arbitrage - This type of investment technique allows the hedge fund manager to buy and sell a financial instrument in a number of different markets at the same time. This then allows them to make a profit from the difference that has arisen between the buying and selling prices.

Along with the two hedge fund techniques we have mentioned above some managers will also use hedging and leverage in order to get a good return on their investment. Hedging allows them to buy or sell a security that they do own in order to use the funds as a way of offsetting against any loss that the investment may otherwise have made. As for leverage, a manager of a hedge fund portfolio arranges to borrow money so that they can invest in a particular financial product, and the money made from the investment can then be used to pay the borrowed money back.

Tax Liens Vs Tax Deeds - Which is the Best Investment?

Frequently I'm asked the question what is more profitable, investing in tax lien certificates or tax deeds. Whether tax lien investing or tax deed investing is better for you depends on the state that you live in and what your goals are. If you are looking to pick up property under market value than you are better off with tax deeds than with tax liens. If you do your homework and purchase tax liens on good properties, the chances of foreclosure are slim. And in some states, even if the lien is not redeemed, you may not be able to get the property.

In the State of Florida for example, if your lien does not redeem during the redemption period, the property goes into a tax deed sale in order to satisfy your lien. If you did your due diligence and purchased a lien on a decent property, in order to get the property, you will have to bid against other investors at the deed sale. So if you want to invest in Florida, and you are interested in obtaining property, then deed investing is the way to go, not lien investing. If, however, you are not interested in owning property, but just want to get a higher return on your money than you could in the bank, then tax liens are the way to go. In Florida, as long as you do your due diligence, you won't have to worry about the possibility of owning the property.

If you live on the west coast, you might want to consider investing in tax deeds instead of tax liens. That's because the states on the west coast are deed states and not lien states. Yes, you could travel to the closest lien state, but that would eat into your profits. And yes, you could invest online but then you have to deal with increased competition and higher costs. Also, would you purchase a property that you did not physically look at first? Even though with tax lien investing, you are not purchasing the property, you're only buying a lien on the property; your lien is only as good as the property that guarantees it.

If you are interested in either owning the property or getting a very good return on your investment and you live in or near a redeemable deed state, than you should consider investing in redeemable deeds. Redeemable deeds are kind of in-between tax liens and tax deeds. You purchase the tax deed at the sale, but there is a redemption period in which the previous owner can come back and redeem the deed from you. They have to pay a pretty hefty penalty in most redeemable deed states in order to do so, and the penalty is on the total amount that you bid at the sale. In Texas the penalty is 25% and in Georgia it's 20%. Not a bad rate of return! Another great thing about redeemable deeds is that the larger counties with bigger cities can have a tax sale a few times a year or even every month. That's better than waiting for a tax sale only once a year as in most states that sell regular tax deeds or tax liens.
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Primes Again Behind Fed Intervention?

Did trading data through Friday last week reveal a massive pile of towels thrown in by panicking investors? No. But we did see:

1. For the first time that we ever recall, Archipelago's volume (in our sample group) topped the Nasdaq Alternative Display Facility's displayed and reported volume (drop a note and I'll explain what it does). We believe it indicated that risk management systems could find no firm footing ahead of options expirations on 1/18. It's noteworthy that when the Federal Reserve acted last summer and in September, both interventions occurred immediately ahead of options expirations (the only exception came at the end of October). Why? Prime brokers like Citigroup and Merrill Lynch provide capital to clients behind the bulk of daily volume, and their capacity to support institutional strategies has been reduced by asset writeoffs. These firms and most all of the biggest primes are also primary dealers for the Federal Reserve. Do they influence monetary policy? We'll leave you to your conclusion.

2. Prime brokers for the first time in months outpaced Electronic direct access on Friday 1/18. Total volumes that day were 60% of levels on 1/16, but these results countered more recent trends reflecting high electronic, anonymous order flow. Primes helped quant clients earlier, and are now moving to protect themselves.

3. In January so far, there is a dearth of rational, fundamental order flow. We're simply not seeing real money committing on dips - hardly a surprise. Yet it's not capitulating either, so far as we've seen.

If the Fed can't catalyze fundamental money, what can? To be brutally honest, bloodletting. Weaker elements - the labored hedge funds with over-extended leverage, some weaker middle-market banks - of the capital-markets infrastructure need to go away, not be propped up. The Fed - governments in general - don't like failures because they reflect badly on policy. But free-markets systems are by nature lumpy. Once casualties have been counted, the strong will pick up the slack. We can see among banks behind volume that already some of the stronger forces are emerging.