(See part 1 here.) Are you guys excited or what? We've reached part 2! Some of the foundational principles that I will share in this post should permanently change the way you look at stocks for the rest of your life.
Short fact: You and I have immediate access to an unbelievable amount of information. (duh?!) We don't have to read the New York Times any more to find out what happened yesterday on the market. We can learn right now, what happened 5 seconds ago. For a quick minute, just think about the changes we've seen in the last 10 years alone. Think about the information that is available to individual investors and the accessibility we have to online brokerage firms that can execute trades instantly. The reality is that in the last 10 years, we've gained immediate access to the same information that the professional traders on the floor have always had. FYI - a "seat" on the floor (NYSE) will cost you more than a million bucks. The good news is that you and I can take "a seat" in the local coffee shop with WiFi access, and we aren't missing out on anything. Meaning, we - the individual investors of the world - have the same information and the same access to the market that the pros have.
So what do we do with this vast amount of information? Well, we learn how to refine that information and combine it with real time market data to make educated buy/sell decisions. Don't tune me out just yet. It's way easier than you think.
You may have noticed a few new items on the right side of this blog. If you haven't noticed them, check your vision. If you read by RSS, click here. There are two new modules on the right side: Stock Chart, and Ticker Time. The Stock Chart module allows you type in a stock ticker (symbol) to pull up a technical chart provided by Yahoo. Just type a ticker in the grey box and hit Enter. The Ticker Time module contains stocks that are on my current "watch list". By clicking a ticker symbol, it will take you to the technical chart of the stock. To prevent the tickers from blending in with each other, they are color coded, loosely based off their respective industries. Please do not miss this: I've configured these modules to take you to a technical chart, with very specific tools and conditions already applied to the chart. It may look like gobbletygook right now, but it won't for long.
I'm hoping to show you six concepts by looking at these charts. Lets use ACL as an example (go over there and click it). Wheww, that's a pretty chart. A chart like that should make you want to put a pile of money in your pockets to sit up on top of it for the rest of the year (not a bad idea really). Anyway, this technical chart has 3 important sections to it. In the top section, the stock is charted on the blue line. The green line that weaves in and out of the blue line is the Moving Average (MA). There are all kinds of MAs; the one you see here is the 20 day MA. Consider the MA as what the stock has been averagely doing over time. Just under the blue and green lines are the spiking red lines (much like my hair-do). Those red lines are the precious little volume indicators. Volume is KEY. Volume volatility is a BIGGER key. More on that later. Here, we're looking at the trade volume per day (or other time increment). I can't even begin to tell you how important volume is. Hear me now, believe me later. Example: just be glancing at this 6 month chart, we can easily see where trade volume was heavy and where it was light. Just plant that seed and we'll come back later and water it. Moving down, the next section is the MACD. This stands for Moving Average Convergence / Divergence. Oh baby, the MACD is magical. I'm not going to drown you in the technical details of MACD, but consider the MACD as the stock's trend momentum indicator. DO NOT MISS that. Trend momentum is a huge deal and an extremely valuable tool. The MACD will become one of the primary indicators telling us when to buy and sell. Well, you could always buy and hold forever, but... well...not only would most professionals laugh at that idea, I can give you a thousand popular examples of when that strategy would award you nothing..... like MSFT from the yr. 2000 till now. How many millions of Americans have had their investment capital tied up in flat stocks? Now, don't interpret that as MSFT equals bad stock. It's not. It's a good stock to trade, bad stock to hold (I said good, not great). Sorry to chase that rabbit trail.... back on point. The section below MACD is the Stochastic. Use that word in a sentence, and you'll sound smart. Consider the Stochastic indicator as a tool that tells when the given stock is over-sold or over-bought.
Quick question: How do stocks continue to go up and down at varying volatilities over time? Answer: Because they move from an over-sold state to an over-bought state, and they go back and forth... and back and forth... and back and forth.... etc. The up and down movement of a stock's price trend is really no more difficult than that. Why do they go up and down like this? Well... the short answer is market news and/or stock valuation. That market news includes but is not limited to: earnings releases, interest rate movement, and possibly a trillion other factors. But frankly, I don't care so much as to understand "why" all the time.... I just want to know WHEN it's leaving an over-sold state (a buy signal), and when it's leaving an over-bought state (a sell signal).
In "Market - Part 3", we're going to put all those factors together (and maybe add a few) to produce magical buy/sell decisions. Meaning, we'll combine several pieces of information and see how those align to produce multiple buy or sell signals, thus resulting in good decisions.
Personally, I wouldn't take the time to share this with you if I didn't truly believe that it will be extremely beneficial to you.
