Good Day Mates!

So we’ve set the foundation for picking quality companies to buy and trade.  We talked about all the reasons why a company might be able to prosper during economic ups and downs, this refers to the dividend history and free cash flow of a particular company.  We talked about how we can compare two similar companies to see which one might present the better opportunity in a particular space and time, this was the discussion about the P/E, PEG, and debt to equity ratios.  Using these tools we can ensure that we are trading good companies and giving us a slight measure of protection against adverse market movements.  So, now that we know what to buy, the next logical question would be when to buy?  Although our P/E ratios can be used as a guide as to when to buy a particular equity, we are looking for a better system to know when to get in and out of positions.  This brings us to our next pillar of good trading, technical analysis.

Technical analysis is the study of using past price movements to gain a perspective on what may happen in future price movements.  Essentially, technical analysis is the study of charts to determine when it might be an appropriate time to enter a particular trade.  The universe of technical analysis is as vast as any subject on trading and we could spend years and years on learning to interpret the information that can be gleaned from the technicals.  However, our time is better spent actually trading instead of reading all there is know about technical analysis.  There are certain technical analysis principles that are absolutely paramount to a traders success and we are going to do a deep dive into those subjects so that we can get a working understanding of how to use technical analysis to our benefit when we trade.

The concepts of technical analysis that are absolute must haves are as follows, reading candlesticks, trends, support and resistance, technical indicators, patterns, volume and its role in price movement.  If you can master these concepts then you will be able to read a chart and be able to decipher what it is trying to tell you.  There is a lot more to technical analysis than what I have mentioned and I encourage you to look further into the subject, but if you get these items down you will be well on your way to getting that all important first live trade under your belt.  There are great resources on the Tackle Trading website for getting deeper into technical analysis, go to the search function and type in the words technical analysis and you will find articles, videos and a full course on technical analysis.

First up, is reading candlesticks.  Have you ever looked at a chart and thought what a mess?  When I first looked at a chart I thought this is jibberish?  It didn’t make much sense but as I started to understand technical analysis and train my brain to recognize the important patterns it all became clear.  I could see the things I was supposed to see and I was able to retrieve the information that was necessary to find good trade setups.  Before we get to that stage we need to get some terms under our belt so that we can begin to understand the language of trading.  The first of which is what is a candlestick and what does it mean to me?

Let’s start this way,  there are several chart types for traders, there is the line chart, the western bar chart and then candlesticks.  There may be more chart types than these but this list covers the main ones.  I won’t go into the two other types as I find that candlesticks give us the most information and once learned are the easiest to recognize. If you look at the picture below you will see the differences between bullish candles and bearish candles.  The reality of candlesticks is that you only need to recognize colors to determine if it has been an up day for a stock or a down day for a stock.  Candlesticks by themselves don’t tell the whole story but when we look at them as a whole we can start to discern what is actually happening in real-time to whatever equity we might be looking at.  In addition to knowing whether it was an up day or a down day, we can get some other important information from candles.  For instance, if we see a long lower wick on a candle that means that the price was driven down during the day but the buyers came in at some point and bought the stock back up.  This kind of behavior can signal strength and a possible change in direction.  The inverse is also true if there is a long upper wick then that means the price was bought up at some point and then the sellers had their way for the rest of the day.   There are many meanings for the different type of candles and in next weeks episode, we will delve into many more examples of candles and what each of them means to our trading.

Until next week, look at the picture below and try to think about what information we might extract from the various different looking candles.