DEFINITION OF TERMS The following words are commonly used in the stock market. Place a check on the terms that you already know and understand. C1 Oversold ~ a term used to describe a stock which has been relentlessly sold down, An oversold stock is a good candidate for recovery. C1 Overbought — a term used to describe a stock which has been continuously bought up. An overbought stock may be pulled by gravity soon. C Divergence — a general term used to describe the relationship between two variables, usually price and a technical indicator, wherein one doesn’t agree with the other. , O Crossover — a general term when the line of one indicator crosses with another. O Bull / Bullish — is a common term used to describe a stock, a pattern, or a market in general, that is characterized by upward movement. A bullish market is a happy green, market, 0 Bear / Bearish — is the reverse of bull / bullish. It is characterized by downward movement. A bearish market is a sad, red market. C Support — is an area where price is expected to stop declining after a selloff. It is an area where buyers are waiting to buy. C Resistance — is an area where it becomes difficult for price to continue moving up. It is an area where selling is heavy. O Breakout ~ a term used to describe price movement that got out of resistance after a long consolidation. (The entire chapter 13 is devoted to breakouts). O Pullback ~a term used to describe a temporary decline in price after a previous upward move. O Going Long — is slang for buying with the goal of selling at a higher price. It is what all of us are doing in the PSE - buying and then selling higher. A long position is a winning position when price goes up. O Short-Selling or selling short~ is the reverse of “going long”. It involves a process of selling shares first (that a broker allows you to borrow) then buying it at a lower price. The price difference will be the profit. A short position wins when a stock’s price goes down and loses when it goes up. So far, short-selling is not yet allowed in the PSE. O Rally —a continued, uninterrupted rise in price. O Paper Profit — it is the unrealized profit in your portfolio. When the price of the stock you bought went up but you haven’t sold yet, the potential gain when you eventually decide to sell is the paper profit.C Paper Loss — it is the unrealized loss in your portfolio. When the price of the stock you bought goes down, you incur losses in your portfolio. But this loss becomes an actual monetary loss only after you decide to sell your position. C Position trading —a trading strategy where one positions at the start ofa trend and exits only if the trend has been completely consumed. Position traders usually hold a position from weeks to a few months. O Swing trading — a trading strategy which involves getting in a trade as long as the momentum is there and getting out when the momentum fades. Swing traders usually hold a position from a few days to a few weeks. Swing traders are also called momentum traders. CO Day trading — a trading strategy which involves getting in and out of a trade in a matter of seconds to minutes. Day traders (sometimes called scalpers), do not hold a position overnight. They close all their trades within the day. Q Tick — or fluctuation, is the minimum increment (up or down) of price. One tick can be as low as 1 centavo for cheap stocks or as high as 2 Pesos or more for large capital stocks. C Oscillator - a general term for a technical indicator that goes up and down a defined range (usually between 0 and 100). (POpulaioSeillatorslare RSTanid Stochastics(STS) O Correction — the term is usually applied to a decline of 10% or more in the overall market, This happens when a market becomes 00008 ond @05000088 The term can also be loosely used to describe a similar decline on individual stocks. C1 Gap - a break or an empty space between candlesticks on the chart. This is usually created when price leaps up or down sharply. Most gaps in charts are filled eventually. If you were able to check: 0-5 You are probably just starting out and may not even have a trading account yet Feel free to Google some of the terms that you don’t understand as you read the book. 6-10 You already know the basics. This book will take you to a higher level. 11-18 You had probably been trading for quite some time now and this book will sharpen your skills further. Maybe you just missed on some terms. 19-20 You are an advanced trader who doesn’t need a glossary. This book will be an easy read for you. I'll be using a lot of these terms throughout the book so I'd like you to familiarize yourself with them before even opening the first few pages of Chapter 1.ee PARTI Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 PART II Chapter 13 Chapter 14 PART III Chapter 15 Chapter 16 PART IV Chapter 17 Chapter 18 Chapter 19 Chapter 20 CONTENTS BASIC TECHNICAL ANALYSIS Price Signs of Reversal (SOR) Volume Moving Average (MA) Moving Average Convergence Divergence (MACD) Relative Strength Indicator (RSI) Stochastics (STS) Directional Movement Indicator (DMI) Trendlines Channel lines Fibonnaci Support and Resistance (SAR) CORE TRADING TECHNIQUES Trading Breakouts Trading Pullbacks ADVANCED TRADING TECHNIQUES SAR-SOR Trading Decoding the Popular Patterns TRADING ESSENTIALS Stop Loss and Target Price Trailing Stops Risk Management Trading Systems 36 147 58 7 82 90 94 104 109 116 128 155 172 194 228 248 254CHAPTER | - PRICE Price is the most important element in a chart. It is impossible to trade without knowledge of price action. All other things that you see in your chart are of secondary importance. Price discounts everything. The past and the future are already factored in it. Price is the present. Below is a “virgin” chart. No volume, no moving averages, no technical indicators. Just pure, clean, price movement. Some technicians are so used to putting all sorts of lines and indicators in a chart that they sometimes miss on the most basic and most important component which is price action. Figure 1-1. A price chart Since price is the most important element in a chart, it should occupy ample space in your chart so you can see it clearly. Maintain, at most, 3 to 4 indicators at the bottom of the price chart. Trevbaiy noize fe riliets at thot wat mln Palo rane Fy PAN Ay , ae — =s own a ie eee Scien We Prey aA Py i we Figure 1-2. How a chart should not look like. Too many technical indicators and too little space for price. You can't even see price movement at allTECHNICAL ANALYSIS 21B ASI So before jumping into more complicated technical tools in this book, you must first learn to master price action. CANDLESTICKS Price in charts are most commonly represented by candlesticks. But before Steve Nison introduced the use of these Japanese candlesticks (concept originated from Japan) in 1991, traders had been using bar and line charts in plotting and observing price action. The candlesticks are so user-friendly that even old traders are shifting from bars to candles. It would be better to focus on the form of these candlesticks than to memorize their names. There is a story behind each candlestick form and you have to be able to interpret them correctly to have a foresight on what could happen next. Anatomy of Candlesticks ’ Parts of a Candlestick A candlestick has only 2 parts: ‘Tail (upper) (1) The Body which is the solid colored portion of the candle; and (2) The Tail (or wick) which are thin lines on the Body Body (white) (black) ends of the candle. Tail (lower) Figure 1-3. Parts of a Candlestick It is possible for a candlestick to have no tail or no body (doji) as you'll see in Figure 1-5. The color of the body determines if the stock has traded up (white) or down (black) for the day. If you have a colored chart, white would be green and black would be red. In a daily chart, a single candle summarizes an entire trading day and you have to pay attention to 4 important points in the candle: the open, high, low, and close (O,H,L,C). For the purpose of our discussion in this chapter, we will refer to a candlestick in the context ofa daily chart.