Support – Trading

Here is a Glossary file where you can look up those confusing bits of financial jargon that are about to make your head go ‘kaboom’.

Derivatives provide exposure to shares, but they deliver greater leverage. A derivative is a financial instrument that has another asset as its underlying base and includes futures, warrants and options. Rather than purchasing the share (also known as the underlying security), we can trade using a tool that will allow us to make money whatever direction the market is trending. The Trading Game offers a variety of courses to help you trade more profitably using derivatives.

A call option gives the buyer the right, but not the obligation, to buy a given security at a particular price up to and including the day of expiry. A put option gives the buyer the right to sell a given security at a certain price within a given time. It is possible to either buy to initiate or sell to initiate a transaction. If you sell to initiate, this is called ‘writing’ an option. Buyers’ have rights, but writers’ have obligations

Let’s use call options as an example. The buyer of a call option has the right (not obligation) to buy a given amount of the underlying security, on or before the expiry date, at a specified price. This specified price is called the strike price. The buyer pays a certain amount of money to attain these rights. This amount of money is called the premium. The benefit of trading options in comparison to warrants is that you can either sell to initiate the transaction (ie write an option), or you can buy an option. You can only ever buy a warrant. To write an option results in a much higher probability trade but the potential risk of contingent liability is present. To buy an option limits your risk, but the probability of a winning trade is less.

For more information, refer to The Secret of Writing Options, by Louise Bedford and Understanding Options Trading in Australia, by Chris Tate. For the next scheduled courses on options, refer to the ‘seminars’ page.

This is a common problem because option trading can be complex. There is more paper work involved than when trading shares, and careful monitoring of open option positions is essential.

Louise Bedford is the author of The Secret of Candlestick Charting, The Secret of Writing Options and Trading Secrets. She has developed an Excel spreadsheet designed to keep track of written and bought option positions. It shows the option positions that have been taken each month, and tallies up profits on a monthly and yearly basis.

Details about how you can obtain a copy are listed on the ‘Shop’ page under software. Click here for more information.

There is a continual tug of war in the market, which displays an imbalance of buyer and seller pressure. Whenever a market is in a state of imbalance, the prices will reflect either a bullish or a bearish sentiment. A single candlestick represents the same data that you will find in a single bar from a bar chart, however they look completely different. The thin lines above and below the real body of the candlestick are called the wicks, shadows or tails (regardless of on which side of the real body they are located). The upper shadow is the high for that period, and the lower shadow is the low for that period. The shadows are usually considered to be of less importance than the thick part of the candle, as they represent extraneous price fluctuations. They provide an indication about the extremes of emotion experienced by the bulls and the bears throughout that period. The thick part of the candle is called the real body and represents the open and the close. These are the most emotionally charged points of the day. The colour of the candle depicts whether the period was bullish (white or green) or bearish (filled in or red). Candlestick charts represent incredible signals that are not available via any other charting format.

For more information, refer to The Secret of Candlestick Charting, by Louise Bedford.

If you’re determined to become a trading professional, you need to take action. With the incredible trading systems we’ll help you develop, and our commitment to supporting you as you learn how to trade or perfect your skills – success is closer than you think. Now is the time to sharpen your axe and get your mindset and trading methods right so that your trading will produce the results that you deserve. Click here for details about the upcoming functions Louise and Chris are running.

The following instructions show you how to set up red and green candles for your charts.In MetaStock, the Candlestick charts show the candles as black and white by default. The Up candles, where the close is greater than the open are coloured white and the Down candles, where the close is less than or equal to the open are coloured black.

Now whilst this is quite acceptable, there is also a general pseudo ‘standard’ that has Up days green and Down days red.

In MetaStock there is some colour selection available through the price plot properties box, but the colour relationship is based solely on the closing price i.e. the Up and Down colour selections apply to the closing price only, from one period to the next. So for example, if you set the colours as Green for Up and Red for Down, you might be surprised at the result.

You actually end up with FOUR different types of candles – and you only wanted TWO!

These are the possibilities:

1. An Open Green candle – the Close is above the Open and the Close today is higher than yesterday’s Close

2. An Open Red candle – the Close is above the Open but the Close today is lower than yesterday’s Close

3. A Solid Green candle – the Close is below the Open but the Close today is above yesterday’s Close

4. A Solid Red candle – the Close is below the Open and the Close today is below yesterday’s Close

So in this case:

‘A’ – the Candle is coloured Red or Green depending on the relationship of today’s Close with yesterday’s Close. If the Close is higher, then the Candle is Green, if the Close is lower, then the Candle is Red.

AND

‘B’ – the Candle is Solid if the Close is below the Open and Open (unfilled) if the Close is above the Open.

All clear – well I hope so!

Anyway, this is different to the way we really want our Candlesticks coloured. Normally, we only want to know if the Close is above or below the Open (part ‘B’ above).

Well the good news is that there is a way to get MetaStock to emulate this much sort after colour scheme using the ‘Expert Advisor’. We won’t be going into any detail about the Experts, except to give you a step-by-step guide to program this Candlestick colouring example.

 

1. Click on the Expert Advisor icon (the little man who looks like Charlie Chaplin!)

Or select the ‘Expert Advisor…’ from the ‘Tools’ drop down menu

You are now at the main Expert Advisor window.

 

2. To create our new expert, click the ‘New…’ button.

This brings up the Expert Editor. Here you can give the Expert a name, something like ‘Candlestick Colours’ and also add some comments so you know what it does. Like this:

 

3. Now select the ‘Highlights’ Tab

Select ‘New’ to create a new highlight!

Complete the details as per the following:

You can use whatever colour you want – I selected Dark Green.

Please note that the O is an O as in Open!!

Click ‘OK’.

You are now ready to enter the second highlight (for Down candles – the unhappy ones!!!)

 

4. Click ‘New’ and complete the second highlight as follows, again you can use any colour you like:

Please note that the O is an O as in Open!!

 

5. To finish again, click ‘OK’.

You should now have something that looks like this:

 

6. Click ‘OK’ to return to the main Expert Advisor window.

Create a new chart or open and existing chart or Smart Chart, Right Click on the main chart window to bring up the right click short cut menu. From here select ‘Expert Advisor’ and then ‘Attach…’. This brings up the ‘Attach Expert’ box – select the Candle colouring expert or whatever you called the Expert and click the ‘OK’ button.

Your chart will then be coloured, Green bars or open candles where the Close is above the Open and Red bars or solid candles for when the Close is below the Open – make sure your chart is set to the Candlestick variety to get the best effect.

If you attach the Expert to a Smart Chart, then it will be saved with the Smart Chart, so each time you look at it, the candles will be nicely coloured. If you attach the Expert to a chart, you will be prompted to save the changes.

Experts can be included in templates too, so you might create a template that changes a chart to a weekly candlestick chart, colours the candles with the Expert and plots a 30 period exponential moving average.

To detach an Expert, right click on the main chart Window and select ‘Detach’ from the ‘Expert Advisor’ menu.

The relative strength comparison (RSC) is a concept that is often confused with the relative strength indicator (RSI). The RSI is a momentum indicator. Alternatively, the relative strength comparison is a rarely discussed method. This does not lessen its power.

The relative strength comparison takes the progression in price of one instrument and compares it to another. In Technical Analysis Explained, Martin Pring states that:

“Relative strength is a very important technical concept which measures the relationship between two financial series… Relative strength is therefore a very powerful concept for individual stock selection”.

John J. Murphy states in The Visual Investor that:

9) What is Short Selling?

10) How do I formulate a Trading Plan?

11) What books should I read?