September 02, 2010, 7:00 pm.
Stock charts can record a wide range of stock market and individual stock activity over varying periods of past time and are readily available to traders who may wish to use them as a tool for interpretation and forecasting, and to monitor the progress of particular stocks of interest.

Let us make a simulated trade for illustration purposes

To show how a chart may be used at our stock market basics level of understanding, I will select a stock and its chart and initiate a “paper trade” based on the chart’s data. In doing this, we can observe how the chart provides, in graphic form, the “summary” of data that we need to monitor and interpret to aid us in further decision-making regarding the stock, whether to buy it, sell it, or keep it.

Out of the more than ten thousand stocks listed on the U.S. exchanges, the particular stock that I have selected is Agco Inc., and the reason that stock seems appropriate is that it appears, from the chart, to have just signaled a possible upward move, a signal triggered by a frequently seen chart pattern.

How can this be of help in learning how to trade stocks?
Because there is a real stock and its chart to make reference to, my hope is that a few chart elements will be seen in the days to come that will provide topics of discussion that are of value to help gain an insight of how and what can happen and the decisions that must be made regarding a stock position that are based on the market events as they occur – and are likely to be shown distinctly on the chart. By becoming familiar and understanding what occurs and how a stock reacts to the daily trading and other pressures, some unconnected with the stock under review, it should provide insight and experience to apply to other situations in the future. And as is often said, experience can be a good teacher.

About Agco, our paper trade stock that we are using for reference in trading
Agco Corp., is listed on the New York Stock Exchange (NYSE) and closed in trading today, Thursday September 02, 2010, at about $36.00. Our target for this stock is $45 or thereabouts,  and out stop loss point, using a trailing stop, will be about 8 to 10 percent lower than its upper price for the period. In other words, if the stock goes up to, say, $41 but then fall back to around $37.00 (about 10 percent lower), we will be forced to exit the stock at the market price then applicable – and that may be at less than $37, depending on the market at that time. All of this information will be discussed as we see how the stock progresses in the market place it will probably be best for our purposes of illustration if it is able to continue on its upward course, although that is not actually essential, especially since there is no real money involved in this “exercise”.

While the trading on this stock continues in the real market marketplace, we will discuss aspects of this paper trade, including the following:

  • the reason for selecting this stock
  • what we think the chart patterns indicate
  • the target price levels on the upside that the stock could achieve if it follows previously seen patterns
  • the price at which to sell if the stock price falls back from its current price
  • how best to minimize the loss if the stock does fall in price
  • other matters that relate to the stock and the chart displayed

The stock pattern shown in the chart below provides a “Buy” signal.

Click on the chart below
I can see that the chart is a little fuzzy — for somewhat better clarity and sharpness, click on the chart and it will improve to some degree. I’m still checking out how to best reproduce them.

A “general” rule to follow
Today is Thursday and the market is now closed. Tomorrow, being Friday, presents us with a small dilemma because we don’t generally like to enter a position at the start of a weekend, especially in an erratic market like we are in right now, and to compound that, it is the start of the long weekend. Sometimes important and unforeseen events occur at weekends, not always directly connected to our particular stocks of interest but events that may affect the market in general and in a big way, we cannot be sure.

So, we will be cautious and watch what happens tomorrow and review the situation with the expectation of entering a 100 share buy order on Tuesday, after the long weekend, with a bid of somewhere in between $36 and $37 per share. There may be a slight fall-back in price anyway if some traders decide to take profits at this level, but as we see the situation now, mainly on a technical basis, the trade looks promising.

Targets and stop losses
Our target for the time being is $45, it might not reach that level of course but whatever happens, I hope it will provide an opportunity to make reference to various points on the chart and the growing chart pattern and in that way help achieve the beginning of an understanding about stock charts and how they are an aid in decision making. To manage risk on the downside, we must also set a trailing stop loss that will be automatically triggered as a “sell at the market” order if the stock falls back in price to the specified level. We will set that level, when placing the order, at about 8 percent to 10 percent lower than the current high price of the stock or any future high price that the stock mach achieve and fall back from. We may get taken out of our position by a “fake move” but we have to follow such rules for risk management.

To provide a better explanation, all of the above matters will be referred to and dealt with in future posts on this website as we watch the paper trade unfold. Let us hope there is sufficient upward move in the stock to allow us the opportunity to discuss the various possibilities.

There is one more possibility starting right now
And that is to take a position in this stock by buying a long call option, following our established 4-rules for trading options, namely, in the money, expiry about 4 months away if possible, and with a delta of 60 to 65.

Checking that out, there are 2 possible options that could be considered:

October call, strike $35 at a bid $2.25 – ask $2.40 with delta 60 — AGCO101016C00035000

November call, strike $35 and bid $3.00 – ask $3.20 with delta 59 — AGCO101120C00035000

It’s now the beginning of September, so the October option expiry is too close, even the November option is close so on Tuesday we will check for a later expiry, the next month available may be in January 2011, but that’s OK, we’ll see.

As well as discussing the stock charts and what they portray, we can also make reference to other routine trading matters including how options are quoted and such.