Friday, November 26, 2001 – reporting on Wednesday’s paper trade
On this website on November 5, we started a new series introducing “paper trading”, also know as simulated or virtual trading, The purpose of paper trading is to help a beginning trader gain insight into the use of stock charts, or other tools and a number of unofficial guidelines, to learn the stock market basics of how to choose a stock and track the progress of a trade to the point of exit. This article is the ninth post in the series.

Stock candidates
On November 15, we first named three possible stocks to paper trade, subject to their meeting certain conditions, and we also identified some of the criteria necessary to qualify such stock issues, in our opinion, to warrant initiating trades.

Caution
I must emphasize that these are simulated trade suggestions made only for the purpose of learning about stock market basics. They must not be considered as real trades, they are too risky to be accepted as such, especially for the beginner, without the input and advice of your registered professional stockbroker or financial advisor. In fact, understanding the need to obtain such qualified opinion in the early days of trading might be another step in learning the basics of stock market trading — but at the same time the person trading should become familiar with suggestions presented here, and other sources referred to here, as part of their education on how the stock market works.

Eventually, when suitable knowledge and experience has been gained through trading it can become a valuable asset. Many people enter the market with such little knowledge and understanding of the importance of managing risk, and how to manage risk, that many lose their entire trading capital. There are guidelines and procedures that can help minimize risk. Not every trade will be a winner, but when properly managed, losses can be tolerated and the winners will provide the necessary gains to sufficiently build up the trading stake, given time.

Our choices
The stocks chosen as promising candidates were, Amtech Systems (ASYS). Ford (F), and Power Shares QQQ Trust (QQQQ). In following posts since that time, we have made brief observations about why their charts indicate the stocks were not giving a buy signal yet and we must wait until they do.

The buy signal for ASYS
On Tuesday, November 23 rd, we wrote in reference to our preliminary choice of ASYS as a paper trade that was detailed in an earlier article:

“[ASYS] Update, time to make a move?
Today, two trading days later, ASYS closed at $18.45, above the 20 dma for the second day and to stay with our earlier choice, if the market is trading up tomorrow Wednesday 24^th November we will initiate a paper trading buy position for both the stock and its accompanying options.

It will be interesting to track the future movements of ASYS as part of our learning the stock market basics trading routines . . . “

So, following that comment to initiate the trade, here are the details using the closing prices of that day, November 24, as the entry prices. For the exercise we will take small positions in both the stocks and their options and will follow the guidelines we have already established on this website regarding how to enter and exit trades. We will keep our own records of the trade, without the need to use an actual stockbroker. We have done this previously on a paper trade with AGCO first described September 2, see the List of Topics, for details on that trade, under the subhead “Simulated Trades”.

November 24, 2010
ASYS traded in a narrow range on the day, closed at 18.84, therefore our paper trade is:

1. Share Position
Bought long, 100 shares of ASYS at $18.84 for a total of $1884.

The target for this stock, for the time being and subject to a reappraisal shortly, is $25. Trading volume is lower at an average of 275,000 than the preferred minimum of 350,000 but we can live with that, compromise is sometimes necessary – but don’t add significant risk. The stop loss risk management factor will be any reversal of 9%, normally based on closing prices.

2. Option position:
Bought May 2011, 2 long call options, strike price $17.50 at $3.90/share for a total investment at risk of $780

The current delta for this option contract is 65, just right.
The 3.90 is a bit pricey but it gives us a lot of time to expiration, the cheaper alternative would have been the February 17.50 but February does not meet our minimum established holding time requirement discussed elsewhere.

The terms and criteria used in this article have been discussed in other posts, however, if anyone has a problem finding them or understanding them, send me a comment in the box below and I will try to clarify.

For the other two issues, Ford and the Q’s,

♦ QQQQ: we await the QQQQ to move and close clearly above the 20 dma, preferably to trade above $54.

♦ Ford is also at the 20 dma and my preference would be to enter a trade on a close above $17.
By the way, about a week after our selection of Ford, Jim Cramer, the well-known professional trader and television personality, has also endorsed Ford as a prime candidate with a great stock future. That’s good if you like Cramer, many don’t but I do, and I recommend his books to the beginning traders who wishes to learn the stock market basics. Colorful and clownish as he is sometimes, Cramer is acknowledged as a very successful trader with a multi million-dollar track record of achievement.

Tuesday, November 23, 2010
Yesterday’s post, titled: Recap: Paper Trading Candidates, Part 2, dealt specifically with Ford Motor Company and showed its stock chart for reference. Part 2 was a continuation of the two earlier posts on paper trading and the choice of stocks to paper trade. This fifth article continues the discussion and the chart of ASYS from the earlier Part 1 article will be repeated at the end of this post that deals with our next paper trade.

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Note: An earlier paper traded involving AGCO was detailed here starting September 02, 2010, and can be accessed from the list of topics on this website. Our AGCO trades produced 2 winners with good gains and one of which is still in progress. It is hoped that paper trading in this fashion provides a path to better learn some of the necessary stock market basics routines and will contribute in a small way to the essential accumulation of stock market knowledge for later trading in real time. These are just examples but their simple suggestions should help.

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In the article of yesterday (Part 2), there were other general comments regarding trading that might be worth going back to take a look at, all offered to help gain an understanding of trading routines and some of the simple unofficial guidelines that can help when first learning the stock market basics. Mentioned there, and explained briefly, were:

♦ the daily moving averages,

♦ support and resistance levels,

♦ my own basic stock criteria to qualify to enter a trade,

♦ the stop-buy order,

♦ the Ford chart and what it shows,

♦ comments on other simple guidelines.

Follow up, by coincidence
An interesting follow up on the latter, the simple guidelines, is my mention that I prefer to not place orders on Fridays or before a long weekend in case something unforeseen and drastic happens during the weekend, politically or economically, or a violent act of nature, any of which can send the market on a quick downfall and something you, as a trader, cannot quickly react to until the market opens, perhaps by then a hundred points lower.

As it works out, we have two examples of the foregoing, the economic crisis in Ireland that came to a head during the weekend, and today, the 23 rd, we have news of North Korea’s shelling of the South Korean island, alarming to all nations.

ASYS, QQQQ, S&P 500 – at close of trading Friday 19 November, 2010
Now we can briefly discuss the stock charts of the other two candidates chosen for paper trading, ASYS, QQQQ, and the S&P 500. The comments noted above from Part 2 apply in the same way, knowing about them is important to understand some of he following.

First, they had all closed below their 20 dma’s making them ineligible for trading according to my basic rule, beyond that, not a lot need be said.

ASYS: the chart (repeated below) shows significant increased volume of trading in the last few days, indicated by the vertical bars at the bottom of the main chart (above the secondary MACD chart shown below the main chart). The increased volume is due to a news release on November 15^th reporting record results, and that news was the reason we chose this as a promising trading candidate. Based on our Friday approach and the 20 dma resistance we awaited the new week and confirmation of upside trading above the 20 dma.

Update, time to make a move?
Today, two trading days later, ASYS closed at $18.45, above the 20 dma for the second day and to stay with our earlier choice, if the market is trading up tomorrow Wednesday 24^th November we will initiate a paper trading buy position for both the stock and its accompanying options.

It will interesting to track the future movements of ASYS as part of our learning the stock market basics trading routines and in doing so, the objective is to establish a way of using the stock charts as an aid for decision making regarding entry points and exit points, just as the move above the 20 dma has triggered the buy signal – only according to my own personal preferences of course, many traders would have entered much sooner I’m sure, but I tried to be a little cautious in order to manage risk.

The following helps explain the excitement and increased volume, today, November 23rd, Zacks.com, in a news report, stated:
Huge Surprise: On November 15 Amtech Systems announced record-setting quarterly revenue, which came in at $45.4 million. The top line has roughly tripled in the past year. Net income was up 38%, to $5.4 million. Earnings per share rose 16 cents, to 58 cents, since last quarter. The Zacks consensus was only 34 cents, giving Amtech Systems its third consecutive surprise.

In conclusion
As stated above: If the market is trading up tomorrow Wednesday 24^th November we will initiate a paper trading buy position for both the stock and its accompanying options. This will be the second simulated set of trades for this Stock Market Basics series. The trade details and the chart will follow, assuming the trade takes place.

Reference will also be made to QQQQ, SW&P 500, and F (Ford).

Stock chart of ASYS Nov 19

Looking at the charts for Friday, 19 November, 2010 at the close

Re the stocks: ASYS, QQQQ, F, and the S&P 500 for paper trading

The charts published on this website yesterday in the article titled “Re-cap: Stock Market Basics Paper Trading Candidates”, showed the daily moving average lines for the 20 day, 50 day, and 200 day averages, so I should explain briefly why I chose to add the 20 day moving average (let’s use “dma” for short) to the default 50 and 200 dma’s shown on the free charts from StockCharts.com. The legend that identifies the colored lines can be seen in the upper left of the main stock chart, as shown in the chart for the Ford Motor Company, at the end of this article.

Support and resistance levels
Those particular dma lines are often used as reference levels of support or resistance to price movement in the stocks or indexes under consideration. They are just arbitrary levels, not mathematical or science-based, but they have acquired a value for interpretation through their popular use.

The terms support and resistance are self explanatory and I assume will be understood by most of the visitors to this Stock Market Basics website. They are frequently referred to, so it is best to become familiar with them. I wonder whether I should perhaps add a short Glossary of Common Terms?

My simple interpretations and a guideline for qualification
I have mentioned elsewhere on this website, that I like to follow a personal general rule, or guideline, that I think effectively lowers risk to a small degree. The guideline being that I prefer to hold stocks that are trading above their 20 dma, especially when I’m wishing to buy in.

For me, that means I see them as a better buy at a higher price, the price they will have to rise to in order to break through the 20 dma line of resistance — in other words they will cost more when they qualify.

The Stop Buy order
Although I do not use it, there is a type of stock order that can be placed called a stop buy order. This type of order instructs the broker to buy the stock when a pre-established price is reached. When triggered by the stock reaching the established price, it enables an order to be filled at the then prevailing market price — which may not be at exactly the established price but maybe a little higher, depending on the demand and volatility of the stock concerned at that time.

There are many other simple guidelines that can help to be disciplined
Most traders have unofficial guidelines to qualify their stock choices or decisions. Another that I have also mentioned is that I try to avoid placing a buy order on a Friday or before a long weekend, just in case something unforeseen happens during that time to alarm and affect the market. For instance, this weekend there was a the news about Ireland’s request for financial aid that set the market back somewhat, not a lot but more serious situations have occurred in the past. There are lots more unofficial mini-rules that we perhaps can refer to from time to time. It is all part of learning the stock market basics lore.

Getting back to the stock candidates for paper trading
Of the 3 candidate issues, ASYS, F, and QQQQ, and the chart of the S&P 500 for the general market, only Ford Motors (F) is above the 20 dma as of the close on Friday.

Looking at the Ford chart, shown below, and my explanation of what I see

1. The chart below shows that the stock has risen nicely in little bounces from about $12 in late August to the Friday 19 November close at $16.28. It is still above the 20 dma but is in a reversal at this time that may continue on down to the 20 dma – or lower. So that is one reason we have to wait a little longer, see item 4.
2. Volume has been increasing since late last month – we like to see rising prices on rising volume but not, of course, declining prices on rising volume.
3. The MACD (the narrow chart below the man chart) is showing a negative crossover that might be indicating a continuation of the downward trend – we will wait a little longer to see.
4. The recent high price that the stock reached was at about $17.25 on November 16, and many would consider that as a possible next level of resistance from the present $16.28 price, if that is the case, we won’t buy in at this time but follow the principle that “it may be a better buy at a higher price”, namely after it has broken through the November 16 price level of $17.25, possible not the first day after, maybe the second and/or at about $17.50 to $18.00. We can afford to wait a little longer, boring I know!.

Stock Chart Ford Motor Comany -- F Nov 19

In conclusion
Right now, with just a few stocks to watch, it is a little slow, but when there are maybe 10 stock issues in play, as there will be when we add more, and with another 10 or more on the watch-list, it becomes more demanding.

By assessing the merits of stocks and paper trading them, it is hoped that some simple and useful routines are learned about the stock market basics, the purpose and objective of this web site.
And simple can be better – someone once said: “Anyone can make a process complex, it takes genius to make things simple”. Just a thought and a quote I should not use, it came, I believe, from Albert Einstein.

In the next post, we will similarly comment on my views of ASYS, The QQQQ’s, and the S&P 500.

A plan and some rules

An important aspect of this Learning Stock Market Basics series is the emphasis on the need for the beginning stock trader to have a plan and to follow some simple rules that can help guide the decision-making process when it come time to enter or exit a stock trade. And this applies to the paper trades we make as it does to real trades.

There must be a reason to enter a trade and a reason to exit a trade and while the trade is still evolving, the relevant activity of the specific stock in the trade must be monitored, as well as the environment of the general market.

Stock market charts
And that brings us to the second point of emphasis in the learning stock market basics series, and that is to encourage the use of stock charts. The information depicted on stock market charts can help the examiner to see and understand what has happened in the past months of trading up until the current close of the specific stock or stock index.

The chart can reveal patterns of stock price movement and volume that have occurred, or are in process of developing, that can be related to frequently occurring patterns in other stock-price movements that are widely recognized and accepted as having been, in the past, predictive of what can take place in subsequent trading. The ability to recognize such patterns provides an “edge”, an advantage that can perhaps favor a particular trading decision. So to help become familiar with what to do and what to look for, at least at a simple level, we will look at the charts of most of the issues discussed on this Stock Market Basics website.

The objective is to learn by doing, even though simulated. It will not necessarily require that we see the “pretend” trades all turn out to be winners, although ego dictates that is the preferred end result. The beginning trader has to be alert to what to watch for and what to do in response to activity taking place in the marketplace regarding their chosen stock trades – some activity that may be expected and some that may be unforeseen.

Just get used to examining stock charts and learn about what data they depict and what might be interpreted from the information portrayed. And not just limited to what I say and can be read here on this website about charts. Also read the Investor’s Business Daily, stock market magazines, and books and other information sources to gain as broad a knowledge of the stock market and the lore of trading as possible.

A primary objective is to limit risks my minimizing losses when a trade does not perform as anticipated. The amount of a loss than can be tolerated is established at the beginning, when entering a trade, and acting on that decision, without hesitation, if necessary. It is well known that many people have lost substantial amounts of their capital by holding onto a stock that is falling in price, and even worse, some compound the problems by buying more stock at the lower price – definitely a “No! No!

Update and objectives
Having said that, let us examine the charts and the stock activity and price movements of the stocks we chose last week as possible candidates for paper trading and possibly take them out of the “candidate” status and initiate an actual paper trade so that we can measure how effective are the suggestions being made on this site. We can make a brief comment on the general market using the S&P 500 index as the base of reference. We use the S&P 500, rather than the DOW or Nasdaq Indexes, because it is more representative of the whole market, as has been discussed elsewhere on this site.

The candidates referred to so far (and we will look for more), are:

1. ASYS (Amtech Systems Inc.),
2. F (Ford Motor), and
3. QQQQ (Power Shares QQQ Trust).

November 21, 7:45 pm Eastern Standard Time
So, I will now publish this current post, and tomorrow, as time permits, will put up charts of the above 3 issues, together with a chart of the S&P 500 and offer my observations of why or when we should initiate our paper trades on those stocks – and on their options. We must also set the price targets and the exit prices and procedures.

We are in this together, if you wish to learn the stock market basics you should begin to assess the suggested stocks after looking at their charts — and in doing so to learn what to look for, it is neither a science or an art, but merely an attempt to find clues that might lead to accurate conclusions about what can happen in the future regarding the price movement of the stock issue under consideration. I can post the 4 charts first and follow up with the comments later.

Meanwhile, a viewer may wish to examine the following charts to see what they show and what possible moves should now be made, if any.  I have added the 20 DMA line, not shown on some of the earlier charts on this website — why is that?

Answer: Because it provides a more restrictive line of reference that can be used, if broached, as an earlier alert signal to be ready to make a move should the stock price fall below the next support line, which on this chart is the 50 dma — although any number of dma lines can be used, other than the 20, 50, and 200 dma lines shown on these charts.

Stock Chart: ASYS Nov 19

Stock Chart Ford Motor Comany -- F Nov 19

Stock Chart: QQQQ Nov 19

Stck Chart: S&P 500 Nov 19

November 16, 2010 after the close
Following up yesterday’s post titled “Finding Stocks for Stock Market Basics Paper Trading”, the charts below will help us assess the first few possible candidates referred to in that post, namely Amtech Systems (ASYS), Ford (F), and the Power Shares QQQ Trust (QQQQ).

The market was down today, November 16, 2010 following the activity in the overseas markets and fears related to the European monetary crisis. The S&P 500 chart shows a correction through the 20 DMA and heading to the 50 DMA, we will watch to see whether it finds support there.  We will await the expected recovery for the QQQQ’s while assessing the other two issues independently.

It should be noted that the comment made on the post yesterday regarding QQQQ  was that it was “definitely not a Buy yet” — todays market action confirmed that, as can be seen in the chart below. As for the ASYS and F, I would be prepared to open a paper trading position on them tomorrow after we can see how the market opens and how it looks to be performing. There is no hurry and it is always best to follow the rule to “trade with the trend”. The purpose of our exercise is to use the paper trading and stock assessment processes to learn the basics of stock market trading and try to develop logical routines for adoption in the real world of trading when the time comes. At this stage simplicity and attention to established guidelines are important, and they work too in real-time trading in the stock market.

In addition to paper trading the shares of any of the companies referred to, I also wish to paper trade their options, again following the previously mentioned 4 Rules for Trading Options. It is important to demonstrate the benefits and risks involved in options. A big advantage with options is that they provide substantial leverage at only a fraction of the cost of the underlying stocks, meaning the investment stake is not depleted as much as when buying only stocks — but the rules must be adhered to.

Here are the Charts, click on to enlarge for clarity:
(Comments can be added later)

S&P 500 Chart for November 16, 2010

Stock Chart ASYS Nov 16

Ford Stock Chart Nov 16

QQQQ Chart Nov 16

November 15, 2010 After the close
The market is down a  little from the highs of a week ago, I assume this will be a minor correction and will be watching to see whether there will be a bounce back up in the next few days – I have added the 20 dma to the usual S&P 500 chart as an additional support reference. And I will try to post that chart on this site tomorrow, the purpose being to prompt beginning traders to become accustomed to looking at charts to immediately see the scope of the changes taking place, if any, from one day to the next.

Time to find stocks to trade
So while watching for the upturn to enter the market this can be the time to search for a few stock candidates for paper trading to gain some insights and experience into the stock market basics of trading.

Where to look for stocks for the Watch List and to paper trade
There are lots of media sources to check for possible stock to trade, it’s a matter of getting accustomed to a search routine that suits an individual and provides promising stock candidates. For me, I find most of my time is spent eliminating stocks from any group listing, most of them lack the specific chart characteristics that I like to see. It is not a scientific process but given time and trading experience, most traders adopt an approach that meets their own particular preferences.

Two of many useful sources of stock candidates are Finance.yahoo.com, a daily reference for the beginner wishing to learn stock market basics, and the IBD (Investor’s Business Daily Newspaper) – where I look at the top 100 stocks – more about this later — and the IBD is also a good resource to stay updated on everything in the market. Among the many categories provided by the IBD, I like to check into the leading sectors and from those look at the top few individual stocks in that sector – commonly referred to as the “Best in breed”.

Best advice
For guidance in how to go about finding stocks and learning the right investment and trading techniques, I have recommended elsewhere on this website, the value of reading the inexpensive learn to trade books by William J. O’Neil. I suggest giving those books priority with perhaps the first one being “24 Essential Lessons for Investment Success”, it covers everything in less than 150 pages.

The early days of learning the stock market basics require that some time be set aside for reading the above and other books, some are mentioned in the “Read to Learn” post on this website, see below in the list of related stocks and click to access.

And there are many other news and advisory services to consider checking into, to give just two more examples, try Market Watch at MarketWatch.com, and The Motley Fool at Fool.com. In the same way as learning from the IBD and the books suggested earlier, these site can provide stock market insights as well as stock recommendations that can be checked out by a trader’s own screening process. And there are many more similar sites — but those should suffice for now, and I will check to see whether I can find promising candidates for paper trading among them.

To make it helpful to someone else who has yet to adopt a search technique I can suggest some of the things to look for, in no special order necessarily, and these are just some of my own preferences for use here in this “Starting Anew” series:

1. Price, this series is targeted at a beginning investor with a small working capital so there is no point in looking at Apple (AAPL) at $307 or at Google (GOOG) that closed today at $595, or other similar perennial high priced favorites, so for now I will look for stocks in the $5 to $25 range.
2. Daily trade volume should preferably be over 300,000 daily on one of the three major exchanges, DOW, S&P, Nasdaq This is needed in order to provide liquidity and the assurance that there will be someone to buy the stock when the decision is made to exit.
3. Stock must be in an up-trend when the overall market is in an up-trend.
4. Must be trading above the 50 day moving average (50 DMA) and preferably above the 20 day moving average (20 DMA). I use the simple moving averages and I prefer to use the StockCharts.com free charts or for a preliminary view, the Yahoo charts are more readily available when already working with Yahoo doing research or following the day’s news.
5. I prefer that the stocks also have options available, most of them do. For an explanation of why I believe options are worthwhile to trade, even though many people think they are too risky, see the articles listed here under the subheading category of Stock Options.

In summary (for now)
It takes time to research for stocks to put on the watch list, maybe I will only be able to add a few at a time. It becomes much easier once there are 10 or so already under consideration.For now I am looking at ASYS closed at $18.49, F closed at $17.00, and QQQQ closed at $57.31(above preferred price range but must be considered)ASYS, Amtech Systems Inc, took a big jump on earnings announcements and projections and traded with heavy volume.F, Ford Motor Company, also gapped up today and traded on big volume.

QQQQ, known as the Power Shares QQQ Trust – definitely not a Buy yet, let’s see if it bounces up off the 20 DMA – if the market performs and finishes the year higher, as suggested here last week, then it should be worth having.

I will try to post the charts for these tomorrow.

The Objectives for future posts in this “Starting Anew” Series
to provide relevant information for the beginning trader

• Find 10 stocks to paper trade
• Find 10 stocks for the Watch List
• Use of Charts – find and explain winning patterns
• Enter paper trades – Follow the 4 Rules
• How to track the trade’s daily progress
• Exit paper trades – Follow the 4 Rules
• Repeat the process – keep simple records

But First a general introduction and explanation

There are already many articles on this site dealing with the trading approach and offering specific suggestions on how to proceed, but for this “Starting Anew” series let us re-summarize.

Stock market basics, the subject of this website, covers a range of topics that are assumed to be of interest to the beginning trader, someone who is searching various sources for relevant information in order to gain a better understanding of how the stock market works and how to make stock trades based on logical and time-tested trading principles established through the experience of successful traders. Reference to such topics is made in several other articles on this site, they can be found at this link: List of Topics.

Making an assumption, trading versus investing
The stock market is a place for both investing and trading, and although there will be some coverage here of investment as a separate and worthy topic, the emphasis on this site is on trading rather than investing. That is because trading can require less capital to get started and provides a possible route to build a bigger stake in a shorter time.

And a beginner is not likely to have the extra financial knowledge and skills required to personally choose an investment grade portfolio of stocks and must therefore place their faith in some form of investment advice. But we will look forward to providing articles here that describe how successful investors have achieved their successes — with reference to their guiding principles that may better inform the beginner who prefers to invest rather than trade.

Trading is the focus because it is assumed that the beginner looking at websites, such as this one, may not have sufficient working capital to invest in some of the higher priced quality stocks for long-term growth and dividend payment, a major focus of investing. Trading is a shorter-term process, considered riskier by some, but done properly with appropriate risk management, trading can provide handsome returns that can help build the needed stake to begin investing as well as trading. There are already many articles on this site dealing with the trading approach and offering specific suggestions on how to proceed.

Just who is a beginning trader?
There is a need to know this so that we can cater to that person’s needs in learning about the stock market basics It might be sensible to try to identify some of the characteristics that could define the category of “beginning trader”.

Someone starting out with a small capital stake – that is who to provide information and guidance for
For now, let us assume that the beginning trader is someone who has a relatively small amount of money to start trading in the stock market – perhaps less than five thousand dollars, or even just one or two thousand. Perhaps someone who has already made a few trades, someone who has recently started trading without knowing much more than how to place trades and whose early experiences indicate the need for a wider knowledge base and is now checking out sources, such as this website, to see what they have to offer.

Cut the losses, let the profits run –  much quoted advice for the beginner
To preserve and protect a small stake and provide an opportunity to double it, there must be rules to follow that will allow a sufficient series of trades, some of which will encounter losses, but where overall a target profit is achievable because the rule of cutting losses has been followed.

Follow basic rules as established in the AGCO paper trade
As we begin here to paper trade some stocks, it is hoped that reference can be made to some of the basic guidelines of trading. That has actually already occurred in the case of the September paper trades for AGCO, one of which is still profitably in play as of this date, November 11, 2010, and the other trade exited with a paper profit of 186% following the rules established at the opening of the trade. Not all trades will provide such winners but the objective is to equal or better them and in any event, win or lose, to learn some basic rules.

Finding the stocks to trade
We also must have a successful method of finding stocks that are promising candidates for trading, most traders have their own preferred routines and here we can start by trying to find stocks that have the characteristics associated with many known winning stocks. For this, stock charts, described elsewhere on this site, will be a useful resource.

The objective is to quickly find a number of stocks to trade only on paper as examples of how to follow some established rules that help qualify and track a given stock – from specifying the reason for choosing it until the reason for selling it.

There should be some winning bullish trades available now that it appears (as of early November 2010) that we may have a few months of an up-trending market ahead of us.

Within the next few days we will endeavor to screen a number of stocks to find a few to start paper trading next week, the week on November 15, 2010.

Check here to re-visit the List of Topics and Categories on this Website.

Part I – How stock charts can be used

Part II – Finding some stock candidates to paper trade

Part III – Other Comments

Part I:

The stock chart, a starting point for reference and an “information base” to work from

Let us start by looking at the chart of the S&P 500 showing the action for the past year up until the close on Friday November 05, 2010. The reason for doing so is just to make a few observations to provide some “context” of what has happened in the market and as a means of encouraging a beginning trader who is learning the stock market basics to become accustomed to using stock charts to help make trading decisions. We are looking at the S&P market index chart here but the same applies generally when using the chart relating to any specific stock.

Charts of the Dow or the Nasdaq could also be used for this purpose but, like many, I prefer to use the S&P 500 because it is more representative of the overall market, representing a wide variety of 500 stocks from various sectors compared with the small number of 30 biggies on the Dow or the tech-weighted Nasdaq.

Where to obtain free stock charts
One of the major sources of detailed free stock charts for the trader is StockCharts.com, check it out, many traders cannot do without it. The free charts are sufficient for most purposes but there are extended versions available by subscription for a modest fee from the same source if desired.

First, some comments about charts, comparing the present to the past

Stock chart analysis, the reading and interpretation of charts, is a specialized skill and can involve quite complex procedures. But at the level of stock market basics at which I prefer to operate, a deep analysis seems unnecessary. Keep it simple.
My approach
In using stock or index charts, I follow a simple approach that takes just a few moments. I look mainly too see the trend, and then compare where a stock or index is trading now to where it has traded in the past. I look for the previous periodic highs and lows because they are likely to be future points of resistance and support and I check the volume, looking for instance to see whether an increase in volume is accompanying a rise in price, which is usually a positive sign on the upside.

I also check the moving averages, such as the 50 day and 200 day, shown on the chart below in blue and red lines respectively, but I also like to see the 20 day average to use as a guide according to the general rule to stay with a stock as long as it does not drop back below the 20 day moving average – and if it does, be ready to exit the position.

We can refer to the above characteristics on the chart of the S&P below.

Looking for specific patterns
And I especially look for specific well-known trading patterns that have been shown on innumerable occasions in the past to be associated with a predictable outcome. From that it might reasonably be concluded that what happened previously is likely to be repeated, in many instances, in the future. For example, if a given pattern exhibited in many stock trades has shown to be associated with a winner seven times out of ten in the past, then it is possible that ratio of 7:10 might continue when similar patterns are seen to be developing in the future. And subject to other factors of course.

So from that, if the conclusion is valid, we must become familiar with a number of typical well-recognized patterns that have already acquired descriptive identification names. There are sometimes more than one name used to describe a pattern but whichever name used, they make equal sense. These include:
1. Breakouts from a trend, to the upside through resistance or the downside through support levels.

2. Cup and handle or saucer formations

3. Flags, pennants, triangles

4. Measured Moves

5. Double bottom etc, etc

6. And there are others.

Supplementary Chart Indicators – and there are many
Other mini-chart indicators shown at the top of and below the main chart illustrated here are the RSI (Relative Strength Index) and the MACD (Moving Average Convergence Divergence). These are not essential for the discussion right now but they can be helpful because they should reinforce the interpretation of what the main chart is depicting. I will try to remember to explain them more fully elsewhere.

And there are many other types of indicators that can be used to aid interpretation that are readily available and can be added to these charts from the chart dashboard that normally appears below the main chart provided by StockCharts.com. For simplicity, I have omitted the dashboard for the chart shown below. I usually don’t need it, I just note what is displayed on the standard default chart layout although I use it occasionally to change the time-span of the trading period.

See the comment at the end of this post about the possible alert provided by the RSI, a supplementary indicator. And maybe the MACD is peaking too.

Click on the chart to make it a little larger:

So what, briefly, can be seen that matters on the above chart?
It takes longer to describe than it does to recognize and interpret mentally – and once an appraisal is made the first time it takes little to refresh the memory from that point on. Some of the main points:

1. Current Trend: upward since the lows of early September.
2. Major highs of the year: The high of the year until now occurred late April at about 1220. Friday’s close broke through that level – so watch the next days and weeks to see if it holds. That’s important to sustain the trend and end the year on a high.

3.Major Lows of the year: at around 1020, a 16% drop from the April high. In early July there was second “not so low” at the end of August. Those lows and the several other highs and lows throughout the year that have served as possible levels of resistance and support until now may not be revisited again for a long time and only if there is a major reversal.

4. Two Important major crossovers of the 50 and 200 DMA: downside around the beginning of July and upside in late October

5. Breaches of the 50 DMA: Beginning of  May on the downside, beginning of September on the upside. The 50 day moving average can be considered a confirmation signal point to indicate that it’s time for an exit or a re-entry in the general market.

For the situation depicted on this chart, that means get ready to exit in early May if the move down is confirmed (it was) and be ready to re-enter in September if confirmed (it was). There was also a short-lived move up in late July that reversed by late August. Like all these signals, they vary in their importance and interpretation, more important would be the specific chart patterns of the individual stock positions that are owned.

The principle and objective is to know when to exit a stock to take a profit or to limit a loss to within an acceptable range.

6. RSI and MACD are positive if you are interested – the RSI may indicate the market is at or heading towards an overbought condition, compare it now with what happened after the last similar high point in mid April – the market commenced its 16% reversal.

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Next: Part II
In our next post let us try to find and itemize some promising stock candidates to watch or to paper trade as part of the learning stock market basics process.

We hope to find some prospects that can equal or better the results of +18% and +186% gains in 2 months obtained in our recent paper trades, details of those trades and links can be found at AGCO Paper Trade.

Today is November 05, 2010, and if you will take a look at the charts of any of the major exchanges or the indexes you will see a rather pretty sight from the perspective of a stock market trader, we are in a bull market phase and it looks like we should end the year, still two months away, at new highs for the year.

From a beginners viewpoint
As beginners, learning the stock market basics, that is important because we should be able to observe what can happen until then, and probably beyond, and see where money is being made and perhaps practice some paper trades and learn to make the right moves to become familiar with the steps involved in making trades.

Experience and skill in trading, once acquired, can provide a profitable source of income for years to come, whatever may happen in the markets. But there will be losses as well as wins, our objective is to keep our losses to within a margin of tolerance and let the profits run, and remember, in real trading life it is not a profit until it is sold!

So, let us together set a path to follow for the next 90 days that gives a good chance to see winning results that can be achieved by learning the stock market basics with just one set of routines out of the many that can be applied. This is the time to begin to build a foundation of stock market know-how from which to base future actions. First you have to know a little, then a little more, and a little more.

What do we need to do to establish a series of steps to learn the stock market basics?
Perhaps we should start by looking at a stock chart of the past 12 months — or for the last 6-month period — of any of the Dow, the Nasdaq, or the S&P 500.

All three charts will provide a similar picture, but I prefer the S&P 500, and that will bring up the first explanation in our “steps to learn the Stock Market Basics”, and that will be to say why the S&P 500 is the preferred index to follow, I can do that in the next post, together with some comments on what information can be seen on the chart.

We should also begin a number of paper trades that can follow and implement whatever we discuss in the “steps” mentioned above.

And I should also add a list of other items that we will need to know about in order to initiate the series of paper trades, one of which is to find out where to find promising stocks to trade and to add to a watch list.

We will certainly need to check out and get to know StockCharts.com, for the stock charts and Finance.Yahoo.com – where we can enter our trading portfolio that can be tracked in real-time by Yahoo – and also get quotes and news updates from Yahoo. There really is a lot of easy to learn material available, but one thing (or two) at a time. Let us start tomorrow.