Rich Dad Stock Blog
Free Information to Help You Build Wealth in the Stock Market
Technical Indicators
Posted by on May 16, 2012
There is no shortage of technical indicators available for the modern trader. In fact, regardless of how long you have been trading you will likely run across new indicators on a constant basis. While there are hundreds of potential indicators to choose from, you don’t have to lose any sleep at night worrying that there is a perfect indicator out there that you are unaware of because the perfect indicator simply does not exist. The key is to identify a few good indicators that relate to your trading style and incorporate them into your trading.
Even after a new trader accepts the fact that there is not a perfect indicator, there is a natural inclination to wonder which indicators are the best. If you ask 100 different traders what the best indicator or combination of indicators is, you will likely get 100 different answers to that question. The key with any indicator is to understand how it works and actually use it in its proper manner. You do not have to become an expert on every indicator to succeed at trading. Simply understanding and incorporating one into your trading can make a difference. In fact, the use of too many indicators can lead to paralysis by analysis!
Here is a list of some of the most popular indicators with a brief description. In the coming months, the Rich Dad e-zine will go into further depth on each of these indicators and show how many traders incorporate one or more into various trading systems, with detailed examples of each.
Fast Stochastic Oscillator
How it Works: The Fast Stochastic Oscillator attempts to identify potential overbought and oversold conditions for a stock. When the lines cross into or out of the respective zones, they are interpreted as possible confirmation signals. The overbought zone is represented by measurements above 80 and the oversold zones are represented by measurements below 20. Potential confirmation signals exist when a break occurs from these zones. For example, when the stochastic oscillator has been below 20 and then breaks above, it can be a potential confirmation for a bullish strategy.
MACD (Moving Average Convergence/Divergence)
How it Works: It can be useful in helping confirm a stock’s momentum, trend direction, potential support and resistance levels, and aid in entry and exit confirmation signals. As a general rule, the zero line is the equilibrium line. If the indicator is above the zero line, it is considered bullish and if it is below the zero line, it is considered bearish. Bullish signifies that the 12-day moving average is higher than the 26-day moving average. Bearish, the12-day moving average is below the 26-day moving average.
The MACD has many potential confirmation signals. These can include crossovers of signal lines, crossovers of the zero equilibrium line, and divergences between the price of the stock and the MACD. Also, when the indicator is at extreme levels on either side of the zero line, the stock or index can be considered either overbought or oversold and prices will soon return to more realistic levels.
On-Balance Volume
How it works: It is a momentum indicator that is primarily used to confirm trends. It does this by taking price and volume into a formula and delivering it as a summary line. It is also read as a price versus volume convergence and divergence indicator.
Price ROC (Rate-of-Change)
How it works: Helps determine change in price direction. As price increases, the ROC increases and as price falls, the ROC falls. Traders can compare the price percentage highs and lows against present highs and lows to gauge the degree to which a stock is overbought or oversold. Confirmation bullish plays often occur when the line crosses upward through the zero line and potential bearish plays are confirmed when the opposite occurs.
RSI (Relative Strength Index)
How it works: The RSI assesses present price relative to historic price (usually 14 days). The scale of the indicator ranges between 0-100. At 50, the indicator suggests that the stock is neutral. Values above 50 are considered positive momentum and values below 50 considered negative momentum. When the RSI line is below 30, it can indicate a market bottom and oversold conditions. Potential confirmation for bullish strategies occurs when the RSI line is below 30 and emerges up through the zone. When the RSI line is above 70, it can indicate a market top and over bought conditions. Potential confirmation for bearish strategies occurs when the RSI line is above 70 and crosses down from that zone.
Slow Stochastic Oscillator
How it works: This indicator gets the derogatory slow title simply because its counterpart (the fast stochastic) uses more near-term price sensitive information. This indicator attempts to identify overbought and oversold conditions. When the lines cross into or out of the respective zones, they are interpreted as possible confirmation signals. The overbought zone is represented by measurements above 80 and the oversold zones are represented by measurements below 20. Potential confirmation signals exist when a break occurs from these zones. For example, when the stochastic oscillator has been below 20 and then breaks above, it can be a potential confirmation for a bullish strategy.
Ultimate Oscillator
How it works: The ultimate oscillator attempts to identify potential overbought and oversold levels. It has values from 0-100 with potential oversold levels identified below 30 and potential overbought levels above 70. Many traders will wait from the Ultimate Oscillator line to leave an overbought (for bearish trades) or oversold zone (for bullish trades) as confirmation to enter a trade. Conversely, when the ultimate oscillator rises above 70 traders can use this as a confirmation to exit bullish trades and when it falls below 30 they can use it as confirmation to exit bearish trades.
William’s %R
How it works: It is used to help predict potential market reversals by identifying overbought and oversold levels. Potential oversold levels are indicated with a measurement of –80 to –100%, while potential overbought levels measure from 0 to –20%. A note of caution should be made as William’s %R is vulnerable to strong trending stocks.
Summary
It should be emphasized again, that all of the potential trade signals that indicators provide should never be used independently to enter or exit a trade. Do not simply enter a trade because the MACD crosses the zero line or because the Williams %R is currently at -90. Indicators are best used when used in conjunction with a larger trading strategy and plan. In next month’s article this larger trading strategy will be discussed with two of the most popular indicators, the MACD and the Stochastic.
Turn Information Into Profit
Posted by on May 16, 2012
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Achieving success is more than simply WHAT you know. It’s also WHO you know and the 2012 Rich Dad Education Annual Forum will be an unparalleled opportunity to network with like-minded investors and potential Power Team members!
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Let go, embrace change and follow the stock market
Posted by on April 27, 2012
In addition to death and taxes, change is guaranteed. Life changes and not too many generations ago, we couldn’t fly. In my own generation, I watched the internet boom as well as the days change from lugging our suitcases around to wheeling them easily through the airports. The stock market prices change daily but the market itself, being based on companies profit and rise and fall, changes often appear based on the perceptions and emotions of the people in the market.
When I was a Financial Adviser with Morgan Stanley, we told our clients to “buy and hold, we are in it for the long term.” This has been the same statement used by advisors across the globe for generations and still is prevalent today. The problem is, since the inception of the stock market, much has changed. Let’s look at the market over the past twenty years; it doesn’t play the same way the previous twenty years did. Where Corporate America was growing and the baby boomers were dumping tons of money into the market and pensions were flush, we were growing year after year. Long term gains overwrote short term losses. The internet boom in the 90′s was one caveat to the change in the market but there were others.
Let’s look at the facts: take a look at the SPX (Standard & Poors Index), you see the market went up and down but was overall moving upward for the first 12 years and this had continued mostly since the stock market crash of 1929.
Then some real life changes happened late in the 20th century moving forward:
- CORPORATE AMERICA was growing and at least for now, how big can Walmart grow? Certainly we can look at new companies that are up and coming from growth but in our current economy they are fewer and farther between compared to the mass industry expansion in the 20th century.
- BABY BOOMERS were the largest generation to date. We are fully aware that they are at that age of retirement and plan to conserve their wealth to live on. Because of preservation plans, they are pulling money out of the market month after month, as they shift to less risk, less reward in assets like bond’s and cd’s. These type of assets focus on wealth preservation but often do not keep up with inflation. The stock market needs money infusion to grow. For now, a large number of dollars are coming out of stocks and mutual funds filled with stocks, daily.
- OVER LEVERAGED AMERICA caused us living in “phantom wealth” until the bubble burst, causing the mortgage crisis, a loss of jobs, a financial meltdown causing America and affecting the globe creating less money in our pocket and less money spent in the companies that grow the stock market. Although we are coming out of the woods now, this is not a fast process and will take time to turn the “Titanic” around.
This all sounds so negative and to some it may be, but for those of us interested in following the market and learning the strategies necessary to capitalize on the movement of stocks in this economy, this is great news. Take another look at the above chart on SPX and what do you see? Up, down, up, down in larger movements. For those of us willing to let go of the past, embrace change and learn how to make money in the current environment, there is an opportunity to not only do well today and moving forward, but to excel financially. Happy trading!
Learn From Your Mistakes
Posted by on April 17, 2012
Once we learn the strategies to trade options and stocks, have a proven system in place and feel we have a solid trading plan and some successes behind us…it is time to watch out. Humility is our friend and no matter how great we become as traders, we will always make mistakes.
There are three keys to remember as time and success builds:
- Be humble enough to admit we made a mistake
- Be coachable enough to learn from our mistakes
- Review your rules, reassess and apply as necessary
Typically with a good trading system in place, we will maintain consistency. For instance, maybe we are a 70% trader where 7 out of 10 trades are typically winners and three are losers. Certainly with our system we know when to ‘book’ our profits as wells as minimize our losses to keep us in a positive net trading profit. Even with a good set of rules in place keeping us in non-emotional trading, our egos like to sneak up on us and try to take control of our trading choices. for instance, let’s say we’re having an exceptionally good streak of trading wins and our egos start to think, ‘maybe I got it going on and got this trading thing down.’ ALERT: This is the time to beware and is often the time we give back much of our wins. It may even be a good time to take a break, stop trading, for a few days or weeks, to pull ourselves back together before trading again. Sometimes the best trade is the one that was never made.
A p
roven rules-based trading system is meant to keep us in the profit zone of larger gains than losses and away from the emotions of trading. It is like when we were kids swimming at the public pool. There was a shallow end and a deep end. They were separated by a rope with floaters to keep us in the ‘safe’ zone of shallow water and warn us when we were getting in too deep. A rules-based trading system serves a similar purpose. Regardless of how educated we get or how long we have been trading, we must, must, must stay within the boundaries of our rules to keep us in the profit zone. It is for our own good, for our safety profiting in all markets. The most successful traders are not the ones that have the highest IQ but instead are coachable enough to learn a rules-based system and stay within the boundaries of the system, month after month and year after year.
Discipline is the Name of the Game
Posted by on April 6, 2012
To be a successful trader means you need to embrace a proven rules based system. Trading is naturally very emotional as you watch the value of your account go up and down. It is imperative to learn the strategies but equally as important to follow the rules. This is what keeps you in the boundary of consistent profits and on the road to financial freedom.
As educated traders, we learn that focus is on booking profits in our profit zone and minimizing our losses so our overall gain is consistent and highly profitable. Typically, I am out near the top and cut my losses before it hits the bottom of the trade. I am not looking for the “lottery ticket”, I am looking for the consistent profits. I don’t need to pat myself on the back with an over-sized ego so I can tell everyone that I “rode it all the way up” or “shorted it all the way down” as if I am some brilliant trader.
I simply need to apply my knowledge consistently, making nice monthly profits, and compounding my profits to achieve all my financial goals. That is real wealth, accumulated over time, month after month, year after year. The rules keep me in the profit zone and out of emotional trouble holding on too long or jumping out too quick. Neither is an issue for a successful trader.
Three keys for your success to focus on this week:
- System: Will keep me in the profit zone
- Discipline: Will keep me on track
- Consistency: Will keep me from my own ego
Every morning or afternoon when you are applying Rich Dad’s trading system, creating the discipline needed to be a successful trader, remember it is the small things done consistently over time that will bring lasting results and lasting wealth for generations to come. You are the cycle breaker and financial pioneer for your family. Regardless of where in wealth you are right now, following the system, rules, and discipline needed will take you from wherever you are financially right now to the next level. Trust it, follow it, and embrace delayed gratification.
