What is an Option?

The formal definition of a call option from the buyer's perspective is as follows: A call option gives the buyer the right to buy (call options) or sell (put options) a given security at a certain price within a given time.

Now, what in the heck does that mean? Let me try to translate this into more easily understandable language. 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 (i.e. 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.

For more information, refer to The Secret of Writing Options, by Louise Bedford.

What courses do you run?

For full details, click here.

What are Candlesticks?

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.

You can obtain a copy of a Special Report - Candlestick Pattern Summary ($19.95 inc GST), or Special Report - New Candlestick Patterns ($34.95 inc GST), via the shop page. Also available is the Candlestick Charting Home Study Course with 12 months of support ($575.00 inc GST).

What is Relative Strength Comparison?

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:

Top Down Analysis involves using the RSC to relatively compare each Sector Index with the overall market average, eg the All Ordinaries Index. This will lead the investor to the sectors that have the most positive market sentiment. Once these Sectors have been identified, the next step is to find the stocks in those sectors that are outperforming their respective Sector Index. Using the RSC to compare each stock in the sector to its corresponding Sector Index does this.

To be carried out effectively, Top Down Analysis requires the software to contain a database with a sequential listing of the Indices that represent the sectors of the market, and for all of the stocks in the market to be allocated to their respective sectors.

Bottom Up Analysis

Bottom Up Analysis involves using the power of the computer to search for shares that are outperforming the All Ordinaries Index, regardless of which market sector they belong to. This list of shares can be viewed to seek entry signals using other technical indicators such as candlesticks, momentum indicators and volume."

Bottom Up Analysis requires a software product that has an "A to Z database".

Gary cautions that:

For more information on how I specifically apply RSC to my trading, refer to my book
The Secret of Candlestick Charting or to see a list of available training courses click here.

What is Short Selling?

Usually when we buy a share, we are hoping to buy it at $5.00 for example, and sell it at $10.00 at a later date. Short-selling performs this same process, but in reverse. In effect, you borrow shares that you do not own, sell them with the expectation that the share price will drop, then buy them back at a later date.

Your profit or loss is the difference between your sell price, and your buy price - so if the share price drops, you make a profit. If the price increases, you will incur a loss. It is actually quite a simple concept, yet less than 1% of transactions in Australia are executed utilising this method.

How do I formulate a Trading Plan?

A Trading Plan is a business plan that will help guide your trading decisions. There are four components that you need to record in your trading diary, prior to entering a new position:

• Entry Requirements

• Profit Taking Methodology

• Stop Loss Procedures

• Position Sizing

Your trading plan should be reviewed on a frequent basis to ensure that your system is in line with your current objectives. Short-term traders should review this process every month. If you are a medium-term or longer-term trader, every 3 – 6 months should suffice.

It is essential that your plan blends in with your lifestyle and personality. No two traders, and therefore trading plans, are the same. This is your blueprint for success – no one else’s.