Charting the right online course
Jana Schilder
Tyler Bollhorn, founder of Stockscores.com, says "traders crowd their stock charts with different indicators, hoping lines and colours will provide insight."
JANA SCHILDER PHOTO
If you're an online investor and are thinking about trying your hand at swing trading or position trading with stocks, a good place to start is with charting basics.
Stock charts provide a picture of the past trading activity of a stock. The vertical axis on the chart shows price; the horizontal axis shows time. When looking at a stock chart from left to right, you are seeing the price movement of a stock through time.
The field of technical analysis is highly complex and is a subspecialty in itself. If you crack open Technical Analysis of the Financial Markets by John Murphy, you'll learn about different types of charts that measure different things about stock markets.
At some point, you might get curious about: Bollinger bands, the Stochastic oscillator, Japanese candlestick charts, Moving Average Convergence/Difference (called MACD), the relative strength index (RSI), and the list goes on.
The quest? To find predictions, patterns, and probabilities in the behaviour of stock markets – which is behaviour of institutions and individual traders in the markets – that will make money for your investments in the future.
For those who are afflicted with analysis paralysis, the field of technical analysis can be a black hole from which they never emerge.
"Some traders crowd their stock charts with many different indicators, hoping that the lines and colours will provide them with added insight. Often, their charts end up looking like a basket weaving competition gone terribly wrong," says Kelowna-B.C.-based Tyler Bollhorn, 39, founder of Stockscores.com.
"Keep it simple. This is an approach that many stock traders forget," says Bollhorn, a self-taught 19-year veteran of online trading.
"I prefer to use `candlestick charts' because they provide more information about short-term supply and demand than a conventional line or bar chart," says Bollhorn.
Candlestick charts demonstrate the open, high, low, and close for the chart time period. The difference between the open and close makes up the fat, middle part of the candle, which is called the body. The areas above and below the body are the tails of the candle; they demonstrate the highs and lows for the time period the candle represents.
"At Stockscores.com, I differentiate between bullish and bearish candles, depending whether the stock closed above or below its open," says Bollhorn.
Bullish candles are those that close above their open; they are usually green. During a trading day, the stock will move up and down. The buyers are in control of the market when the candle has a close that is higher than the open, and is therefore optimistic.
Bearish candles are red, indicating that they closed below their open. The stock will close below its open and with pessimism when the sellers are in control.
"The approach I teach online trading students is that `message candles' have noticeably taller bodies than those before them. The price volatility over the period that the candle represents is high, indicating a strong opinion by either buyers or sellers," says Bollhorn. "If the candle is green, the buyers are giving a message of strength. If red, the sellers are expressing pessimism," says Bollhorn.