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(6) How to use point and figure trading techniques.
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Thursday, September 23, 2010

THREE BLACK CROWS - Bearish Candlestick Pattern









Three Black Crows (Bearish)

Three Black Crows is a top reversal / bearish reversal formation.
It could occur at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

This pattern consists of 3 consecutive long black candlesticks that appear in an upward price trend.
The opening price of Candles 2 and 3 of the pattern should be higher than the previous day's closing price (i.e. The prices open within the previous day’s body).
And all the 3 candles should close near or at their lows, and make new lows in each day.

Since all the 3 candles should close near or at their lows, the lower shadows of the Three Black Crows formation are normally short, or even no shadow in some cases.

This pattern is formed when the prices are in overbought condition, and indicate a sign that the bulls might have lack of conviction in the current uptrend. This uptrend has now reached levels where the bears have started to short the market.
On 1st day, due to increasing selling pressure, the price closes below its opening price.
On 2nd and 3rd days, it seems that as if the price wants to regain its former strength, as the price opens higher than the previous day’s close. However, by the end of each day, the sellers would regain control, causing the price to fall to a new closing low (i.e. the price closes at lower levels than previous day’s closing price).

The Three Black Crows pattern does not occur very frequently. However, when it does occur, traders / investors should be very alert, because their appearance indicates a period of strong selling pressure, and hence the reliability of this pattern is likely to be very high. If on the 4th day the stock is not able to show strength, then lower prices may potentially continue.

The reliability of this pattern tends to increase in the following conditions:
1) Longer black candlesticks’ body.
However, it should not be too long as well because if the black candlesticks are too long (over-extended), traders / investors would worry that the market could be oversold by now and hence may pause accordingly.
2) Shorter lower shadow of the candles.
3) The opening prices of the 2nd and 3rd days can be anywhere within the previous day's body. However, it is better to see the opening prices to be below the middle of the previous day's body.
4) Increase in trading volume.

Although the reliability of this pattern is likely to be very high, but it is always better to substantiate this signal with other technical indicators to confirm that the momentum is actually changing.

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* Learning Candlestick Charts
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* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Wednesday, September 8, 2010

One-Cancels-Other (OCO) & One-Cancels-All (OCA) Orders

One-Cancels-Other (OCO) Order is a group of orders that consists of two individual orders; if one of the orders is executed, then the other order will be automatically canceled.

One-Cancels-All (OCA) Order is a group of orders that consists of 2 or 3 individual orders. When any one of the orders in the group fulfils a trigger condition, the triggered order will be sent to the market for execution, whereas the other order(s) will be automatically canceled.
Basically, One-Cancels-Other (OCO) Order and One-Cancels-All (OCA) Order are similar. The difference may be that OCO Order consists of two individual orders in a group, while OCA Order can be made up of 2 or more individual orders in a group.

Generally, the following are some characteristics of One-Cancels-All (OCA) Order:
* Individual orders in one OCA group order can be either stocks or options, and the security type does not need to be consistent across all individual orders in the group. That means you can mix the orders for stocks or options in one OCA group order.
* Once one of order is triggered, the other remaining order(s) in the group will be canceled. The triggered order does not need to be executed for other remaining order(s) to be canceled.
* All orders in an OCA group order will be are held at the brokerage until triggered. Once triggered, the triggered order will be sent to the market as either Market Order or Limit Order as set by the trader/investor.
* If one order is partially filled, the remaining order(s) will be reduced proportionately to the remaining quantity of the unfilled order.
* If one order is canceled by the trader/investor before it gets triggered & executed, all the remaining order(s) will automatically be canceled as well.
* However, if one of the orders is rejected or canceled by the system, the remaining order(s) will NOT be canceled automatically.

Some examples of how you can make use of OCA order:

Example 1:
You want to enter into a long position in either a particular stock or an option in that stock.
You can place a One-Cancels-All (OCA) order that consists of the following orders:
a) Order 1 – Buy stock DEF with Limit Price of $30.00.
At the time you’re placing the order, stock DEF is trading at $32 / share.
b) Order 2 – Buy option DEFJKL of stock DEF with Limit Price of $1.60.
At the time you’re placing the order, Option DEFJKL is trading at $1.80 / contract.

If the price of stock DEF drops to $30.00 before option DEFJKL hits $1.60, Order 1 will be triggered and sent to the market as Buy Limit Order to buy stock DEF at $30.00 or lower. At the same time, Order 2 will be canceled automatically.
On the other hand, if the price of option DEFJKL drops to $1.60 before stock DEF hits $30, Order 2 will be triggered and sent to the market as Buy Limit Order to buy option DEFJKL at $1.60 or lower. At the same time, Order 1 will be canceled automatically.

Example 2:
You’ve own stock OPQ that is currently trading at $25.00. In order to manage the position without having to constantly monitor the market, you want to place Sell Limit Order at $32.00 to lock in profit when the price has reached your Profit Target Price, and Sell Stop Order at $20.00 to limit your losses in case the price moves against your expected direction. When one of the orders is triggered & executed and your position is closed as a result, the other order will be automatically canceled.
Note:
The purpose of the order in this example is actually similar to that of Bracketed Order, which is to allow you lock in profit and limit your losses.
The difference is that in this case, you place the above two opposite orders when you’ve already own the stock; whereas for a Bracketed Order, the above two opposite orders are submitted together with the buy order for opening the position.

Disclaimer:
This order is a more complicated order, not all brokerages can accept this order.
Even the procedures, rules, terms and/or how to place this order may vary from one to another brokerage. Hence, you need to check with your own brokers specifically for the details before placing such order.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
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