Investing Education Stories

A very popular momentum indicator is the Relative Strength Index or RSI for short. The Relative Strength Index uses a specific period of time, measuring speed as well as price movements of the equity you have chosen. When using the RSI, it is primarily used to determine if an equity is over bought or over sold, and does so by indicating a range from 0 to 100, with zero being extremely over sold and 100 being extremely over bought.

There are many different moving averages and for this one, we are going to take a look at the 4 period moving average. The 4 period moving average simply takes a look at the four periods previous to give you an average line. This type of moving average is quick and does not give you a whole lot of data for the person that is investing long term. However, if you are a day trader or an extremely short term investor, this could help you navigate the more volatile markets.

If you have been using candle stick pattern trading, then you have probably hear of the gap three method, which can work to the upside or downside. The gap three method to the upside happens when there is a strong uptrend. The gap happens to the first candle to the second, and then the third candle fills the gap. A reason that this occurs could be that people are simply taking profits from the gap up, but it may alter the long term up trend.

As simple as it sounds, a one year return is nothing more than the annualized return of a equity over a one year period. When using a one year return, there are many ways to implement it in your investing strategy. If you have multiple equities that cover the specific time period, using the one year return can help you to narrow your search. Mutual funds would be a popular area to use a one year return, because you can take the one year returns, less the expense ratios, and that will give you a good idea of how each fund will return. Certainly some funds are more volatile, but this is simply a place to start.

Taking a look at this charting tool, it allows the trader to see when a stock is in the upper part of its trading range or the lower. The Bollinger Band was created by John Bollinger, and it uses the simple moving average, and plots two standard deviations away from the average. Many traders and investors use the Bollinger Band to determine if a stock or other trading product is becoming over bought and over sold. Using standard deviation, we can assume that there is an above 90% chance that a given data point stays within two standard deviations.

Beta is the measurement of how an equity or product moves with the underlying instrument it is attached with. Beta is measured as follows, if a product has a Beta of 1 or above, than the product is more volatile, but if it falls below 1, it will be less volatile. When a Beta is at 1, that means it will move in rhythm with the asset it is tied with. For example, the ETF ticker SPY that follows the S&P 500 will have a Beta near 1 because it is supposed to follow the S&P 500 Index. Conversely, if you invest in an inverse ETF, it will likely be near a 0 Beta because it moves in the opposite direction of the market it is intended to follow.

A Doji is a pure technical analysis indicator to look for and is found on the candlestick chart. It is when the open and close are very close together and the body of the candle is almost non existent. When searching for a Doji, many people are looking for candles that have been bearish or bullish for several periods and then when a Doji happens, it could be an indication of a price trend change. Although this is not 100% accurate, it gives investors and traders a way to gauge when the market may be changing tides.

Just as the name sounds, this section is going to be about shares owned by institutions. What is the significance of this you may ask, it is important because if many different large institutions own the stock, they could all be expecting the stock to do something in the future. Of course if you are looking at companies such as Apple or Amazon, institutions are going to have this stock because they more than likely use it in the funds to ensure it follows their intended benchmark.

When looking for a tool that can help you determine where the market may go, the 20 period moving average certainly is a must. A 20 period moving average takes the last 20 bars of data, which could be as small as one minute, all the way to monthly candles, and will provide you with an average of those 20 periods. Having this tool on your charting will allow you to see how far the market is moving from the average of the last 20 periods. This is of significance because if the market begins to move drastically in one direction, you can have the knowledge that it should return to the average sooner rather than later.

When taking a look at companies and their fundamentals, you will usually end up on the balance sheet. Within the balance sheet, there is a section called current liabilities, what are and debts that the company must within twelve months. This line item could include any short term debts, any accrued liabilities, and accounts payable. Working capital is also derived using current liabilities, with the formula current assets minus current liabilities. There are also many different ratios out there that use current liabilities, such as the quick ratio and current ratio, which all tell us if the company can pay off their current liabilities effectively.