Discussion Paper: Trading Periods. Written by: John Howell & Andrew Dimitri. Planet Wealth Trading Room

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1 Discussion Paper: Trading Periods Written by: John Howell & Andrew Dimitri Planet Wealth Trading Room

2 Bar Charts - OHLC There are many different ways to identify what is actually happening in the market. A popular method and one which I often use is called CandleStick charting. The only draw-back with CandleStick charting is that they can be confusing to interpret. In a later module I will explain CandleStick charting in detail. However for the moment let s stick to a good substitute but simpler price indicator called an OHLC Price Bar. OHLC stands for Open, High, Low and Close. The OHLC indicator is a simple graphical representation of the price movement for a particular period, see diagram 1 for an example of a day movement. Diagram 1. You will see on the left hand side there is a vertical bar, with a small bar on the left and one on the right. The one going left represents the Opening Price. The top of the vertical bar is the Highest price for the period (Daily High Price) and bottom of the vertical bar is the Lowest price for the period (Daily Low Price). Finally, the small bar going right represents the Closing Price. We will be using the OHLC indicator as a significant reference point to assist our decision making on whether to enter a trade. The OHLC indicator forms the basis of our Trading Plan and provides an instant reference to individual price movement. It is important to note that the Close may not necessarily be the Last price for the day. After Market Trading occurs for some time after the actual close (usually at 4pm), so it is important to notice that the last trade before 4pm may not always be the Close price, and there may be trades for a short time after that.

3 Daily, Weekly and Monthly This type of bar chart shows you the Open, High, Low and Close price for a particular trading period. These trading periods can vary from one minute to one month, depending on the type of trading you are doing. I will concentrate on the daily and weekly charts because of the relatively short term trades we do in the Trading Room. A day trader would use what we call an intra-day chart, which would separate each trading session into small blocks of time such as five or ten minutes. Conversely, a longer term investor might only be concerned with the monthly charts. While each chart looks the same, it is important to note that a daily chart will show you the Open, High, Low and Close for that particular day. A weekly chart will show you the Open, High, Low and Close for that particular week. Whenever I vary the trading period, I must also vary the way I read the chart. I will look more closely at how to read the daily and weekly charts in a later module. However, the examples on the following page show how 12 months look different when comparing the daily chart (diagram 2) with the weekly chart (diagram 3).

4 Daily vs. Weekly Diagram 2. Diagram 3.

5 Trading Periods Daily Chart When I am looking to trade, I m waiting for the market to indicate to me that its intention is to move one way or the other. Historically a majority of upward moves begin with one specific type of signal and the same is true of downward moves. For upward moves, we are looking for a Bullish Up Day. And for downward moves, we are looking for a Bearish Down Day. These two types of days are the ONLY two which constitute the beginning of a possible entry signal for a trade. Bullish Up Days A Bullish Up Day (sometimes called a Northern day or just an Up day), is a particular trading day which has a Higher High and Higher Low compared to the previous day. We require both the HIGH and the LOW for the day to be above that of the previous day s trading, which may indicate a bullish (upward) move in the share price. Diagram 4.

6 Bearish Down Days A Bearish Down Day is the exact opposite of a Bullish Up day that is, a particular trading day has a Lower High and a Lower Low. We require both the HIGH and the LOW of the day to be below that of the previous day s trading, which may indicate the beginning of a bearish (downwards) movement in the share price. Diagram 5. Sideways Days When buying option positions, we require the option price to move in order to obtain a profit. Options undergo a phenomenon called Time Decay, where the time value of the option will decrease as it gets closer to expiry. When trading options, we either buy a call option in anticipation of an upward move, or buy a put option in anticipation of a downward move. However, if the option doesn t move and the price of the stock moves sideways, Time Decay will begin to eat away at the option price, resulting in a possible loss. Therefore, when buying options we are always looking for clear signals of a directional move, in this case a sideways move is our enemy. Generally, sideways movements do not give a clear indication of market direction and should not be used as entry signals. Two examples of Sideways Days are called Inside Days and Outside Days.

7 An Inside Day has both a Lower High and a Higher Low than the previous day, as follows: Diagram 6. An Outside Day has a Higher High and a Lower Low than the previous day s trading, as follows: Diagram 7. In both of these examples the key word is side. Both Inside and Outside days indicate to the short term trader that there is significant indecision between

8 buyers and sellers. Therefore, the overall direction of the price of the stock is not clearly apparent and there is no trade indicated. In my view it is wise to avoid trading on these particular days based on charts alone. There are some situations where Candlestick charting can offer earlier warnings of impending price movement. Although whilst you are starting out and only have a basic level of understanding, you should wait for the market to show its hand. Here s an example of a longer term sideways chart, showing daily price movements with no clear indication of direction definitely one we avoid for a directional trade! Diagram 8. Range Sizes It is important to realise that for us to embark on a successful trading career, our trading strategy must be based on sustainable trading patterns. We are stacking the odds in our favour, and by sticking to our trading plan we are more likely to have long term success. I have lost count of the amount of times I have seen people try to chase the market after the horse has bolted. By this I mean something extraordinary happens to a particular stock and the thing takes off like a rocket - one way or the other.

9 Human nature dictates that we have to make the big hit, or the home run, in order to be successful. The challenge is that most of us are not equipped to enter such trades until after the event, when it s too late. So it is important to compare range sizes with that of the normal ranges of a particular stock. By normal I am referring to the good old, everyday, nothing too special, run of the mill ranges. By sticking to this basic type of trading and not searching for the big hit we increase our chances of achieving a long and fruitful trading career. More often than not a really large range will be followed by a period of consolidation where all the buyers and sellers will catch their breath, or even a rapid reversal. Likewise, an unusually small range indicates that neither the buyers nor the sellers are willing to forecast the direction of future price movement and therefore the stock could sit for days, weeks or even months at similar levels. You will see with the following examples what can happen after Large or Small ranges. It is always good trading practice to stick with stocks which tend to follow a reasonably predictable pattern, bearing in mind that we are still looking for stocks which can head Up or Down at regular intervals. Our goal is to be like Goldilocks, not too big, not too small - just normal, everyday ranges which can continue without pushing the stock to its limits. Diagram 8.

10 When a stock is going through abnormal conditions it is advisable to stay away from it until it returns back to normal trading. Diagram 9. As a final summary, when trading we are always looking for certain indications of possible entry points for a profitable trade. When using OHLC or CandleStick Charting, there is only one type of setup that indicates a possible entry. That setup doesn t guarantee an entry, but gives us the first step towards one. Our full Trading Plan must be satisfied before entering a new trade, but if we get this setup it s a good start. Once again, the ONLY setup we are looking for as an initial indication of a possible entry signal is either a Bullish Up or Bearish Down day. Here s a final summary of the two:

11 Diagram 10. As always, DO NOT make a trade based on these indicators alone. Theymust be combined with other entry signals. You can learn them all from a professional trader LIVE in the Planet Wealth Trading Room. Check it out: The Planet Wealth Trading Room Planet Wealth Pty Ltd is as an authorised representative of Falconer Bellomo & Co Ltd, ABN , holder of Australian Financial Services Licence No Falconer Bellomo & Co Ltd has authorised Planet Wealth to provide general financial product advice only. Planet Wealth has prepared this report for multiple distribution and without consideration to the investment objectives, financial situation or particular needs of any individual investor. Accordingly, any strategies discussed are not a recommendation that a particular course of action is suitable for any particular person and the information contained in this report is not suitable to be acted on as investment advice. Readers must assess whether or not the advice is appropriate to their objectives before making an investment decision on the basis of this report, and/or seek independent financial advice. This information is simply a statement of fact reflecting the way some or all of Planet Wealth itself, its shareholders and/or directors invest their money. It is done with the intention of sharing our investment strategies with other investors. All research is based on information obtained from sources believed to be reliable but in stating so Planet Wealth does not make any representation or warranty that it is accurate, complete or up to date. Planet Wealth accepts no obligation to correct or update the information or opinions within this report. Any persons relying on the above information do so at their own risk. Except to the extent that liability under any law cannot be excluded, Planet Wealth disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report. Planet Wealth is either the owner or licensed user of the copyright in the material in this report. You may not reproduce, adapt, link, frame, broadcast, distribute or in any way transmit the material on this site without the written consent of Planet Wealth, other than to the extent necessary to view the material or as permitted by law.