Assuming you read my last article entitled “How to get started investing in the stock market”, I will also assume that you took my advice and have opened an account with TDAmeritrade or one of the other online brokerage firms. If so, you’ll find that they offer you “charting” along with your new account.
Charting allows you to follow the movement of your favorite stock up and down from day to day - and minute by minute if you’re so inclined. I’m sure you’ve seen simple “bar” charts somewhere before - so now let me introduce you to a “candle chart”. Instead of tracking stocks up and down in a straight line, a candle chart allows to you see a pattern of movement instantly.
Think of a candle. At the top is a wick, and at the bottom is the candle. You’ve heard of “burning a candle at both ends” so I’d like you to picture a candle with a long wick at the top, and another sticking straight out of the bottom. On a day when your stock rises, you will know that the bottom end of the candle is the price at which it opened, and the top of the candle is the price at which it closed. If the wick, or thin line at the bottom sticks out below the candle itself, that is an indication of how low the stock fell before closing at the top of the candle. If the wick also extends above the top of the candle, it is an indication of how high the stock rose before closing at the top of the candle.
If this decription of a candle chart sounds confusing, go ahead and open the account you’ve started, and pick any stock. Go to the advanced “charting” function and set it up as a “candle” chart. Now take a look at the chart. You’ll see the candles I’ve just described. In fact, you’ll see candles of all sizes and description. Some have two long wicks, some no wicks at all. Some with only a top wick or a bottom wick - and some with just candle bodies. Nevertheless, if you go back and read the last paragraph while looking at the chart, you will see what I mean.
Once you’ve chosen a candle chart for your favorite stock, you’ll need to set an additional charting function called “Bollinger Bands”. This may be under a tab called “Upper Indicators”. Activate the Bollinger Bands, and you will see some new lines on the chart you’ve created. There are two of them - one running above the candle chart, and one running below the candle chart.
Notice that wherever the candles are on any particular day, they always run somewhere between the upper and lower Bollinger Band. Often, when they fall to the point where they are touching the lower band, they will seem to bounce off of it and begin to rise. The opposite happens with the upper band.
In other words, once you get acquainted with the movement of your favorite stock between the Bollinger Bands, you will also have a good idea whether the stock will begin to rise or fall in the next few days. This is all you need to get started buying your first stock. In my next article, entitled “How to build an advanced chart!”, I’ll cover some additional charting functions you can add - one at a time - until you’re familiar with how they interact to give you “Buy!” or “Sell!” signals.
It’s time to pick your first stock, but don’t buy until it’s clear to you that it is at a low point. Watch your chart throughout the day until you begin to see the various patterns it presents. Remember, you will only “Buy low!” - so be patient. Once you get started, let me know how you do.
I am neither a CPA, investment advisor, nor an attorney - just an investor like you. There are risks, as well as rewards, so take this learning experience seriously. Never invest money you need for personal expenses!
