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What is a price-weighted index?

When creating an index, it must be decided what criteria will affect the value of the index, and in the case of a price-weighted index, the only consideration is the price of shares. A price-weighted index is created by adding up the individual price per share of the companies included in the index and dividing by the number of companies. Essentially what you've done is arrived at the average price per share of the companies included in the index. Continue reading...

Why Does the Price of a Stock Change?

Stock prices change based on the law of supply and demand. Ultimately, as with the price of any good or service, the outstanding supply and consumer demand will define its value in the marketplace. Indeed, the efficient market hypothesis states that the price of a LINK will already reflect all known information about it and what investors are willing to pay for it at the time, based on that information. Continue reading...

What is the Price to Earnings Ratio (P/E Ratio)?

The Price to Earnings ratio is a company’s stock price relative to its net income per share. A low P/E indicates that a stock is trading at a low premium to earnings, which may indicate that the market thinks low relative growth rates are ahead for the company. A company with a high P/E means investors are willing to pay a premium for growth, perhaps anticipating high future growth rates for the company. The P/E ratio is calculated by dividing the market value per share of a company by its earnings per share. Continue reading...

What Does Having a Long Position Mean?

A long position in a security means owning shares and having a positive investment balance in a stock, bond, commodity, etc. This is done by simply buying and owning the investment. An investor with a long position in a stock will benefit financially when the price of the stock rises. What is a Short Position? What is Short Selling? Continue reading...

What Does Market Capitalization Mean?

Market Capitalization refers to the total ‘market-size’ of a company, calculated by the number of shares outstanding multiplied by the stock price. Investors should take care not to consider a company’s market capitalization as an accurate reflection of the company’s actual size by assets. Companies with very large market capitalizations can still operate with net losses, Twitter being an example. Continue reading...

What is the Profit Rate for the Head-and-Shoulders Bottom (Bullish) Pattern?

The bullish head and shoulders is the opposite image of a bearish head and shoulders. It has all the same parts—two shoulders, a neckline, and the head. Only instead of the shoulders and head being formed at high points for the stock, they are formed at low points. The investor psychology is the opposite of the bearish pattern. The stock is falling and hits a temporary low to form the left shoulder before a bounce occurs and forms the left side of the neck. The upward momentum is temporary and the next down leg takes the stock lower than the left shoulder and forms the head. Continue reading...

What is a market-on-open order?

Traders can enter time-specific trade orders in the form of opening or closing orders, which are only to be executed as close to the opening or closing price as possible. Market-on-open orders are looking to buy or sell immediately after the market opens, at the opening price. Market-on-open orders are instructions for a broker or floor trader (even though we don’t see those much anymore these days) to buy or sell shares at opening price of the stock being traded. Continue reading...

What is the Elliott Wave Theory?

Elliot Wave Theory incorporates the natural cycles of nature and waves with market movements in an attempt to explain and predict the historical and future prices of stocks. Penned by Ralph Elliott in the early 20th century, the Elliott Wave Theory attempts to organize the seemingly random behavior of the market into cycles. The theory visualizes a series of waves cycles, each representing a different length of time or magnitude of a trend or cycle. Continue reading...

How to use the Broadening Bottom (Bullish) Pattern

A broadening bottom can be characterized as a bullish reversal pattern. It consists of two divergent lines that form a triangle. The movements between the two triangle sides increase as the pattern continues. Each side must be touched at least twice to be validated. The Broadening Bottom pattern is formed when the price of a security progressively makes higher highs (2, 4) and lower lows (1, 3, 5) following two widening trend lines. The price is expected to move up or down past the pattern depending on which line is broken first. What distinguishes a Broadening Bottom from a Broadening Top is that the price of the security is declining prior to entering the pattern formation. Continue reading...

What is the Rectangle Bottom (Bullish) Pattern?

The Rectangle Bottom pattern forms when the price of a security is stuck in a range bound motion. Two horizontal lines (1, 3, 5) and (2, 4) form the pattern as the security bounces up and down between support and resistance levels. Depending on who gives up first ­ buyers or sellers ­ the price can breakout in either direction. This pattern is commonly associated with directionless markets. Usually, the pattern performs better when there is a strong downtrend leading into the formation. Continue reading...

What is the Rising Flag (Bullish) Pattern?

The Rising Flag (or Bullish Flag) pattern looks like a flag with a mast. It forms when rising prices experience a consolidation period, and the price moves within a narrow range defined by the parallel lines through points (2,­ 4) and (3,­ 5). After the consolidation, the previous trend resumes. This type of formation happens when the price of a security is expected to move in a rising trend line, but some volatility along the way creates a consolidation period. Continue reading...

What is the Falling Flag (Bearish) Pattern?

The Falling Flag (or Bearish Flag) pattern looks like a flag with the mast turned upside down (the mast points up). The pattern forms when falling prices experience a consolidation period, and the price moves within a narrow range defined by the parallel lines through points 2-4 and 3-5. After the consolidation, the previous trend resumes. This type of formation happens when anticipation of a downtrend is high, and when a security’s price consolidates during a broader decline. It may indicate growing investor concern of an impending downtrend. Continue reading...

What is the Rising Pennant (Bullish) Pattern?

The Rising Pennant (or Bullish Pennant) pattern looks like a pennant with a mast. It forms when rising prices experience a consolidation period, and the price moves within a narrow range defined by the converging lines through points (2, ­4) and (3, ­5). After the consolidation, the previous trend resumes. This type of formation happens when anticipation of an uptrend is high, and when the price of a security consolidates within a range. It indicates growing investor interest in a potentially explosive uptrend. Continue reading...

How to use the Broadening Top (Bullish) Pattern in trading

Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the upward breakout price/entry point. To identify an exit, compute the target price by adding the pattern height (H on the chart) to the breakout price. The pattern height is the difference between the pattern’s highest high and its lowest low. Continue reading...

How to use the Broadening Wedge Ascending (Bullish) Pattern in trading

Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the upward breakout price/entry point. To identify an exit, compute the target price for this formation by adding the height of the pattern to the upward breakout level. Pattern height is the difference between the breakout price (the highest high within the pattern) and the highest low. Continue reading...

What is the Falling Pennant (Bearish) Pattern?

The Falling Pennant (or Bearish Pennant) pattern looks like a pennant turned upside down (the mast points up). It forms when falling prices experience a consolidation period, and the price moves within a narrow range defined by the converging lines through points (2, ­4) and (3, ­5). After the consolidation, the previous trend resumes. This type of formation happens when anticipation of downtrend is high, and when the price of a security consolidates during a declining trend. It may indicate growing investor concern of an impending downtrend. Continue reading...

What is the Broadening Bottom (Bearish) Pattern?

The Broadening Bottom pattern forms when a security price makes higher highs (2, 4) and lower lows (1, 3, 5) following two widening trend lines. The price is expected to move up or down past the pattern depending on which line is broken first. What distinguishes a Broadening Bottom from a Broadening Top is that the price of the security is declining prior to entering the pattern formation. This type of formation happens when volatility is high or increasing, and when a security's price is moving with high volatility but or no direction. It potentially indicates growing investor nervousness and a little indecisiveness. Continue reading...

What is the Broadening Top (Bearish) Pattern?

The Broadening Top pattern forms when a security price makes higher highs (1, 3, 5) and lower lows (2, 4) following two widening trend lines. The price is expected to move up or down past the pattern depending on which line is broken first. What distinguishes a Broadening Top from a Broadening Bottom is that the price of the security is rising prior to entering the pattern formation. This type of formation happens when volatility is high or increasing, and when a security’s price is moving with high volatility but little or no direction. It indicates growing investor nervousness and indecisiveness. Continue reading...

How to use the Cup-and-Handle (Bullish) Pattern in trading

Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the upward breakout price/entry point. To identify an exit, compute the target price for the Cup­-and-­Handle pattern by adding the pattern’s height (the difference between the highest high and the bottom of the cup) to the price at the right cup lip. The confirmation move is when the security moves past the breakout price above the right cup lip. Continue reading...

What is the Broadening Wedge Descending (Bearish) Pattern?

The Broadening Wedge Descending pattern forms when a security price makes lower lows (1, 3, 5) and lower highs (2, 4), forming two downward sloping lines that expand over time (kind of like a pointed down megaphone shape). This pattern may form when large investors spread out their selling over a period of time, and the Breakout can occur in either direction. When the initial selling occurs, other market participants react to falling price and jump on the bandwagon to participate. Then the value investors begin to sell, believing the price has not fallen enough, which spurs the original large investor to resume selling again. Continue reading...