Foundations: The Tools of the Trade

The Foundations of Stocks and Options class does an excellent job of bridging the gap between the uninformed novice to the informed student. As you travel across the bridge, you gain knowledge of the stock market, you gain an understanding of the tools which are available for you to use, and you gain a firm foundation upon which you can stand. The main pillars of study are presented clearly, so you leave the class with insight into such topics as candlesticks, chart patterns, moving averages and indicators, line drawing, and your trading plan. Let’s take a quick look at each one below.

Candlesticks

A candlestick is a graphical representation of the sentiment which is currently running through the marketplace. They highlight the four most important price points of a given period on a candlestick chart: the stock’s opening price, the stock’s highest price, the stock’s lowest price, and its closing price. Technical traders use them to scan for patterns they know will most likely produce repeatable results and are best seen as indicators of market sentiment. We have covered them in detail in the FOSO Level 2 Class 5 blog: The Story Behind a Candlestick and the Stock Market Made Simple blog Anatomy of a Candlestick.

C​hart Patterns

Chart patterns are a grouping of individual candlesticks that tell a repeatable story, and just like a single candlestick, traders use them when they are trading to scan for repeatable results. Usually, candlestick patterns will identify market moves such as trend reversals, consolidation patterns, or a continuation of the current price trend. We have covered them in detail in our pass Foundations blog, The Story Behind the Pattern, which you can read here.

​​Indicators and Moving Averages

Indicators are a minor part of the trading puzzle; however, they offer vital supporting data when used in conjunction with your candlestick chart can confirm your charting analysis. You can read our blog, which introduces you to indicators here, and you can read our coverage of one of the most useful indicators, the exponential moving average, here. All in all, they make an excellent supportive data tool to use when trading as they can alert us to market factors we may have failed to see.

Line Drawing

After studying the candlesticks, chart patterns, and various indicators, it is time to move into an active phase by taking your analysis and applying it to line drawing. The purpose of line drawing is to give us a framework in which we can plan our trades, and we introduced you to this concept in our Foundations blog Support and Resistance a Framework for Trading, which you can read here. By drawing lines on our charts, we can determine the possible zones where stock prices will turn or pivot. Line drawing helps us determine the stock’s possible trading direction, and it helps define our price targets. In short, drawing lines on our charts maps out our trading plan.

Candlesticks

As for a trading plan, they can be as simple as determining your entry point of the trade in question, determining your target or exit point, and setting a stop just in case the trade turns against you. As a reminder, it is best to stick tight to your trading plan. Thus if the stock in question never hits your entry point, then the trade should never execute. We strongly recommend avoiding trades that fail to meet your trading plan requirements and encourage you to trade on facts, not emotions.

In closing, thank you so much for reading, and as always, if you wish to learn more regarding this topic, please consider signing up for our Foundations of Stocks and Options class, which you can do here, and we look forward to seeing you next Thursday in our final Foundations of Stocks and Options blog which will cover my thoughts on my trading journey as I completed all twenty-four classes of the Foundations series!