Page 56 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

2. Non-bounded. Non-bounded indicators are less common, but still help form buy
and sell signals as well as show strength or weakness in trends. However, they
accomplish this in many ways without the use of a set range.

Indicators generate buy and sell signals through crossovers or divergence. Crossovers
are the most popular technique whereby the price moves through a moving average or
when two moving averages crossover. Divergence occurs when
the direction of a price trend and the direction of an indicator are moving in opposite
directions, which tends to suggest that the direction of the price trend is weakening.

Indicators can be extremely helpful in identifying momentum, trends, volatility, and other
aspects of a security. But, it’s important to note that indicators work best when
combined with other forms of technical analysis to maximize the odds of success.

Trends
Trends are an important piece of the trading puzzle for a technician. The trend is the
overriding directional movement of a security's price. Whether we’re talking about
investing, economic or fashion trends, the assumption is the same — a trend is
expected to continue for a certain length of time. Technical analysis is no different and
many of its methods are derived from this premise. Bear in mind, there’s no guarantee
that the trend will continue as planned.

Technical analysis focuses more on decoding the market’s psychology around a stock
more than the company’s actual merits as a long-term investment.

The trend is the main direction of a stock’s price. There are three main trends: up, down
and sideways. If a bullish chart is identified, also known as an uptrend, a trader
expecting the trend to continue would look for opportunities to profit from the continued
movement upward. Simplistically speaking, a trader could buy the stock — known as
going long. If the trader instead finds a bearish pattern to work with, in this case a
downtrend, then the trader would determine an area to enter a short sale — or go short.

A quick explanation of short selling

Selling short is the process of borrowing shares via your broker and selling them in the
open market, with the intention of purchasing the shares back for less cost in the future.
To be clear, you did not own the shares before selling them, which is why you had to
borrow them via your broker. (The shares must be returned to your broker at some point
in the future.) Unfortunately, your intentions will not always be fulfilled and losses can
result in a few different ways.

First, you may have to pay more to buy back the stock than you received when initially
shorting it; this can result in unlimited losses. Not only that, if you are short the stock
when the company declares a dividend, and the ex-dividend date occurs while your
position is open, you will owe the dividend to the owner of your short stock. Finally, this

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