Financial Markets For The Rest Of Us An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds |
Page 248 resistance around $60, it could prompt the investors to sell the stock at $60 or so with some certainty that the stock will perhaps pull back from that level. Recognizing support and resistance levels is a tricky job. Many professionals use complex analysis to seek out these levels, frequently using computer models to help them along. The average investor would have a tough time figuring them out, although an intimate knowledge of a stock's price and volume activity coupled with consistent tracking could yield some useful data in that regards. Momentum - This is a continuous measurement of a stock's price change over a certain period of time and plotted to form a chart using zero as a reference. The period could be arbitrary, but the longer the period, the less sensitive it is to the stock's price changes. The chart can then be used to find a momentum trend for the stock which then an investor can use to time his trades. As an example, to construct a 10-day momentum chart for a stock one would subtract the stock's closing price of 10 days ago from today's closing price and mark this value with a point on a chart. Continuing with this exercise for a number of days (or weeks or months) and connecting the points, a momentum graph is formed which can then be examined to find momentum patterns. Once a pattern is found, the trader might recognize the initial signs of a positive momentum pattern and buy the stock, then watch it as it follows the upward momentum pattern, and finally sell it at the conclusion of the upward momentum. The same concept could be used for downward momentum, only the investor would short a stock at the initial signs of this pattern. A similar analysis known as Rate of Change (ROC) and used by some traders as momentum indicator works by continuously dividing the latest closing price of the stock by its closing price of 10 (or however many) days ago and generating a chart from this data and using one as the reference. If the graphs falls below the reference line, this indicates … |
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