TRADING TIPS AND CHEAT SHEET FOR BEGINNERS Disclaimer:

Trading and investing involves risk. You alone are responsible for any losses that may occur. It is
highly suggested that you learn the material, study and paper trade first. DO NOT live trade
until you feel that you are ready and have an understanding of the market. I am not responsible
for the actions that YOU take. Trade responsibly and NEVER risk what you cannot afford to
lose!!!!

Chart Indicators

RSI (Relative Strength Index) – This is a momentum indicator that compares the
magnitude of gains and losses over a period of time. Although the RSI can be used
for conformation in various chart patterns, the primary function is to determine if
a stock is Overbought or Oversold.

The RSI ranges from 0-100. If the RSI is at or above 70, it is considered to be
Overbought, and shows that a bearish reversal may be coming. Holders of a stock
that is overbought will begin to sell off their stock and take profit. Shorts will
begin to move into position.

If the RSI is at or below 30, it is considered to be oversold and may indicate that a
bullish reversal is coming. Shorts will have to cover their positions and buyers will
begin getting into position for a buy.
Although the RSI is a great tool for determining oversold and overbought, do not
rely on RSI alone. A stock could remain on either side for a long period of time.

See Chart On Next Page For RSI Example:

On the first blue line you see a textbook oversold pattern. The RSI hits 30 (30 being
oversold), and begins the bullish reversal.

The Second blue line you see, the RSI falls below 30, begins to pull back, but then
hits oversold again. On the second bounce, the bulls take over and the price moves
up. This is a perfect example on why you don’t rely just the RSI.

On the red line you see the RSI falling towards oversold but does not quite reach it.
However, other signals indicate a bullish reversal and the price goes up.

You will learn these other bullish signals later on.

MACD (Moving Average Convergence Divergence) – I am going to keep this short
and simple. There is a bit of technical formula that goes into this, but the most
important thing is understanding the movement. It is a great tool, if used along
with the RSI, can give you a good idea of how the market is moving. It is a
momentum indicator that shows movement between two Exponential Moving
Averages (EMA). It is calculated by subtracting the 26 day EMA from the 12 day
EMA. Don’t get freaked out with all the equations. This is just so when you see the
chart, you understand what you are looking at.

There are 4 parts to the MACD:

The MACD line, explained above. (12 period EMA minus 26 day EMA). This line
also helps indicate who has control of the market.

The MACD Signal – 9 period EMA of the MACD (again don’t worry about the math,
this is just for you to identify the lines.)

MACD Histogram – MACD minus Signal Line.

Zero Line – Just as it sounds, a line on the chart that represents 0.
Image taken from Wikipedia
Notice the blue (MACD) crossing the red ling (Signal Line) to the upside. With that
you see the Histogram crossing the Zero line to the upside. This is an indicator
that the bears lost control and the bullish reversal is on. If you line this up with an
oversold indicator from the RSI, now you have a pretty good buy signal.

The same is true for the opposite. Notice the areas where the MACD is beginning
to turn down, crossing the Signal Line. On the Histogram you see it turning down
and falling below the Zero Line. This is showing the bullish run is at an end and the
bears have now taken over.

Compare both of those signals with the candlestick chart and you can see how the
MACD is moving with the chart.

Lets see an example of this below:

In this chart the MACD line is black and the Signal Line is red:

On the first blue line you see the Chart is at its peak. Up until then you see the
MACD line in an up trend and above the Signal Line. The Histogram is trending
above the Zero line. Then you can clearly see the reversal signals. The MACD
begins to turn down starting to cross the Signal Line. The Histogram begins to fall
below the Zero Line. Now if you compare that with the RSI, you see that it is
Overbought. This signals confirm each other and the bears take control.

Now look at the other blue lines I drew on the chart and begin to compare the
indicators with the chart. You should now start to see the patterns and reversal
points.

Start going through charts on your own and put this to practice. Paper trade on
this and write down your results.

Chart and Candlestick Patterns

Support levels – Area of the chart where the stock bottoms before moving back

up.

Resistance levels – Area of the chart where stock peaks before turning back
down.

It is important to identify your support and resistance levels so you can begin to
watch for entry and exit points. Always confirm your support and resistance with
other signals such as the RSI and MACD.

If one of the levels is broken, the other level then takes over. If support is broken,
it now becomes resistance. If resistance is broken, it now becomes support. Wait
for conformation before you determine if the levels are broken.
When to enter a trade - So you have identified a stock that is showing a bullish
reversal. You read your RSI and MACD indicators and the signal is strong. It is
important to wait for conformation on the signal. We are not trying to capture the
full run, only part of the run. Remember, the goal is 5-10% gain on a swing trade.
On a swing you are only holding 1-4 days. You keep your stop losses at a 3% loss.
Not every trade you make will be a success. If you stick to this basic rule, you will
prevent yourself from hitting those huge losses.

How to confirm your entry – Looking on a 1 day chart, you see a bullish candle
after a previous bearish trend. You are waiting for the next days candle to open
above the previous days close. That is your conformation to buy. This is known as
the “Candle Over Candle.”

If you enter and do have to take a stop loss, don’t sweat it. You can always re-
enter if the stock does continue to trend up. OR, rinse, repeat and move onto the
next stock. If you stick to the 3% loss and 5-10% gain rule, you only need to be
correct 60% of the time to profit. Our goal is 79% success.
Candlestick Patterns

REMEMBER

Do not rely on one indicator. The Patterns you see below are a great starting
point, just like the RSI and MACD. When you see a signal, you want to compare it
to the other indicators to see if you in fact have a strong buy signal. Confirm your
entry and make your decisions.

Basic Doji Candlestick

A Doji represents a struggle between the bulls and bears. The market opens and
closes at or near the same point. The Doji looks like a cross, inverted cross, plus
sign, or a “T”. The shadows can vary in length. This could indicate both a
continuation signal or a reversal signal.

Below will be different examples of Doji’s and how to trade them.

Abandoned Baby:

This is a reversal pattern that is a rare find, but if found can be a profitable signal.
This occurs at the end of a price run. The doji gaps the candle of the previous day
and next day, leaving obvoius distance between the gap.

How to trade this:

Wait for the next days candle to open above the Doji, with a bullish candle. Make
sure there is a clear gap on both sides.

Harami Cross:

This is a reversal point that can occur in both a bullish and bearish reversal. The
entire Doji sits within the real body of the previous candlestick.
How to Trade This:

Wait for the next candle to show bullish and place your buy above the upper
shadow of the cross, confirming the bullish reversal.

Dragonfly Doji:

This can be a very powerful indicator showing that greater moves are coming.
This usually appears at reversal points and can be both a bearish or bullish
reversal. As great of an indicator that this could be, it can also be tricky. There are
times where the Dragonfly will appear but continue its current trend. Wait for
conformation for the buy.

How to trade this:

Wait for conformation that the reversal is on. Place your buy at or above the
upper shadow of the dragonfly.
Morning Star Doji:

This is one of my favorite set ups. I have made several winning trades off this and
in my opinion is second best to the Abandoned Baby pattern. This is usually a
good indication of a bullish reversal. There will be an obvious down trend,
followed by a Doji. The next day’s candle should close above the candle before
the Doji.

How to Trade This:

There are a couple options for entry on this trade. The safest way and
recommended way is to buy in at the next day candle, following the Morning Star
set up (as you see illustrated above by the blue lines). Option 2 is set up a test
entry, buying in at half of what you would normally buy. Your test entry should be
above the open of the candle before the Doji. This is when you see the set up of
the Morning Star in progress and you want to catch an early run up. If you test
enter and the stock does run up, you can add to your position by filling the other
half of your buy.

Evening Star Doji:

This is the exact same thing as the Morning Star Doji, except it is a bearish
reversal. Take the Morning Star Doji chart, flip it upside down and you got the
Evening Star Doji.
How to Trad This:

Here you are looking to take profit. If you entered earlier in the uptrend, now is
your time to sell. Again, you have a couple options. You can sell all and secure
your profit. The other is, sell half and if the set up fails you can let the other half
continue to ride up. If the set up is successful you sell the other half for your total
profit. The safe and recommended way is to sell and secure your profit.

Gravestone Doji (AKA Reverse Dragonfly)

This usually indicates a bearish reversal or can be used to determine the

continuation of a downtrend. The upper shadow is long in length and the body
opens and closes at or near the same point. If a chart is showing bullish reversal
signals but you see a Gravestone Doji, it is important to wait to make sure the
bears don’t still have control.

How to Trade This:

You WAIT! On the left you see what typically happens with a Gravestone Doji. The
Bulls fight hard and drive the price way up, but in the end the bears conquer and
continue the bearish trend. On the right you see the bulls ultimately come out on
top. Wait for your signals to line up, look for a candle over candle, then get ready
for the buy. If you see the Gravestone Doji after an uptrend, it may be a good
time to take profit and sell.

That ends the basic Doji patterns. Next, I will show you Short Body Candles.

Short Body Candles: Evening Star

This is just like the Evening start set up in the Doji patterns, except is has a short
body. This is the same reversal set up. Refer to the Doji Evening Star on how to
trade it.

Morning Star

Again, this plays just like the Morning Star Doji. The only difference it the Doji v
the Short body. Refer to the Morning Star Doji on how to trade it. Same set up
and play.
Hammer

This is a candle that you will be looking for during a down trend or near the
bottom of the trend. It’s a good indicator that a bullish reversal is coming.

How to Trade This:

Line this up with your signals along with other reversal points. Wait for
conformation and position for your entry. Do this and you could have a strong buy
signal.

Inverted Hammer

This is when happens when the price shoots up after the open and closes
significantly lower then the high. It forms the hammer but inverted. This could be
the sign of a bullish reversal.
How to trade this:

Watch for the Inverted Hammer to be at the bottom of a downtrend. Wait for
conformation on the next candle to open or go above the close of the inverted
hammer. Position for entry.