Understanding Stocks

138 UNDERSTANDING STOCKS
is pushed well outside the upper or lower band, this means that there is
strong buying or selling activity. Many times, a stock will ride the upper
or lower band for minutes or hours and then cross through. Often, if the
price indicator begins in one band, it will cross to the other band. This
tells you that in the next few minutes, or perhaps hours, the stock price
will reverse direction.
The good news is that in the hand of an expert, technical indicators
like Bollinger bands are extremely useful. The bad news is that the indicators
change so quickly that they are useful primarily to short-term
traders. As always, you should experiment and practice before risking
real money on technical indicators or oscillators.
Conclusion
One of the problems with technical analysis is that it is extremely difficult
to read the signals correctly. If all it took to be successful in the
market were sophisticated oscillators and indicators, then most people
would use only technical analysis. Although most investors should have
a basic understanding of how to read charts and how to use technical
indicators like moving averages, this probably won’t help for long-term
investments. After all, technical analysis is most useful for short-term
decisions.
Although charting stocks can be fun and profitable, you must also
be careful to keep it simple. Many traders find that the more indicators
they use on a chart, the more confused they get. It is what one trader
friend of mine calls “analysis paralysis.” You spend so much time
studying charts that you don’t make trades. Keep it simple—the less
complicated the information on your chart, the better.
Speculating on Commodities and
Futures Contracts*
The futures exchanges were created to provide a market for pork
bellies, hogs, cattle, corn, and hundreds of other commodities. A
futures contract is simply an agreement that requires the holder