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Before
I go any further with the technical issues within your portfolio,
I want to say that I hope you've pulled your teens into this
portfolio building and learning process. While they might
not understand some of the technical terms if they're between
ages 12 to 15, they can enjoy the process. In other words,
those moving average lines will make more sense to them when
they view the visuals and when you explain how those tools
work.
Older
teens can probably take on most of this process with some
explicit written instructions. But - as you and I know - financial
topics can bore them to tears; so, your presence can help
to make learning more fun. It's important for teens to learn
how portfolio tools work for several reasons:
- A
portfolio is just a portfolio unless a person understands
how the tools within that portfolio can help the investor
make decisions. Then, the portfolio becomes the investor's
best friend.
- As
you teach your teens how to use the tools contained within
an online portfolio, you might be pleasantly surprised at
your child's insights. I've used Cora's perspectives to
add value to my portfolio in the past.
- Remind
yourself (not necessarily your child) that your portfolio
will belong to your teen one day. Do you want to hand over
your lifelong work and savings to an unseasoned investor?
I didn't think so. But, don't use this reminder as a threat
to hold that child captive to portfolio lessons. You might
be surprised in upcoming years how much that teen learned
through osmosis. Teens always want to know what you're doing,
even though they act nonchalant or even disgusted about
your activities. And they pick up your habits whether they
want to or not. Just think about how many times your behaviors
remind you of your parents?
With that
said, I want to return briefly to the Moving Average (MA)
with a brief explanation about the EMA (Exponential Moving
Average). Then I'll begin to move on to other technical terms
to explain how you can use them to make financial decisions.
You'll need to head to your Yahoo! portfolio to view your
stock picks through Yahoo!'s beta charts so that you can play
along with these tools as you learn.
I put
you through some tough work when you began to learn about
Simple Moving Averages (SMA), because - as you later learned
- you really didn't need to do the math since the Yahoo! beta
charts calculates that math for you. But that initial work,
I hope, helped you to blow off any previous misunderstanding
behind the SMA. I didn't introduce the EMA until now, as you
really don't need to work with the EMA formula:
EMA(current)
= ( (Price(current) - EMA(prev) ) x Multiplier) + EMA(prev)
Instead,
allow your portfolio to configure the above average for you.
Go to your portfolio, click on a ticker symbol, click on that
symbol's chart and use the beta version. Now click on the
"Technical" tab and choose the EMA option. A window will pop
up that allows you to add additional MAs to the second box
under the "50" day MA. Add '200' and click "draw."
If you
followed along last week, the 50- and 200-day SMA might still
be on your chart. The EMA additions will help you see the
differences between the SMA and the EMA calculations. If your
chart looks too confusing, simply click on the "Technical"
tab again and click on SMA. When the box opens, click on the
'remove' option and the SMA lines will disappear.
If you
choose to keep the SMA and EMA lines together, notice that
the EMA lines and SMA 50-day lines follow closely together
and that the 200-day lines follow suit as well - which is
why these lines can be confusing. The only difference is that
the EMA lines may show fewer lags behind the price line than
the SMA, since more weight is given to the latest data in
EMA.
This is
why the SMA is fine to use when you don't day trade, because
the only reason that you'll use this tool is to help you determine
entrance and exit strategies as I mentioned in the previous
article. I won't talk you out of using the EMA, as it boils
down to personal preference for the long-term investor as
to whether you use the SMA or the EMA.
But, I
also mentioned that moving averages need support from other
indicators if you want to make a truly wise financial decision.
In other words, when you use the SMA or EMA alone, it's like
listening to one person when you seek advice. Although you
may trust that person with your life, it's helpful to seek
other advice as well - especially when that decision regards
your money.
One tool
that you can use to support your interpretation of any MA
are Bollinger Bands, a tool created by John Bollinger in the
early 1980s. At that time, traders began to realize that volatility
was dynamic over a period of time, and that a tool was needed
to define highs and lows so that opportunities to trade could
present themselves easily.
Since
I'm running out of space here, I'll point you to BollingerBands,
a site created by Bollinger Capital Management. Yes, John
Bollinger is alive and well and, since investors the world
over use the tool that he created, it stands to reason that
he would maintain a Web site.
The BollingerBand
site contains tutorials that you might find interesting, but
if you don't understand them don't worry. Just join me for
the next article and I'll make the mysterious appear mundane.
Until
Then,
Linda Goin
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