Steve Palmquist.

Author of ‘The Timely Trades Letter’.

‘How to Take Money from the Markets’,

and Money-Making Candlestick Patterns.

Analyzing trading patterns is vitally important to trading. Trading without understanding the statistics of a trading pattern is just taking unknown risks, and makes little sense. The trading patterns tested and analyzed in my first two books provide the beginnings of a trading toolbox, and the knowledge of when to use each tool. Without a clear understanding of how and when different trading patterns work, it’s easy to get caught up in fear, greed, group think, etc. However these emotional and non-data driven approaches often lead to losses. Traders need to be first and foremost focused on what the market is doing, and then selecting the most appropriate trading patterns, or remaining in cash, to address the current market conditions. Without previous testing and analysis of trading tools, and how they perform in differrent market conditions, traders are just randomly using tools that may or may not be appropriate for the current market.

It is also very important to have a clear exit strategy before entering any trade. If I don’t know where I want to exit a trade then I don’t take the trade in 1^st place. In trading range markets most stocks tend to pop and drop, if they didn’t the market (which is the summation the large number of stocks ) would be trending. So a trading range environment tells us that stocks are not going to run very far, by definition. I use this information to drive my exit strategy which is more short term in a trading range market then it is a trending market as outlined below. In a trending market, individual stocks tend to pop and then move for a while. The market, the summation of a large number of stocks, is moving or trending because a lot of individual stocks are moving or trending. Once again observing the market conditions tells us how individual stocks are likely to behave, and that tells us how to manage our exit strategies.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

In the figure blow, I show a chart of Green Mountain Coffee Inc. with the two PMAC indicators and the MACD indicators. The cyan line is the PMACzero, which is the price tomorrow that would have to be attained for the MACD to equal zero. This indicator has wide swings because sometimes a big move in price is needed to bring the MACD back to zero. The purple line shows the PMACeq indicator, which shows tomorrow’s price that would make MACD the same as it was today. It stays close to the current price. The lower panel shows the MACD (white) and the MACD signal (yellow) indicators.

 !REVERSING MACD
!Author: Johnny Dough, TASC January 2012
!Coded by: Richard Denning 11/9/2011
!www.TradersEdgeSystems.com

!ABBREVIATIONS:
C is [close].
H is [high].
L is [low].
O is [open].

!INPUTS:
mfast is 12.
mslow is 26.
msig is 9.

!UDFs:
emaFast is expavg(C,mfast).
emaSlow is expavg(C,mslow).
MACD is emaFast – emaSlow.
sigMACD is expavg(MACD,msig).
len_X is mfast.
len_Y is mslow.
lvl is sigMACD.
alphaX is 2 / (1 + len_X).
alphaY is 2 / (1 + len_Y).

!PLOT THE FOLLOWING AS SINGLE LINE INDICATOR ON PRICE CHART:
PMACDeq is (expavg(C,len_X)*alphaX
   -expavg(C,len_Y)*alphaY)/(alphaX-alphaY).

one_alphaX is 1 – alphaX.
one_alphaY is 1 – alphaY.
PMACDlvl is (lvl+expavg(C,len_Y)*one_alphaY
   – expavg(C,len_X)*one_alphaX)/(alphaX-alphaY).

!PLOT THE FOLLOWING AS SINGLE LINE INDICATOR ON UPPER CHART:
PMACDzero is (0+expavg(C,len_Y)*one_alphaY
   – expavg(C,len_X)*one_alphaX)/(alphaX-alphaY).

AIQ Education Holiday Sale 20% off your entire order on selected products through December 14, 2011 Use coupon code holiday2011 when you checkout http://aiqsystems.com/holiday2011sale.html Products include: When Dale spoke to the attendees, everyone’s full undivided attention was set on him. He revealed his system that utilizes the power of the MACD (Moving Average Convergence Divergence) indicator, which is the only indicator he uses and swears by because of its astounding results with less risk. As he cuts right to the chase, he laid out the charts and let the simple rules demonstrate how it works and what it is capable of doing for the traders in the room……more

Steve Palmquist.

Author of ‘The Timely Trades Letter’.

‘How to Take Money from the Markets’, and

Money-Making Candlestick Patterns.

I went to the Traders Expo in Las Vegas last week. While walking the floor of the show and talking to traders, I was amazed at the number of people who were looking for a new trading technique because the one they were using was ‘not producing results’ during the last few weeks. There were a lot of slick presentations on trading, but few contained any real data indicating how the system actually performed, or how the results varied by market condition. Trading a tool based on just a few examples is a good way to drain an account. Most of these people only had one trading tool, either focused on stocks or ETFs, and did not trade both. They had no idea how their trading tool performed in different market conditions. They had no idea of how to adapt to the market conditions instead of complaining about them.

Trading the same tool constantly in all market conditions is a good way to drain an account. Moving blindly from one tool to another is also a good way to drain an account. Since stock and ETF trades often work in different timeframes; I have found that trading both is an advantage to me, and lets me participate in both short term and intermediate term movements. Understanding the current market conditions and having that information drive the selection of trading tools, number of positions traded, and position sizing, is one of the keys to success. It takes some time and effort to learn this. The ‘traders’ that are looking for a simple indicator or magic tool that will lead them to riches are asking for trouble.

There are no magic tools. If there were tools that required no effort to learn, and always worked, then everyone would be rich. Trading, like other professions, requires some time, effort, and expense, in order to develop the skills. None of the people complaining about the recent market environment had used that information to adjust their trading styles. In my case, I have been standing aside for a couple weeks as the market has shown unusual volatility in a tight trading range. Both of those conditions are caution signs, and together indicate it is best to sit tight and focus on protecting previous profits until the market picks a direction; which it will when it is ready. None of the people complaining about the market environment and the results of their trading were sitting tight (as the recent conditions called for). They felt that since they were traders they should be trading. When I suggested they should be focused on generating profits, not trades, and the recent environment had the odds stacked against them they were very quiet except for a couple that argued they had to be trading in order to have the opportunity to make profits. I quoted a Kenny Rogers song and told them that successful traders need to ‘know when to hold them and know when to fold them’. Sometimes the best, and most profitable, strategy is to stand aside for a week or so and let the market sort itself out. Traders need to have studied their trading tools and market conditions to know which tool is most likely to be appropriate for the current market conditions.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

The code has been modified from the author’s formulas, which used weighted averaging. That type of averaging is not offered in AIQ as a built-in function and had to be coded long style; the result was very inefficient code that ran too slowly to be of any use. So I modified the formulas by substituting exponential averaging for the weighted averaging. The code now runs fast enough to be useful, and the indicators can be plotted without hanging up the processor.

I believe that the modified code can produce similar results. Although the values are not the same as the author’s values when using the same parameters, the resulting shapes of the indicators are similar.

On my website, I have a “PCratio.dta” data file that can be downloaded and saved into the “C:wintes32tdata” folder. Once the file is saved, go to the Data Manager module and run the utility “Rebuild Master Ticker List” to complete the data file installation process.

Using the system from Vervoort’s article called the SVE_Stoch_IFT, I ran a test on the NASDAQ 100 list of stocks using the Portfolio Manager module. The following capitalization settings were used:

In Figure 6, I show the equity curve for long-only trading on the NASDAQ 100 list of stocks. The return averaged 19% per year with a maximum drawdown of 50% on March 9, 2009.

The short side, when tested separately from the longs, lost 91% of the initial capital by January 7, 2004, and then ceased to trade due to limited capital. The results of the short-side test are not shown.

I did not attempt to filter the trades using the put/call ratio indicators, since the author did not supply specific code for this purpose.

The code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm.

—Richard Denning
info@TradersEdgeSystems.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it.
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By Jay Kaeppel