IDENTIFYING CUP FORMATIONS EARLY

Apr 4, 2011 | Uncategorized

I have prepared the AIQ code based on Giorgos Siligardos’ article in the April issue of Stocks & Commodities magazine, “Identifying Cup Formations Early.” (The code can be viewed at www.Traders.com.) I devised a trading system using the Russell 1000 list of stocks to test the semi-cup formation as an entry technique. The trading rules for the system are as follows:

Entering a long position:

* Using a daily time frame, enter a long position when a semi-cup formation is first detected.
* Enter the next bar at the open using a market order.

Exiting a long position:

* Use a trailing 25% exit, or
* Protect 100% of a 15% or greater profit.
* Exit the next bar at the open using a market order.

Short positions were not tested.

In Figure 9, I show the results of simulated trading on the Russell 1000 stocks, using the following parameters:

1. Maximum positions per day = 3
2. Maximum total positions allowed = 10
3. Choose weakest candidates using 32-bar Aiq relative strength
4. Size each position at 10% of total account equity recomputed every day.

Figure 9: AIQ SYSTEMS, SAMPLE RESULTS FOR semi-cup formation SYSTEM. Here, a sample trading system using 76 actively traded NASDAQ stocks tests the semi-cup formation as an entry technique. For the test period 1/3/2000 to 1/6/2011, the average annual return was 18.8%, with a maximum drawdown of 68.8% on 11/20/2008.

For the test period 1/3/2000 to 1/6/2011, the average annual return was 18.8% with a maximum drawdown of 68.8% on 11/20/2008. Although the return is reasonably good, the maximum drawdown is larger than most could tolerate. With this in mind, I added a very simple market timing technique that added the following rules:

1. Longs can only be entered when the S&P 500 is trading above its 200-day simple moving average for two or more consecutive days.

2. Exit all positions when the S&P 500 falls below its 200-day simple moving average for two or more consecutive days.

For the test period 1/3/2000 to 1/6/2011, the average annual return was 10.1% with a maximum drawdown of 25.6% on 7/17/09 (see Figure 10). The drawdown was significantly reduced by the addition of the simple market timing technique. Although the average annual return was also reduced, the Sharpe ratio increased from 0.47 to 0.75, indicating a less risky approach.

Figure 10: AIQ SYSTEMS, revised results with market timing added. For the refined semi-cup system, over the test period 1/3/2000 to 1/6/2011, the average annual return was 10.1% with a maximum drawdown of 25.6% on 7/17/09.

The AIQ code is available in an EDS file at  http://aiqsystems.com/april2011cupandhandle.EDS
save the file to your /wintes32/EDS strategies folder

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

TIme Tested Trading TIps… March 19

Mar 19, 2011 | Uncategorized

Steve Palmquist.

Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns.

I got a panicked email from a trader worried that the run ‘was over’ and he would not be able to trade long positions for ‘weeks’. First, the market moves in waves. It is normal for it to run up, then pull back then run up again. There is no way to know if a pullback will last a couple weeks, or a couple months. Secondly, traders can generate profits when the market is going up, or down. With the right set of tools it should not matter to a trader which way the market is going. Third, panic is incompatible with trading success. I just look at the markets price and volume pattern, form a trading plan that switches between different tools for different market conditions, and then implement the plan. Panic comes from ‘needing’ the market to go up, and not having a set of trading tools for different market conditions. The market does not care what we need or want, it will do what it wants. This is why we have different tools for different market conditions and switch between them based on what the market is doing. If the market direction is really, really important; it is usually a signal that the trader is using the ‘hold and hope’ approach rather than adapting to the market.

In order to trade confidently in different market conditions traders need to understand exactly how and when their trading patterns work. Testing different tools, and understanding how each trading tool performs in different market conditions, allows traders to make effective use of each tool in the trading toolbox. If traders have not tested their tools in different market conditions they are taking unknown risks. Back testing does not guarantee future results. There are no guarantees in trading, and no way to know if any particular trade will be profitable or not. Backtesting helps remove some of the emotion, hunches, and unknowns in trading. It can show you how a particular system has performed in different market conditions in the past and what types of filters may be most interesting in prioritizing trading opportunities. Examples of six complete trading systems and how they perform in different market conditions is covered in ‘How to Take Money from the Markets’. The knowledge of what to expect from a trading tool, and seeing how different trading tools perform in different markets allows traders to adapt to the market rather than just guessing what to do.

Steve is the author of two trading books: “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not.

“How to Take Money From the Markets, Creating Profitable Trading Strategies” in which he uses the results of extensive backtesting techniques to smash trading myths and get to the truth of what has worked and what has not. The book provides six fully analyzed and tested trading systems and shows how they have performed in different market conditions.

Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques.

The Commodity Channel Index (CCI)

Mar 16, 2011 | Uncategorized

Some indicators work well in trending markets while others work in consolidating markets. The Commodity Channel Index (CCI) works best in strong trending markets. Unlike other trend following indicators, the CCI is designed to limit whipsaws during choppy markets.

Created by Donald Lambert, the CCI is a price momentum indicator that measures the degree of variance of a security’s price from its statistical mean. Although originally developed for trading commodities, the CCI can be used for equities or indexes as well.

AIQ has a default time period of 90-days in the calculation of the CCI. Time periods that are too short can lead to whipsaws while time periods that are too long result in missed signals. The 90-day time period seems to be a good compromise.

In general, the CCI looks at prices relative to the average price. If the CCI is high, then prices for that security are higher relative to its average price. Conversely, if the CCI of a security is low, then prices are lower than the average price. 

In consolidating or sideways markets, the CCI tends to fall within the +/-100 range (the two horizontal lines on an AIQ chart). Whenever the CCI moves above or below this range, then it suggests a strong trend is in place. Therefore, when the CCI rises above +100 it suggests a strong
uptrend is underway and that long positions can be established. Long positions are closed once the CCI falls below +100. Conversely, when the CCI falls below –100 it means a downtrend is in place and short positions can be established. Short positions can be covered once the CCI rises above –100.

The chart above shows the S&P 500 along with its CCI indicator. Notice how this indicator was on a sell signal during the September sell-off. When the S&P 500 drifted sideways from November through April, the CCI was within the +100/-100 range so no signals were fired. This helped to avoid whipsaws. There was a brief sell signal when the CCI fell below –100 in late April and then another sell in late May.

Like other indicators, it is best to use the CCI in conjunction with other technical tools. Modifications to the simple buy/sell rules can be made as well. For instance, if the CCI has fallen to –170 and you have large profits on short positions, then it may be best to lock in some of the
profits rather than waiting for the indicator to rise above –100. Money management rules are important. Still, it is easy to see the value of the Commodity Channel Index indicator.

An Excerpt From the Timely Trades Letter…

Mar 5, 2011 | Uncategorized

Time Tested Trading Tips, March 2…

Mar 3, 2011 | Uncategorized

Parabolic SAR – powerful position exiting tool

Mar 2, 2011 | Uncategorized

The “SAR” in this indicator stands for “stop and reverse. ” That means that with this indicator you are always in the market. You simply reverse the position when the stop level is reached. When you are on a buy mode and the stop is reached, then you switch to a sell (or short) mode. If you are on a sell mode and the indicator turns bullish, then you switch to a buy mode.

To see the Parabolic SAR indicator in the TradingExpert system, open a stock chart and click the ParaSAR indicator in the Control Panel. Since this indicator overlays the stock price chart, it is found in the upper half of the Control Panel. The Parabolic SAR indicator is shown in the chart below. The indicator gets its name from the shape assumed by the trailing stops that tend to curve like a parabola. Dots below prices indicate a long position while dots above the prices indicate a short position. The dots represent the stop and reverse points.

As the prices move higher, the rising dots below the price action tend to start out slow and then accelerate with the trend. The slow start in the indicator allows a trend to take place. As the stock moves higher, there is an acceleration factor and the indicator moves faster until it catches up to price action. The same is true for stocks that are falling. This is a trend following indicator so it obviously works best on volatile stocks that are in trends. Even on trending stocks, there will be whipsaws.

For short-term swing traders who deal with volatile stocks such as those found on the Nasdaq, the Parabolic SAR indicator may help improve entry and exit points.

Determining Trend Strength And Turning Points The Spearman Indicator For Technical Analysis

Feb 9, 2011 | Uncategorized

by Dan Valcu, CFTe

This indicator is a very old statistical tool that even to this day helps determine trend strength and turning points. Here’s how to apply it to your trading.

Technical analysis can be considered both a science and an art; patterns and chart reading represent the artistic component, while technical indicators help us analytically understand trend strength, buy/sell pressure, and divergences. There are perhaps thousands of technical indicators, but few seem to deliver real analytical power and differentiation in this increasingly crowded landscape, especially since many can be perceived simply as intellectual exercises that produce little bottom-line impact.

To narrow down this set of tools, statistics offer a great source of established knowledge for those who want to focus on more tangible and useful indicators. For instance, the tried-and-tested Z-score has become a classic in both statistics and technical analysis.

In this article we will discuss an established concept in statistics originally proposed in 1904, with potential for use in technical analysis: the Spearman’s rank correlation coefficient, also known as the Spearman indicator.  Article extract courtesy Stocks & Commodities magazine

The AIQ code for the Qstick and the Psychological Indicators as mentioned in Dan Valcu’s article, “The Spearman Indicator for Technical Analysis”available from TradersEdgeSystems courtesy of Rich Denning

Symmetrical triangle – use Point & Figure charts real-time

Jan 31, 2011 | Uncategorized

Every trading day, the price of a stock is determined by a struggle between supply and demand. In technical analysis, charting a security is critical because it shows the interaction of supply and demand. The demand fluctuates at any given moment from a variety of factors, some rational and some irrational.

As a stock enters into a period of fluctuation, one of several traditional chart patterns may emerge. The pattern we’ll focus on in this article is the Symmetrical Triangle.

The Symmetrical Triangle pattern has two sloping trendlines that converge to each other. That is, a stock fluctuates up and down but each move is smaller than its predecessor. The descending tops in the price movement are defined by a downward sloping boundary line (resistance line) and the low points in the fluctuation can be defined by an upward sloping line (support line). The top and bottom boundaries need not be of equal length.

With the Symmetrical Triangle pattern, it’s seldom that a clue is given on the chart indicating which direction will eventually be broken. This is an attractive pattern for day-traders. That’s because good tradable moves come after a period of reduced volatility and because the pattern lends itself to tight stops. I’ll explain with an example. The chart below shows a one-minute chart of the S&P 500 Notice that after rallying in the morning, the S&P 500 stalls and begins to move sideways. In the 11:00 hour the index enters the Symmetrical Triangle pattern. Each rally is less than the previous rally and each decline is less than the previous decline.

As the pattern develops, volatility falls. The eventual break came to the upside. After the break, investors had several minutes to act on the signal before the S&P 500 jumped higher. Once the pattern is broken, a tight stop can be placed using trendlines. In this case, the break was to the upside so the stop is placed just below the support trendline (lower trendline). If the break occurred to the downside, the stop would be placed just above the resistance trendline.

Realtime Point & Figure charts can help identify this pattern. Unlike bar charts where the vertical coordinate is based on price and the horizontal coordinate is based on time, the Point and Figure chart is only concerned with price. Since time is not a factor, small fluctuations in price are often not charted. Without these disturbances, it is easier to spot emerging patterns.
 
The figure below shows the S&;P 500’s Point & Figure chart using the same date as the first chart. The Symmetrical Triangle is seen at the very end of the pattern.

Looking at the last five columns, each rally (the Xs in the chart) is less than or equal to the previous rally and each decline (the Os in the chart) is greater than or equal to the previous decline. In this chart I elected to have a small box size (1.5 S&P 500 points per box) to make the chart more responsive and appropriate for active trading. It is also the reason behind the small Xs and Os. By increasing the box size, the Xs and Os will appear larger on the monitor.
 
The figure below shows Bed Bath & Beyond (BBBY) using a $0.20 box size. The larger Xs and Os make it easy to spot the Symmetrical Triangle pattern.

In the center of the pattern, BBBY enters a period where each rally is less than the previous rally and each sell-off is less than the previous sell-off. The bearish signal came once BBBY fell below the pattern and the column of Os fell below the previous column of Os. The Symmetrical Triangle pattern is an attractive pattern for active traders because tradeable moves often come after periods of reduced volatility and because the pattern allows for time stops. You can identify the pattern using traditional bar charts or with the real-time Point & Figure charts. Most people find it is easier to identify the pattern using the Point & Figure technique.

If you missed Adrienne Toghraie’s webinar today – DON’T WORRY

Jan 14, 2011 | Uncategorized

My very special guest, Adrienne Toghraie joined us today for an excellent presentation on ‘Modeling Success Qualities of Top Traders’

Adrienne, founder of TradingonTarget and author of 12 books, is an expert on coaching traders and investors to their next level of success by helping them overcome their self-imposed limitations.

This Webinar-workshop was about learning the qualities you need to acquire for running a successful trading business in order to become a master trader. Here are the categories Adrienne discussed:

• Entrepreneur Qualities

• Trader Qualities

• Emotional Stability Qualities

• People Skill Qualities

• Mastery Qualities

Many of you have busy schedules and some missed out on the event, however we have recorded the entire event and it’s available for you to view at

http://prowebinars.na5.acrobat.com/p36555229/
We look forward to seeing you at our next scheduled event on Januuary 26, 2011. I will be presenting ‘How to test a trading strategy using a systematic approach’.

Register now at http://tradingontarget.omnovia.com/registration/pid=51731291740818

Combining RSI with RSI by Peter Konner

Jan 3, 2011 | Uncategorized

Stocks & Commodities Magazine Traders Tips – January 2011 “Combining RSI with RSI” by Peter Konner

You would like to be long in a market that’s trending up, but what about when the trend turns down? Do you exit and just watch from the sidelines, or do you try to trade on the corrections in the downtrend? Here’s a simple combination where you can trade long-term uptrends and short-term corrections, all in one chart.

One of my previous strategies didn’t allow me to enter a trade and stay there in a long and strong uptrend, since the strategy was designed to use the relative strength index (Rsi) on a daily basis. The total return from my Rsi strategy was fair, but there were many trades with little return, especially in volatile markets.

I decided to build a new strategy with these requirements……read more at http://www.traders.com/Documentation/FEEDbk_Docs/2011/01/Konner.html

Rich Denning has coded this indicator for AIQ EDS, you can pick up the code from Rich’s website at http://www.tradersedgesystems.com/aiq/traderstips/traders-tips-january-2011.htm