Mar 17, 2010 | Uncategorized
In this hour long session Steve Hill of AIQ Systems will cover the importance of using a systematic approach to testing a trading strategy. Too many back tested trading systems look fantastic on paper but fail to take into account real-life situations. Steve will highlight the step by step methodology required to effectively evaluate a trading strategy.
Register at https://admin.na5.acrobat.com/_a787702240/tradingtest/event/event_info.html
Mar 9, 2010 | Uncategorized
In bull markets everyone suddenly becomes an expert when their investments appreciate. What a marvelous turn of events. It is however that small segment of traders who have traded both sides of the divide using an informed trading procedure that will appreciate the irony of having the Midas touch.
The kind of protégés the bull market produces are deluded into believing in their rapidly acquired expertise, while engaging in the rampant growth investing demanded by Efficient Markets Theory. They are deprived of any opportunity to undertake any fundamental analysis to speak of, and a rarely called upon to exercise any discipline. Their clearly profitable trading process will most likely avoid review.
Security of property and resources is fundamental to Maslow’s Hierarchy of Needs, and in the pursuit of self interest, a human being will rarely find anything remotely attractive about a loss. Still, the inability to appreciate something ought not to be determinant of its existence, and a small loss will most definitely endure to be preferred over a large one.
Ultimately, no one participant is bigger than the market however, some individuals such as Warren Buffet standout with alarmingly consistent success. In response to how he became so wealthy A.J. Rockefeller merely replied ‘I guess I took my profits too soon’. The premise that traders such as these are simply lucky is ludicrous.
Integral to a trader’s systemic process is self realization. Unless traders can identify Maslow’s Hierarchy at work in themselves, they will be at continual risk of the inherent emotion that the Market feeds upon. For this reason, a non-reflective person will provide an easy target in the routine short covering rally, or the institutional sell-off that triggers all but the Governor’s stop loss order. Greed will cause such a person to watch a profitable position dissolve and crystallize into a loss; a traumatizing experience. Similarly, when looking into the abyss of capital loss, rather than finding character, such a person finds the fortitude to demand their preferred exit price. In the face of a disastrous inflation figure or even a war, this is the kind of stuff that nightmares are made off.
When a trader knows themselves, and caters for their idiosyncratic limitations within a considered trading process, they will find that taking responsibility for that process and the decisions therein, actually sets one free – free to trade again with undivided attention.
When taking a loss, take it all at once, it only hurts for a little while.
Mar 9, 2010 | Uncategorized
In bull markets everyone suddenly becomes an expert when their investments appreciate. What a marvelous turn of events. It is however that small segment of traders who have traded both sides of the divide using an informed trading procedure that will appreciate the irony of having the Midas touch.
The kind of protégés the bull market produces are deluded into believing in their rapidly acquired expertise, while engaging in the rampant growth investing demanded by Efficient Markets Theory. They are deprived of any opportunity to undertake any fundamental analysis to speak of, and a rarely called upon to exercise any discipline. Their clearly profitable trading process will most likely avoid review.
Security of property and resources is fundamental to Maslow’s Hierarchy of Needs, and in the pursuit of self interest, a human being will rarely find anything remotely attractive about a loss. Still, the inability to appreciate something ought not to be determinant of its existence, and a small loss will most definitely endure to be preferred over a large one.
Ultimately, no one participant is bigger than the market however, some individuals such as Warren Buffet standout with alarmingly consistent success. In response to how he became so wealthy A.J. Rockefeller merely replied ‘I guess I took my profits too soon’. The premise that traders such as these are simply lucky is ludicrous.
Integral to a trader’s systemic process is self realization. Unless traders can identify Maslow’s Hierarchy at work in themselves, they will be at continual risk of the inherent emotion that the Market feeds upon. For this reason, a non-reflective person will provide an easy target in the routine short covering rally, or the institutional sell-off that triggers all but the Governor’s stop loss order. Greed will cause such a person to watch a profitable position dissolve and crystallize into a loss; a traumatizing experience. Similarly, when looking into the abyss of capital loss, rather than finding character, such a person finds the fortitude to demand their preferred exit price. In the face of a disastrous inflation figure or even a war, this is the kind of stuff that nightmares are made off.
When a trader knows themselves, and caters for their idiosyncratic limitations within a considered trading process, they will find that taking responsibility for that process and the decisions therein, actually sets one free – free to trade again with undivided attention.
When taking a loss, take it all at once, it only hurts for a little while.
Mar 8, 2010 | Uncategorized
During the market move last week we saw nice moves in many of our setups from last weekend’s Letter. PCLN moved up sixteen dollars, CMG was up five dollars, NEWP moved up 4.5%, OIIM up 4.8%, PIR up 6.7%, CPO up 3.7%, JLL up 3.8%, CMI up 5% and LZB up 13%. We also saw new moves in the setups from the mid week Letter including AF, EQR, TCO, MYL, BEBE, and CVG.
Now that the market has reached the horizontal resistance area from the January highs the trading plan is fairly straight foreword. The normal actions for the market when reaching horizontal resistance are to either break above resistance, base for a bit just under resistance, or retrace. The latter two scenarios occur more often that just breaking through resistance on the first try; but experienced traders have a plan for either outcome, and just trade the plan.
If the market sets up a tight base just under horizontal resistance I will stand aside while the market rests, and then trade in the direction of the break out of the base when it comes. If the market breaks above horizontal resistance, I will add new long trading positions. On a small volume break above horizontal resistance I will pick up a few ‘feeler positions’. The price pattern tells me which way to trade, and the volume pattern tells me how aggressive to be. Light volume indicates light interest in a move so I trade lightly. If the market breaks above horizontal resistance on strong volume I will take more long positions. If instead of breaking above resistance, the market pulls back, I will close most remaining long positions. If the pullback comes on clearly above average volume I will pick up a couple of short positions. A light volume pullback is best left alone until it finds support and bounces.
There are no risk free trades. I want to manage risk by looking at each setup and asking, ‘what is the lowest risk way to enter this trade?’ I then want to compare that risk to what my other choices are. I am not focused on one stock, I am looking to manage units of risk by looking at all available trades, the various entry techniques, and the potential risk to reward that each trade yields. I then take the best of what is available, within the constraints of the trading plan. I do not focus on watching for triggers to within the penny. I am looking at all the potential trades and then picking the ones that are best. All trading involves risk, there are no sure bets.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “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. 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. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
Terms of Use & Disclaimer:
This newsletter is a publication for the education of short term stock traders. The newsletter is an educational and information service only, and not intended to offer investment advice. The information provided herein is not to be construed as an offer or recommendation to buy or sell stocks of any kind. The newsletter selections are not to be a recommendation to buy or sell any stock, but to aid the investor in making an informed decision based on technical analysis. Readers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment or trade. Trading stocks involves risk and you may lose part or all of your investment. Do not trade with money you cannot afford to lose. All readers should consult their registered investment advisor concerning the risks inherent in the stock market prior to investing in or trading any securities.
Mar 4, 2010 | Uncategorized
The market broke above the tight basing pattern, noted in the last Letter, during Monday’s session. The move came on above average, and increasing, volume. On Tuesday the market continued moving up, once again on increasing volume. During Wednesday’s session the market was down fractionally on declining volume.
The trading plan was to sit tight until the market broke out of the tight basing area, and then trade in the direction of the break. This resulted in looking for a few long positions on Monday and Tuesday, and there were plenty to choose from. A number of the setups from the last Letter triggered and made strong and profitable moves in just a few days. PCLN moved up sixteen dollars, CMG was up five dollars, NEWP moves up 4.55, OIIM up 48$, PIR up 6.7%, CPO up 3.7%, JLL up 3.&%, CMI up 5% and LZB up 13%.
Since I was only looking to add a few long positions I prioritized the opportunities by looking at the risk in each trade, as measured by the distance between my entry point and the placement of the initial stop loss. I also look at the potential reward, as measured by the distance between my potential entry point and the next resistance area. Trading is about managing risk, so when there are multiple opportunities I pick the trades that present the best potential reward with the least risk.
When there are a large number of triggers from the setups shown in the Letter I often get an email from a trader that either has, or wants to, take them all. They get excited when things start moving, and want to jump into the market. Trading is not about feelings or hopes or desires, it is about analyzing the market, developing a plan, and then trading well tested systems. The market analysis called for taking just a few new long positions on a break above the tight basing area noted in the last Letter. The reason for just wanting to ‘test the waters’ with a few longs is that the market is close to resistance from the upper Bollinger Band, and also horizontal resistance from the recent highs. The market tends to base or retrace as it approaches resistance, so I did not want to be loaded up on longs in case the market follows the normal action upon reaching resistance. If the market breaks above the recent highs on strong volume, then it will have proven itself and I will be using more trading positions. Any move worth trading does not require you to be ‘all in’ on the first day or two. The idea is to take a couple of ‘feeler positions’ and then add to them if the move is confirmed. Trading fewer positions and using small position sizes gives me some profit potential if the market continues up, and it protects previous profits in case any rally stalls around previous highs.
If the market continues up I will continue trading a few longs, and will take profits on them if the market becomes extended above the upper Bollinger Band, or approaches the recent highs in the 2335 area. Since the market is close to resistance this is not a time to be loading up on longs, just focusing on a few positions that present favorable risk/reward ratio’s as noted above. If the market had more ‘room to run’ before reaching resistance I would be using more trading positions.
The markets price pattern tells us whether to focus on longs, shorts, or cash; and the volume pattern tells us how aggressive to be. The continuation of the bounce off the 02/05 hammer pattern indicates that trading longs is interesting, but the risks of a retracement increase as the market approaches resistance. The close proximity of the market to resistance from the upper Bollinger Band and the recent highs in the 2025 area indicates that risks have increased, and we should only be looking at trading a few longs.
If the market hits the upper band, or gets close to the recent highs, I will be taking profits on long positions; which is the normal practice in a trading range market environment. If the market pulls back below the 2265 area, I will take profits on long positions that are not moving up on increasing volume, or showing accumulation patterns.
Short positions would be interesting if the market approaches the recent highs on declining volume, and then pulls back on strong volume. Aggressive traders might consider a few short positions on a strong volume pullback below the 2260 area, and add a couple more more if a strong volume pullback continued below the 2225 area. I will avoid new short positions on a light volume pullback.
There are no risk free trades. I want to manage risk by looking at each setup and asking, ‘what is the lowest risk way to enter this trade?’ I then want to compare that risk to what my other choices are. I am not focused on one stock, I am looking to manage units of risk by looking at all available trades, the various entry techniques, and the potential risk to reward that each trade yields. I then take the best of what is available, within the constraints of the trading plan. I do not focus on watching for triggers to within the penny. I am looking at all the potential trades and then picking the ones that are best. All trading involves risk, there are no sure bets.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “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. 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. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
Terms of Use & Disclaimer:
This newsletter is a publication for the education of short term stock traders. The newsletter is an educational and information service only, and not intended to offer investment advice. The information provided herein is not to be construed as an offer or recommendation to buy or sell stocks of any kind. The newsletter selections are not to be a recommendation to buy or sell any stock, but to aid the investor in making an informed decision based on technical analysis. Readers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment or trade. Trading stocks involves risk and you may lose part or all of your investment. Do not trade with money you cannot afford to lose. All readers should consult their registered investment advisor concerning the risks inherent in the stock market prior to investing in or trading any securities.
Mar 2, 2010 | Uncategorized
When I am trading I know exactly how I am going to exit the position before I ever enter it. Entering a position without a clear exit strategy usually ends up trading on emotions or hunches. Trading on emotions or hunches often leads to losses. Mary your spouse for life, but just date stocks. Always have an exit strategy. Always.
The current market conditions play a key role in determining exit strategies. Stocks behave differently in trading range markets than they do in trending markets. Since a key part of trading is adapting to the market (it will not adapt to you, you must adapt to it) traders exit strategies should change with the market conditions.
The market is the summation of a large number of individual stocks. In trading range markets most stocks tend to ‘pop and drop’ rather than show strong trends. When the market is in a trading range then almost by definition most stocks cannot be trending. If they were then the market, which is the sum of all those trending stocks, would also have to be trending. When the market is in a trading range it tells you that the typical stock is not going to run far before it retraces. Traders use this market information to realize that in trading range markets they need to focus on shorter holding times and quick profits. IN trading ranges traders are trying to piece together a trend in their account from the brief pops in several different stocks rather than trying to catch the rare single stock that is trending. Traders pick up the initial move on a stock that triggers, close it then pick up another pop and keep trying to repeat the process. Looking for stocks that run far in a trading range is likely to just be frustrating, adapt to what the market is showing you. If you use the same approach in all market conditions you are likely to get a lot of practice exercising stops.
When the market is trending stocks tend to run longer because they have the wind behind their backs. The market is the sum of a large number of stocks. To make a trend out of a large number of stocks many of them need to be running for more than just a few days. Once again, it is the observation of the market conditions that tell traders how to trade. Traders do not trade a new shiny system just be cause they have it. The trade a system because testing indicates it is appropriate for the current market conditions and then they use the market conditions to determine the most appropriate exit strategy.
Eventually almost all resistance areas are broken, but if the stock usually retraces at resistance I want to go with the odds, and be positioned to profit if the stock does the normal thing and retraces. If it does retrace I have my profits and can use them in a new trade. If the stock breaks above resistance I still have my profits and can still take another trade. From a risk management standpoint I am better off to have taken the profits. I do not worry about what a stock does after I am out, I am off to the next trade. I am always trying to position myself if the market and my positions do the normal thing. When something unusual happens I may loose a few bucks, but by definition unusual things do not happen often. One of the keys to trading is learning what usually happens in a given situation and then being positioned to profit if it does.
In a trending market I will allow the position more room to run and will actively manage the exit. This approach comes from testing a number of trading systems in different market conditions and seeing how holding times effect the results. When the market is trending I will still look to close positions when either the market or my position approaches resistance. If the position is not close to resistance then I watch the volume pattern. If it is going up on generally large volume and down on generally small volume I will give it some room. I look for trend lines to use to manage the exit. I look for signs of distribution in the position to indicate that it may be best to exit and move on to another position. The basic rule is that if there is not a clear reason to hold the exit and move into another position that does have a clear position to be holding.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “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. 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. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
Feb 27, 2010 | Uncategorized
Please note correction in this scan
3. The 14-day RSI Wilder today has to be less than 30.
This was previously stated as greater than 30. Our apologies for the error.
Feb 25, 2010 | Uncategorized
I was looking through some old tradings scans the other day, and came across a really basic scan that still works well today. Here’s the nuts and bolts.
1. Look for stocks with todays volume that is twice the 21 days ESA of volume.
2. Close today has to be greater than the mid point between the high and low today.
3. The 14-day RSI Wilder today has to be less than 30.
4. Go long at next days open.
I tested this on Sp500 stocks with a simple holding period of 2 days, no other capital protection or exit strategy. Very interesting results. The test below was from 10/07/2007 – 03/05/2009. I wanted to cover a protracted pullback in the market (SP500 index was -39.17% for the period). The table below shows encouraging results.
The winners outnumbered the losers by 138 to 79 with an average profit/loss for all trades of 2.49%. Key points to note. With a holding period of 2 days, some positions take a big loss, some have hard drawdown (even in 2 days). You’d need a strong stomach to ride these positions. Scanning the positions in this strategy, there was one period where 25 new positions would have been established in one trading day. While not insurmountable, existing cash in an account would have been spread thinly if your capital was less than $50,000.
I ran this startegy for the last 24 months with similar results below. Again same key points on drawdown and new positions applied to this test.
In the next article, I’ll run this through the Portfolio Simulator with ‘real’ money for a complete real life test.
Feb 25, 2010 | Uncategorized
Trading is based on being positioned to profit if the stock, or the market, does the usual thing in a given situation. Since stocks often bounce from support, candidates with a larger distance to support from the entry are more attractive because they have more ‘room to run.
I apply the concepts of support, resistance, and accumulation to the market itself to determine if trading is appropriate. If I am trading shorts and the market is approaching support I become cautious. The reason is that the market often bounces or bases near support and thus shorts would be less attractive. When the market is clearly trending and well away from support I will use larger position sizes in my trades than when the market is approaching a support level. I cannot influence what the market does, but I can react to it and reduce my risks by taking smaller position sizes when the market is approaching a support level.
The upper Bollinger Band will often act as resistance to market moves, particularly in trading range markets. This tendency to retrace from the upper band during trading range conditions is something that can be used as part of a traders money management strategy. In strongly trending markets the market may ‘ride the bands’, but it is quite common for the market to base or retrace when hitting the upper band during a trading range environment. Since I always want to be positioned to profit when the market does the normal, or usual, thing I take profits on positions when they approach the upper band during a trading range environment.
There are a variety of interesting pullback systems for traders. Pullbacks are one of the bread and butter techniques of trading because they occur frequently and can be found in most market conditions. Most traders should have more than one pullback system in their trading tool box. There are interesting pullback systems based on the percentage of retracement, pullbacks to key moving averages, pullbacks for a specific number of days, and pullbacks with specific volume patterns.
Volume analysis is an important part of trading. Volume measures the interest in a move. It isn’t necessarily the absolute level of the volume that is key, it is often the volume pattern or the recent changes in volume that tell the story. My youngest daughter played soccer through high school and college, we attended a lot of interesting soccer games. If I was talking to someone at the game and all of a sudden the crowd noise increased significantly, we both know to quickly look on the field because something important was happening. For stocks, volume is like the crowd noise. The level of noise, or volume, changes depending on the importance of what is going on in the game.
Strong stocks tend to move up to lots of cheering, or volume; and they tend to retrace or pullback on light volume. The light volume pullback is not necessarily a significant change in behavior, which is noted by the quiet crowd or low volume. As stocks go through a rhythmic cycle up upward movement followed by brief retracements and then a continuation of the upward movement, we can use volume clues to determine of the retracements are a normal part of the stocks rhythm, or the beginning of a change in trend.
.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “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. 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. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
…
Feb 18, 2010 | Uncategorized
Bearing some resemblance to mutual funds, the ETF is actually in a class of its own. Rather than purchasing an individual stock, an ETF is a manner of automatic diversification, without the capital demands of individual stock purchase, yet all the while allowing the benefits of direct stock appreciation.
Mutual funds will have a daily valuation that will apply to all transactions on that day, as the unit price is altered to reflect the funds asset value; the advantage to the short term trader is minimized. ETF’s on the other hand are quite able to be traded intra-day, as the price will dynamically respond to the ordinary markets forces of demand and supply, and are able to trade at a discount or a premium to the underlying instrument they are hinged upon. This of course will take into account numerous fundamental variables, not the least of which is the cash and carry premium that is inherent in synthetics to reflect the absence of physically carrying the underlying instrument or commodity. Importantly, short selling is possible with ETF’s, and so trading on margin also adds to the inherent leverage that this type of synthetic instrument allows.
ETFs are available on numerous underlying instruments including indices, industry sectors, regional sectors, commodities, and in fact a plethora of niche markets that marvelously, even extend to fixed interest income streams. In a bid to maximize every possible return, this type of flexibility allows investors to tailor their portfolios to unprecedented accuracy. With ETF’s, any composition is quickly able to be implemented and adjusted when the need arises.
Often a mutual fund will charge fees up to 3% p.a. while an ETF will rarely exceed 1%. Still given a liquid ETF market exists, the bid ask spread will contribute to an investors expense and will detract from any return accruing. This is the one aspect of ETF trading that may dissuade smaller investors from redirecting investments from similar leveraged instruments such as mutual funds. Larger institutional traders on the other hand can cover their exposures easily in large volumes, which are far easier to execute than in individual markets.
There also exists a certain tax advantage concomitant to ETF’s. Capital gain will be realized and tax will accrue upon the conversion of equity through an exit trade. Additionally, some ETF’s upon equity will allow an exchange for physical stock, and similarly enabling the deferral of tax. Mutual funds however, must purchase and redeem shares of stocks as they are created within the fund, and then distribute the capital gain each quarter. This declaration is subject to an immediate tax liability, a nuance that an ETF does not lend itself to.
English