Thursday, October 27, 2005

Strategy Session: Predicting Strong Closes

While recently reading The Kirk Report I came across Dr. Brett Steenbarger's latest article on TradingMarkets.com, "Here's a way to predict strong closes... ". I dedicated the rest of the day to modeling the strategy described in the article and liked the results enough to share them - but judge for yourself.

Background:
Brett Steenbarger Ph.D., is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). He writes alot about statistical behavior and interesting tendencies in the markets and the perils of not knowing them. More of his bio appears below.

The Strategy:
The article - while worth the read - can be boiled down to the falling observation and conclusion. The observation is based on studying 36 days of stock price behavior in which he notes that

"the daily high occurred during the first or last hour 28 out of 36 times--over 75% of the time."

The conclusion:

"When prices make early highs or lows and cannot move beyond these in early trading, I label those extremes 'candidate daily highs' or 'candidate daily lows'. And when prices make new daily highs or lows in the midday period, I entertain the hypothesis that the ultimate daily highs or lows have not yet been put into place."

Bingo. That's something that can be modeled in Trade-Ideas. Inspired by his idea of the highs and lows made during the session probabilistically may signal more to come, I decided to create a scan that would find such candidates. I added a few requirements to make sure my results were stacked more towards the desired outcome. I started with a strategy called, “Highs Yet to Arrive.”

How It's Modeled:
The basic filters were:
1. stocks must be at least $5
2. daily average volume of at least 400,000/shares/day
3. reasonable maximum spread of 10 pennies

Some additional filters to increase probabilities of a trend were:
4. stocks had to be up 2 days in a row prior to today
5. the minimum current (i.e., relative) volume (as an index) must be at least 1

With these filters defining my universe I selected the two alerts that would tell me my candidate stocks broke out of the early hour trading ranges (and thus maybe headed to a high during the last hour of the session):

The 30 and 60 minute opening range breakouts (http://www.trade-ideas.com/Help.html#ORU30).

Who Could Benefit:
I think intraday traders will benefit the most from this strategy. If a stock alerts to a 60 minute opening range breakout during the session, the strategy suggests entering a position with the intent of leaving it sometime during the last hour of the day. Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do.

Footnotes:
Here is the full bio on Brett Steenbarger Ph.D.:

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.

Here is his review of Trade-Ideas

Tuesday, October 25, 2005

Strategy Session: Next Level Tape Reading

Definition
Tape reading is the technique used by "seasoned" professional traders to get a feel for the market. The idea is simple, as you watch the "ticker tape" you get a sense of what is happening - whether buyers or sellers are in the control at the moment. Tape reading skills can be applied against the entire market, a particular group of stocks or even one stock at a time.

Background
Not too long ago the only way to get a feel for the market was to watch the "ticker tape" in real-time. You can still see examples of ticker tapes on places like CNBC, FOX and Bloomberg TV as well as many financial websites. Training to become a trader often included time spent watching the tape go by in an effort to develop a sense or quick read for the market based solely on what happened with the tape.

Today if you are tape reading from a CNBC ticker it would be the equivalent of surfing the Internet on a Radio Shack (TRS 80) - with a hand crank. To begin with many tickers are delayed at least 20 minutes but even with real-time access to the data, the market is faster these days and participants use evermore sophisticated tools such that reading the tape in a traditional sense can put you at a dissadvantage.

Tape Reading Intelligently
That said the art of tape reading is far from dead, it has evolved. Trade-Ideas puts itself squarely at the forefront of this evolution. We built a preconfigured strategy to help tape readers get a better sense of what is happening - not by looking at ticks "in the weeds" but by being able to look at specific events from a better (i.e., higher) vantage point that provides a quicker, easier and more accurate a sense for the market.

The Strategy
Here is our latest version of "Tape Reading" http://www.trade-ideas.com/GettingStarted.html?name=The+%22Tape%22+Reader+%28see+how+stocks+are+trending+NOW%29

How It's Modeled
The key to this set up is the combination of alerts and filters. Instead of just looking at any random ticks what you are doing with this set up is noticing when real buyers and sellers are taking action. This action is combined with filters for high relative volume to give a tape reader a better sense of:
  • who is in control
  • when to act and
  • what to trade

As usual remember that these set-ups are sketches meant to give you an idea of how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do.

Wednesday, October 19, 2005

Block Traders - A Spur to Action

The Block Trading services like POSIT and Liquidnet seek to minimize the market impact of their clients' (i.e., portfolio managers') large, institutional orders. Successful matches get printed on the tape as they happen but no one sees the activity leading up to the trade on a Level 2 market depth screen. These services only send the transaction to the tape after a buyer and seller are completely matched.

In a recent informal focus group several portfolio managers of funds large and small discussed with us how they use Trade-Ideas. One PM described a typical situation in which she has not yet placed her 'name' to trade on one of the Block Trading services (e.g., POSIT or Liquidnet), sees block trades going off in DELL, for example, and realizes its a good time to put the trade through. Trade-Ideas helps her filter out the noise of the overall market and concentrate on the institutional activity within the market.

How? Trade-Ideas has a specific alert to identify large blocks of stock being traded. The idea is to give Portfolio Managers more information on the likelihood of getting business executed. Here is a link that defines this alert. http://www.trade-ideas.com/Help.html#BP



Trade-Ideas offers the ability to customize an alert window to look at minimum (or maximum) size for block trades (i.e., anything over 500,000 shares as in the figure above) as well as specific U.S. exchanges.

Below is a preconfigured strategy looking at block trades over 500,000 shares for all U.S. exchanges
Block Trades 500K

An alert window like the one above helps these Block Trading services because it's like a reminder to a PM that s/he may want to place their block through as well. Like the dinner bell calling everyone to the table - a spur to action.

Tuesday, October 18, 2005

Strategy Session: Breaking Consolidations - Be There

Since we just announced the addition of 4 new filters (Ed.: see yesterday's blog entry), it is appropriate to create two new sample strategies utilizing them. As usual remember that these set-ups are sketches meant to give you an idea of how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do.

The Strategy: 3Day or More Consolidation + Breakout
This window looks for stocks that are consolidating for a period of at least 3 days and are now breaking out of that range. The idea is to look for basing stocks that are making a nice push upwards.

How Its Modeled:
In this strategy called 3 day + consolidation breakout we look for stocks that have been consolidating for at least 3 days or more with the new filter. Then we set a crossed above daily resistance alert with a 2 for the number of days resistance crossed. The volatility filter is there as a requirement that stock display some good movement on a regular basis - you could substitute the Min Current Volume filter if you wanted. It's simple and it follows our golden rule in modeling strategies: less is more.

Who Could Benefit:
These filters add to the growing list of alerts and filters that can target opportunities for traders with longer time horizons. Swing and longer term traders can do very well with these filters by using them to define the most appropriate trading universe to find the breakout or breakdown patterns they require.

Wait! There's More!
Here is an opposite of the strategy discussed above but with the other new filter added. It uses the position in the consolidation filter to enforce a maximum limit of where the stock can be in the height or percentile of the consolidation range.
4 Day Or More Consolidation + Breakdown

Monday, October 17, 2005

New Long Daily Consolidation Filters Added

New Service Innovation Announcement

Today we added 4 new filters suggested by several user groups. They come in 2 pairs. These new filters are called (sounds of trumpets):

Min and Max Consolidation Filter
Min and Max Position in Consolidation Filter

Quite simply these filters look for a consolidation pattern on a daily stock chart that you design. The first pair of filters asks you to consider the length of the consolidation and the second pair asks you to consider where in its height you want to be.

Min and Max Consolidation filters look at daily candles for the previous 40 trading days and allow you to select minimum and/or maximum sizes of a stock's consolidation pattern (expressed in number of days). Note these filters do not look at today's data.

For example, set the minimum consolidation to 7 and see only strong consolidation patterns of 7 days. Conversely set the maximum consolidation to 3 and see only stocks with little or any 'significant' consolidation. The longest consolidation reportable is 40 days. However these very high numbers mostly report strange and unusual cases. If you are looking at consolidations, consider a maximum of 25 days or lower to see more ordinary patterns.

Min and Max Position in Consolidation filters examine where in the height of the consolidation you want to look for opportunities. They compare the current price to a recent consolidation pattern or one that you have defined in the filters above. Set the Min Position in Consolidation to 70 and see only opportunities that are in the 70th percentile of this consolidation pattern or higher (i.e., the top 30% of the range).

To find consolidations on an intra-day basis, look at the Consolidation, Channel breakout, and Channel breakdown alerts.

Here is the official Help description of the new filters: http://www.trade-ideas.com/Help.html#wsf_MinConDays

Relevant scans: 4 Day Consolidation, 5 Day Consolidation, 6 Day Consolidation, 7 Day Consolidation, Longer Consolidation.

We look forward to your comments!

Sunday, October 16, 2005

Strategy Session: Fading an Up Move

We have all been there on some days. Days where no matter what you try to do, everything seems to go the wrong way. George Costanza the under achieving "Cult Hero" from Seinfeld figured out how to use this power in one of my favorite episodes. We harness that power to create "Fade the Up Move".

The Strategy
The following strategy was suggested to us by one of our more outspoken subscribers who has the handle, "Diamondtrim". This is a strategy that is designed to fade (go in the opposite direction of) a fast up move.

How is it created? Remember set-ups are always a combination of:
  1. alerts, subject to
  2. filters and
  3. exchanges or symbol lists.

How Its Modeled
This strategy follows a useful rule when designing set-ups: less is more. It uses only one alert as the trigger: our "Running Up Intermediate Alert" http://www.trade-ideas.com/Help.html#RUI. This strategy uses several filters to help define the a favorable universe to fade. It uses our volatility filter set at $0.10 (10 cents) http://www.trade-ideas.com/Help.html#WSF_MinVWV to locate the stocks with the potential to move. How do we arrive at this number? To find volatility for your favorite stock use the "Stock Research" link from our web site http://www.trade-ideas.com/StockInfo/ type in your favorite symbol to see our volume weighted volatility and other technical indicators. Additionally this strategy sets a Min 15 Minute RSI filter to 70 http://www.trade-ideas.com/Help.html#WSF_MinRSI15. This filter helps find the stocks that are technically overbought on a short term basis.

Who Could Benefit
The end result is "Fade the Up Move". We looked at the history this produced and liked the results, especially trading right at the open, enough to share it with you - use this as a starting point or modify it some more for your own purposes. Try designing the opposite set-up and watch for opportunities to "Fade the Down Move".

We look forward to your comments. Good luck.

Wednesday, October 12, 2005

Beating Wall Street's Algorithms Part 2: How To

Is "Reaching Liquidity" causing you to 'get wet'?
For Institutional Traders and Hedge Funds

Often people get very excited about the “New New” thing. On Wall Street the “New New” thing is Algorithmic trading. This practice allows a trader to let the computer do the leg work in executing orders. The purpose is often to reduce the cost of executing large, involved orders on the exchanges. There are several popular algorithms today provided by big firms like Goldman, Merrill, CSFB, etc.

As brokerages invest large amounts of capital in Algorithms that are harder to detect, we at Trade-Ideas already have a solution to beat the ones currently available OR give brokers the best tool yet to monitor their own algorithms in real-time for undue market impact. [See our previous post, "Best Position: Algorithm 'Sniffer'" from October 9, 2005 for both sides of this battle.]

Additionally recent press about key trends in algorithmic trading mention Trade-Ideas and its 'sniffing' capabilities. Here is just such an article written in the July-September 2005 issue of, The Trade:
"Algorithmic monitoring on tap"

Below is an example of how you can use our analytics to either outperform brokerage algorithms or simply monitor their unintended market impact.

Popular Algorithms and How to Beat Them:

VWAP – You can manually beat the VWAP Algorithm with our Crossed Above or Below VWAP Alert http://www.trade-ideas.com/Help.html#CBVC depending on if you have buy or sell orders.

Liquidity – Use our large Bid Size and Large Ask Size Alerts http://www.trade-ideas.com/Help.html#LBS to see exactly when liquidity appears. Remember that people are often hiding size using discretionary and hidden orders, but sometimes that does not make sense so you need to always know when real buyers and sellers are present.

Improvement – Use our special volatility filter to place bids and offers at the best prices for you based on statistical analysis http://www.trade-ideas.com/Help.html#wsf_MinVWV.

There are many other ways to get inside the 'algorithmic pipe' through which many brokerages send the orders. For more specific information please comment or send an email to info@trade-ideas.com

Tuesday, October 11, 2005

Strategy Session: in Play en Fuego

Find the stocks that are in "Play" right now!

We've got another set-up not found in our Proven Strategies or Samples section that we've designed ourselves! Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do.

The Strategy
The most obvious way to find stocks that are moving fast is to look for VERY HIGH relative volume compared to what a stock normally trades. This is done using the "Min Current Volume" (a Window Specific Filter) http://www.trade-ideas.com/Help.html#wsf_MinRV set this filter to 5 to see only the stocks that are 5 times the normal amount for this time of day. Don't forget this important FAQ, http://www.trade-ideas.com/FAQ.html#Q23.

How Its Modeled
Below is a new preconfigured strategy using the methodology described above.
Big Movers

There is another way to approach this. You can also use the "Strong Volume Alert" http://www.trade-ideas.com/Help.html#SV which can show you stocks that are trading, for example, 2X their normal average daily volume.

Take a look at a strategy created just for this purpose.
Big Volume Movers

Who Could Benefit
Anyone who follows the belief that volume portends interest and movement will find these starting points indispensible. Anyone who wants their ideas to come from someplace besides CNBC during the day or anything else that everyone is watching - say 'Amen'. Even if everyone were using Trade-Ideas you could filter the strategies above to define your universe slightly different - and view an entirely different set of opportunities.

There are many other ways to use our software to create unique set ups that can give you a big advantage in the market. If you are looking for something particular feel free to comment.

Monday, October 10, 2005

Strategy Session: Volatility Divergence

We've got another set-up not found in our Proven Strategies or Samples section that comes to us from a strong advocate and subscriber of Trade-Ideas. Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do.

The Strategy
"Volatility Divergence" spots stocks diverging from the sectors to which they belong. It will identify, for example, when Intel begins to behave differently from the Semi-Conductor Index. Depending on whether the divergence is postive or negative, the action could be strong or weak for the stock respectively. The strategy also compares stocks to the S&P Futures. Imagine the Futures heading upwards and the alert window shows a stock that is diverging and headed downwards. This could be a early sign of even more weakness on the stock if the Futures were to roll over and head downward itself. Open up the strategy and click on 'History' to see how many alerts get generated on a typical day.

Who Could Benefit
The strategy is ideal for those who trade options based on the strength or weakness of stocks relative to their sectors or indices. It is also good for Momentum traders.

How It's Modeled
The main feature of the strategy is the series of alerts in our inventory marked as sector breakouts and divergences found here. The other key ingredient is the filter upon which the aforementioned alerts are subject to: the Volatility filter. We set it at $0.15 to minimally ensure that there's enough movement in the stock every 15 minutes. For a more detailed explanation of this filter, click here.

Sunday, October 09, 2005

Best Position: Algorithm 'Sniffer'

There's a revealing article written by a British magazine covering the worldwide buy-side community called, "The Trade". http://www.thetrade.ltd.uk

We've found alot of their articles great reads on the pulse of innovation and rebalancing of informational power between the buyside and sellside. Unfortunately sometimes the really great stories don't make it to their website - like the one we read in the July-September 2005 issue titled, "Sketches on the algorithmic canvas". The article is part of a series based on an ongoing survey of buy-side attitudes to algorithmic trading across the US, UK and continental Europe. Firms like Morgan Stanley, Lehmans, CSFB, and Goldmans are evaluated by the head traders at client firms. The articles also discuss how smaller client firms use the algorithm tools these big companies provide. The results are extremely interesting. There are varying degrees of enthusiasm for these tools - with a lot of hype that confuses what these tools really provide in terms of cost benefits or return ("alpha") benefits.

I like the thoughts expressed by Simon Thompson, head of equity portfolio trading for BGI and an active user of algorithms.
"What algorithms add is expedience. If you are relying on algorithms to provide you with alpha, then your investment management model is lacking some robustness."
Makes sense: these tools help deliver on the cost of trading/working an order - they are not going to haul in the outstanding returns.

Here's the meat of the article that really got my attention: The article then quotes Steve Wood, global head of trading at Schroders.

"We use a mix of DMA (direct market access tools (i.e., manned by traders)) and algorithms. We focus on putting the vast majority down an algorithmic pipe, but then looking at the order flow that is moving away from us or moving for us, taking it out of the algorithmic trading mechanism and using DMA to add value. So we get a hybrid of both, which enables us to reduce our costs.

That approach also makes it less likely that the strategy will be detected by a 'sniffer' program."

'Sniffer' programs like Trade-Ideas indeed. There are already several firms using Trade-Ideas to act as their sniffer against any undue market impact when running their various algorithms. If the impact of their activity appears within Trade-Ideas, they switch to the human touch. Trade-Ideas acts as a first line of defense - their tripwire. Conversely we have many individual subscribers who hunt for this sort of activity and prey on those who don't employ Algorithmic Monitoring tools.

Our conclusion: It's a good position to be in when both sides of the contest find your tool invaluable.

Friday, October 07, 2005

Beating Wall Street's Algorithms

An interesting article in Waters, UK financial publication, appeared recently about some of the consequences of Algorithmic Trading http://db.riskwaters.com/public/showPage.html?page=291701. On Wall Street Algorithmic Trading is the hot topic and buzz word of the day.

For those that are not familiar with the term, institutional based Algorithmic Trading is different from the Black Boxes proprietary traders use to automate a good strategy. Among these well capitalized firms Algorithmic Trading hands an order to buy or sell a stock to a computer hoping that it will do a better job than you. One of the more common algorithms involves VWAP or Volume Weighted Average Price (http://www.trade-ideas.com/Glossary/VWAP.html).

As automated logic for trading becomes better and better at handling orders for traders, Waters points out, the human touch becomes less and less required, and cites several of the rounds of layoffs that occured recently among Wall Street firms. It's a chess match between man and machine. Can a system with a human touch be devised that considers a market full of automated, efficient systems and comes out with an advantage? We at Trade-Ideas believe that the answer is yes.

We compared the following strategy to Algorithms made by Goldman, Merrill and a few others and the results were very favorable for the "hands on" approach. Many of our institutional customers and trading desk clients use a derivative of the following strategy using Trade-Ideas:

Imagine you are a trader working buy orders for a basket of 20 stocks. How would your bonus look if your average price to buy the order was significantly below the VWAP? There are several ways in which Trade-Ideas can make that happen. First you can set our servers to alert you to anytime the stocks you are working are below the VWAP(http://www.trade-ideas.com/Help.html#CAVC), second you can be alerted anytime a stock makes a counter directional move that's well suited for you to bid (http://www.trade-ideas.com/Help.html#RDI).

Monday, October 03, 2005

How to use PayPal with Trade-Ideas

Paying for subscriptions should not be difficult, however when you do it online there always seems to be issues that get in the way. As the number of our subscribers grow we get more questions on various things having to do with PayPal our credit card processor.

1) Why do you have to add a bank account to PayPal to verify transactions:
Once you go over a certain amount of business through PayPal, I think it is $1200.00, they want to make sure that you are the legitimate credit card user. They way they do that is to make you give them your bank account number so that they send and then take out an amount of like 30 cents to your account. They ask you to give them the exact amount proving that you have access to your bank statement. This is all done for your protection and not so that PayPal has more information on you. The fund continue to be taken from the credit card you have on file and not from your bank account.

2) What happens if you lost or had your credit card, had it stolen, or are simply changing your card:
There are steps that you need to take in order to get everything up and working. If you do not follow these instructions in order, PayPal may cancel your account. Here are steps.
a.) Go to PayPal and to "My Account" section, and the "Profile" subsection to add the new credit card.
b.) Go to your subscription and change it to use the new credit card.
c.) Go back to the credt card information and delete the old card

Additionally please be aware that Trade-Ideas does not have access to your PayPal account. You activated your subscription through PayPal and if you want to cancel just log into your PayPal account and cancel your subscription.

All of this is in detail in the updated FAQ http://www.trade-ideas.com/FAQ.html#Q19