Friday, July 27, 2007

Find and Adopt Dead Cat and Bow-wow Trading Patterns

If you're not a regular reader of The Kirk Report, you're missing market commentary from a trading veteran who's concise and straightforward about market activity - he's also got a fun streak of cynicism as it relates to the mainstream financial publications like Barrons et al. I got hooked on Kirk's site by the lists of links he regularly produces.

A couple of posts this week speak directly to real-time Trade-Ideas strategies and our free stock research. So I'm putting 1 and 1 together to make something that's at least 2 or greater than the sum of its parts.

Dead Cat Or Buying Opportunity?
Charles wrote on Wednesday this week:

The reaction to earnings this week has been disappointing and many traders will be watching the strength of this bounce to gauge whether we're just seeing just a dead cat-like oversold bounce. . . the last thing you want to see if you're long and strong is a strong morning followed by another round of selling on higher volume.

Previously we've modeled many strategies that look for oversold opportunities; however, we may be seeing overbought conditions. Take a look at the strategies we've described below and think of you can use them when "Flipped".
Bow-Wow Situations
Charles wrote on Thursday:

Speaking of dogs, two bow-wow situations of major proportions can be seen in both the financials and homebuilders. I guess all of that "subprime is non-sense" and "what housing bubble?" is starting to come home to roost. Perceptions in the market can change like the weather in Minnesota (often and without notice).

A Trade-Ideas custom scan (Note: this is free EOD data we make available for anyone) spots in quick fashion plenty of the stocks within these industries and in others. Here's two versions on the same theme:

Have a great weekend

Thursday, July 26, 2007

Use the Latest Trade-Ideas Automated Trading Tools for Free - Deep Dish Style

I just came back from Chicago with some good news for everyone.

First if haven't experienced Chicago in the summer, the good news is you're guaranteed a fun, good time - no matter who's paying the bar tab.

Second as I mentioned in an earlier post, we are moving forward with optionsXpress to build an automated trading application that uses their brokerage services with Trade Ideas PRO strategies backtested and controlled by The Odds Maker.

Let me put this good news another way:

You created a strategy to identify momentum moves in this market using Trade-Ideas PRO. The Odds Maker backtests the strategy (or event-pattern as we also call it) over the last 3 weeks according to your position management rules that cover stop losses, time in trade, when during the market session trading occurs, etc. The Odds Maker reports great results and now the Automated Trading Bot (ATB) rolls forward getting you in and out of trades according to the same position management rules.

The 411

Readers of this blog hear this news first: A pilot program is being organized where Trade-Ideas and optionsXpress (OXPS) invite anyone interested in trading with these tools in an optionsXpress brokerage account to submit your name and contact us at Our goal is to provide The Odds Maker and the Automated Trading Bot (ATB) at no charge to pilot participants with an optionsXpress brokerage account for 3 months. Note that OXPS will apply a special commission rate for trades via the Automated Trading Bot (ATB) (details below). An existing or new subscription to Trade-Ideas PRO will be required to participate but the cost of the subscription will be rebated back to participants by OXPS. The pilot will begin as soon as 100 participants are identified, but early participants to sign up for the pilot can be trained to use the tools before the 3 month program formally begins.

After 3 months it is uncertain at this time whether the tools will continue at no charge or if special pricing for pilot participants will exist different from the general rollout if the results are as good as expected. Despite this uncertainty for some individuals this arrangement will be too hard to resist - we already have our first participant (Thanks Frank!) who is an existing Trade-Ideas subscriber (and read our earliest mention of this opportunity) and is creating a new brokerage account with optionsXpress.

Purpose of Pilot

OXPS and TI will conduct a pilot program of the OXPS API Autotrading application that automatically trades from the backtested, pattern alert strategies of Trade-Ideas PRO and The Odds Maker. All participants will receive online training, understand the disclaimers involved with pilot participation, and watch demonstrations of the tools before using them.

Pilot Participant Requirements

Participants will be selected from the following available pools:

  • Trade-Ideas (TI) customers with an existing OXPS brokerage account

  • TI customers interested in opening an OXPS brokerage account to participant in automated stock trading

  • OXPS customers interested in subscribing to TI PRO and participating in the pilot
Participants must opt-in to study and agree to all legal disclaimers – the pilot will be initially limited to 100 participants before evaluting the need for more.

Participants screened for following activity:

  • Subscribe to TI PRO

  • Have an OXPS brokerage account with ability to trade equities

  • Trade at least 3 times/month

  • Trade at least 200 - 300 share lot sizes (this is a recommended size in order to breakeven against the proposed commission rate described below)
PLEASE NOTE: ANY and all of these details are SUBJECT TO CHANGE. Participants agree to trade under the following commission schedule:

  • $9.95/trade up to 1000 shares with a $1.95 rebate/trade (apply towards commission and TI PRO subscription)

  • $0.01/share for 1000 shares or more
Remember: It's Announced Here First Before It's Formally Communicated Elsewhere

UPDATED: Related Posts

More on Chicago

I just came back from a week stay in Chicago. What a city! It's such a gem of a town during the summer where everybody organizes block parties, festivals, and concerts that celebrate anything unrelated to the cold or snow. Staying in the city (I was in the Gold Coast neighborhood) makes everything practically within walking distance and enjoyable to do so in the perfect weather - like outdoor air-conditioning. Restaurant recommendation:

We have trips coming up to Toronto and New York. If you are in town, let us know if you're available to meet!

Thursday, July 19, 2007

Automation Does Not Equal Profitability - Pt. 2

Here's the second part of a 2-part post on the questions we are answering about the upcoming option to automate the strategies developed in Trade-Ideas PRO and backtested with position management rules in The Odds Maker.

Yesterday's answers are here.

Why this matters

By sharing these questions and answers with you, dear reader, you are getting a tour of the "construction site" upon which we're building an innovative, smart tool. You also get to see how software tools flow from design principles which in turn flow from a clear vision/direction about what a tool should do. Rather than keeping the playbook in our heads or amongst ourselves, we are writing it down and sharing it with you. If we get feedback - great. If not at least the act of sharing it forces us to be clear about our intent so we hit the mark later on (i.e., Ready, Aim, Fire vs Fire, Ready, Aim).

Welcome to the cookie dough.

5. Whose data are your trades based upon?

The trades are based on the data that comes through the TI Pro windows. The alert would be the trade trigger; the filters in the alert window are what filters the universe of stocks to the ones that came through the window. The new features are that we time the trades so you can exit after certain time period like 15 minutes or at the close and that we allow you to set stops and profit targets. All of that is data that is already in the OddsMaker. There is no additional data needed for automation, the automation is ALL built around the OddsMaker. There is no TI automation without the OddsMaker.

6. How would we research questionable trades?

All trades taking place would be just like any other trade placed through the broker electronically. Brokers will have all of the trade I.D. # and times. Brokers will have the same ability to look up and investigate any of those trades via a trade history. There is complete transparency via recorded data with the broker and with Trade-Ideas. Within Trade-Ideas anyone can always go back to the alert history to see what triggers were triggering the trades etc.

7. What makes Trade-Ideas automated trading different from others?

Trade-Ideas automated trading is different from all other automated systems

  1. It is the only automated trading based completely on the Trade-Ideas alerts and filters and therefore uses our proprietary algorithms. Things like Running Up and Running Down and Breaking Support and Resistance are all proprietary to TI and nobody else has the same algorithms for those things.
  2. This automation is based on event-based back testing via The Odds Maker versus stock-specific based backtesting that is done in TradeStation and WealthLab and countless others. Nobody today has a tool that competes head to head with The Odds Maker.

Wednesday, July 18, 2007

Automation Does Not Equal Profitability - Pt. 1

Automation of the Trade-Ideas set-ups and backtested position management rules within The Odds Maker is in beta now with our key partners. More details like screen shots and how it all works are coming. In a nutshell if you know how to use The Odds Maker, you will know how to use the automation tool - it's all built from it.

Exciting summer indeed.

What I can share with you is a series of questions and answers asked by one of the partners mulling their use of the automation tool. The title of today's post comes from one of our answers. Today is part one and tomorrow I'll post part two.

By the way we will take any suggestion for a name for the new tool. The winning entry will get 200 credits to use The Odds Maker in Trade-Ideas PRO.

1. Who does this version of automated trading fit?

This version of automated trading is geared to the current and future users of Trade-Ideas Pro. It is the next logical step in a series of tools we provide designed to improve a trader's discipline and remove manual, non-value added steps from the trading process.
Question for current customers: You have a good set up in Trade-Ideas but can you really follow it if you had to do it all by hand? What if you got 3 signals in the same minute? Can you keep track of the 30 minute hold time or a 15 minute hold time if the signals all came in 2 or 3 minutes apart?

The automation helps not by giving some magic formula but by simply offloading the grunt work of manual order entry. The investor/trader should always focus on the strategy not the actual punching of the keys. The traders who will use this automation are the more active traders typically but not always. A customer may want to trade a strategy while they are at a meeting and unable to be in front of a computer for example.

2. Why is automated trading important?

From a customer’s perspective the most important reason for automated trading is the ability to follow a trading plan without breaking the rules. This discipline is often overlooked. So often, investors/traders get caught in the cycles of fear and greed that ultimately leads them to making mistakes that cause serious financial harm. You always hear of the trade that went against you and because the customer did not take the loss early it wiped out their accounts.

Think of things like Enron, and World Com, and countless others. The automation does not care about names it only cares about following strict rules, rules that you the customer sets to protect their capital. Capital preservation and growth is a key to having customers be happy and trading more often.

3. What are your Pro/Cons to automated trading?

Cons are simple. Automated trading is not and will never be for everyone. It will be for a subset of more market savvy active traders. The other con is garbage in garbage out. If you tell the computer to do something stupid, it will then do exactly what you tell it to do. It will follow your stupid rules. That is why you can’t have automation without proper strategy building and back testing.
It is important to make the customer aware that automation does not equal profitability. The Pros are the ability to explore and participate in market situations that you would otherwise never see. Of course the obvious things like discipline, taking the emotions out of trading, and following the rules exactly as they are laid out are important benefits.

4. Can the user enter the amount of money he/she wants to have auto-traded that day?

Yes. The user will be able to specify things like how much money to allocate to an automated strategy. We already give the ability for the user to specify share amounts to be traded and how many trades they want the system to make on their behalf. More features will be coming. Important note: If the user runs out of buying power the system stops trading.

Friday, July 13, 2007

Strategy Examples of 10 Trading Principles

What a prize. I don't have the occasion to tie in as many revelant, organized links from our content as I do today.

Yesterday Dr. Brett Steenbarger of TraderFeed put together a list of 10 Principles of Short-Term Trading.

Notice how articulate Dr. Brett is with his plain English description of ideal trading patterns? Quite succinct. This is the point I made yesterday.

A great coach always reminds his/her players of the fundamentals at the best times. In this summertime period now is a great time to review a few of these principles as they apply to Trade-Ideas strategies we've posted.

1) Strength Begets Strength and 5) Strong Tests of Prior Market Highs or Lows Tend to Persist

Related Trade-Ideas posts:

2) Weak Rises Tend to Reverse and 4) Weak Tests of Prior Market Highs or Lows Tend to Reverse

Related Trade-Ideas posts:

6) Weak Pullbacks Following a Strong Move Will Reverse

Related Trade-Ideas posts:

9) Important Market Moves are Often Triggered by Intermarket Events

Related Trade-Ideas posts:

7) Markets Are Dominated by the Sentiment of the Largest Participants

Related Trade-Ideas posts:

I notice that the strength and momentum strategies in the first set contain the largest amount of examples. That's an interesting observation and a belief perhaps in the power of the bull and our optimism.

There's also a common thread through many of our strategy ideas: the seed comes from Dr. Brett Steenbarger - a frequent and appreciated source of inspiration. Have a great weekend.

Thursday, July 12, 2007

4 Steps to Get the Jargon Out of Your Strategy

We were recently asked by Technical Analysis of Stocks & Commodities magazine (a review of our event-based backtesting tool The Odds Maker appears in the July 2007 issue) what's the biggest stumbling block faced by new users when trying to work with The Odds Maker. We answer the question below.

How Jargon Harms Learning

The biggest problem is that traders cannot articulate what they want to see. Thinking of market movements in terms of RSI, Stochastics, MACD, Elliot Waves, etc. never help in articulating the picture.

The customers we help use these technical terms as mental foot and handholds up the steep side of the mountain. We tell them, why not take the chairlift we've created? The chairlift refers of course to the plain English, pattern-based alerts and filters found in Trade-Ideas. We believe this approach makes for a easier to use and more powerful tool.

Example: Many of our customer start by asking us can your software tell me when the RSI does this and the MACD does that. Many customers reduce their ability to articulate what they seek as they bog themselves down in the use of jargon. Jargon is meant to be short-hand for understanding larger conceptual ideas among experts. The real harm of jargon is that it can short-cut the process of how such concepts are learned. The Trade-Ideas approach is much simpler: be an expert in trading - not technical analysis indicators.

Here then are the steps we use to design successful systems and clear out the jargon:

1. Write down what you want to see on a chart in simple English

DO NOT USE ANY technical analysis jargon in the description. Leave the MACD, RSI, CCI, and the rest of the alphabet at the door. Here is a better, descriptive example:

The stock has been consolidating for a couple of days and I want to see it today as it makes a new high that is above yesterday high - on above average volume.

2. Reduce the Universe (Start first with the Window Specific Filters)

The challenge is to avoid jumping right to the trigger event that generates the alert. Better to start with the filters to make sure you have the pattern on the left hand side of the chart modeled. We describe further the difference between filters and alerts here.

In the example above use the Minimum Consoldiation (in Days) set to 3 or more depending on your preference. Then add the Minimum Position in Previous Day's Range (percentile) set to 100 to see all stocks above yesterdays’ high. Finally for the volume component, add the Minimum Current Volume (ratio of Current/Historical Average) set to 1.5 or more to see all stocks trading at least 50% above normal at the time of the alert.

3. Choose an Event (Set the Alerts)

Once the left side of the chart matches your pattern requirements using the filters, modeling the trigger event means selecting an alert. In this case it's a simple alert of a new daily high.

4. Keep your system simple

The biggest mistake customers make is using too many alerts in a system - it creates too many variables to isolate when testing results with The Odds Maker. This applies even to filters (where too many can reduce your trading results). Keep you system simple so that you can really trade it and get the right results. Think of Hemmingway, Strunk & White, or Stephen King - wherever possible, omit needless words or in this case, extra indicators. Make it a goal to use one alert as the trigger when designing systems with The Odds Maker.

Fortunately in addition to this blog and our online support, we schedule one on one training sessions to help customers get through the learning curve in the fastest way possible. Please contact us to schedule your appointment.

Related Posts

Tuesday, July 10, 2007

What to Do When You're Suspicious of Low Volume Rises in the Market

TraderMike's commentary on the markets yesterday included this observation,

"I’m always suspicious of low volume rises and this time is no different, especially for the S&P 500 which has been making lower highs and lower lows for the last month or so."

I agree. In fact we've created a couple of strategies in Trade-Ideas that model the behavior TraderMike describes, namely; upward price movements on lite volume.

The question is how to trade such patterns? Is the market favoring this kind of strategy?

Fortunately much of the guesswork can be removed from the equation. Trade-Ideas' event-based backtesting tool, The Odds Maker, summarizes how each of the strategies are doing over the last 3 weeks in the market. It turns out that this strategy is very sensitive to when during the day its traded and how long the positions are held if the trailing stop threshold is not met. Let's look at each strategy and what The Odds Maker suggests in terms of position management.

The first strategy's genesis came from a pattern described by Andy Swan (Note: to see the what Andy's up to these days, check out his NetVibes for stocks and trading - a great news dashboard for traders - called MyTrade). Below we've updated the strategy by adding a minimum Average Daily Volume requirement of 500,000 shares/day and we've required that all the alerts occur with a Max Distance from the Inside Market of 0.1%. We add this last filter to ensure that the strategy is not dependent on catching a sudden trade way outside the market - in other words we keep the strategy rooted in what is typically possible for a trader to do. We also removed an alert that just did not help The Odds Maker results at all - this alone proved to be a valuable insight.

Updated Strategy Session: Moved Up on Lite Volume? Fade It.

Here is a picture of The Odds Maker configuration screen that shows one set of rules for position management of this strategy:

Here is The Odds Maker Summary:

98 / 279 = 35.13% winning trades defined as movement down $0.01 with all positions exited at 10 minutes before the close; Average winner = $0.2103, Average loser = $-0.0939, Net winnings = $4.99, Best = $1.23, Worst = $-0.10; Casino Factor = 75.55%

Daily summary:
6/19 : 0.4900/22
6/20 : 0.4000/6
6/21 : 0.2000/2
6/22 : 1.0900/5
6/25 : 1.0600/5
6/26 : 0.0000/0
6/27 : 0.6600/7
6/28 : 2.2500/76
6/29 : 2.0400/21
7/02 : 0.7400/8
7/03 : 0.1900/21

7/04 : 0.0000/0
7/05 : 0.3700/24
7/06 : 1.9100/65

This summary won't mean much unless you read an explanation from The Odds Maker quick manual.

Take the average winning trade and average losing trade and make a ratio of it. You can then categorize and position the value of this strategy into a convenient 2x2 decision box that we discussed before.

Our second strategy carrying the same theme appeared in our post entitled,

Strategy Session: Exhausted Rallies

Take a look at this strategy and try to model it within The Odds Maker. Not a customer? You have 10 free trials before we ask you to decide - simply download the latest version of Trade-Ideas PRO.

Tuesday, July 03, 2007

A Nation of Laws, Not Men - Good Idea for a Trading Plan

On this Independence Day it's important to remember one of the most important differentiating characteristics of our nation from others past and present:

We are a nation of laws, not men.

We celebrate the fourth in my mind as reminder that our freedoms rest not on the whims of one man's behavior but on laws created from a body representing all of us - where everyone is equal before such laws and everyone has the freedom to direct their lives according to their dreams and hard work.

Be a Trader of Rules, Not Emotions

Whereas our nation conducts its business from the rules established in our Constitution, so should every trader conduct their business according to the rules of a well developed trading plan. Such a trader constantly tests the rules using appropriate tools. When the rules show him/her an advantage to exploit in the market, s/he uses their trading tools to enforce discipline and succeed. Changing any rule only comes from factual data that something needs modification - not on whim.

Test your trading plan rules by reading the informative blogs on the internet. Excellent examples include: TraderFeed, Trader Mike, the Chairman, and even TickerSense. More options exist as part of blogroll.

Tools that enforce your trading plan discipline and test event-based strategies can be found here at Trade-Ideas in the form of Trade-Ideas PRO and The Odds Maker.

We participated in an online expo organized by TradersWorld. Our presentation was attended live by over 100 persons and now exists here for the next 3 months or so. Take a tour and learn how The Odds Maker makes event-based trading possible (and why its so intuitively successful).

Have a Happy 4th of July everyone.