Sunday, May 25, 2008

Checking In with The Doctor: Memorial Wknd Reading

There's a couple of good articles over at TraderFeed, Dr. Bret Steenbarger's widely read and essential blog for the self-improving trader.

Both articles compliment each other: one post discusses a checklist of elements to consider when making a transition from one trading style to another (make sure to read the helpful reader comments too). The other post discusses some useful exercises to perform when things hit a bump in the road. The exercise helps with a trader's confidence and a rightful sense of control one should have.

The Doctor's useful posts are a treasure trove of information, I recommend never letting too much time pass between regular visits to not only read the posts, but read the engaging comments other traders leave.

Tuesday, May 20, 2008

Strategy Session: Find the Move During the Pause that Refreshes

I received a good question from our support forum that I want to repeat here. It's a simple request about how to model a pattern that this customer wants to see in the market.

Question: Stocks Taking a Breather
What filters or alerts can I use to finds stocks that are, "taking a breather"?
I.e. it is in a daily uptrend, but volume slows and price drops; OR, it is in a
daily downtrend, but volume slows and price rises slightly.

Tip: Understand the Left and Right Side of the Chart

Here's a modeling tip. When I start out modeling an idea or pattern I want all my stocks to exhibit, I start with the filters. The filters in Trade-Ideas are great for describing the left hand side of the chart - i.e., everything that's happened leading up to today or this minute (depending on what increment of time you are using on the horizontal axis). The Alerts in Trade-Ideas describe the first point of the right hand side of the chart - i.e., what happens the moment Trade-Ideas alerts you. Ok. Let's give this a shot.

Answer: Stocks Taking a Breather

Good question. I'd put together the following FILTERS:
and then I would choose my trigger with the following ALERT:
See if that works for you. To get the opposite view, configure this and then use the "Flip" button.

Footnotes and Related Articles:
  • Here's another article we wrote about lite volume moves called, "What to do When You're Suspicious of Low Volume Rises in the Market"
  • Check out the whole category of articles written about patterns we've modeled from various other authors and articles we've come across called: Strategy-Sessions
  • Use The OddsMaker to further understand what trading rules would produce the optimal trading outcome for this strategy in the recent market. Trading rules would include the answers to these questions: How long to hold each opportunity? When during the market session should this strategy be traded? Where should the stop loss be set?
  • 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. Know, however, that Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice
  • See this video on our Collaborate function to learn how to open these strategies inside Trade-Ideas PRO

Monday, May 12, 2008

It's the Pattern, Not the Stock that Makes the Mad Money

Disclaimer: The article mentioned below mentions Trade-Ideas as an 'industry standard' and sprinkles a bit more praise on us but was written unsolicited by a former trader, Dave Goodboy, turned writer for TradingMarkets.com and other outlets.

"How To Use A Stock Screener"

Goodboy's article addresses the most basic of scanner and screener tools available to the new trader/investor. Much of what he describes are the free tools available to help define the appropriate environment a trader has learned or researched to trade. I am only adding the following footnotes:

"What's Free at Trade-Ideas"

  • Don't forget about the free data Trade-Ideas provides in the form of End-of-Day data and even delayed intraday data. The cream rises to the top when we compare this data to what else is out there (many companies even charge for less quality data than what we give away)

"Scanning Patterns Will Set You Free"

  • Scanning for stocks will only get you so far - it often leads to chasing stocks and mounting frustration. Ever been there? Think instead about screening for patterns - the pattern -that a trader believes consistently yields a positive outcome. If its a technical pattern, then I submit there's no better tool than Trade-Ideas for finding it in real-time as it's happening
Which brings me to this question I answered on the public forum regarding the Equity Markets found on LinkedIn.com.

A better strategy than Dogs of the Dow?
Asked by Paul Zabin 5 days ago in Equity Markets, Personal Investing Open
My public answer:
“The DoD (Dogs of the Dow) strategy evolved into something unintended in my view: a focus on the stocks. The strategy's real benefit is to call attention to a group of stocks that would exhibit the same pattern; namely, responsible management, good dividends, and a strong upward trend pattern. The pattern and the way to trade it have become my preferred way of discussing winners and losers. For example I speak fondly of "rubber band" moves that stretch a stock several standard deviations away in price from its norm, and ride the move back to the average. How long I hold these opportunities, stop loss targets, and when during the day I'll trade them are equally important parameters.

I've even developed a method of backtesting these events to determine how successful they are in the recent market. Notice I mention the event and how I trade it that's backtested - not the basket or list of stocks. This form of backtesting focuses on the event a priori - not relying on knowing the specific stocks themselves beforehand. The DoD strategy has never been loyal to the stocks that rotated in and out - we should be the same way.”
Messages about this question (1):
RE: A better strategy than Dogs of the Dow?
The LinkedIn article and my footnotes to Goodboy's article refer to the growing importance of the pattern when discussing trades. Everyone at the water cooler will recall fondly how Stock 'XYZ' paid for that vacation or was responsible for my biggest gain last month. What they really mean and what will be evident more in the future is how fondly Pattern XYZ worked in their favor.

Related Articles

Check out the whole category of articles written about patterns we've modeled from various other authors and articles we've come across called: Strategy-Sessions

Friday, May 09, 2008

Dark Pools Looking More Like the Kiddie Pool: Shallow and Smelly

2 interesting articles this week from WSJ and Reuters on the untamed and unaccountable dark pools in the market.

What are dark pools?

The WSJ defines them as "the secretive electronic trading networks that match buyers and sellers anonymously." These trades are done outside of the traditional stock markets like the NYSE and NASDAQ.

The WSJ journal points to the dark pools at failing on their promise of making it easy to move large shares without affecting price. In fact with more dark pool firms competing for volume and their share of the business, the consulting firm TowerGroup reports that the average trade was just 260 shares at the beginning of 2008. A decade ago it averaged over 1,400 shares. Ugly shrinkage.

The Reuters article observes that as a result of the competition for liquidity and volume, many dark pool firms are falsely boosting their trade volume numbers. With no standards among these market players, many are knowingly double counting attempts to fill blocks as new and reportable volume.

I mention the articles because this has been a recurring theme when I speak with our Director of Trader Education, Jamie Hodge. He shared his observations in his recent interview with StockTickr:

StockTickr: How do you think the market has changed over the last several years? How have you adapted?

Jamie: The biggest issue has been the systematic retooling of the trading network over the past 7 years. In 96 when I first started trading there were 0 ECNS, it was just all market maker’s thick bids and offers and you could see exactly who you were trading against. It’s quite the opposite today, no liquidity and you can’t see anything. Take all of your ecn books, level II, and any other feed you can pay good money for and you’re lucky if you’re seeing 10% of the real order flow. Just like casinos have banned card counting at black jack the big boys have taken every advantage away from the small day trader. Now more than ever, you need to fight algorithms with algorithms.


Our point? The larger market participants play their games at the expense of those not armed with better or equalizing technology and analytics. They prey on the regular investor/trader unequipped to react. The technology is here. It's available to our subscribers and traders who recognize they need real-time analytics. Whether you use Trade-Ideas or not, it's time to make software work for you and your trading plan.

Wednesday, May 07, 2008

Strategy Session: Automation for Swing Trades

The fast paced world of trading excites us - buyers vs. sellers, large capitalized players vs smaller and quicker/nimble players, etc.

However we at Trade-Ideas recognize that for many in the investing public, trading twenty or thirty times a day is a lot - completely alien. That's why our tools are also made for longer-term traders.

Let's define some terms first.

The difference between day traders and swing or position traders is length of trade: the day trader exits position by the end of the trading day. Longer-term traders ride the position for a couple of days or weeks.

How can a real-time intra day scanner be used to find longer term trades?

We asked them (our surveyed customers) and they responded. Trade-Ideas focuses on getting the longer-term trader through the best initial entry point and getting him/her to the next day and beyond. That's when risk management takes over. In their words, "Trade-Ideas puts you in front of a tail wind so that hopefully you can ride the longer term trend."

How? Let's use the intra day scanner to set up the entry and then test a set of trading rules with the OddsMaker to make sure that it works. We can then put it on autopilot (via controlled automation) with our brokerage partners supporting this automation at TD Ameritrade, InteractiveBrokers, and OptionsXpress.

So here we go. One of the easiest tells in terms of supply versus demand is something that is also often overlooked: Gaps - specifically Gaps to the upside. In this strategy we are going long.

  • First let's find stocks on the NYSE, AMEX, and NASDAQ Gapped up over $2 USD today. That is done by going to our Window Specific Filters tab and putting a 2 next to the Min Gap Up filter.
  • Second we add a market direction filter just to make sure we are not buying or even looking at opportunities when the market is really heading south. In Trade-Ideas we have market direction filters for the S&P requiring it to be up a certain amount in the last 5, 10, 15, or 30 minutes. In this case the S&P must be up .01% in the last 30 minutes. That gives us just a bit of an insurance that there has been some positive action.
  • Third we do something a bit counter-intuitive. This is a bit like poker. We are assuming that the the Gap Up is the tell. So we actually wait for a signal showing some weakness in the stock. This weakness signal is when the stocks crosses below the Opening Price.
Basically we'll see and do the following: if the stock Gaps Up, trades and falls back to just below the Opening price assuming the S&P was up .01% in the last 30 minutes, we are going long.

Then we hold at least until the Open tomorrow. Here is the set up with more of the details.

Strategy Session: Gap Retracement Play Hold till next Open

When we start this strategy we wait for the first 30 minutes of the market to give the S&P a chance to see where it is going. Then after the first 30 minutes we enter positions. Our stop for this strategy is 1 dollar + the wiggle which is our custom volatility based stop-loss number.

Here is the overview: In the last 15 trading days this system had only 3 losing days and they were pretty small, while on the upside it was able to rack up 51 points in 76 trades.

OddsMaker Summary:

45 / 76 = 59.21% up $0.01 at next open; Average winner = $1.7813, Average loser = $-0.9264, Net winnings = $51.442, Best = $7.59, Worst = $-3.186; Casino Factor = 99.88%
Daily summary:
4/15 : +18.0100 /7
4/16 : +5.9600 /7
4/17 : +0.9900 /1
4/18 : +4.4134 /13
4/21 : +2.9400 /1
4/22 : +9.1300 /4
4/23 : +11.4244 /11
4/24 : -(1.8327) /3
4/25 : -(0.8600) /7
4/28 : +0.5800 /3
4/29 : +0.5300 /2
4/30 : +1.1405 /5
5/01 : +0.8965 /6
5/02 : -(1.8800) /6

(to fully understand what all the numbers mean, refer to The OddsMaker Manual)

Remember that this type of strategy can be automated using our integrated brokerage partners mentioned earlier. This is the trend in trading. Institutions run their algorithms - and now the "instividuals" such as yourself have the same capabilites only with much better analytics and backtesting features.

Related

Interested in automating a trading strategy like this one or one that you design with even better odds? Consider one of the brokers mentioned above that offer automated trading of your Trade-Ideas strategies. Details can be found be clicking on their links in this post or simply email us at info@trade-ideas.com and tell us you are interested. There are also great discounts available from these brokers.

Footnotes

  • Link to other Strategy Sessions
  • 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. Know, however, that Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice
  • See this video on our Collaborate function to learn how to open these strategies inside Trade-Ideas PRO

Monday, May 05, 2008

Interview with J. Hodge, Director of Education, Trade-Ideas

I am back from some good times in Chicago that included events for TD AMERITRADE and optionsXpress. There's plenty new strategies and insights to tell you, but I want to bring to your attention this interview of Jamie Hodge, our Director of Trader Education and long-time trading veteran, by Dave Mabe of StockTickr.com.

Interview with Jamie Hodge, Trade-Ideas - May 5th, 2008

Jamie tells us what "gimmick" trading is all about and how the ability to recreate your trading plan with the market's changes makes or breaks your success as a trader - a good read.

Related Links