Steve Palmquist.Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns.
I got a panicked email from a trader worried that the run ‘was over’ and he would not be able to trade long positions for ‘weeks’. First, the market moves in waves. It is normal for it to run up, then pull back then run up again. There is no way to know if a pullback will last a couple weeks, or a couple months. Secondly, traders can generate profits when the market is going up, or down. With the right set of tools it should not matter to a trader which way the market is going. Third, panic is incompatible with trading success. I just look at the markets price and volume pattern, form a trading plan that switches between different tools for different market conditions, and then implement the plan. Panic comes from ‘needing’ the market to go up, and not having a set of trading tools for different market conditions. The market does not care what we need or want, it will do what it wants. This is why we have different tools for different market conditions and switch between them based on what the market is doing. If the market direction is really, really important; it is usually a signal that the trader is using the ‘hold and hope’ approach rather than adapting to the market.
In order to trade confidently in different market conditions traders need to understand exactly how and when their trading patterns work. Testing different tools, and understanding how each trading tool performs in different market conditions, allows traders to make effective use of each tool in the trading toolbox. If traders have not tested their tools in different market conditions they are taking unknown risks. Back testing does not guarantee future results. There are no guarantees in trading, and no way to know if any particular trade will be profitable or not. Backtesting helps remove some of the emotion, hunches, and unknowns in trading. It can show you how a particular system has performed in different market conditions in the past and what types of filters may be most interesting in prioritizing trading opportunities. Examples of six complete trading systems and how they perform in different market conditions is covered in ‘How to Take Money from the Markets’. The knowledge of what to expect from a trading tool, and seeing how different trading tools perform in different markets allows traders to adapt to the market rather than just guessing what to do.
Steve is the author of two trading books: “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. “How to Take Money From the Markets, Creating Profitable Trading Strategies” in which he uses the results of extensive backtesting techniques to smash trading myths and get to the truth of what has worked and what has not. The book provides six fully analyzed and tested trading systems and shows how they have performed in different market conditions. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques.
The Commodity Channel Index (CCI)
Some indicators work well in trending markets while others work in consolidating markets. The Commodity Channel Index (CCI) works best in strong trending markets. Unlike other trend following indicators, the CCI is designed to limit whipsaws during choppy markets.
Created by Donald Lambert, the CCI is a price momentum indicator that measures the degree of variance of a security’s price from its statistical mean. Although originally developed for trading commodities, the CCI can be used for equities or indexes as well.
AIQ has a default time period of 90-days in the calculation of the CCI. Time periods that are too short can lead to whipsaws while time periods that are too long result in missed signals. The 90-day time period seems to be a good compromise.
In general, the CCI looks at prices relative to the average price. If the CCI is high, then prices for that security are higher relative to its average price. Conversely, if the CCI of a security is low, then prices are lower than the average price.
In consolidating or sideways markets, the CCI tends to fall within the +/-100 range (the two horizontal lines on an AIQ chart). Whenever the CCI moves above or below this range, then it suggests a strong trend is in place. Therefore, when the CCI rises above +100 it suggests a strong
uptrend is underway and that long positions can be established. Long positions are closed once the CCI falls below +100. Conversely, when the CCI falls below –100 it means a downtrend is in place and short positions can be established. Short positions can be covered once the CCI rises above –100.
The chart above shows the S&P 500 along with its CCI indicator. Notice how this indicator was on a sell signal during the September sell-off. When the S&P 500 drifted sideways from November through April, the CCI was within the +100/-100 range so no signals were fired. This helped to avoid whipsaws. There was a brief sell signal when the CCI fell below –100 in late April and then another sell in late May.
Like other indicators, it is best to use the CCI in conjunction with other technical tools. Modifications to the simple buy/sell rules can be made as well. For instance, if the CCI has fallen to –170 and you have large profits on short positions, then it may be best to lock in some of the
profits rather than waiting for the indicator to rise above –100. Money management rules are important. Still, it is easy to see the value of the Commodity Channel Index indicator.
An Excerpt From the Timely Trades Letter…
Steve Palmquist.Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns.
I got an email from an excited trader last Tuesday, when the market was down forty five points. He had just taken large short positions because the ‘market was already down forty points and this was surely the end of the run’. The trading plan outlined in the Timely Trades Letter had us holding off on new trades unless the market broke above the ascending trend line drawn through the lows of 08/31 and 01/31; or moved below the 2670 area, which would set up a pattern of lower highs and lower lows. This trader ignored the trading plan and was trading on CNBC induced emotion. When the market popped up fifty points on Thursday the same trader was in a panic to close shorts and take longs ‘because the pullback was over’. Trading on emotion frequently results in losses.
The trading plan is based on how the market normally behaves. The idea of trading is to be positioned to profit if the market does the normal or usual thing in a given situation. Sometimes the market does unusual things, and then profits are not realized. However, by definition the market most often follows the normal path in a given situation; so that is the way to bet for long term success. In the current case the trend line break on 2/23 indicated that conditions were changing, but it does not indicate an immediate switch from up trend to down trend. Rather than guess what the market is up to, I just took my profits from the recent run on the trend line break and will now give the market a few days to set up again. Trying to consistently guess the markets next move is a losing game over the long run. A better bet is to protect profits while the market is in transition, and then pick up new trades when the market shows its hand. I trade what the market is telling us, not the opinions of the talking heads on TV.
After a trend line break the market may base for a bit, resume the up trend or start a new down trend. If the market is going to start a new down trend then it will by definition have to form a pattern of lower highs and lower lows. For this process to start we will need to see a break below the 2670 area. Until then the market is not in a down trend and short positions carry above average risk. New long positions also carry above average risk since the market just broke below an ascending trend line. The trading plan is to hold off on swing trades until the market picks a direction and either moves back above the ascending trend line or below the 2670 area.
I got an email from an excited trader last Tuesday, when the market was down forty five points. He had just taken large short positions because the ‘market was already down forty points and this was surely the end of the run’. The trading plan outlined in the Timely Trades Letter had us holding off on new trades unless the market broke above the ascending trend line drawn through the lows of 08/31 and 01/31; or moved below the 2670 area, which would set up a pattern of lower highs and lower lows. This trader ignored the trading plan and was trading on CNBC induced emotion. When the market popped up fifty points on Thursday the same trader was in a panic to close shorts and take longs ‘because the pullback was over’. Trading on emotion frequently results in losses.
The trading plan is based on how the market normally behaves. The idea of trading is to be positioned to profit if the market does the normal or usual thing in a given situation. Sometimes the market does unusual things, and then profits are not realized. However, by definition the market most often follows the normal path in a given situation; so that is the way to bet for long term success. In the current case the trend line break on 2/23 indicated that conditions were changing, but it does not indicate an immediate switch from up trend to down trend. Rather than guess what the market is up to, I just took my profits from the recent run on the trend line break and will now give the market a few days to set up again. Trying to consistently guess the markets next move is a losing game over the long run. A better bet is to protect profits while the market is in transition, and then pick up new trades when the market shows its hand. I trade what the market is telling us, not the opinions of the talking heads on TV.
After a trend line break the market may base for a bit, resume the up trend or start a new down trend. If the market is going to start a new down trend then it will by definition have to form a pattern of lower highs and lower lows. For this process to start we will need to see a break below the 2670 area. Until then the market is not in a down trend and short positions carry above average risk. New long positions also carry above average risk since the market just broke below an ascending trend line. The trading plan is to hold off on swing trades until the market picks a direction and either moves back above the ascending trend line or below the 2670 area.
The more traders understand exactly how and when their trading patterns work, the more effective use they will be able to make of each tool in the trading toolbox. Back testing does not guarantee future results. There are no guarantees in trading, and no way to know if any particular trade will be profitable or not. Backtesting helps remove some of the emotion, hunches, and unknowns in trading. It can show you how a particular system has performed in different market conditions in the past and what types of filters may be most interesting in prioritizing trading opportunities. Examples of six complete trading systems and how they perform in different market conditions is covered in ‘How to Take Money from the Markets’
Steve is the author of two trading books: “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. “How to Take Money From the Markets, Creating Profitable Trading Strategies” in which he uses the results of extensive backtesting techniques to smash trading myths and get to the truth of what has worked and what has not. The book provides six fully analyzed and tested trading systems and shows how they have performed in different market conditions. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques.
Time Tested Trading Tips, March 2…
Steve PalmquistAuthor of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns.
During 20 years of active trading experience I have researched, tested, and analyzed a number of trading systems and techniques. Some have shown promising results, some do not. I add tools to my trading toolbox based on their effectiveness. Trading systems are not effective because Aunt Millie or uncle Bob told you about them, they are effective because they work. Most trading systems, are affected by market conditions, volume patterns, and other factors. Using a trading technique that has not been analyzed in different market conditions, or failing to match trading techniques to the current market environment is asking for trouble. Making money in the stock market requires knowledge of what to trade, when to trade, and a variety of trading tools designed for different market conditions. Just as a carpenter will use several different tools when building a house, traders will use different tools to build their account. Using the same trading tool in all situations is like trying to build a house with just a hammer. Carpenters have tools designed for specific jobs, and so should traders. The successful trader has a tool box with a variety of trading tools for use in different market conditions. The trader, like the carpenter, must go beyond just acquiring the tools. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. Some tools, like a screwdriver, are fairly easy to learn how to use. Other tools, like a table saw, require a lot more training and experience to get the most out of. Most carpenters serve an apprentice period where they work with, and learn from, someone with years of experience. It is amazing how many people will just start trading their hard earned money without ‘learning the trade’ first.
During 20 years of active trading experience I have researched, tested, and analyzed a number of trading systems and techniques. Some have shown promising results, some do not. I add tools to my trading toolbox based on their effectiveness. Trading systems are not effective because Aunt Millie or uncle Bob told you about them, they are effective because they work. Most trading systems, are affected by market conditions, volume patterns, and other factors. Using a trading technique that has not been analyzed in different market conditions, or failing to match trading techniques to the current market environment is asking for trouble. Making money in the stock market requires knowledge of what to trade, when to trade, and a variety of trading tools designed for different market conditions. Just as a carpenter will use several different tools when building a house, traders will use different tools to build their account. Using the same trading tool in all situations is like trying to build a house with just a hammer. Carpenters have tools designed for specific jobs, and so should traders. The successful trader has a tool box with a variety of trading tools for use in different market conditions. The trader, like the carpenter, must go beyond just acquiring the tools. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. Some tools, like a screwdriver, are fairly easy to learn how to use. Other tools, like a table saw, require a lot more training and experience to get the most out of. Most carpenters serve an apprentice period where they work with, and learn from, someone with years of experience. It is amazing how many people will just start trading their hard earned money without ‘learning the trade’ first.
The more traders understand exactly how and when their trading patterns work, the more effective use they will be able to make of each tool in the trading toolbox. Back testing does not guarantee future results. There are no guarantees in trading, and no way to know if any particular trade will be profitable or not. Backtesting helps remove some of the emotion, hunches, and unknowns in trading. It can show you how a particular system has performed in different market conditions in the past and what types of filters may be most interesting in prioritizing trading opportunities. Examples of six complete trading systems and how they perform in different market conditions is covered in ‘How to Take Money from the Markets’
Steve is the author of two trading books: “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. “How to Take Money From the Markets, Creating Profitable Trading Strategies” in which he uses the results of extensive backtesting techniques to smash trading myths and get to the truth of what has worked and what has not. The book provides six fully analyzed and tested trading systems and shows how they have performed in different market conditions. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques.
Parabolic SAR – powerful position exiting tool
The SAR in this indicator stands for stop and reverse. That means that with this indicator you are always in the market. You simply reverse the position when the stop level is reached. When you are on a buy mode and the stop is reached, then you switch to a sell (or short) mode. If you are on a sell mode and the indicator turns bullish, then you switch to a buy mode.
To see the Parabolic SAR indicator in the TradingExpert system, open a stock chart and click the ParaSAR indicator in the Control Panel. Since this indicator overlays the stock price chart, it is found in the upper half of the Control Panel. The Parabolic SAR indicator is shown in the chart below. The indicator gets its name from the shape assumed by the trailing stops that tend to curve like a parabola. Dots below prices indicate a long position while dots above the prices indicate a short position. The dots represent the stop and reverse points.
As the prices move higher, the rising dots below the price action tend to start out slow and then accelerate with the trend. The slow start in the indicator allows a trend to take place. As the stock moves higher, there is an acceleration factor and the indicator moves faster until it catches up to price action. The same is true for stocks that are falling. This is a trend following indicator so it obviously works best on volatile stocks that are in trends. Even on trending stocks, there will be whipsaws.
For short-term swing traders who deal with volatile stocks such as those found on the Nasdaq, the Parabolic SAR indicator may help improve entry and exit points.