A trading log is an important element of a successful trading strategy.This presentation, recorded from last week’s free presentation will take you through the process of developing a trading log and why a trading log is critical to successful trading. Click on this link to view the archive
http://prowebinars.na5.acrobat.com/p10075144/
During the presentation Steve shared his personal trading log with attendees. This log is available for you to download at the following location
The large drop in the market on Thursday was interesting, but the question is always what does it mean, and what is likely to happen next. In order to get some insight into this question I ran a test that looked back over the last three years to see how many times the market was down at least 80 points, and what would happen if I had bought at the opening the next day. The table to the left shows that during the last three years the market was down at least 80 points 16 times. If you bought the market the next day, and sold the following day, you would have been profitable eight times and shown eight losses. Essentially being down more than 80 points has not been predictive of whether or not the market will be up or down in the short run. When the market shows strong down days, like we saw on Thursday, the news media is full of stories about major corrections and the like. The news media’s job is to sell commercials, advertising space, and not necessarily to provide actionable information for traders. The market’s behavior over the last three years indicates that in the short-term it is just as likely to bounce after an 80 point drop as it is to continue going down. Based on this data we need to look elsewhere to determine an effective trading plan.
Extensions below the lower Bollinger band are unusual, as you can quickly verify by just scanning a NASDAQ chart for the last couple of years. The Bollinger bands contain the vast majority of the price action, and movements outside the band rarely last more than two or three days. The market typically moves back inside the lower Bollinger band by either moving sideways for a few days, or bouncing. I ran another test that bought the market every time the NASDAQ closed at least 10 points below the lower Bollinger band. I ran this test over the last 36 months using a one-day holding period to determine whether or not closing below the lower band was predictive of short-term behavior. The results, as shown in the chart to above indicate that during the last three years the market closed at lease 10 points below the lower band 21 times, and buying the open the next day and holding for one day was profitable 12 times and showed losses nine times. 57% of the time the market bounced. This data, along with other extensive testing, is why I take profits on short positions when the market becomes extended below the lower Bollinger band. It’s not a guarantee, but if the market bounces in the short-term 57% of the time then in the long run I am better off to have taken profits on shorts when the market moves below the lower band.
Trading is a statistical business, there are no magic indicators that tell you what is going to happen in a given situation every time. Trading is about knowing how the market, and different stock patterns, usually behave in a given situation; and then being positioned to profit if the market, or the stock set up, do the normal thing. Since by definition they do the normal thing most of the time, over the long run I have a good chance to see profits. On any given trade I do not know what is going to happen, it may be a winner or a loser, but over the long run being positioned to profit when the market or stock position does the normal thing is the way to bet.
Sometimes traders will start trading more aggressively when they are down in an attempt to get back to even. Draw downs are a fact of life in trading. Trading is not like drawing a paycheck. You do not get paid because it is Friday. I research the systems and then use that information when trading. If I have a losing streak I know that is to be expected and just stay focused on using the knowledge and skills that come from fully testing and analyzing trading systems.
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.
Volume patterns have an important effect on many trading systems. Volume measures the interest in a move, it shows how many people are interested in the current price pattern and how they are voting with real money. Rather than listen to the talking heads on the business channels discuss their opinions of what is going on, it is better to look at the volume patterns and see what people are actually doing with their money.
Serious traders will go through a learning curve as they study market behavior and how their trading systems function. They will have times when they run into situations that have not been experienced or researched and they may be unsure of what to do. This is normal, it is the price of admission to the trading business. My general rule is that when I am unsure I close the position. It is hard to go broke taking profits so my focus is on needing a clear reason to stay in a position, not wondering whether or not I should get out. If there is no clear reason to hold I take profits and move on to another trade.
When trading I am not holding out for the perfect trade, there is no such thing. Trading is about managing risks and I use the current market conditions to determine how many trades to be taking and the appropriate position sizing to use. Setups with more room to run are prioritized above ones with little room to run. Setups triggering on stronger volume compared to the previous days volume are prioritized above ones with lower trigger day volume. Setups with shallower pullbacks are prioritized above ones with deeper pullbacks. I then look at the setups that are triggering andstart from the top of the prioritized list and work down until I run out of setups or fill the number of positions I am interested in.
When I go to a trading conference I often ask how many traders are bullish, a number of hands go up. I then ask how many traders are bearish and more hands go up. I then ask how many traders do not care if the market is bullish or bearish, this usually generates some chuckles and a couple of hands. The serious traders do not care whether the market is going up or down, they know it is out of their control and they have tools to deal with both conditions so it does not matter. The traders laughing at this question usually have interesting stories of significant drawdowns from guessing incorrectly. Try not to be bullish or bearish, just focus on where the markets key trend lines and support/resistance levels are and adapt to what the market is actually doing.
Sometimes I will see traders trading weaker patterns because they have had a good winning streak and are ‘using the house’s money’. Nonsense, profits are yours there is no house. Each trade must stand on it’s own. Do not be tempted to trade weaker patterns after a winning streak. Stick to what works. Dance with the one that brought you.
Sometimes traders will start trading more aggressively when they are down in an attempt to get back to even. Draw downs are a fact of life in trading. Trading is not like drawing a paycheck. You do not get paid because it is Friday. I research the systems and then use that information when trading. If I have a losing streak I know that is to be expected and just stay focused on using the knowledge and skills that come from fully testing and analyzing trading systems.
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.
When the market is falling and the charts look terrible, your emotions want you to sell. Conversely, when the market is rallying and the news is good, your emotions want you to buy. Unfortunately, this can lead to selling at the low or buying at the high. One way of controlling your emotions is to set some market timing rules based on AIQ’s US score, a unique indicator that can be found on the Market Log report.
While the Expert Ratings on an individual stock can be suspect, the Expert Ratings taken from a large database of stocks are more effective in classifying the health of the market. That is, when a lot of stocks are giving AIQ Expert Rating buy signals, a market rally may be near. Conversely, when a large number of stocks are giving AIQ sell signals, a market decline may be approaching. Expert Ratings are either confirmed” or “unconfirmed.” A confirmed buy signal occurs when a stock has a recent Expert Rating up signal of 95 or greater along with an increasing Phase indicator. The opposite is true for confirmed sell signals. Unconfirmed signals, however, occur when there is an Expert Rating of 95 or greater but the Phase indicator fails to move in the direction of the signal. It is the unconfirmed signals that you should be interested in.
AIQ’s Market Log report lists the percentage of stocks giving unconfirmed signals (US). The US score is found near the top of the report (Figure 1). The percentage of stocks giving unconfirmed AIQ buy signals appears to the left of the hyphen and the percentage of stocks giving unconfirmed AIQ sell signals appears on the right side of the hyphen. In the image below we see that of the stocks giving unconfirmed signals, 95% are on the buy side and 5% are on the sell side. To open the Market Log report, go to Reports and double-click Summary Reports and then Market Log. I run the Market Log report on the S&P 500 database.
It is important to keep in mind that AIQ Expert Ratings fire against the trend. As the market declines, the percentage of stocks giving unconfirmed AIQ buy signals increases. As the market rallies, few stocks give buy signals and more stocks register sell signals.
The US score serves as an overbought/oversold indicator for the market. That is, when the US score 85% or more on the buy side, then that implies the market has recently experienced a sharp decline, is oversold, and due for a rally. Conversely, when the US score shows 85% or more on the sell side, then the market has rallied and is overbought.
Some AIQ users immediately enter the market when the US score moves to 85% or more on the buy side. They exit anytime the US score is 85% or more on the sell side. I don’t recommend this approach because the market can stay overbought or oversold for quite some time. Instead, it may be best to wait for a trend-following indicator such as the Directional Movement Index to confirm the new trend direction.
Rather than using the US score as a strict market timing model, use it as a simple tool to keep your emotions in check. It helps you avoid buying high or selling low. Here is the rule: Don’t turn bearish on the market and sell positions when the US score shows 85% or more buy signals. Similarly, never turn bullish or add positions when the US score shows 85% or more sell signals. This rule sounds simple but your emotions will tell you otherwise. When the US score has a high percentage of buy signals, the market has fallen and news reports are gloomy. That’s when your emotions tell you to bail. You may be selling right at a low, however. You either should have already sold or you should wait until the market rallies enough to where the US score is no longer giving a bullish reading.
When the market rallies it gets easier to buy. News reports are better and you think you may miss a big rally if you don’t immediately buy. Your emotions tell you to buy more but the US score can counteract your emotions. Don’t buy until the market pulls back enough to bring the US score out of bearish territory. Preferably, wait until the US score turns bullish Monitoring the US score on a daily basis gives you a good indication of the market’s health. It helps to control your emotions because it turns more bullish as the market falls and it turns more bearish as the market rises.
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In addition to standard tools, AIQ TradingExpert Pro has some unique features that nearly every user would find beneficial. In this article, we’ll demonstrate the benefits of creating industry groups specific to your trading needs.
TradingExpert comes with two industry group structures, the Standard & Poor’s structure and the AIQALL structure. The software also has the ability to create new industry group structures. Those who use standard analysis tools may think creating industry groups is unimportant, but we’ll show that almost every user can benefit from AIQ’s industry group tools.People who perform a top-down analysis obviously find AIQ’s group analysis capabilities very important. These people first analyze industry sectors and groups and then pick stocks within the attractive groups.
Most people, however, are bottomup traders. They screen a broad database of stocks trying to find attractive trades. The group analysis feature in TradingExpert Pro is important for bottom-up traders as well.
By creating AIQ groups you can crate your own index and control which stocks comprise the index and you can see volume data calculated from the stocks in the index. A similar analysis can be done on the stocks in your portfolio. By creating a group of the stocks your trading system selects, you can see when the system outperforms the market indexes and when the system struggles. It helps tell you when you want to be active in your trading and when you should sit on the sidelines.
Groups can also be created to track mutual funds. By creating industry groups based on the 10 largest stock holdings of the mutual funds, one can analyze these surrogate groups using both price and volume-based indicators.
To create a surrogate mutual fund group, first build a list of the 10 stocks and then create an index for this group of tickers.
Step 1. Create a list name. In the Data Manager, click List and then New. Enter a list name and click OK.
Step 2. Create a group ticker. In Data Manager, click Ticker and New. Enter a ticker for the new group. Make sure the ticker symbol isn’t the same as an existing stock’s symbol. Click Group and then OK. Drag the group name to the left side of the Data Manager and drop it on the list name.
Step 3. Enter the stock symbols that comprise the group. In the panel on left side of the Data Manager window, single-click on the group ticker symbol which appears just below the list name. With the ticker highlighted, click List and Insert Tickers. Enter the ticker symbols that you want in the group separated by semicolons.
The next time you download data, indices for the groups will automatically be calculated. You can also calculate the groups by going to the Data Manager and clicking Utilities and Compute Group/Sector Indices. Highlight the list name and click OK. I repeat, having the ability to create industry groups or an industry group structure for your specific needs is a valuable tool for AIQ users. Whether you use the group feature to spot the rotation of industry groups or whether you use the feature to track the performance of a set of stocks, performing group analysis helps you to better understand the market environment.