All posts in "Day-Trading"

Systematic Trading Continued. Unwrapping the onion

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By NikolayFrolochkin from Pixabay

Systematic Trading Continued. Unwrapping the onion

by SCOTTMARCH 15, 2017

One continual theme in my own trading is that every time I think I have it figured out – I get punched in the face with a unexpected problem. The tendency is to go more complicated, but often the solution is a degree of acceptance around the nature of the game. Sometimes my edges work, sometimes they don’t. Sometimes they stop working for long periods, 6 months or more. That’s actually ok for me, but it’s not ok for other people. The ultimate systems you choose have to suit your personality. If you cannot handle extended periods of working hard without making money (I can) then you have to retool your systems to avoid this.

My opinion is that the best edges are robust. Robust edges tend not to disappear, but not post objectively high results either (in SQN, Sharpe or expectancy). I’m an investor in a fund with the following returns (after fees) off a very simple and standard approach to trend following, no different to a number of other firms doing very similar things. You can see this is clearly an amazing investment, but it is lumpy, producing 108% in 2008 but a few negative years. Sharpe ratio is only .7 or so, not institutional grade for most people. But the edge is robust, demonstrably provable and the system is simple and I understand it. It is almost inconceivable that in 20 years (the timeframe I intend to keep this investment) I will be looking at an empty account saying “I wonder why trend following stopped working”. Almost certainly, if the bear dreams come true, the odds are strong that this will post a triple digit year. This, for me, is the gold standard of a robust edge.

mulvaney

My opinion is that simplicity is sophistication, and complexity is laziness.

The first thing you need to figure out, before you go any further is:

Is it an edge? – Use a scatter plot to figure that out. If you don’t want to do that then pick the classic edges which other professionals use and you won’t go too far wrong.

This is actually a special day for me on Evilspeculator. For years when I was a regular here I was telling people to get off their asses and do the damn work of finding some edges and exploiting them. Mostly my advice went unheeded but every now and again someone gives me hope, just like Bobby did when he went all out on system creation. User Francis (Mulv) has gone out of his way to provide some excellent statistics on the fakeout setup which Ivan provided us with.

What he discovered is a classic property of mean reversion systems, which segues into a classic mistake we often make in backtesting. That problem would be selection bias, where if we select any random entry and test it on a market we know has gone up, then it will probably show an edge. We can subvert this tendency to bullshit ourselves by testing random markets (and keeping the results from ourselves so we can’t trick ourselves). Professionals call this “out of sample data”. Another method is to sequester part of your available data and keep it aside, then test your data against it, to see if your hypothesis matches clean data. One thing for sure we know

Mean reversion works DRAMATICALLY BETTER in the direction of the higher timeframe trend. So if this works as a short setup, as a long setup it should be better (or something is very wrong)

Let’s dive deep and take a look at the bounty he has provided. I haven’t had the time to personally verify these statistics, but at a glance they look right. Take it for what it is, an interesting learning exercise you can apply to your own potential setups, rather than an authoritative data set. Also, there is a significant chance I’ve misinterpreted the data, since it’s not my spreadsheet I’m working with. If so, mea culpa, but the learning exercise remains.

If you want detailed instructions on how to do this click here (and read the bit about adding the regression lines). I’ll break down the results for you. Firstly Francis has tested with and without the condition of the “break of the low of the setup bar”, so we can dive deep and see how much, if at all, it changes things.

The reason we want to test firstly without the break of the low/high and then with is that so we can test everything one at a time. Maybe if the setup works with the break of the low the effect is only due to the break. That is the kind of thing we want to know.

fo

At this stage I’ll look at just the long setups. As expected the short side in a bull market is categorically not an edge (in fact not surprisingly shorting the emini has been a good way to get your face ripped off the last 7 years). So bottom line, we have to take all these results with a grain of salt since it is a strong market.

Firstly lets look at what the market does on the day after making a double bottom (without breaking the high). You can see this is a decent positive correlation, the points are reasonably clustered (ok R squared value). This tells us what we would probably expect, that the market is trying to go up making a double bottom. One thing that would be worth testing is buying the close and selling the following close. Or alternatively buying the old spike low on a limit and selling the following close.

foday1

Day 2, however, is showing that the first day was just a blip. Market is now negatively correlated. Not what we would want to see, but perhaps the low is being retested (that’s drawing a very long bow)

foday2

On Day 3 we have a weak positive correlation, so the market is trying to rise.

foday3

So what do we have here? We have a market with very weak tendency to rise on day 0 and day 3 after making a double bottom. This is not at all what we would expect from a strong edge, aside from day zero it’s not an edge at all.

When we move on we will consider, firstly how it behaves with the break of the lows/highs as part of the condition. Then we will consider it as a component of mean reversion, at bollingers/keltners/50 bar highs/lows. The logic for this is sensible, perhaps a reversal setup is better at an extreme.

For now we have to conclude that there is nothing inherently bullish about a double bottom in ES beyond an intraday bounce. That’s great to know, and tomorrow we will continue.

My apologies for this being slower going than I thought, and apologies for rambling a little today. I’ll pick it up again tomorrow :-)
Published at Wed, 15 Mar 2017 10:43:19 +0000

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Domino’s Streak of Strong Sales Growth Continues

by Riedelmeier from Pixabay

Domino’s Streak of Strong Sales Growth Continues

By Daniel B. Kline | February 28, 2017 — 12:01 PM EST

Clearly, the Noid has been defeated.

Domino’s (NYSE: DPZ) continues to deliver results that defy the market conditions dragging down sales in much of the restaurant industry. The company posted comparable-store sales gains in both the United States and globally in the fourth quarter, its 23rd straight quarter of domestic same-store growth and its 92nd quarter in a row growing internationally.

And it’s not just that the company managed to add to its same-store sales totals: The numbers have been impressive. Domestic same-store sales climbed 12.2% year over year in Q4, and they jumped 10.5% for the full year. The chain’s international locations had 4.3% growth in Q4 and a 6.3% gain for the year.

“I’m extremely proud of our franchisees and operators worldwide, including those who contributed toward back-to-back years of double digit sales growth in the U.S.,” said CEO J. Patrick Doyle in the Q4 earnings release. “While these unprecedented results speak for themselves, I am most pleased with the passion and energy we demonstrated throughout 2016 in meeting the challenge of sustained success. The momentum and alignment within our system has never been stronger.”

A look at Domino’s numbers

In addition to growing same-store sales, Domino’s also improved its earnings per share. The company delivered Q4 EPS of $1.48, up 25.4% over the prior-year quarter. Full-year EPS came in at $4.30, up 23.9% over 2015. Revenue also climbed 10.6% year-over-year, despite the previous year’s quarter being a week longer.

Domino’s also provided indications that its expansion across the world is unlikely to slow down anytime soon. The company reported “record global net store growth of 1,281 stores in 2016, comprised of 171 net new domestic stores and 1,110 net new stores internationally.”

What’s next?

This is a clear case of “if it’s not broke, don’t fix it.” Going forward, however, Domino’s will tweak its formula. The company will continue to modernize the look of some of its stores, and it has been a steady innovator when it comes to ordering technology.

There’s nothing that suggest that an end is coming to either of Domino’s same-store sales streaks in the current quarter. Customers globally seem to have an ever-increasing desire for really convenient, mediocre pizza that this chain has been stunningly good at filling.

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Daniel Kline has no position in any stocks mentioned.
Published at Tue, 28 Feb 2017 17:01:02 +0000

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A New Low Volatility ETF Soars

{pixabay|100|campaign}A New Low Volatility ETF Soars

A New Low Volatility ETF Soars

By Todd Shriber | February 28, 2017 — 12:12 PM EST

Low volatility exchange traded funds (ETFs) were the talk of the ETF universe for a significant portion of 2016, but judging by recent outflows from some of these funds, investors currently are not overly enthusiastic on the low volatility factor.

Enthusiasm or not, some low volatility ETFs continue delivering solid returns and that includes some of the newer members of the group, such as the Fidelity Low Volatility Factor ETF (FDLO). FDLO debuted in September as part of a broader group of smart beta offerings from Fidelity, so the ETF is not old, but it was one of about 120 to ascend to record highs on Monday.

FDLO tracks the Fidelity U.S. Low Volatility Factor Index, “which is designed to reflect the performance of stocks of large and mid-capitalization U.S. companies with lower volatility than the broader market,” according to Fidelity.

A deeper look at FDLO reveals this is not what many are used to when it comes to low volatility ETFs, but that is not a bad thing. For example, FDLO’s largest sector weight is an almost 21.4% allocation to the technology sector, making FDLO the only U.S.-focused ETF dedicated to the low volatility factor that features technology as its largest sector weight.

Said another way, investors are unlikely to find rival low volatility ETFs that feature Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL) as the top two holdings, as is the case with FDLO.

Standard operating procedure for many low volatility ETFs is to feature overweight exposure to the utilities and consumer staples sectors, and maybe healthcare, too. FDLO’s 13.2% healthcare weight is nearly inline with the S&P 500, but the ETF’s 3.1% utilities weight is low compared to competing volatility-fighting equity funds.

While FDLO has its perks, including the availability of trading the ETF without a commission charge on the Fidelity platform, this is still a low volatility fund. What that means is that investors should be prepared for some lagging when the broad market is sailing higher. For example, FDLO is up 8.4% since inception, a performance that lags the S&P 500 by about 200 basis points.

FDLO charges 0.29% per year, which is inexpensive relative to other smart beta strategies, but nearly double the 0.15% annual fee on the rival iShares Edge MSCI Min Vol USA ETF (USMV).
Published at Tue, 28 Feb 2017 17:12:00 +0000

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The Psychology of High Intensity Interval Training

 

The Psychology of High Intensity Interval Training

High intensity interval training (HIIT) is an approach to exercise that replaces extended workout routines with shorter, more intense periods of activity that alternate with periods of slowing down.  The graphic above depicts one approach to HIIT; this article outlines several common protocols.  HIIT is related to super slow approaches to strength conditioning, which emphasize the value of fewer repetitions performed slowly and carried out to the point of failure.  The idea is that the body achieves maximum adaptive response when it is challenged intensively for short periods of time.  This makes exercise time-effective as well as effective for aerobic conditioning and strength-building.

Interesting from a peak performance perspective is the psychological impact of HIIT.  Viewed as psychological training, HIIT can be seen as a system for routinely challenging one’s limits.  Imagine starting every day by testing your limits and extending those.  Day after day, we become accustomed to extraordinary effort and we improve our capacity to sustain effort.  After all, when we push our limits with super slow activity and high intensity effort, we also have to sustain a high degree of focus and cognitive intensity.  As I wrote about the preparation routine of legendary wrestler and coach Dan Gable, his workout routine included intense visualization as well as physical effort.  His training extended to mind and body.

And what about training for traditional performance fields, from athletics to the performing arts to trading?  Would such training benefit from high intensity routines?  Would traders learn markets better if their learning did not take place in a classroom, but instead in an environment of intense simulation?  If we don’t systematically test our limits, can we truly hope to extend them?  If we don’t train for extraordinary effort, can we expect to summon our best in moments of challenge?  High intensity interval training may pose benefits across many domains, as a framework for self-development.

Further Reading:  Life’s Formula for Success

My Trading Journal: 30 Day Trading Journal

Published at Sat, 10 Dec 2016 11:06:00 +0000

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Momentum in the Market: Trade It or Fade It?

 

Momentum in the Market: Trade It or Fade It?

A trend day is basically a day with momentum on the day time frame.  The buyers or sellers so dominate the market activity that the other side backs off for the remainder of the session.  That is what we saw in yesterday’s trade:  once we broke to new highs with significant uptick readings, the buyers remained in control for the session.  I find it useful to track the distribution of NYSE TICK readings during the trading day to identify when we have made significant shifts in buying/selling and when we are extended within a relatively static range.  That shift of distribution often makes the difference between trading strength or weakness versus fading it.

The momentum principle is true on longer time frames as well.  Yesterday’s post took a look at the absence of market weakness as an indication of potential future market strength.  Now let’s look at the presence of market strength, such as we saw in yesterday’s session.  Does that tend to lead to future weakness as an overbought signal, or does it tend to yield further gains as part of momentum?

If we track the number of NYSE stocks closing above their individual Bollinger Bands and those closing below, we find that 412 closed above their bands.  That is a huge number; one of the highest since I began aggregating these data in 2014.  For comparison, since 2014, the median number of stocks closing above their bands each day has been 62 with a standard deviation of 69.  We’ve had 48 occasions over that period in which more than 200 stocks have closed above their upper bands in a trading session.  Five sessions later, the average price change in SPY has been a loss of -.13%, compared with an average gain of +.15% for the remainder of the sample.  When we look 20 days out, however, the average gain in SPY after the strong session has been +.96% versus an average gain of +.49% for the remainder of the sample.  While it’s been normal to have some near-term pullback after extreme strength, it’s also been common for the strength to resume.

The market spends much of its time trading in a range.  During that range trade, by definition the moves higher and lower lack the momentum to be sustained.  The best trading strategy is to recognize the loss of momentum and fade the strength or weakness.  Once we expand buying or selling, however, we can get the breakouts from ranges in which strength or weakness leads to further strength or weakness.  We lose flexibility when we identify ourselves as range (mean reversion) traders or trend (momentum) traders.  One of the great challenges of trading markets lies in recognizing shifts in buying and selling regimes.

Further Reading:  Tracking Institutional Participation in the Market

My Trading Journal: 30 Day Trading Journal

Published at Thu, 08 Dec 2016 11:03:00 +0000

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What is Your Recovery Plan After Trading?

 

What is Your Recovery Plan After Trading?

Many thanks to a savvy portfolio manager who passed along this dramatic account of what professional football players go through to recover from their weekend games.  One of the big points of the article is that the longevity of a professional career is partly a function of the time spent in recovery on Mondays.  Tending to the body after injuries allows for faster healing and prevents those injuries from compounding to the point where they lead to disability.

The principle of recovery is important for all performance professionals, if not so dramatically as in football.  In performance, we push beyond our comfort zones, and that effort taxes us.  A great example is willpower.  When we’ve focused and made critical decisions under pressure for an extended period, that willpower runs out of power.  We become fatigued, and in the fatigued state we’re more likely to make mistakes and fall into old habit patterns that cost us money.

Imagine a person who works nonstop planting grass seed and becomes so exhausted that they fail to water the areas they planted.  We can wind up pushing ourselves to the point where we fail to water ourselves.  We fail to take the time to renew our energy and that takes a toll on performance.

We often hear that traders should plan their trades and trade their plans.  Less appreciated is the importance of plans and routines for recovery.  What are you doing on evenings and weekends that renews you?  Of the four main sources of well-being, which ones are you cultivating in your time away from markets:

Happiness, and doing things that are fun and enjoyable
Satisfaction, and doing things that are meaningful
Energy, and doing things that energize you mentally and physically
Relationships, and doing things that bring you closer to the ones you care about

A good recovery plan should include healthy eating, high quality sleep, and activities that check all four of the boxes above.  

It’s the watering you do at night and on weekends and holidays that allows your career to blossom during the work day.

Further Reading:  A Personality Questionnaire for Traders

My Trading Journal: 30 Day Trading Journal

Published at Tue, 06 Dec 2016 11:49:00 +0000

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A Unique Way of Tracking Market Strength and Weakness

by geralt form Pixabay

Photo

Above we see a cumulative running total of the number of NYSE stocks closing above their upper Bollinger Bands minus the number closing below their lower bands.  (Data from the Stock Charts site).  This is an interesting measure, because it tells us how many issues are distinctively strong versus weak.  The slope of the cumulative line is as important as the direction, as it gives us a sense for the breadth of market strength or weakness.  Note the anemic bounce in the cumulative line since the election lows.  This reflects the very mixed breadth of the market rise–some sectors quite strong, others distinctively weak.  Still, the line has been consistently rising, reflecting relatively little weakness among stocks.  For example, the past two days we’ve seen 95 and 103 stocks close above their respective bands, but only 5 and 9 stocks close below their lower bands.  In general, to get a sustained market decline, we need to see not just a reduction in market strength, but an expansion of weakness.  

The absence of weakness very often is a useful predictor of future market strength.  For example, when the number of stocks below their Bollinger Bands has been in its lowest quartile since 2004 (little weakness), the next 20 days in SPY average a gain of +.95%.  When the number of stocks below their bands has been in their highest quartile (great weakness), the next 20 days have averaged a gain of +.70%.  All other occasions have averaged a 20-day gain of only +.21%.  It’s a nice example of how so much in the way of market returns comes from the relative extremes of momentum and value.

Further Reading:  Momentum, Value, and Short-Term Market Movement

My Trading Journal: 30 Day Trading Journal

Published at Wed, 07 Dec 2016 11:01:00 +0000

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The Path of Persistence

 

The Path of Persistence

Here’s a great exercise:

Review your trading journal and/or your written goals and plans over the past several months.

How many items appear repeatedly, over many days per week and over many weeks?

Change is rarely instantaneous.  Enduring change requires repetition.  Repetition requires persistence.  

If your notes and journal entries don’t have items you work on repeatedly, over time, then you’re simply logging one good intention after another.  The path of least persistence rarely is the path to success.

And if you’re not persisting in keeping a journal, setting goals and plans, and chronicling your progress and learning?

We don’t win by persisting at trading.

We win by persisting at working on our trading.



Further Reading:  How Ordinary Traders Become Extraordinary

My Trading Journal: 30 Day Trading Journal

My Trading Journal: 30 Day Trading Journal

Published at Mon, 05 Dec 2016 11:09:00 +0000

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Trading Model and Market Update

 

Trading Model and Market Update

Here’s an update of the multivariate trading model I keep for SPY.  A number of variables go into the ensemble model, including buying pressure, selling pressure, breadth, sentiment, and volatility.  Readings of +3 or greater and -3 or less have had particularly good track records in and out of sample, anticipating price change 5-10 days out.  Note that we hit a -3 reading on Friday; prior to that we saw +3 readings shortly before and after the election.

Thus far, we are not seeing significant breadth deterioration in stocks.  For ten consecutive sessions, we have had fewer than 200 stocks across all exchanges register fresh monthly low prices.  This breadth strength generally occurs in momentum markets; weakening of breadth–particularly an expansion in the number of issues making fresh lows–tends to precede market corrections.  It is not at all unusual for momentum markets to correct more in time than price.  We’ve seen selling pressure the past two sessions, but not significant price deterioration.  This dynamic allows momentum markets to stay “overbought” for a prolonged period as price consolidates and often grinds higher.

Further Reading:  Previous Model Update

My Trading Journal: 30 Day Trading Journal

My Trading Journal: 30 Day Trading Journal

Published at Wed, 30 Nov 2016 10:13:00 +0000

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Trading Market Flows by Sustaining the Flow State

 

Trading Market Flows by Sustaining the Flow State

 

The flow state is one in which we become highly absorbed in our activities, losing a sense of time and experiencing deep pleasure.  A great example of flow comes from the drumming movie mentioned in the previous post.  The drumming greats are not explicitly thinking about what they are doing, what they should do, or what they should have done.  The skill is flowing through them, and they are performing in a profoundly fulfilling zone.

The capacity for operating within a flow state is one that can be developed.  Indeed, we can look at deliberate practice as a training ground for flow.  As we tackle one challenge after another, we also extend our capacity to sustain the flow state.  Flow requires an ability to operate outside our comfort zones, but our limits of willpower make it difficult to stay outside our sphere of comfort.  A fascinating study by Judith Lefevre found that people experience flow more often in work than in leisure, and yet they are more motivated to seek leisure than work.  She notes:

“It is possible that the higher levels of concentration and activation in flow cannot be tolerated by most people for extended periods of time.  In making the choice to spend their leisure time in the low challenge, low-skill context rather than flow, the workers may be indicating their preference to rest from the demands of work, even at the cost of an overall reduction in the quality of experience.”  p. 317

If the research on flow is correct, then much of traditional trading psychology is wrong.  The elite athlete, drummer, or chess player does not achieve flow by controlling emotions, imposing discipline, or basking in awareness of their feelings.  Rather, flow is achieved by shifting to an entirely different state of consciousness, not by rearranging the components of normal consciousness.  That different state requires sustained, relaxed focus and immersion in experience.  That shift of state is one in which we experience ourselves and the world differently.  It’s also one in which we become sensitive to patterns in the world around us.  A wonderful portion of the drumming movie pans to the lake surrounding the camp and the sounds of the insects and lapping water.  It is impossible to not hear a poly-rhythmic drumming in the sounds of nature–something we would have never apprehended prior to watching the film.

 It is in this context that Campbell’s observation is profound:  when we follow the bliss of operating within the zone, doors open to seeing the world in new ways.  Patterns that are hidden to us in normal, distracted consciousness pop out when we in a flow state.  In our normal state, we try to perform well; in the zone, performance flows through us.

Are you trying to correct your mistakes while you’re trading?  Are you trying to avoid poor trading practices?  If so, you’re trading in a flaw state, not a flow state.  Flow requires a loss of self-awareness; not thinking positively or negatively about ourselves, our P/L, or our performance.  

One of the greatest dilemmas we face as traders is that we benefit from following our bliss, but we are limited in our capacity to sustain bliss.  It may well be the case that the greatest value of preparation for trading and review of trading is the exercise of the capacity for relaxed concentration.  In building our capacity for flow, we cultivate the state of consciousness in which we’re most sensitive to the flows of markets.

Further Reading::  Why It’s Important to Go With the Flow State

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Sat, 26 Nov 2016 13:08:00 +0000

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Drumming, Trading, and Greatness of Performance

 

Thanks to an unusually creative and savvy trader for recommending the movie “A Drummer’s Dream“.  The movie, available via Netflix, takes place at a camp for young drummers in Canada.  The instructors at the camp are some of the world’s most talented drummers.  The movie interviews the drummers and shows them in action, both as performers and teachers.

A few fascinating takeaways from the movie:

Many of the drumming greats started at an early age and practiced intensively, reaching a high level of talent early in life.  Watching someone like Mike Mangini, it’s clear, per the Seykota quote in Market Wizards, he doesn’t have talent; the talent has him.

Several of the drummers talk about being in a zone when they are performing at their best.  They also talk about drumming as fun.  There is an exuberance to their performance that suggests that immersing oneself in the fun of exercising a talent is essential to reaching and staying in that zone.

The learning process for the young drummers was one of observing the greats in action, having the great drummers explain and model techniques, copying those techniques under the watchful eye of the instructors, and repeating skills until they are familiar.  

There is an unusual bond among the drumming legends based upon respect for one another and a sharing of a common passion.  Many of the legends have performed with one another and value that collaboration.

Now think about the learning process for most traders:

*  Do most traders begin early in life and engage in intensive deliberate practice before actually performing in real life settings?

*  Do most traders find a zone of performance based upon love of what they do or does P/L emphasis and pressure make that zone difficult to find?

*  Do most traders truly learn by observing and copying masters and intensively repeating techniques and skills?

*  Do most traders find a collaborative bond with peers and mentors that sustains their passion and learning?

It is not surprising that there is a very high failure rate among new traders.  What other field features people trying to make a living from performance before they’ve truly learned how to perform?  How many traders, per Lionel Hampton, experience their work as a path to the divine?

Further Reading:  What It Takes to Trade in the Zone

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Fri, 25 Nov 2016 13:49:00 +0000

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Reading Supply and Demand for Stocks During the Trading Day

 

Who is in control of the day session for stocks:  buyers or sellers?  A straightforward way to assess this is to track the NYSE TICK ($TICK), which continually updates the number of stocks trading on upticks versus downticks.  If we see broad buying, we’ll see very high (+800 or greater) TICK numbers.  Broad selling gives us readings of -800 or lower.  

Above we can see the five minute TICK readings for yesterday’s trading session.  Note that we opened with significant buying interest and stayed above the neutral zero (yellow) line for most of the trading session.  Most important, we never saw selling readings of -800 or less.  Quite simply, many more stocks traded on upticks than downticks over time, not so much because upticks were extremely high as because we had a relative absence of selling pressure.  That absence of sellers was a great tell that prices would remain firm through the session.

By watching the distribution of TICK readings–and shifts in that distribution–through the trading day, we can become sensitive to demand/supply changes that typically occur at market turns.  When the distribution is one-sided, recognition of that fact can keep us out of bad trades.

Further Reading:  Tracking the Stock Market With a Broad TICK Measure

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Tue, 22 Nov 2016 10:57:00 +0000

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Correcting Two Great Trading Psychology Mistakes

 

Too often, traders take in one piece of information after another, reading emails, scanning charts, reviewing research pieces, tracking news, and talking with other traders, and never get to the point where the information is transformed into knowledge.  Someone trading the stock of a company may compile all sorts of statistics and news items about that company, but those in themselves don’t ensure a knowledge of the company’s competitive advantages and disadvantages or its growth potential.  If someone gathered pieces of information about our lives, would they truly understand us?

We often hear that the heart of trading psychology is discipline and the control of emotions.  Other times, we hear that openness to and awareness of our emotions is crucial to enlightened decision making.  Both perspectives have merit, yet both make the mistake of assuming that trading psychology is basically about what and how we feel.  

Not so.

Every bit as important to our trading as our emotional psychology is our cognitive psychology:  how we process information and turn it into knowledge.  Indeed, I would argue that, as we move from beginning traders to experienced ones, emotion becomes less of a central focus for trading and information processing becomes more critical.  Lo and Repin, for example, found that traders responded to heightened market volatility with emotion, with inexperienced traders far more reactive than experienced ones.  Experienced, successful traders may or may not wrestle with emotional responses to a market scenario, but they will always be actively involved in processing that scenario and searching for opportunity.

Two cognitive psychology mistakes are common among traders:

1)  Not making the time to assemble information into knowledge – Key to knowledge is finding meaningful patterns in data and placing those patterns into a framework for understanding.  In my trading, I track statistics ranging from volume, breadth, sentiment, and buying/selling pressure, but it’s the integration of the data that contributes to understanding.  One form of integration is in the form of a mathematical model.  Another form is a conceptual framework that is grounded in the concept of market cycles.  If I get so caught up following the data that I don’t engage in integration, I will fail to perceive valid trading opportunity.  Equally problematic, I will tend to act on individual pieces of information that grab my attention without placing that information into proper context.

2)  Not playing to our information processing strengths when we generate trading ideas – Each of us is quite different in how we make sense of the world.  Some of us are quite mathematical and analytical, assembling views from the ground up.  Others are conceptual and qualitative, looking for broad patterns to derive a top-down view of the world.  My most native form of information processing is writing.  Quite literally, writing is my way of thinking aloud and generating an internal dialogue that places information into perspective.  Other traders accomplish the same thing by reading and taking notes; still others by engaging in multiple conversations.  Far too often, traders fail to reach their potential because they’re not accessing their cognitive potentials.  They are making sense of markets in someone else’s style, not their own.

I’ve recently begun an experiment in which I engage in very extended journaling, writing out my assessment of the most recent day’s market and where it fits into the broader picture of market cycles, but also writing out every single trade that I place, why I placed it, what worked and didn’t work, and what I have done well or could have done differently.  The depth of the journaling is far different from the typical end of day notes on trading and markets.  In practice, I keep writing and writing until I get to the point where knowledge results from the information.

It’s early days, but the method so far has been helpful.  One unintended consequence:  I find myself feeling more confidence in trades when I’ve processed the opportunity in greater depth, in ways that are most productive for my sense-making.

Further Reading:  The Two Brains of Trading

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Thu, 24 Nov 2016 11:51:00 +0000

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A Strong Market is One With Few Weak Stocks

 

A Strong Market is One With Few Weak Stocks

We often think of a strong market as one in which many stocks are making new highs.  Interestingly, a better indication of market strength has been the absence of weakness: few stocks making new lows.

One way I track this is the daily number of listed stocks making fresh one-month new highs and lows.  (Data from the Barchart site).  When the number of shares making monthly lows is in its lowest quartile since 2012, the next five days in SPY have averaged a gain of +.32%.  When the number of shares making monthly lows has been in its highest quartile, the next five days in SPY have averaged a gain of +.53%.  All other occasions have averaged a gain of only +.02%.  

The absence of new lows occurs when we’ve had a momentum rise that has lifted the great majority of stocks.  That has been the case recently.  That momentum tends to continue over the near term.  Conversely, when we make an important low, we see an expansion of fresh lows.  That tends to bring in value participants and strength over the near term.  Much of market strength can be traced to such momentum and value effects.

It’s but another example of how looking at different data in a different way can yield helpful trading insights.  Markets are ready to turn around when one or more sectors show weakness and we start to see an expansion of new lows, even as the index might be hovering near highs.  When there is very little weakness, we have an important clue as to strength.

Further Reading:  Strength and Weakness as Separate Market Dimensions

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My Trading Journal: 30 Day Trading Journal

Published at Wed, 23 Nov 2016 10:39:00 +0000

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Living Your Ideals and Other Great Ideas to Start the Week

 

*  Every serious trader is a leader, running a trading business.  Would you want to work for the business you’re creating?  Would you follow yourself as a leader?  Would you allocate your hard-earned money to someone who manages their trading the way you do?  Inspiration follows from aspiration: We are most energized when we live up to our highest ideals.

Great weekly perspective from Jeff Miller; excellent focus on what’s really important for markets.  A useful way to read Jeff is to make it a point to visit the sites he links to in his posts.  Enhancing your information set is essential to enhancing your ability to recognize opportunities and turn those into successful trades and investments.

*  Here’s a useful post from Adam Grimes on how to calculate volatility in Excel.  Every weekend I work on a new research project.  This weekend I took a hard look at the volatility of buying and selling activity in the stock market by tracking the volatility of upticks and downticks.  There was a distinct tendency for returns in SPY to be superior when buying and selling volatility have been high; returns to be subnormal when buying and selling volatility have been low.  More to come on this topic.  Recently, we’ve had relatively high volatility readings for buying and selling, helping fuel the current rally.

*  Another excellent site for perspective is Abnormal Returns.  The most recent links include valuable views on the recent decline in bonds.  AR is a very useful way to discover sites that enrich your thinking about markets.  

*  A feature I like on Stock Twits summarizes the message volume and sentiment for stocks and ETFs.  Small caps have been on fire since the election, and message volume for IWM has been high.  Interestingly, though, 45% of participants have been bullish on IWM and 55% bearish.  We’re hovering near highs for the broad indexes, but I’m not seeing frothy sentiment so far.  My “pure sentiment” measure, which takes recent price change and volatility out of the equity put/call ratio, has been surprisingly bearish during this rally.

Have a great week trading!

Brett

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Mon, 21 Nov 2016 09:47:00 +0000

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What Do You Do After a Big Winning Day?

 

What Do You Do After a Big Winning Day?

A little while ago, a trader who has been quite successful this year sent me a draft of his trading plan for the new year.  Shortly after, he had his best day of the year.  I have little doubt that he’ll use information from the winning day to help him build on his strengths and hone his goals for 2017.

That’s what winners do.  They learn from what they do wrong, they learn from their successes, and they translate their lessons into plans and actions.  A big winning day is a double win if you can figure out what you did well and replicate that success going forward.  Maybe the big day was a function of a particular type of market action that you recognized early on.  Maybe the big day was a function of researching great trade ideas.  Maybe the big day was a function of sizing up a position you had prepared well and saw clearly.  

Suppose you catalogued your top 10 trades of the year, where you fired on all cylinders, making the most of your trading process.  What patterns of success would you discover?  What best practices could you identify that you could bring into the new year?

Good traders celebrate after a win.  Great traders treat wins like losses and learn from both.

Further Reading:  How to Become a More Confident Trader

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My Trading Journal: 30 Day Trading Journal

Published at Fri, 18 Nov 2016 13:24:00 +0000

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Trading Model Update: Finding Edge in the Market

 

Above is an update of my ensemble trading model, which combines individual predictive models for SPY over a 10 day horizon.  The individual models include measures of buying and selling pressure, institutional participation, volatility, breadth, sentiment, and cycle status.  The best signals occur at +3 and above and -3 and below; we currently stand at +2, with a mildly bullish bias.  We had +3 readings on 11/1 and 11/2 and, despite considerable election-related volatility since then, we stand meaningfully higher at this point.  

At present, breadth has been expanding, in no small part due to the strength of small cap stocks since the election.  We have also seen selective strength among sectors, most notably the financial and industrial sectors deemed to benefit from the new administration.  Stocks making fresh three-month highs have expanded to their greatest level in many months.  It’s exceedingly rare for such expanding breadth to suddenly reverse and morph into a bear market.  Rather, these momentum phases of a cycle tend to fade away, with decreasing volume and volatility and divergences of new highs, as value investors no longer perceive value and pull back from segments of the market.  I would expect the model to turn bearish should volume and volatility pull back and should we see diminishing institutional participation on any further strength.

Meanwhile, the model components contributing to the modestly bullish current reading include sentiment, institutional participation, and buying pressure.  In a nutshell, sentiment (adjusted for volatility and recent price movement) has been unusually bearish; participation has been quite high; and a growing proportion of that participation has been channeled toward buying.  Those dynamics have had me in the mode of buying dips.  Equally important, the model readings have prevented me from fading strength, which I’ve seen a number of traders doing, perhaps caught up in a bearish bias related to the election result.  The psychological value of a well-constructed trading model is that it imposes the discipline of patience.  Instead of assuming that I have an edge in trading, the model tells me when the market is affording edge.  That’s an important distinction that takes a lot of ego out of trading.  Once we realize that edge is a function of opportunity set in the market, we can flexibly adapt to changing market conditions.

Further Reading:  Quant Models and Trading Psychology

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My Trading Journal: 30 Day Trading Journal

Published at Sat, 12 Nov 2016 12:11:00 +0000

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Mastering Trading Psychology: Free Webinar Today

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Mastering Trading Psychology: Free Webinar Today

We would never choose to trade in a noisy and polluted physical environment, and yet many times we find ourselves trading in the psychological equivalent.  When we are distracted, frustrated, and filled with negative thoughts, we unwittingly create an environment that works against our success.  That is why successful traders work on themselves and not just on their trading.

At 4:30 PM EST today, I will conduct the second webinar this week, this time focusing on psychological best practices and specific techniques for dealing with the psychological challenges of risk, reward, and uncertainty.  The free webinar is hosted by John Locke and team; a link for registration can be found here.

One unique aspect of the webinar is that I will be conducting most of it as a group coaching, where participants can bring their questions and challenges and I’ll provide specific help in addressing those.  Hope to see you there!

Brett

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Thu, 03 Nov 2016 11:27:00 +0000

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How Productive Are You During The Trading Day?

 

How Productive Are You During The Trading Day?

It’s been a good thing that I’m doing two webinars this week focusing on different aspects of best practices of the best traders I’ve known.  (Next webinar is at 4:30 PM EST tomorrow).  Reviewing the practices of successful traders helps me put into perspective what works in markets and what doesn’t.  Time and time I’ve found that to be the case: in teaching others, we cement our own learning.

One best practice that came out in yesterday’s session was the quality of time spent *not* trading, particularly when markets are open.  When I think about really good traders I’ve worked with, the great majority don’t spend their entire trading days staring at screens.  Rather, they identify opportunity in advance, do their trading, and then move on to other productive activity, including researching new strategies and opportunities.  Like any good company, the best traders spend significant time on research and development and reviewing/improving their own performance.  That’s what keeps them learning, growing, and adapting to changing markets.

It’s sad to say, but many traders spend so much time trading that they never do the things needed to truly master their craft.  Peak performance requires time deliberately working on performance.  A useful exercise is to look at your research and development pipeline and see if you’re really moving the ball forward in your growth as a trader.  If not, it might be useful to work on articulating your processes away from screens in as detailed a manner as you plan your trading time.

Further Reading:  How to Use Your Calendar to Become More Productive in All Activities
Get The #1 Daily Trading Journal: TTW 30 Day: My Trading Journal

Published at Wed, 02 Nov 2016 13:02:00 +0000

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Best Trading Practices: Trading Psychology Webinar

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Best Trading Practices: Trading Psychology Webinar

How do successful traders generate, express, and manage their best ideas?  What best practices can you take away from your own successful trading?

After the market close, at 4:30 PM EST, I will be conducting a free webinar hosted by the SMB Options Tribe.  A good amount of time will be devoted to your questions about raising your trading game through best of breed trading practices.

Here is a link for joining the webinar; hope to see you there!

Brett
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Published at Tue, 01 Nov 2016 09:39:00 +0000

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