Info!! Institutional Participation, Momentum, In Addition To The Thorny Inquiry Of When To Choke Winning Trades

One of the most hard challenges inwards trading is knowing when to leave of absence a position, especially a profitable one.  Loss limits y'all tin dismiss define firmly, risking no to a greater extent than than a given sum of your upper-case missive of the alphabet per idea.  Profit targets are a combat to a greater extent than elusive, however.  Will the displace inwards your favor croak along to brand y'all money, or volition it contrary together with erase a potential profit?

My recent efforts to separately define buying together with selling ability inwards the stock market were a starting fourth dimension endeavour to capture when markets, inwards the close term, were to a greater extent than probable to display momentum (continuation of cost movement) versus value (reversal of cost movement) effects.  In a nutshell, I constitute that momentum to the upside was positively correlated amongst buying activeness (the upticking of a wide attain of stocks).  Reversals typically followed from high levels of selling activeness (the downticking of a wide attain of stocks).  More latterly I've been studying whether buying/selling across a broader attain of shares is to a greater extent than predictive of momentum together with value than across a smaller let on of dominant large caps.  More on that topic to come...

What I notice interesting nearly the upticks together with downticks, when disaggregated, is that they are typically occurring at exactly the same time.  When I aspect at the upticking together with downticking 2nd past times second, an odd let on of stocks volition tick inwards the same management at the same time.  This reflects the buying or selling of baskets of stocks, most oft either every bit outright directional bets or to choose futures prices inwards business amongst the cash index.  Either way, modest traders together with marketplace makers inwards private shares are non typically buying together with selling wide baskets of stocks.  Such handbasket execution is a footprint of larger, institutional involvement inwards the market.

Proceeding on that logic, I constructed a mensurate of full upticks together with downticks on a 2nd to 2nd basis.  This mensurate but looks at the full sum of uptick/downtick elbow grease across stocks together with doesn't tending whether the ticks are to a greater extent than to the upside or downside.  The persuasion is that to a greater extent than full ticking is a reflection of greater institutional participation.  If large (and largely directional) participants are to a greater extent than acquaint inwards a market, I would aspect marketplace moves to accept a greater odds of extending.  Without such participation, I would aspect directional elbow grease to to a greater extent than oft hold upwards out of gas.

From February, 2012 forward--the catamenia of fourth dimension inwards which I assembled moment-to-moment full ticking--I constitute 165 trading days inwards which SPY moved to a greater extent than than fifty bps (half a percent) or to a greater extent than to the upside inwards a trading 24-hour interval (prior day's around electrical flow day's close).  Three days later, the average marketplace gain was +.14%, amongst 107 occasions upwards together with 58 down.

If nosotros but interruption downward those occasions past times median dissever based on full ticking, the adjacent 3 days after a high institutional participation winning 24-hour interval averaged a solid gain of +.26% (55 occasions up, 28 down).  If the winning 24-hour interval occurred amongst depression institutional participation, the adjacent 3 days averaged a gain of solely +.02% (53 occasions up, 29 down).  In other words, days next a solid gain were every bit probable to ascent when institutional involvement was depression vs. high, but the grade of follow through was together with hence much greater when institutions were active that essentially all momentum effects (in terms of cost movement) occurred at those times.

This is a squeamish illustration of the importance of, non solely how markets move, but who is inwards the market.  Many valuable enquiry questions follow from this form of analysis.  For instance, does institutional participation early on inwards the 24-hour interval session assistance predict elbow grease for the residual of the trading day?  Does institutional participation assistance to predict, non solely full general marketplace movement, but the elbow grease of private stocks together with sectors?  In trading, every bit inwards other high functioning fields--from cycling to warfare--we increasingly notice quantitative tools supporting together with informing discretionary decisions.  The pop mantra to follow one's trading plans agency trivial if those plans are uninformed.

Further Reading:  Factors That Affect Short-Term Stock Market Movement
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Info!! Why Institutional Participation Matters Inwards The Stock Market

Above nosotros tin give the axe meet a nautical chart of SPY (blue line) from 2014 to the present.  The blood-red work represents what I refer to every bit Institutional Participation.  It is a stair out of full upticks together with downticks amid all NYSE stocks each trading day.  Going dorsum to 2012, if nosotros dissever daily institutional participation into quartiles, nosotros discovery meaning relationships.  Specifically, when participation is inward its highest quartile, the side yesteryear side 10 days inward SPY average a gain of +1.72%.  When participation has been inward its lowest quartile, the side yesteryear side 10 days inward SPY bespeak maintain averaged a loss of -.28%.  

Let's retrieve almost why this mightiness be.

Suppose nosotros stair out institutional participation each infinitesimal of the trading day.  To laissez passer a high reading, nosotros would bespeak maintain to meet a swell bargain of upticking or a swell bargain of downticking at that time.  In other words, in that location would bespeak maintain to live on broad-based buying or selling amid shares--a surge of need or supply.  Such surges are most probable to come upward from institutions deploying a swell bargain of capital, buying/selling stocks overall every bit an property class, non but accumulating/distributing shares inward a item refer or two.

The wide accumulation of stocks is associated amongst momentum--a continuation of toll strength.

The wide distribution of stocks is associated amongst value--the reversal of toll weakness.

When in that location is piffling institutional participation, neither momentum nor value motivations to ain shares is present.  Returns are subnormal.

One of the greatest mistakes I meet traders brand is focusing on "fundamental" reasons for short-term stock marketplace movement.  This leads to frustration, every bit many marketplace moves seemingly "make no sense".  Fundamentals are real relevant to investing, less together with then to trading.  Trading is almost gauging marketplace flows, together with flows are non best measured yesteryear nautical chart patterns or net levels.  In gauging the buying together with selling demeanour of institutional participants, nosotros tin give the axe assess whether flows are waxing or waning--which tells us if momentum or value are probable to live on drivers of futurity toll action.

Further Reading:  Institutional Participation together with When to Exit
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Info!! Trading Model Update: Finding Border Inwards The Market

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

At present, breadth has been expanding, inwards no little component subdivision due to the forcefulness of little cap stocks since the election.  We get got equally good seen selective forcefulness alongside sectors, most notably the fiscal as well as industrial sectors deemed to produce goodness from the novel administration.  Stocks making fresh three-month highs get got expanded to their greatest degree inwards many months.  It's exceedingly rare for such expanding breadth to all of a abrupt contrary as well as morph into a comport market.  Rather, these momentum phases of a cycle tend to fade away, with decreasing book as well as volatility as well as divergences of novel highs, equally value investors no longer perceive value as well as trace dorsum from segments of the market.  I would await the model to plough bearish should book as well as volatility trace dorsum as well as should nosotros run across diminishing institutional participation on whatever farther strength.

Meanwhile, the model components contributing to the modestly bullish electrical flow reading include sentiment, institutional participation, as well as buying pressure.  In a nutshell, persuasion (adjusted for volatility as well as recent cost movement) has been unusually bearish; participation has been quite high; as well as a growing proportion of that participation has been channeled toward buying.  Those dynamics get got had me inwards the trend of buying dips.  Equally important, the model readings get got prevented me from fading strength, which I've seen a position out of traders doing, perchance caught upward inwards a bearish bias related to the election result.  The psychological value of a well-constructed trading model is that it imposes the bailiwick of patience.  Instead of assuming that I get got an border inwards trading, the model tells me when the marketplace is affording edge.  That's an of import distinction that takes a lot of ego out of trading.  Once nosotros realize that border is a purpose of chance develop inwards the market, nosotros tin flexibly arrange to changing marketplace conditions.

Further Reading:  Quant Models as well as Trading Psychology
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Info!! Momentum Inwards The Market: Merchandise It Or Fade It?

A tendency twenty-four hours is basically a twenty-four hours amongst momentum on the twenty-four hours fourth dimension frame.  The buyers or sellers in addition to hence dominate the marketplace activeness that the other side backs off for the ease of the session.  That is what nosotros saw inward yesterday's trade:  1 time nosotros broke to novel highs amongst pregnant uptick readings, the buyers remained inward command for the session.  I honor it useful to rails the distribution of NYSE TICK readings during the trading twenty-four hours to position when nosotros convey made pregnant shifts inward buying/selling in addition to when nosotros are extended inside a relatively static range.  That shift of distribution frequently makes the difference betwixt trading push clit or weakness versus fading it.

The momentum regulation is truthful on longer fourth dimension frames equally well.  Yesterday's post took a await at the absence of marketplace weakness equally an indication of potential hereafter marketplace strength.  Now let's await at the presence of marketplace strength, such equally nosotros saw inward yesterday's session.  Does that tend to Pb to hereafter weakness equally an overbought signal, or does it tend to yield farther gains equally business office of momentum?

If nosotros rails the unwrap of NYSE stocks closing to a higher house their private Bollinger Bands in addition to those closing below, nosotros honor that 412 unopen to a higher house their bands.  That is a huge number; 1 of the highest since I began aggregating these information inward 2014.  For comparison, since 2014, the median unwrap of stocks closing to a higher house their bands each twenty-four hours has been 62 amongst a measure divergence of 69.  We've had 48 occasions over that menstruation inward which to a greater extent than than 200 stocks convey unopen to a higher house their upper bands inward a trading session.  Five sessions later, the average toll alter inward SPY has been a loss of -.13%, compared amongst an average gain of +.15% for the ease of the sample.  When nosotros await 20 days out, however, the average gain inward SPY after the strong session has been +.96% versus an average gain of +.49% for the ease of the sample.  While it's been normal to convey approximately near-term pullback after extreme strength, it's also been mutual for the push clit to resume.

The marketplace spends much of its fourth dimension trading inward a range.  During that arrive at trade, past times Definition the moves higher in addition to lower lack the momentum to hold upwards sustained.  The best trading strategy is to recognize the loss of momentum in addition to fade the push clit or weakness.  Once nosotros expand buying or selling, however, nosotros tin croak the breakouts from ranges inward which push clit or weakness leads to farther push clit or weakness.  We lose flexibility when nosotros position ourselves equally arrive at (mean reversion) traders or tendency (momentum) traders.  One of the bang-up challenges of trading markets lies inward recognizing shifts inward buying in addition to selling regimes.

Further Reading:  Tracking Institutional Participation inward the Market
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Info!! Random Observations

*  If you lot decompose marketplace behaviour into a linear, tendency cistron together with i or to a greater extent than cyclical components, you lot tin seat optimal fourth dimension horizons for asset positions.  Those optimal horizons are much longer than traders together with portfolio managers typically hold.  Most people concord positions for shorter-than-optimal periods because of such factors equally the postulate to trade, the fearfulness of losing money, overly tight opportunity management, etc. 

*  Trends together with cycles run out to a greater extent than regular together with noticeable when measured inwards number time, equally opposed to chronological time.  Influenza A virus subtype H5N1 uncomplicated illustration of number fourth dimension would locomote bars denominated inwards book rather than minutes, hours, days, or weeks.  When assessing long-term cycles, the telephone commutation is finding a agency to stair out number fourth dimension given the variability of book across instruments, across decades.  Such number cycles are to the lowest degree stable over curt fourth dimension horizons; much to a greater extent than stable over longer horizons, per the starting fourth dimension signal above.

*  Who is inwards the marketplace determines how the marketplace volition move.  If nosotros hold off at each transaction inwards each stock traded together with assess whether the merchandise occurs on an uptick or downtick--and if nosotros cumulate those information daily for many years--what nosotros run into is that a) buying together with selling (activity on upticks together with downticks) are dissimilar activities amongst their dissever impacts on futurity marketplace behavior; b) the full activity of participants (total upticking together with downticking) is a practiced proxy for institutional participation inwards markets; together with c) the marketplace is significantly to a greater extent than probable to rising next periods of high institutional participation.  To simplify a bit, cycles spill out because of the waxing together with waning participation of agents that movement the market.

*  Strong buying (activity on upticks) tends to fuel futurity buying (momentum).  Heavy selling (activity on downticks) tends to fuel futurity buying (value).  Weak buying together with selling (little activity) tends to atomic number 82 to subnormal returns per the signal above.  Shifts inwards buying together with selling over fifty-fifty a curt fourth dimension horizon tin deport on returns days together with fifty-fifty weeks forward.

*  The worst traders are permabears together with permabulls.  By definition, they create non accommodate to marketplace cycles.  They merchandise their predilections, non the objective activity of the marketplace.  

*  An declaration tin locomote made that the lows pose inwards during Jan together with Feb were purpose of a longer-term cyclical bottom together with that the recent upswing has significantly to a greater extent than (event) fourth dimension to run.  Frankly, I tin intend of many reasons for the marketplace to weaken from here, only that's non what my analyses are telling me.  

Further Reading:  Trading Coaches As Whores
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Info!! Trading Notes For The Calendar Week Of March 28, 2016

Friday, Apr 1st

*  Top twenty people to follow on Stock Twits as well as Twitter for corking marketplace position content.  Of course, Ivaylo is besides pocket-size to include himself, hence I'll nominate him hither both for his spider web log content as well as his books. 

*  We've pulled dorsum from recent highs, equally my measures of realized resultant fourth dimension volatility hold lower--a province of affairs that, inwards the past, has been associated amongst subnormal forrard returns.  Stocks making novel monthly highs across all exchanges declined from 1221 to 822; monthly lows ticked upward from 106 to 137.  So it's difficult to say that nosotros pick out weak breadth.  As noted yesterday, my mensurate of upticks vs. downticks has continued positive.  Yesterday was positive, but full institutional participation contracted least since the rally began.  Again, this has been associated historically amongst subnormal returns.  Institutional participation is a mensurate of full upticks as well as downticks across all NYSE shares (not mass traded).  The depression mass as well as volatility brand me non peculiarly bullish; the absence of novel lows as well as downticks brand me non peculiarly bearish.

*  My cycle mensurate continues inwards positive territory but off its highs.  Many of my breadth measures await this way:  positive, but off their peaks.  Note how we've stayed positive for much longer than during recent cycles--again a tell that this has been to a greater extent than than a comport marketplace position rally or fifty-fifty a bounce higher inwards a make market. 

*  Are in that location microtrends inside the marketplace position as well as are these tradeable?  Hell, I pick out no idea, but I'm researching it.  Will permit y'all know what I find.  This volition live on a purely systematic implementation.  My other inquiry projection is identifying longer term cycles inwards the stock market, amongst information going dorsum to 1980.  This is based on a unique implementation of the resultant fourth dimension concept.  Basing resultant fourth dimension on mass doesn't move because of the secular differences inwards mass over the catamenia of decades.  If you're non innovating, you're stagnating.  Too many traders pat themselves on the dorsum for doing the same affair 1 time again as well as 1 time again as well as calling it discipline.  Influenza A virus subtype H5N1 disciplined implementation of an outmoded approach volition lose coin amongst admirable consistency.

*  If y'all await at stocks exterior the U.S., such equally the EFA ETF, the longer-term motion painting is pretty unimpressive.  It is non clear to me that negative rates are having the desired affect overseas.  If this is the case, nosotros could run into to a greater extent than aggressive key depository fiscal establishment stimulation of economies, peculiarly if those indicators of deflation--strengthening currencies, weakening commodities, etc.--become to a greater extent than problematic.  

Thursday, March 31st

*  Is the housing marketplace position strong or weak?  See It Market notes mixed signals amidst furnish constraints.

*  Oil as well as commodities overall (DBC) pick out been lagging stock toll gains recently; keeping an oculus on that relationship.  I'm also noticing high yield bonds (JNK) lagging recent toll gains inwards stocks.  These relationships were key during the catamenia of marketplace position weakness.

*  Stocks rallied nicely early on yesterday, 1 time again posting fresh rally highs earlier pulling back.  Breadth 1 time once again expanded, amongst over one m stocks across all exchanges posting fresh monthly highs.  My mensurate of upticks vs. downticks continued quite strong; below nosotros tin run into a 10-day moving average.  As mentioned before, mass has non been impressive, but the mass traded has been quite skewed toward the buyers:

*  One of my pure volatility measures continues at levels to a greater extent than consistent amongst marketplace position highs than lows.  Note VIX straightaway trading a flake higher upward 13.  This has the potential to significantly constrain directional movement across all fourth dimension frames.  There is less mass traded, *and* each unit of measurement of mass moves toll less.

*  Note the continued forcefulness of liquid, high character corporate bonds (LQD).  In a globe of depression as well as fifty-fifty negative rates, whatever yield becomes a prophylactic haven.  Hence the surroundings inwards which stocks as well as bonds pick out been jointly outperforming (the conduct a chance parity trade).


Wednesday, March 30th

*  New Trader U highlights 22 bad trading habits.  Notice how many of them boil downwards to non existence rule-governed, where the rules reverberate trading strengths as well as identified best trading practices.  That suggests that traders are suffering, non simply because they don't written report markets, but because they haven't genuinely studied their ain performance.

*  Stocks liked the statements of the Fed chair as well as that has lifted us to a novel high for this rally.  Interestingly, across all stocks on all exchanges, iii calendar month novel highs versus lows are lagging their peak from a dyad of weeks agone (see below).  Among SPX shares, however, fresh 100-day highs vs. lows did hitting a marginal novel peak.  I would larn concerned nearly the uptrend if stocks making fresh novel lows were to expand from here.

*  Once again, nosotros saw buying pressure level completely dominate selling pressure level via the uptick/downtick measures.  This lifted the cumulative uptick/downtick mensurate to novel highs (see below).  As noted yesterday, mass has non been stellar (though it picked upward yesterday), but what mass has been in that location has been strongly skewed to the buyers as well as that has been associated historically amongst favorable near-term returns (upside momentum).

Tuesday, March 29th

*  How tin y'all honor merchandise opportunities that others miss?  Here is a procedure that tin assistance y'all larn amend at perceiving opportunity.

*  Meh.  Volume has been quite lackluster, as well as that is to a greater extent than typical of marketplace position tops than bottoms.  We remain inwards relatively oversold territory on my swing measures as well as my measures of upticks vs. downticks remain strong.  So my base of operations illustration remains a continued displace higher, but I can't say I'm peculiarly impressed amongst recent action.  Financial as well as unloosen energy shares pick out been relatively weak as well as I hold to hold an oculus on little caps.  Perhaps calendar month end/quarter cease flows volition convey about life to the market.  Stocks making fresh monthly highs did uptick yesterday as well as I'm non seeing an influx of selling at all.  Of the (low) mass acquaint yesterday, buyers were dominant.

*  Put/call ratios were depression yesterday; shares outstanding for SPY pick out been modestly elevated.  Bears are relatively absent.

*  We're working off quite an overbought level, per the intermediate-term forcefulness nautical chart below, which tracks the release of SPX shares making novel highs vs. lows on multiple fourth dimension frames.  To the extent that nosotros tin produce hence amongst minimal toll damage, it is supportive to the bulls.

Monday, March 28th

*  In illustration y'all missed, here's my latest podcast; thank y'all to Chat With Traders.

*  We've bounced from a swing oversold degree and, equally nosotros tin run into below, are non yet at an overbought level.

*  Buying involvement hitting a novel rally high amongst this most recent bounce.  This mensurate tracks upticks versus downticks for all listed stocks, non simply those on NYSE.  

*  The 1 wing inwards the ointment that I run into is the depression mass as well as volatility, which are associated historically amongst subnormal forrard returns over an intermediate-term horizon.  My mensurate of cumulative upticking as well as downticking is non yet at such a depression request that would advise pathetic near-term returns.  As a rule, bull moves decease amongst an absence of buyers.  It's something I'm monitoring daily.

Info!! A Hold Off At The Recent Buying Surge

The recent post noted the drying upwards of downside breadth inwards the stock market, fifty-fifty equally nosotros were posting fresh cost lows.  I said at that fourth dimension that I would hold upwards surprised if the bottoming procedure were over, only that I'd hold upwards on the sentry for continued signs of strengthening breadth.  Well, I was surprised, as well as nosotros for certain convey had the strengthening breadth!

The charts higher upwards document the recent surge inwards buying interest.  The Buying Power measure, which is derived from a mensurate of the publish of upticks alongside NYSE shares, has hitting its highest degree since I began collecting those information inwards early on 2012.  Over that same period, short-term breadth alongside SPX stocks has moved from deeply oversold to strongly overbought (middle chart), which is reflected inwards the radical shift inwards the shape of the Momentum Curve (bottom chart; the percentages of SPX shares trading higher upwards their diverse moving averages).

As nosotros tin come across from the middle chart, surges inwards breadth from oversold levels tend to demo momentum:  farther cost gains fifty-fifty equally breadth wanes.  Many investors as well as traders convey missed this "V-bottom", as well as that provides powerful incentives to purchase the commence dips.  

Further Reading:  Institutional Participation as well as Momentum
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Info!! The Ability Measure: Trading Amongst Direction Too Volatility On Your Side

my Power Measure, which tracks the correlation betwixt the directional possess of each bar in addition to the absolute size of that bar. When tracking intraday shifts inwards management in addition to trend, I purpose a moving 20-bar correlation of five-minute data. The underlying logic of correlating toll in addition to range, however, is useful across fourth dimension frames.

Notice how the correlation has stayed positive for much of the day, peculiarly since the marketplace opened upwards at 8:30 AM CT. Indeed, the expansion of the Power Measure every bit nosotros were breaking to a higher house multi-day back upwards was helpful inwards identifying the nascent trending move. In gross terms, what the Power Measure is indicating is whether the market's "big bars" are predominantly occurring inwards ane direction. When that is the case, it to a greater extent than oftentimes than non way that at that topographic point is meaningful book (i.e., institutional participation) in addition to momentum behind the move--and that's worth respecting.
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Info!! Pre-Opening Briefing: How Produce Nosotros Merchandise Later Adept News?

A bounce next a high momentum spend upwards is non unusual; returns thereafter tend to hold out dicey. A movement below the degree from which nosotros rallied amongst the 7:30 AM CT numbers would propose difficulty moving higher on expert news; that would striking my radar.

9:03 AM CT - Here's an update of ES trading (top chart); authorities annotation how we're edifice value betwixt 921 in addition to 924 inwards a arrive at merchandise in addition to then far this morning. I'm watching closely to encounter if moves toward the edges of this arrive at attract book (institutional participation). Should book ho-hum significantly, nosotros could fix roughly extended arrive at trade.
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Info!! V Things To Hold Back For Inward A Stock Marketplace Set Breakout

It's tardily to give-up the ghost lulled past times range-bound merchandise together with thence immature lady a pregnant toll breakout. There are several things I await for inwards identifying a promising breakout move:

1) The presence of an extended trading hit - On average, the longer the range, the to a greater extent than extended the subsequent breakout/trend move, every bit a greater pose out of traders are forced to embrace positions (thereby extending the breakout).

2) An increase of book on the attempted breakout - The fresh higher or lower prices attract the participation of large, institutional traders, every bit nosotros start to bring value at higher or lower prices.

3) One-sided stance on the attempted breakout - Influenza A virus subtype H5N1 valid breakout volition demonstrate persistently elevated or weak NYSE TICK together with extremes of book transacted at the offering or bid.

4) Limited retracements - Pullbacks next the breakout thrust are express both inwards terms of TICK values together with sum of points retraced.

5) Broad participation - The attempted breakout volition conduct maintain wide participation, alongside the major indexes together with sectors moving to novel highs or lows.

Many practiced breakout moves laissez passer on next short-term oversold or overbought markets. That is because many traders who are asset positions curt or long are trapped past times the breakout together with postulate to exit, adding to the buying/selling of momentum traders.

The to a higher house v features of a valid breakout brand a overnice checklist to continue inwards heed when nosotros merchandise inside an extended range.
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Info!! Best Practices Inwards Trading: Quest Novel Questions

I induce got consistently flora that success comes from hollo for ameliorate in addition to deeper questions.  It's the out of the box questions that tin Pb to fresh insights in addition to answers.  I of late came across a 2014 review of functioning from a trader that outlined all the mistakes he had made during the twelvemonth in addition to the things he wanted to improve.  I asked a inquiry he did non anticipate:  "What did you lot create good inward 2014 in addition to what if you lot *only* did those things inward the novel year?"  Asking a fresh inquiry volition non e'er generate novel in addition to ameliorate answers, but hollo for the same, stale questions most sure as shooting volition non yield creative insights.

In my electrical flow research, I'm looking at overbought in addition to oversold indicators.  How much of an border create they truly provide?  Do roughly measures offering significantly greater edges than others?  Over what fourth dimension frames?  Do overbought in addition to oversold measures offering unlike levels of border inward unlike types of markets?  Are at that spot times to utilise these indicators in addition to times nosotros should non endure giving them weight?

Notice that such an approach is really unlike than merely looking at a criterion mensurate such every bit RSI or Stochastics in addition to pronouncing a given grade every bit overbought or oversold.  It's the tougher, to a greater extent than detailed questions that tin yield nuggets of insight.

For example, suppose nosotros rails the set out of stocks inward the SPX index that are making fresh five-day highs vs. five-day lows.  If nosotros teach dorsum to 2006 in addition to separate the marketplace position into quartiles based upon volatility (VIX), nosotros detect that an oversold grade inward the lowest VIX quartile (1 SD below average) is -62.  An oversold grade inward the side yesteryear side VIX quartile is -138.  In the 3rd VIX quartile, the same oversold grade is -199.  And at the highest VIX quartile, the oversold grade is -265.  In other words, what constitutes overbought in addition to oversold is relative to the volatility government of the market.  Looking at static levels of overbought in addition to oversold across all markets gives us really distorted results.

Does a regime-specific mensurate of overbought vs oversold breadth offering a greater trading border than an absolute level?  It's all really testable, but solely if nosotros get together the information in addition to enquire the question.

Further Reading:  Institutional Participation in addition to Momentum
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Info!! An Introduction To Trading - Marketplace Auctions In Addition To Multiple Timeframes

The most recent post for the Introduction to Trading ebook introduced the catch of the auction marketplace equally a framework for agreement the stock market, using the uncomplicated illustration of an eBay auction. Now let's expand the conceptual framework to catch how auction markets tin choose together participants who operate at differing fourth dimension frames.

Central to whatever auction procedure is the notion of value. Value is the price--or arrive at of prices--that choose together buyers in addition to sellers. Because the auction exists to facilitate trade, the auction procedure constantly hunts for value: that cost grade that volition enable buyers in addition to sellers to transact with i another.

It is of import to recognize that value has both an objective in addition to a subjective meaning. An objective Definition of value inward the Market Profile framework is that arrive at of prices during a twenty-four hours or calendar week that covert to a greater extent than or less 2/3 of the bulk for that period. This value arrive at represents the prices that brought together the bulk of buyers in addition to sellers; it is objectively measurable equally a share of time, price, in addition to volume.

Value too has a subjective important to auction participants, equally each has his or her ain ideas of what a marketplace is worth. Influenza A virus subtype H5N1 value investor may define value good below the market's electrical flow level, because that is what stocks are worth according to his or her metrics. Influenza A virus subtype H5N1 short-term trader may perceive value inward an uptrend when a marketplace pulls dorsum to a 20-day moving average line. Influenza A virus subtype H5N1 longer-term trader mightiness give away value when at that topographic point is a important expansion of the release of stocks making fresh 52-week lows.

Trading occurs at the intersection of a trader's subjective Definition of value in addition to the market's objectively determined placement of value. If I recall "true" value is good higher upwardly or below the market's electrical flow assessment of value, I own got an incentive to instruct inward an fellowship to own got payoff of this discrepancy. My merchandise reflects my supposition that the market's assessed value will, over time, movement toward my value assessment. If I house value where the marketplace is currently trading, I may own got no incentive to instruct inward the market. By my subjective criteria, the marketplace is fairly priced, in addition to I volition hold off for the marketplace to movement below my value grade to brand buying profitable.

Imagine an auction with participants at many dissimilar fourth dimension frames, each with real dissimilar subjective definitions of value. An automobile auction, for example, mightiness characteristic active participation with people who own got used cars to sell in addition to others who wishing to instruct used vehicles. Bidders in addition to sellers own got an catch of what constitutes fair wholesale in addition to retail prices in addition to essay to obtain prices equally closed to those extremes equally possible.

Suppose, however, that--lurking inward the background of the wholesale machine auction--is a grouping of dealerships that brand their living past times buying inexpensive used cars, fixing them up, in addition to and hence selling at closed to retail prices. They volition entirely bid on cars when an oversupply province of affairs pushes prices to or fifty-fifty below traditional wholesale levels; this enables them to brand a prissy profit, fifty-fifty afterward they position operate into the vehicles. This way that a whole novel root of demand--and volume--will instruct inward the auction marketplace when prices striking levels that works life subjective value for large, longer-time frame participants.

Above in addition to below the market, yous ever own got value-oriented institutions (such equally usual funds) ready to instruct stocks when they're inexpensive (by the institutions' criteria) in addition to sell them when they're priced higher upwardly (the institution's Definition of) value. No incertitude you've seen markets that own got traded inward a narrow arrive at on placidity volume, entirely to movement higher on increased bulk next a arrive at breakout, in addition to and hence contrary sharply on fifty-fifty stronger volume. During the narrow arrive at bound action, marketplace makers were dominating the action; technical traders (including short-term prop traders) jumped into the marketplace on the breakout; in addition to value-oriented traders (including hedge funds) sold into the forcefulness equally stock index futures went to abrupt premium to cash. This is a uncomplicated event of how auctions choose together participants across dissimilar fourth dimension frames.

When I showtime began operate at a prop firm, I was surprised to detect that the traders focused on something quite dissimilar from the average traders I had run into. They used cost in addition to bulk information (including information from the fellowship book) to position *who* was inward the market. They wanted to know if at that topographic point was higher upwardly or below average institutional participation; if moves to novel cost highs or lows were attracting momentum participants; etc. By using "technical" marketplace information to brand inferences almost underlying auction processes, they were able to brand reasoned judgments equally to whether marketplace moves were probable to proceed or reverse.

In the side past times side segment of the book, we'll own got a closer expect at how savvy traders educate trading ideas from auction-generated marketplace data.
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Info!! Tracking Speculative Stance Inwards The Market

I lately posted on the importance of identifying who is inwards the market every bit a agency of gauging how the marketplace position is probable to move, tracking the demeanor of large institutional participants.  Influenza A virus subtype H5N1 dissimilar agency of assessing marketplace position participation is yesteryear looking at speculative persuasion inwards the market.  This tin laissez passer on the sack endure accomplished yesteryear looking at full options volume, non merely the ratio of seat book to telephone band volume.  

When full equity options book (volume of options trading for stocks listed across all options exchanges) is inwards its lowest quartile going dorsum to 2014, the side yesteryear side 10 days inwards SPY convey averaged a loss of -.51%.  When full options book has been inwards its highest quartile, the side yesteryear side 10 days convey averaged a ambit of +.91%.  If nosotros strip out the utilisation of full trading book from full options book inwards a regression model, nosotros uncovering that when pure options book is inwards its lowest quartile (as was the illustration later Monday's close), the side yesteryear side 10 days inwards SPY convey averaged a loss of -.41% versus an average ambit of +.49% for the relaxation of the sample.  

In other words, when speculative persuasion has died out, the marketplace position has been nigh vulnerable to correction.  Bear moves tend to terminate inwards a frenzy of activity, every bit value in addition to momentum participants instruct involved at multiple fourth dimension frames.  Bull moves tend to terminate inwards complacency in addition to lack of interest, every bit the marketplace position becomes also tiresome for momentum participants in addition to also rich for value players.  It is the interplay of high in addition to depression participation, tracking the action of dissimilar participants, that creates the dynamics of marketplace position cycles.

Further Reading:  Volatility in addition to the Dynamics of Market Cycles
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Info!! Novel Views For The Marketplace Week

*  Here's an indicator I've devoted a proficient sum of fourth dimension to this weekend.  The thought is to rails a handbasket of stocks, where each of the names is actively traded past times large institutions.  I facial expression at the take away of the stocks multiple times per infinitesimal throughout the trading 24-hour interval in addition to position occasions inwards which virtually or all of the components merchandise higher or lower at exactly the same moment.  These occasions correspond the acquit on of programme buying in addition to selling inwards the market.  The nautical chart higher upwards compiles the information on a one-minute footing in addition to examines the ongoing proportion of purchase programs to sell programs.  I believe this provides a unique window on institutional see in addition to participation.  You tin reckon how sell programs dominated every bit nosotros went into the Oct lows, followed past times a pregnant preponderance of purchase programs.  Most recently, we've seen a tailing off of purchase programs in addition to around expansion of selling.  This is consistent amongst the recent weakness I noted from my other measures.

*  Thanks to a savvy trader at SMB for a heads upwards on this article concerning the value of repetition in addition to resilience.  By the way, that savvy trader lately publish a video on trading secondary offerings.  I dearest learning novel stuff!

*  Kudos to Abnormal Returns for linking to the Morgan Housel post on rules for investors to alive by--especially the observation that short-term thinking is a major root of investing problems.  Investors cannot await stratospheric Sharpe ratios, which way that drawdowns volition hold upwards proportional to sought returns.  Strategies to cutting off losses past times restricting asset periods every bit good cutting off positive returns, a cistron that has contributed to recent pocket-sized fund performance.

*  Excellent post service from Worch Capital on the value of patience, given signs of marketplace fatigue.

*  I reckon there's a Stock Twits meetup inwards NYC this Tuesday evening!  I'm going to produce my best to hold upwards there.  Hope to reckon readers there. 

*  Here's a actually interesting newspaper on returns from overnight versus 24-hour interval markets.  An of import implication is that 24-hour interval traders missy out on a proficient percentage of momentum-based returns.

Have a groovy get-go to the week!

Brett
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