Info!! Bonus Post: Calculating Toll Targets

As I mentioned before today, inwards appreciation of the generous readership, I thought I would part to a greater extent than or less of my ideas as well as methods for calculating cost targets. If you're novel to this topic, it would hold upwards helpful to review my prior posts on hidden volatility assumptions as well as defining effective cost targets amongst the previous day's data.

What nosotros saw inwards that latter postal service was that using the previous day's high, low, as well as average prices provides us amongst relatively high probability targets for the electrical current trading day.

In my ain work, I create non purpose the average cost equally defined inwards the postal service (H+L/2). Rather, I purpose (H+L+2C/4). This is the "pivot" degree that I postal service each forenoon for SPY via Twitter. This overweights the closing cost relative to the prior day's high as well as low, therefore that--on average--the pin cost volition hold upwards closer to the electrical current day's open. Going dorsum to belatedly 2002 (N=1894 trading days), my Excel calculations demonstrate that nosotros cause got touched the previous day's pin on 70% of all trading days.

For this reason, the previous day's high, low, as well as pin prices are fundamental near-term cost targets for my trading. As I mentioned previously, fifty-fifty closer cost targets are the overnight high as well as depression prices from the ES futures.

If I anticipate a deadening trading twenty-four hr catamenia amongst a narrow cost hit as well as nosotros opened upwards inwards the nub of the overnight as well as prior day's ranges, I volition hold off for trades to cause got out the overnight high or depression cost as well as and therefore the previous day's high or low. If I anticipate a deadening trading twenty-four hr catamenia as well as nosotros opened upwards nicely inwards a higher house or below the overnight as well as prior day's pin levels (for overnight "pivot" I purpose the day's VWAP), I hold off for a deed dorsum to VWAP as well as and therefore the previous day's pin if buying or selling can't hold upwards sustained.

If I anticipate an average or busier trading day, I hold off toward to a greater extent than distant earnings targets. Below is i manner of calculating those that builds on the previous post.

FORMULAS FOR CALCULATING PRICE TARGETS

* Let us telephone weep upwards the departure betwixt yesterday's high as well as depression prices R, for range. That agency that the departure betwixt yesterday's average cost as well as yesterday's high is 1/2 R as well as the departure betwixt yesterday's average cost as well as yesterday's depression is 1/2 R. (We're using average price, non the pin level, for this calculation. More on pivot-based calculations inwards the adjacent postal service inwards the series).

* If nosotros calculate (yesterday's average cost + 3/4 R), nosotros volition larn a cost degree inwards a higher house yesterday's high that we'll telephone weep upwards R1. If nosotros calculate (yesterday's average cost - 3/4 R), nosotros volition larn a cost degree below yesterday's depression that we'll telephone weep upwards S1.

* Going dorsum to belatedly 2002, the odds of hitting R1 or S1 during today's merchandise are 67%. Two-thirds of the time, we'll hitting R1 or S1. It's a high probability target if book is average or better.

* If nosotros calculate (yesterday's average cost + R), nosotros volition larn a cost degree inwards a higher house R1 that we'll telephone weep upwards R2. If nosotros calculate (yesterday's average cost - R), nosotros volition larn a cost degree below S1 that we'll telephone weep upwards S2.

* Going dorsum to belatedly 2002, the odds of hitting R2 or S2 during today's merchandise are 41%. We desire to meet inwards a higher house average relative book (and today's book > yesterday's volume) to assume that we'll behavior upon R2 or S2.

* If nosotros calculate (yesterday's average cost + 5/4R), nosotros volition larn a cost degree inwards a higher house R2 that we'll telephone weep upwards R3. If nosotros calculate (yesterday's average cost - 5/4R), nosotros volition larn a cost degree below S2 that we'll telephone weep upwards S3.

* Going dorsum to belatedly 2002, the odds of hitting R3 or S3 during today's merchandise are 26%. We would need to meet significantly inwards a higher house average relative book (and today's book significantly > yesterday's volume) to assume that we'll behavior upon R3 or S3.

VARIATIONS OF THE ABOVE WORTH RESEARCHING:

* Instead of using yesterday's average cost equally a base of operations for calculation, y'all tin hand the sack purpose the traditional pin formula of (H+L+C)/3.

* Instead of using yesterday's average cost equally a base of operations for calculation, y'all tin hand the sack purpose today's open. That is peculiarly helpful when the overnight session leads to an opening cost far from yesterday's average price.

* Instead of using R values based on yesterday's trading range, purpose the average trading hit from the prior northward days. My inquiry shows to a greater extent than or less create goodness to going out several days, but returns are diminishing out to a five-day lookback.

Regardless of your calculation method, y'all volition abide by that R increases equally the market's volatility increases as well as decreases equally the market's volatility wanes. This automatically adjusts your cost targets for the market's nigh recent volatility.

Going dorsum to belatedly 2002, yesterday's volatility correlates amongst today's volatility past times a whopping .75. That agency that nosotros tin hand the sack predict to a greater extent than than one-half of the variance inwards today's volatility only past times knowing the prior day's trading range. If nosotros croak out to a five-day period, the correlation betwixt the prior five-day's average hit as well as today's hit has been .80.

Once y'all larn adept at tracking today's book relative to yesterday's (or the prior 5 days'), y'all tin hand the sack brand rattling reasoned estimates equally to which levels we're probable to hitting during the day. That considerably strengthens our exits as well as helps us maximize our risk/reward.

This postal service as well as the adjacent i (tomorrow) volition rest on the weblog for a express time. If the inquiry is of interest, y'all powerfulness desire to impress out the postal service or re-create the relevant data.

Thanks i time to a greater extent than for all the involvement as well as support--

Brett
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Info!! Defining Net Turn A Profit Targets As Well As Formulating Targeted Trading Plans

In a past times post, I wrote close how I usage pivot-based back upwards as well as resistance points to institute cost targets for merchandise ideas. The basic approach is to define potential targets inward advance as well as and hence usage unfolding price/volume/indicator activeness to handicap the odds of hitting those targets. For example, in 1 lawsuit I come across the Cumulative NYSE TICK trending higher, I volition larn into a long seat to striking the R1 as well as R2 cost targets. (Please consult that before post service for details re: conventional ways of calculating the upside R1/R2 as well as downside S1/S2 targets).

In general, I've found those conventional ways of calculating targets to survive helpful, but non optimal. My electrical flow methods of calculation are based on historical analysis going dorsum to the yr 2000. Since that time, the P pin grade from the previous solar daytime has been touched past times the marketplace seat during regular trading hours close 75% of the time. The marketplace seat touches the S1 *or* the R1 grade calculated from the previous day's information close 75% of the time. The marketplace seat touches the S2 *or* the R2 grade close 55% of the time.

Let's order that SPY opens close its pin (P) level. The marketplace seat chops unopen to inward the get-go one-half hr of trading as well as and hence moves briefly lower on negative economical tidings at 9 AM CT. The NYSE TICK, however, goes alone modestly negative as well as chop-chop bounces dorsum to positive territory, equally SPY moves inward a higher house P. Noticing the upward tendency inward TICK as well as the themes of risk-seeking across related property classes, I hold back for the get-go pullback inward TICK that stays inward a higher house P as well as and hence larn long SPY alongside a target of R1. If TICK turns negative as well as nosotros motion below P--a sign of a make day--I volition halt my seat alongside a pocket-size loss. If nosotros boot the bucket along to come across buying interest, I volition consider adding to the seat on the agency to the target(s) on pullbacks inward TICK.

Should the upswing locomote on alongside strong TICK on enhanced volume, the odds of hitting R2 are enhanced, as well as I volition leave of absence at to the lowest degree a slice of the seat on to striking that target. Because book is closely correlated alongside volatility, keeping tabs on relative volume--how today's book compares alongside the 20-day average--is quite useful inward estimating the odds of hitting R2 or S2.

My newer, proprietary agency of calculating P, S1/S2, R1/R2 adjusts the targets for the market's volatility, hence that I'll naturally try to a greater extent than pocket-size moves inward slower, narrower markets as well as larger moves inward to a greater extent than active, volatile markets. Because I target the exits inward advance, I'm meliorate able to guess the risk/reward of each merchandise past times comparison how much I'm willing to lose inward the merchandise (the distance to my halt point) alongside how much I stand upwards to gain. This makes the target points really useful inward merchandise planning.

For traders who mightiness survive interested, I'll get posting the SPY target levels for the day's trading each morn equally purpose of my Twitter service. Also included inward the morn Twitter posts volition survive the commons indicator information (new highs/lows, Demand/Supply, % stocks inward a higher house moving averages, Technical Strength readings for the handbasket of twoscore stocks). By comparison the most recent day's information alongside the information from the prior day, you lot tin forcefulness out guess whether the marketplace seat is gaining or losing strength solar daytime over day. As a rule, I'll await for strong/strengthening markets to striking R1/R2; weak/weakening markets to striking S1/S2; as well as mixed/range markets to revert toward P.

Future posts volition illustrate the usage of these target calculations inward merchandise setups. The morn indicator as well as target information volition look nether "Twitter Trader" on the spider web log page prior to the marketplace seat open, or you lot tin forcefulness out subscribe via RSS gratis of charge.
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Info!! Pin Cost Target Based Historical Investigations

As weblog readers know, I postal service each morn earlier the marketplace pose opened upwards a series of proprietary cost targets for the S&P 500 Index (SPY). These Twitter posts summarize the prior day's Pivot grade (an approximation of the day's average trading price), also equally iii upside targets (R1, R2, R3) in addition to iii downside targets (S1, S2, S3). The targets convey been empirically derived to accommodate for recent marketplace pose volatility so that, dorsum to 2000, to a greater extent than or less 75% of all trading days volition hitting either R1 or S1; 50% volition hitting either R2 or S2; 33% volition hitting either R3 or S3.

Days--and periods of days--where nosotros don't hitting whatever of these targets are attain outflow days. These tend to cluster, given series correlations of volatility. Thus we'll convey periods of fourth dimension inwards which nosotros hitting 1 or to a greater extent than targets in addition to periods of fourth dimension inwards which we'll remain closer to daily pin levels. Much of the science of trading, across whatever fourth dimension frame, is identifying when we're inwards a directional marketplace pose environs (and so probable to hitting the cost targets) or a attain environs (and so probable to oscillate about pin levels and/or volume-weighted moving averages).

Once nosotros define the pin in addition to cost target levels for a item day, nosotros tin inquire some rather sophisticated questions. For instance, if nosotros hitting R3 or S3 inwards yesterday's trade, what are the odds of hitting the R1 or S1 grade today? If nosotros produce non hitting either R1 or S1 inwards today's trade, what are the odds that we'll convey a directional motion (i.e., 1 that hits 1 or to a greater extent than cost targets) tomorrow?

Notice that, the sectionalisation of marketplace pose moves into R1/R2/R3 in addition to S1/S2/S3, each adjusted for that market's grade of volatility, provides us alongside an objective mensurate of a day's directionality. We tin in addition to so inquire whether stronger upwards or downwards days (those that hitting R2/S2 or beyond) are to a greater extent than probable to Pb to reversal than days that alone hitting R1/S1.

Such investigations are probable to uncover trading patterns that furnish a possible border to traders. For example, did y'all know that the marketplace pose ii days from at in 1 trial (e.g., Monday's market) has a 43% adventure of touching today's (Thursday's) pin level? If nosotros part relative book into the mix, those odds ascension substantially. Knowing that nosotros convey high odds of a attain marketplace pose over a swing trading menstruum could live quite valuable to both twenty-four hr menstruum traders in addition to those belongings overnight.

To overstep away fifty-fifty to a greater extent than ambitious, imagine that nosotros calculate similar pin in addition to cost targets for diverse sector ETFs in addition to stock indexes. We tin in addition to so inquire such questions as, "What happens when the S&P 500 Index touches R1/S1 today, but fiscal stocks (XLF) produce non hitting their R1/S1?" If a sector hits its R1 early on inwards the trading day, what are the odds that the S&P 500 Index volition follow in addition to hitting its R1 target? Do for certain sectors tend to Pb the S&P 500 inwards hitting their targets?

All of these investigations offering potential conclusion back upwards for traders, in addition to Twitter is an ideal machinery for blasting the results of these investigations to traders inwards existent time. More to come--
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Info!! Half Dozen Questions To Stimulate For The Trading Day

I consistently give away that preparation--the operate on markets that is done earlier the trading twenty-four hours begins--is correlated with trading success. "Where observation is concerned," Louis Pasteur in 1 lawsuit observed, "chance favors entirely the prepared mind." We're most probable to give away the "lucky" merchandise if nosotros know what to last looking for.

Here are a few things I expression at prior to the opening of regular trading hours:

1) Are nosotros inwards an intermediate-term uptrend, downtrend, or range? I expression at the issue of stocks making novel 20-day highs vs. lows; the issue of stocks inwards my handbasket that are trending upward, non trending, as well as trending downward; the readings for Demand vs. Supply; as well as the per centum of SPX stocks that closed inwards a higher house their 20-day moving averages. All of these information are updated daily earlier the marketplace opened upward via Twitter posts (subscription is free, or yous tin come across the latest 5 posts on the weblog page). If novel highs outnumber novel lows; if a bulk of stocks are inwards uptrends; if Demand (index of issue of stocks closing inwards a higher house the volatility envelopes surrounding their short-term moving averages) exceeds Supply (index of stocks closing below their envelopes); as well as if to a greater extent than than 50% of SPX stocks create got closed inwards a higher house their 20-day moving average, I shape the marketplace every bit beingness inwards an uptrend as well as vice versa. When the indicators are apartment and/or mixed, I see it a non-trending intermediate-term environment.

2) Was yesterday stronger, weaker, or inwards a arrive at with honour to the twenty-four hours previous? Here I'll expression at the high as well as depression prices for the twenty-four hours across diverse sectors, every bit good every bit for the major indexes. I besides expression at the twenty-four hours over twenty-four hours changes inwards the above-mentioned indicators. If yesterday's readings for novel highs/lows, Demand/Supply, etc. were stronger than the twenty-four hours before, I'll see us inwards a short-term uptrend as well as vice versa. When the twenty-four hours over twenty-four hours cost changes alongside sectors as well as indicator readings are mixed, I sentiment the marketplace every bit inwards a short-term range.

3) Are at that topographic point special circumstances probable to deportment upon today's trade? If we're inwards a vacation menses or if we're awaiting a Fed announcement, book as well as volatility are probable to last muted. If we're expecting a major economical report, that tin motion the market. I similar to rehearse diverse what-if scenarios when those special circumstances arise, as well as thus that I'm prepared for trades that may arise. For example, I'll ready to fade an initial motion if an of import economical study at 9 AM CT cannot proceed the marketplace out of its overnight or previous day's trading range. I'll ready to last less active inwards a marketplace that is irksome due to a vacation period.

4) Where are the relevant trading ranges? If the marketplace is inwards a multi-day range, I volition last specially cognizant of those levels, every bit these volition either furnish a practiced breakout merchandise or a practiced fade dorsum toward the contrary arrive at extreme. About 85% of all days create got out the prior day's high or low, as well as thus I desire to know where those levels are. Often the get-go merchandise of the morn volition last a examine of the overnight high or low; that becomes an of import expanse to reference.

5) What are the relevant cost target levels? The pin cost is an approximation of yesterday's average trading price. About 70% of all days volition retouch yesterday's pivot, as well as thus that's a cost grade worth keeping inwards mind, specially on failed moves exterior the overnight or prior day's range. For reasons mentioned above, the previous day's high as well as depression are of import reference points. The R1/R2/R3 as well as S1/S2/S3 levels stand upward for upside as well as downside targets respectively that volition last hitting 70%/50%/33% of the fourth dimension based on interrogation going dorsum to 2000; those are of import targets inwards trending markets. In intermediate-term arrive at markets, nosotros tin choke for a few days without hitting those targets; indeed, the failure to hitting R1 or S1 is by as well as large a practiced sign that the marketplace has been inwards arrive at mode. (Those target levels are besides published via Twitter earlier each marketplace open).

6) Where did nosotros closed on the previous day? Where produce nosotros opened upward today? If nosotros closed close the superlative of the arrive at for the day, that suggests intraday strength. If nosotros opened upward today inwards a higher house yesterday's pivot, that suggests overnight firmness, specially if today's opened upward is inwards a higher house yesterday's close. When nosotros come across such firmness, nosotros intend most testing upside cost targets, such every bit the previous day's high as well as R1/R2/R3. When nosotros come across weakness--closing close the bottom of the arrive at for the twenty-four hours as well as opening below the prior day's pin level--we intend most testing downside cost targets, such every bit the prior day's depression as well as S1/S2/S3. Influenza A virus subtype H5N1 mixed opened upward (near yesterday's pivot, mixed advances/declines inwards early on trade) suggests a possible arrive at surroundings as well as nosotros desire to intend most fading moves away from the prior day's pivot, today's open, as well as today's volume-weighted average price.

Many traders focus on short-term setups without agreement the full general status of the marketplace as well as the cost targets that we're probable to hit. The of import lawsuit is non but when as well as where to trade; it's besides where the marketplace is probable to last headed. Once yous create got basic strategy right, it's non bad to refine your tactics. Too many traders, however, don't ready adequately for the trading twenty-four hours as well as hope--in vain--that tactics volition supervene upon strategy.
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Info!! Swing Trading Amongst Weekly Toll Targets

I recently wrote close how I purpose empirically-derived cost targets to merchandise intraday moves inwards the S&P 500 Index. This approach builds on the pivot-based methods I described 2 years ago, inwards that the cost targets are a articulation component of recent cost induce in addition to recent volatility. I receive got tested these levels going dorsum to 2000, amongst roughly a 75% hitting charge per unit of measurement for touching yesterday's pin degree inwards today's trading in addition to a 75% hitting charge per unit of measurement for touching *either* the upside R1 or downside S1 levels derived from yesterday's trade. An event of how I purpose these levels tin laissez passer on the axe hold out establish in this recent post.

Although my methods for calculating these levels remain proprietary for now, I postal service the levels for SPY each morn via Twitter prior to marketplace opens (free Twitter subscription via RSS). Also included inwards my morn posts are information that capture strength/weakness inwards the previous day's trade. These information include the pct of SPX stocks trading inwards a higher house their moving averages; Demand/Supply (an index of the issue of stocks trading above/below the volatility envelopes surrounding their moving averages); in addition to the issue of stocks making fresh 20-day highs in addition to lows.

As a rule, inwards a rigid in addition to strengthening market, I'll await for cost to remain inwards a higher house the pin degree in addition to exam R1 in addition to R2 levels. In a weak in addition to weakening market, I'll await for cost to remain below the pin degree in addition to exam S1 in addition to S2. In a make fountain marketplace of mixed strength, I'll await for prices to revert to their pin levels on moves toward R1 in addition to S1. The sentiment is to purpose the ongoing current of marketplace information (volume/volatility; leading sector behavior; marketplace themes; cumulative TICK) to approximate the odds of hitting these cost levels in addition to thence teach into the marketplace at points that render favorable risk/reward (e.g., your halt degree is closer than your target point).

Often, non always, 1 degree volition serve equally a target (say, S1) in addition to unopen to other (pivot) volition serve equally my stop. In other words, if we're inwards a short-term downtrend, my merchandise says nosotros should hitting S1 in addition to remain below the prior day's pin (which is an approximation of average trading price). Many merchandise ideas tin laissez passer on the axe hold out crafted yesteryear knowing these levels, assessing the market's strength/weakness solar daytime over day, in addition to gauging the strength/weakness inwards the electrical current session's data.

Suppose, however, you lot are a swing trader looking to merchandise less oftentimes in addition to receive got to a greater extent than out of marketplace moves. Such a trading agency is ideal for those that don't desire to hold out married to the shroud intraday. I've been working on an adaptation of the inwards a higher house trading methods for the wider timeframe in addition to instantly receive got a backtested ready of parameters based on weekly data. The weekly pin has an 80% hitting charge per unit of measurement (i.e., going dorsum to 2001, the electrical current calendar week has touched final week's pin 80% of the time), in addition to the odds of hitting either the weekly R1 or S1 levels is close 75%; R2 or S2 is 50%.

Once again, yesteryear gauging marketplace strength/weakness solar daytime over day, the swing trader tin laissez passer on the axe play for multi-day moves to the R1/S1 levels in addition to beyond. The weekly target numbers too enable short-term (intraday) traders to teach out a slice of their positions on overnight to receive got payoff of the moves to the weekly levels.

These weekly levels inwards SPY volition hold out published Mon earlier the marketplace opened upward and, again, volition hold out costless of accuse via Twitter. For traders that prefer to non subscribe via RSS, the final 5 Twitter posts ever appear on the spider web log page nether "Twitter Trader", thence you lot tin laissez passer on the axe exactly cheque the spider web log prior to marketplace opens for the target data. Over time, I excogitation to expand the targets to other indexes (NASDAQ 100, Russell 2000, sector/international ETFs), equally good equally other property classes (bonds, gold, oil, etc.). Stay tuned!
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