Info!! Substance Ideas Inwards Trading Psychology: Reading Marketplace Psychology Amongst Book Too Price

Previous Posts inwards This Series:

Identifying Historical Patterns inwards Markets

Market Structure as well as Adapting to Change

Implicit Learning as well as Somatic Markers

Mirrors as well as Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading every bit a Performance Activity

Introduction to Trading Psychology

An of import subject throughout the spider web log is that reading the psychology of markets is a essence trading skill. Markets, similar people, bear inwards patterns. Those patterns shift over time, alongside shifts accompanied past times markers that accompany changes inwards state: changes inwards management as well as changes inwards volatility.

The start of import acre marking to live on able to read is volume. Volume tells us *who* is inwards the marketplace. Volume besides correlates highly alongside volatility. When book jumps, it tells us that institutional participants direct keep give-up the ghost to a greater extent than active. When book dries up, it tells us that the marketplace is dominated past times marketplace makers: the liquidity providers. Is a intelligence special or cost motion to a novel bird significant? Volume volition typically render us alongside an answer: events are meaning if they tin give notice attract the participation of large traders. It is their revaluation of assets that creates marketplace trends.

What is most of import nigh book is relative volume: the bird to which electrical flow book diverges from recent volume. If nosotros desire to know if the book from eleven AM to 12 Noon is high or low, nosotros should compare it to the median book posted during that hour. If nosotros desire to know if today's book is high or low, nosotros should compare it to the most recent median volume. Because relative book is as well as then closely connected to volatility, reading book as well as its shifts provides of import clues every bit to how far markets tin give notice give-up the ghost for or against us. That is useful data inwards setting halt loss points as well as turn a profit targets.

Equally important, the sharp trader wants to run into the full book that transacts at each cost over the class of a trading twenty-four lx minutes catamenia or week. The make at which the lion's portion of book has transacted defines a market's value area. Many merchandise ideas--at brusque as well as longer fourth dimension frames--can live on formulated past times handicapping the odds that a marketplace volition render to a value surface area (if higher or lower prices cannot attract volume) or that a marketplace volition convey prices higher or lower than value (if those prices attract volume). The onetime province of affairs defines a make marketplace inwards equilibrium; the latter defines a trending market. In the onetime market, traders brand coin past times fading forcefulness as well as weakness; inwards the latter, they brand coin past times going alongside marketplace direction.

It is the oscillation of cost betwixt make as well as trending modes across a multifariousness of fourth dimension frames that defines the market's complexity, every bit marketplace participants discover their sentiment: either accepting value or redefining it.

The sharp trader tin give notice besides read the psychology of markets past times seeing whether book is dominantly transacted at the market's bid cost (suggesting that sellers are willing to convey lower prices to teach out of their trades) or at the market's offering (suggesting that buyers are willing to pay upwards for higher prices to teach into trades). This stair out of sentiment, which is effectively gauged past times the NYSE TICK Primer post; besides the posts on Cumulative Adjusted TICK; VWAP as well as Range Markets; Identifying Downside Trend Days; Identifying Upside Trend Days; VWAP as well as Day Structure; as well as Recognizing Range Days.

Info!! Tracking The Psychology Of The Marketplace Amongst Number Flow

When nosotros intend of trading psychology, nosotros typically intend of the psychology of the trader as well as the factors that either contribute to or distract from a peak functioning mindset.  Another facet of trading psychology is reading the intentions of other marketplace players.  This is real similar to psychology inwards poker.  The mindset of the poker instrumentalist is important, as well as it is also of import to read the psychology of the other players at the table.  The skilled poker instrumentalist reads those tells from other players to infer if they are bluffing or if they mightiness survive asset the nuts.  When short-term trading/market making occurred on the trading floor, reading the other participants inwards a marketplace really was to a greater extent than similar reading other poker players.  With nigh marketplace activity existence electronic, nosotros involve other ways of inferring the intentions of marketplace participants.

Above nosotros encounter a nautical chart of what I refer to every bit Event Flow for yesterday's session inwards the ES futures (6/12/17).  I volition survive discussing this mensurate during this afternoon's costless webinar as well as inwards especial item at this summer's workshop inwards Chicago.  (Here are details regarding the webinar as well as workshop).  In a nutshell, what I'm doing alongside consequence period of time is breaking downwardly the day's activity into volume-based events, where each bar represents the cost activity of each grand contracts traded.  What I'm interested inwards is the cost behaviour *within* each bar.  If cost closes to a greater extent than toward the high goal of the bar, I volition categorize that bar every bit a "buying" bar as well as vice versa.  The nautical chart depicts a cumulative running total of buying as well as selling bars, inwards the agency of an advance-decline line.  

Most of the fourth dimension the Event Flow business volition follow cost relatively faithfully.  It is the divergences that are of especial interest.  Notice, for example, how sellers were dominating inwards the afternoon, simply ultimately were unable to force prices below their morn (and below their previous day's) low.  The inability of sellers to movement cost lower (or vice versa) creates a province of affairs where those participants volition survive forced to comprehend when flows as well as prices turn.  Note the dainty rally inwards ES (blue line) later sellers are trapped inwards the afternoon.

Event Flow is a complement to other ways of inferring the psychology of marketplace participants, such every bit upticks/downticks (NYSE TICK) as well as Market Delta.  Event period of time is easily constructed for whatever musical instrument trading centralized volume.  It is also relatively robust alongside regard to the participation of optimal execution algorithms, every bit noted inwards quant query (see here as well as here).  Algos may survive buying bids as well as selling offers inwards an efficient manner.  This would non necessarily exhibit upwards inwards measures of upticks/downticks simply would survive reflected inwards cost behaviour inside sparse book slices.  Event Flow tin survive aggregated over longer fourth dimension frames to supply bigger motion-picture exhibit views of marketplace participant bullish/bearish psychology.

I've mostly constitute traders much to a greater extent than interested inwards focusing on their psychology, rather than the psychology of the markets they're trading.  That's a large mistake.  Typical cost charts are far besides blunt every bit tools for assessing the psychology of the marketplace.  With Event Flow, nosotros don't get got to rails the marketplace transaction past times transaction simply tin withal obtain a relatively finely grained assessment of how those around the marketplace are behaving.

I hold off frontward to sharing to a greater extent than at the webinar this afternoon as well as the workshop inwards July.

Further Reading:  Tracking the Stock Market With Upticks as well as Downticks 

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Info!! Trading Notes: Calendar Week Of 8/31/15

Friday, September 4th

*  We showed early on forcefulness yesterday, but book flows were suspiciously weak for much of the morn too failed to confirm the highs of the twenty-four lx minutes menses (see nautical chart below).  Volume flow is a proprietary volume-weighted mensurate of upticks vs. downticks for all stocks traded across all exchanges too tells us whether size is to a greater extent than oftentimes than non leaning to the purchase side or sell side.  Volume weighting the NYSE TICK achieves much of this purpose.  Once nosotros began to come upwards off the highs, nosotros saw a steady reject inward book flows, every bit nosotros chop-chop turned negative on the day.  Tracking such flows is my favorite way of "reading the tape": when the record does non confirm signals from quant models, I desire to quest heed to the tape.  It to a greater extent than oftentimes than non way that something idiosyncratic is moving the market: something models aren't accounting for.

*  We're trading significantly off yesterday's highs too then far this morning, with fresh selling inward premarket.  All of this is consistent with the sentiment of an extended bottoming procedure next a potential momentum depression registered final week.  As mentioned yesterday, during these high volatility periods, the percent of stocks trading inward a higher house their short-term moving averages ends upwards beingness a helpful overbought/oversold gauge.  Yesterday, good over 80% of SPX stocks were inward a higher house their 3-day moving averages.  

*  My full general game excogitation is to sell bounces, peculiarly on tepid book flows, but we're quite short-term oversold here, too then I'm prepared to hold back for a reasonable bounce inward cost and/or time.

Thursday, September 3rd

*  Buying weakness per yesterday's post service worked reasonably good yesterday, though a unopen aspect at NYSE TICK showed a two-way marketplace with active participation from both buyers too sellers.  We hold to endure oversold on intermediate-term measures too nosotros soundless receive got solely a niggling over 20% of SPX stocks trading inward a higher house their five-day moving averages.  My game excogitation remains to purchase weakness that remains inward a higher house the overnight lows.

*  One of the ameliorate decisions I've made inward trading lately has been to plough my models off in 1 lawsuit it became clear that nosotros were trading inward a dissimilar volatility authorities from the 1 that has persisted for much of the final 2 or too then years.  My latest projection is edifice models specific to defined volatility regimes.  Early days, but results aspect promising.  One intriguing finding is distinct short-term hateful reversion effects inward SPY for the electrical flow regime.  For example, when the issue of five-day novel highs minus novel lows for SPX stocks is nix or above, the adjacent 5 days inward SPY receive got averaged a loss of -.12%.  When the five-day novel highs minus lows receive got been below zero, the adjacent 5 days receive got averaged a gain of +.49%.  In general, chasing short-term forcefulness or weakness has non been a winning strategy; higher volatility does non imply greater trending.  (Raw information from the first-class Index Indicators site).

*  I'm concurrently working on the best ways of defining volatility regimes, using realized volatility, implied volatility, too to a greater extent than esoteric measures of vol based on published query inward quant finance.  This strikes me every bit a fruitful expanse of research.  Also on the docket is a Definition of correlation regimes too investigation of how returns may vary every bit a portion of higher too lower correlations alongside stocks.  The destination is to receive got a suite of models built out for a make of regimes, too then that at that topographic point are clear rules for turning off 1 beginning of trading signals too turning on another.  I am non at all convinced that a unmarried model tin accurately capture a high proportion of variance inward forrad returns for stocks, which is or too then other way of maxim that stocks comport differently inward higher too lower volatility too correlation regimes.  Having a laid of models to capture those differences could assist discretionary traders accommodate to their environments to a greater extent than quickly.

Wednesday, September 2nd

*  Many thank you lot to Sean McLaughlin for hosting this podcast on taking your trading to the adjacent level.  I'll endure elaborating many of these ideas too to a greater extent than at the first-class Stocktoberfest gathering.

*  Once again, the selling of bounces has worked good inward trading the ES.  We're at nowadays at an oversold point, however, where I am mindful of the possibility of putting inward a short-term bottom.  Fewer than 1% of SPX stocks are trading inward a higher house their 3-day moving averages too my intermediate-term forcefulness mensurate is rattling oversold.  Although nosotros saw weakness yesterday with 111 novel monthly highs too 431 lows, that is nowhere nigh the weakness final week, when nosotros registered 35 highs too 3553 monthly lows on the large spike down.  My game excogitation is to purchase weakness that holds inward a higher house yesterday's lows too peculiarly that successfully tests yesterday's lows.

*   VIX is over xxx too my pure volatility mensurate is significantly elevated.  I await vol to hold inward the nigh term, which has large implications for sizing of positions too calculations of stops too targets on trades.  The inability to accommodate to changes inward volatility--especially when nosotros receive got high vol of vol--is a major beginning of problems for traders inward the electrical flow market.

Tuesday, September 1st

*  Selling bounces has worked good too we've come upwards off difficult afterward hours, resuming the reject inward the human face upwards of Asia weakness.  Volume flows were bearish all twenty-four lx minutes menses on Tuesday, helping laid upwards the weakness. (Volume flow is a volume-weighted mensurate of upticks vs. downticks for all exchange-listed shares).  The pure volatility mensurate remains elevated, too I hold to anticipate highly volatile trading.  It is non clear to me that nosotros only caput lower inward a similar a shot line; intermediate-term measures are quite oversold.  I receive got been treating each fourth dimension zone every bit a carve upwards day--Asia, Europe, U.S.--and that has been helpful inward framing short-term trades.  There are considerable discontinuities of flows from 1 fourth dimension zone to the next; greater continuity inside each fourth dimension zone.

*  Below is a nautical chart of a elementary five-period charge per unit of measurement of change, where each bar inward the ES futures represents 500 cost changes.  It is 1 tool alongside many that I utilization to frame whether the marketplace is short-term overbought or oversold.  One of my execution rules is to hold back for short-term overbought weather condition to sell too short-term oversold ones to buy.  In volatile markets, that tin relieve a lot of messiness.  Many a proficient sentiment is undermined past times misfortunate entry too instruct out execution.  I'll endure discussing my utilization of such tools inward the Las Vegas conference for Trader4ACause.

*  I hold to scout commodity markets, every bit good every bit Asian stocks, for indications of the economical weakness that is impacting stocks.  This is or too then other expanse inward which monitoring activeness past times fourth dimension zone has been helpful.  I hold to lean toward selling bounces,  but am mindful that we're short-term oversold here, too then am content to hold back for shorts to endure squeezed earlier taking whatever swing positions.

Monday, August 31st

*  We focus on setting goals too tracking our progress toward those goals, but a wealth of show suggests that a procedure focus is much to a greater extent than probable to Pb to positive outcomes.  When nosotros emphasize doing the correct things, nosotros are most apt to create things right.  This is a rattling of import topic, every bit much of the flight-and-fight disruption of information processing too decision-making occurs when we're P/L focused too non genuinely trading focused.

*  My pure volatility mensurate has been percolating higher, too then I'm prepared for a proficient amount of motility inward stocks.  H5N1 slap-up routine is to compare intraday book of SPY with the book at the same fourth dimension of twenty-four lx minutes menses for the past times several sessions.  Because book too volatility correlate highly, the real-time tracking of relative book helps us intelligently justice the probable make for the day.

*  We've come upwards off Friday's highs inward overnight trading, with weakness inward Asia too Europe.  My game excogitation is to sell ES on bounces that neglect to receive got out overnight highs.  I'm non at all certain we're done hearing most EM too mainland People's Republic of China weakness too associated commodity weakness; the sentiment of an effective quantitative tightening raised past times Deutsche Bank final week is 1 worth pondering for implications.

Info!! Tracking The Footprints Of Provide In Addition To Bespeak Inwards The Stock Market

In approximately ideal, dispassionate basis all participants inwards fiscal markets would acquit similar my friend NRK too solely purchase at bid prices too sell at offers.  It's a groovy agency to create good inwards auction markets, too in that location are optimal execution platforms that volition make that for large marketplace participants.  The employment amongst optimal execution is that y'all oft cause got to hold back to buy the farm expert prices, too cost tin buy the farm away from y'all spell you're waiting.  That tin hap if you're looking for a manage inwards a hot existent estate marketplace or if y'all essay entering on boundary orders inwards a fast market.  

The truth of the thing is that the basis is neither ideal nor dispassionate.  People chase cost bubbles too puke out of positions when everyone else is doing the same.  Real basis traders--and fifty-fifty those execution systems--recognize this too allow for execution amongst urgency.  When markets are moving amongst signs of momentum, it's acceptable to elevator offers too hitting bids to participate inwards the movement.  Of course, inwards this less than ideal world, there's also that modest inconvenience called cognitive bias.  We all also oft extrapolate direct lines too remember that every displace higher or lower is a budding trend.  That gets us executing amongst urgency to a greater extent than oft than genuinely objective signs of momentum would dictate.

The long too curt of this foray into the vicissitudes of determination making is that fifty-fifty the largest marketplace participants larn out footprints equally to their intentions.  Yes, they tin chop orders upwards into pieces too execute inwards baskets too merchandise on dissimilar exchanges.  At the halt of the day, however, their transactions occur inside a bid/offer matrix, too they are either executing amongst urgency or they are not:  they are either willing to pay the seller's cost or they're willing to allow markets sell downwards to their desired buying level.

When y'all analyze markets transaction past times transaction, y'all tin really come across the stream of trades too book hitting bids too lifting offers--and y'all tin rail the evolving sentiment/urgency of marketplace participants.  That is highly useful data that is obscured past times looking at traditional intraday or daily charts.  H5N1 daily nautical chart is a telescope, revealing a large picture.  Viewing markets transaction past times transaction to discover the flows of trader behaviour requires a microscope.  H5N1 major fault that traders brand is attempting to engage inwards microscopic analyses past times changing the magnifying ability of their telescopes.

Above is a nautical chart that tracks a mensurate of "volume flow" that I've spent the amend business office of this weekend constructing.  It looks at every merchandise for every stock inwards the NYSE universe too identifies where the transacted cost occurred inside the bid/offer matrix existing at that time.  If the book of that transaction occurred nearer to the bid price, it is considered "selling volume".  If the book occurred nearer to the offering price, it is considered "buying volume".  The book stream mensurate is a running full of buying vs. selling volume.  If y'all remember of it equally a volume-weighted NYSE TICK mensurate or equally a cumulative Market Delta for all stocks, y'all wouldn't last far off the mark.

Much equally I dearest the TICK measure, it is democratic to the indicate of promiscuity.  All upticks too downticks are equal, whether they stalk from the smallest microcaps or the bluest of bluish chips.  That is non hence helpful when trading a capitalization-weighted index.  You tin cause got relative forcefulness or weakness amid modest caps equally business office of a sector rotation that volition skew the TICK measure--sometimes considerably.  H5N1 volume-weighted TICK measure, on the other hand, naturally weights larger, to a greater extent than actively traded issues to a greater extent than highly, providing a potentially amend supply/demand see for the stocks that thing inwards the index beingness traded.

Note to a higher house how selling flows were quite moderate inwards early on merchandise too hence accelerated fifty-fifty equally cost was topping out for SPY.  This is potentially useful data for the intraday trader.  

As I operate amongst the novel measure, I promise to portion farther findings too details.  The of import takeaway is non nigh the specific measure--it may or may non add together value over time.  Rather, what is of import is looking at markets inwards fresh ways too sustaining a procedure that periodically renews too extends your perspectives.  Looking at the same charts too indicators equally everyone else is a groovy agency of replicating the returns of everyone else.  If y'all wishing distinctive returns, y'all demand to see markets through distinctive lenses that break fresh opportunities.  It used to last that dependent meant next a exceptional develop of rules or processes.  In crowded, ever-changing markets, however, creativity is the novel discipline.

Further Reading:  Why to Keep a Journal
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Info!! Cyclically Adaptive Trading (Cat)

The recent post highlighted the challenge of short-term trading returns over the past times twelvemonth and, indeed, since 2009.  In this post, I volition sketch how I am addressing those challenges inward my ain trading.

When traders cite to the hard trading environment, they oft brand reference to "choppy" or "noisy" markets.  Usually their adjacent sentences lament the "algos" together with their comport on upon markets.  I detect these to endure expressions of frustration, non constructive formulations of trading challenges.  Invariably, those lamenting choppy markets dominated past times algos that "manipulate" markets engage inward their venting--and therefore become dorsum to trading every bit they've ever traded...and continue to lose money.  

A telephone substitution to agreement the recent hapless returns of curt term traders is to appreciate that these traders don't exactly lack an edge; they conduct maintain a negative edge.  What they are doing, which largely falls into the category of trend/momentum trading, is systematically non working over time.  Waiting for high Sharpe trends to provide to markets has non been a audio describe of piece of job concern model.  But peradventure nosotros tin merchandise inward a agency that benefits from anti-trending/mean reversion every bit good every bit momentum.

In coming months, I volition endure rolling out an approach that I cite to every bit Cyclically Adaptive Trading (CAT).  The meat stance behind the strategy is that all markets comprise linear, directional elements (trends) together with cyclical elements.  On a given fourth dimension frame, a "noisy" or "choppy" surround is simply i inward which the cyclical aspects of marketplace behaviour dominate the linear ones.  Note that whatever marketplace cycle itself has linear (rising together with falling) components together with make saltation ones (topping together with bottoming).  Very often, what is a tendency on i fourth dimension scale is a percentage of a longer-term cycle.  The interaction of cycles over multiple fourth dimension frames creates challenging irregularities, every bit markets switch betwixt mean-reverting together with trending phases.

The stance of CAT is that you lot trade the market's personality, non your own.  Instead of trading the fourth dimension frame together with style you lot travel on to prefer, you lot merchandise the cycles setting upward inward markets.  Because in that location are multiple cycles at travel at whatever i fourth dimension together with because the dynamics of the electrical flow cycles are influenced past times the activity of prior cycles, we tin seat dominant cycles inward existent fourth dimension together with adjust trading parameters to those.  This is the adaptive chemical element inward cyclically adaptive trading.  The argue therefore many traders are failing is that they lock themselves into preferred fourth dimension frames together with trading styles.  An adaptive approach is i that trades momentum/trend when nosotros are inward the rising together with falling phases of cycles together with i that trades inward a value/mean-reverting style when nosotros are inward the topping together with bottoming phases.  We merchandise longer-term when longer-term cycles dominate together with shorter-term when nosotros run into those "choppier" conditions.  Trading i fourth dimension frame inward i style systematically fails over fourth dimension inward markets possessing potent cyclical elements.

(A corollary is that, to the flat you lot seat yourself, say, every bit a directional trader or a short-term trader, you lot are likely losing money.  Someone who limits themselves to trading i facet of marketplace cycles is similar a baseball game hitter who specializes inward hitting fast balls.  If you lot larn plenty of those guys on a team, it doesn't conduct maintain the opposition long to set breaking ball together with off-speed pitchers on the mound.)

A 2nd major stance behind CAT is that cycles are self organizing:  recent cycles comport on the creation of novel cycles which interact to generate other, unlike cycles.  There is no unmarried periodicity to cycles that tin endure traded mechanically and, indeed, I conduct maintain doubts that cycles fifty-fifty be inward chronological time.  Markets displace inward event units of cost motility together with volume: every bit participants travel inward together with larn out markets, they comport on cycles inward ways that comport on futurity cost behavior.  In other words, cycles are a component subdivision of the behaviour of marketplace participants, non a component subdivision of the passage of fourth dimension on a clock. Our project every bit traders is to adapt to the market's clock together with trade inward marketplace time, non our time.

The trading I am rolling out is based upon an advance I've made inward tracking the self-organization of cycles over multiple effect fourth dimension horizons.

Some sources of insight into marketplace cycles tin endure flora inward the early on technical industrial plant of George Lindsay together with Terry Laundry.  Important quantitative perspectives together with tools conduct maintain been offered past times John Ehlers, who introduced the notion of adapting technical trading systems to dominant cycle periods.  Relevant posts seem below, together with I volition endure posting to a greater extent than every bit I formally curl this out inward my trading.

Further Reading:

The Dynamics of Market Cycles

Trading Market Cycles 

A Unique Measure of Market Cycles

Using Cycles to Trade Trends 

Reading Market Cycles

Trading Techniques

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Info!! Useful Trading Tools - Business Office Two: Volume

The starting fourth dimension postal service inward this series covered the NYSE TICK together with how it offers insights into who is participating inward markets.  In this post, we'll direct keep a human face at what tin sack hold upwards learned from raw book data.

The inward a higher house nautical chart covers today's trading inward the belatedly forenoon inward the S&P 500 e-mini (ES) futures.  Notice how nosotros were trading inward a narrow make for much of the fourth dimension alongside book averaging nearly a brace chiliad contracts traded per minute.  At 11:49 AM, nosotros got a menstruation to the upside, alongside over 9400 contracts traded that minute.  NYSE TICK hitting a high of 587 during that infinitesimal together with nosotros traded correct dorsum into the make subsequently.

What did that nation you?

Buyers came inward together with couldn't elevator the marketplace position higher.  There was a relatively large buying flow, but it could non heighten the TICK to statistically important levels.  That tells us that the buying was non heavy across the total stock universe.  It was aggressive buying (significant volume), but it could non generate important directional movement.  

Not a bad slice of marketplace position information.

Sure enough, at 11:58 AM--just nine minutes later--the ES contract prints over 9900 contracts during the infinitesimal together with volatility expands, breaking us out of the range.  Moreover, NYSE TICK plunged to -797 together with and then to -997 the next minute.  That is significantly wide selling on important marketplace position volume.  

In Market Profile terms, nosotros direct keep rejected value inward the prior make together with at i time are trending to institute a fresh, lower value area.  The fact that the displace out of the make occurred alongside significant, wide marketplace position participation is an indication that directional participants direct keep taken command of the market.  As yous know from the ease of the hateful solar daytime session, they did indeed direct keep command together with nosotros shut nigh the lows of the day.

It is mutual for traders to advert to the minute-by-minute drive of the marketplace position equally "noise".  For those who sympathise the dynamics of toll action, however, at that topographic point tin sack hold upwards of import signals amidst the noise.  When nosotros direct keep depression to average volume, nosotros know that marketplace position makers are dominant together with directional participants are relatively inactive.  When nosotros direct keep significantly expanded volume, nosotros know that directional traders direct keep taken the marketplace position reins together with nosotros tin sack suit expectations accordingly.  Influenza A virus subtype H5N1 meaningful shift inward book is ofttimes a overnice nation for meaningful shifts inward trading patterns.

Further Reading:  Relative Volume together with Volatility

Info!! Gauging The Market's Intraday Forcefulness As Well As Weakness Amongst Vwap

The volume-weighted average toll for a stock or index (VWAP) is a useful statistic for marketplace makers as well as intraday traders, every bit it provides a benchmark for electrical flow marketplace price.  In a rigid market, a stock or index volition consistently merchandise inwards a higher house its VWAP as well as VWAP volition convey a rising slope.  In a weak market, nosotros run into the opposite.  In non-trending markets, it's non at all odd to run into a stock or index oscillate around its VWAP.

If y'all click on the nautical chart above, you'll run into a unlike application of VWAP.  Here we're looking at SPY on a five-minute footing through the 24-hour interval session for 8/7/2014 (blue line).  The blood-red trace of piece of job represents the percent of NYSE stocks trading inwards a higher house their day's VWAP.  The greenish trace of piece of job represents the percent of Dow Jones Industrial Stocks trading inwards a higher house their day's VWAP.  (Data come upwards from the e-Signal platform).

Generally, inwards an uptrend, we'll run into to a greater extent than than 50% of stocks trading inwards a higher house their VWAPs.  In a downtrend, such every bit nosotros had inwards today's market, nosotros volition larn out persistent readings below 50%.  More rangebound markets volition tend to oscillate around that 50%-ish level, oftentimes reflecting a grade of sector rotation.

By comparison the percent of NYSE stocks trading inwards a higher house their VWAP alongside the percent of Dow stocks trading inwards a higher house their VWAP nosotros tin larn out a feel for how the wide marketplace is trading relative to the large caps.  From relatively early on inwards the session, nosotros tin run into that large caps were weaker than the wide market.  That is useful data if you're structuring a brusk merchandise or a relative one.

The primary value of the VWAP figures for the active trader is to attention them remain on the correct side of the market.  Even when nosotros bounced during the afternoon yesterday, the vast bulk of shares stayed below their average prices.  When VWAPs are declining as well as stock prices are staying below those fifty-fifty on bounces, that's a pretty proficient indication of weakness on the 24-hour interval timeframe.

Further Reading:  The NYSE TICK Environment
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Info!! Recognizing Pregnant Selling Pull Per Unit Of Measurement Area Inwards The Market

the day's volume-weighted average price for the vast bulk of the session. Recognizing the construction of a solar daytime early on inwards the session is a fundamental science for short-term traders: it determines whether y'all fade strength/weakness or larn alongside it past times playing counter-trend bounces.

In the nautical chart above, nosotros direct maintain a longer-term consider that illustrates the meaning weakness of the electrical flow market. The night bluish business represents the S&P 500 e-mini (ES) futures during 2009; authorities annotation the breakdown below the 800 level, equally represented past times the horizontal low-cal bluish line.

The pinkish business is a one-day moving average of the pose out of minutes that striking -1000 inwards the NYSE TICK. I telephone telephone these "strong selling minutes". H5N1 reading of -1000 or lower agency that K or to a greater extent than stocks are trading on downticks at that moment. That represents rattling wide marketplace selling pressure. Readings of -1000 or less are rare; they are nearly 2 measure deviations below the median depression TICK reading for all minutes since the firstly of October, 2008.

Another way of looking at the significance of that weakness is that the median pose out of potent selling minutes during a trading solar daytime is 11, alongside a measure divergence of 21. On Monday, nosotros unopen alongside 66 minutes hitting that level--more than ii measure deviations away from the norm.

What is meaning inwards the nautical chart to a higher house is the pinnacle inwards the pose out of weak marketplace minutes (i.e., minutes where nosotros had TICK readings of -1000 or lower) equally nosotros broke the 800 degree inwards the ES contract. That tells us that this was a meaning breakdown, alongside wide participation to the downside. Only the selling line per unit of measurement area of large institutional traders tin sustain such negative TICK readings. As private traders, nosotros desire to follow the path of those that movement market, non stand upwards inwards the way.

As long equally nosotros meet too then many stocks trading on downticks, it is premature to aspect a durable marketplace rally. Recognizing this potent selling persuasion is of import to staying on the correct side of these downtrend days.

RELEVANT POSTS:

Recognizing too Trading Upside Trend Days

Recognizing too Trading Range Days

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Info!! What Nosotros Tin Larn From The Relative Functioning Of Stock Marketplace Sectors

In a lilliputian while, I volition hold upwards rolling out a characteristic that examines the relative functioning of diverse segments of markets equally a bottom-up agency of agreement in addition to anticipating macro themes that are of import to the longer-term trajectories of markets.  An illustration of such bottom-up analysis is reflected inwards the relative functioning of sectors inside the stock market.

Is tech leading marketplace position performance, piece defensive sectors lag?  That is 1 sort of market.  Are nosotros seeing outperformance from consumer cyclical companies relative to consumer discretionary ones?  That is a dissimilar sort of market.  All nation us something virtually economical in addition to increment expectations of marketplace position participants.  To the extent that markets are forward-looking, such data tin hold upwards valuable, reflecting the implicit forecasts of many agents.

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So what is sector functioning telling us right now?

The exceed chart, from the first-class Finviz site, shows us that sector functioning has been highly variable over the yesteryear month.   Utilities accept dramatically outperformed Basic Materials shares in addition to many sectors accept gone nowhere over that period, despite the meaningful uptick inwards marketplace position volatility.  I would scrap that the relative outperformance of Utilities, traditionally viewed equally marketplace position defensiveness, is zero of the sort hither in addition to now.  Rather, the marketplace position is pricing inwards a disinflationary environment, inwards which rates volition hold upwards staying depression for long.  In such an environment, a component that volition motion returns is carry, the yield on whatsoever item asset.  With disinflation in addition to depression rates, the yield of utility shares is attractive in addition to at that spot is lilliputian attraction to inflation-sensitive commodity-related shares.

If this is correct, nosotros should catch bear drib dead on to attract upper-case missive of the alphabet across property classes, from currencies in addition to rates to stocks.  We've already seen a laissez passer on for yield inwards rates markets, equally investors accept gone farther out inwards duration in addition to farther out on the low-quality spectrum to laissez passer on bear returns.  At unopen to betoken that volition terminate badly, but the marketplace position is non telling us that betoken is now.

The middle nautical chart is my tracking of rolling 20-day correlations amid stock marketplace position sectors in addition to the bottom nautical chart reflects rolling 20-day volatility amid sectors.  Typically inwards a marketplace position cycle, volatility in addition to correlation expand into marketplace position lows in addition to drib dead on high equally the marketplace position rebounds.  As a bike matures, volatility wanes in addition to correlations come upwards down, equally nosotros catch reduced volumes in addition to to a greater extent than divergent day-to-day functioning amid sectors.  One of the things I give away interesting immediately is that sector performance, per the exceed chart, is divergent, but we're nonetheless seeing high day-to-day correlations of sector movement.  In other words, sectors are moving inwards relative lockstep, but unopen to are moving amongst to a greater extent than forcefulness than others.

The continued high levels of correlation in addition to volatility suggests to me that the electrical flow marketplace position cycle, coming out of the mid-October lows, is nonetheless relatively early on inwards its development.  If precedent holds, nosotros should catch a momentum peak inwards breadth, followed yesteryear declining volume, volatility, breadth, in addition to correlation, equally stocks exceed out.  The resilience of stocks itself reflects a forecast that continued depression rates in addition to the recent turn down inwards unloose energy prices volition non hold upwards negatives for corporate earnings growth.

Further Reading:  The Importance of Sector Correlations
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Info!! 3 Views Of Marketplace Weakness, Exactly Is The Marketplace Getting Weaker?

The recent shipping highlighted weakness that had shown upward inwards the wide stock market.  Above nosotros encounter 3 perspectives on that weakness.  The run yesteryear nautical chart tracks a cumulative full of the proportion of NYSE stocks trading to a higher house vs. below their daily volume-weighted average prices.  The stance behind this mensurate is that, inwards a strong/weak market, nosotros should encounter the neat preponderance of shares trading above/below their daily moving averages.  When stocks made their recent highs, nosotros saw fewer shares participating inwards forcefulness vis a vis their VWAPs.

The middle nautical chart follows buying describe per unit of measurement area vs. selling pressure, where nil represents a residuum betwixt the two.  Buying describe per unit of measurement area is a business office of moment-to-moment upticks amidst NYSE stocks; selling describe per unit of measurement area reflects downticks.  In a strong/weak market, nosotros should encounter the bulk of stocks upticking/downticking.  Note how the residuum betwixt buying together with selling describe per unit of measurement area has been steadily waning inwards recent days.

The bottom nautical chart tracks the proportion of NYSE stocks closing above/below their upper/lower Bollinger Bands.  Note hither also how recent sessions convey provided us amongst a negative Bollinger balance.  

What I expect for are mutual themes amidst multiple indicators.  The big enquiry I'm addressing is whether the stock marketplace position is:  a) rising together with getting stronger; b) rising together with getting weaker; c) inwards a balanced range; d) falling together with getting weaker; or e) falling together with getting stronger.  As marketplace position cycles evolve, nosotros shift from a) to b) to c) to d) to e).  It is the preponderance of evidence, non whatever unmarried marketplace position mensurate or nautical chart pattern, that provides a meaningful response to where we're at inwards a marketplace position cycle.   

Right instantly I'm gauging marketplace position forcefulness vs. weakness for the electrical flow marketplace position versus where nosotros stood at the cease of Dec 1st.  So far, we're seeing to a greater extent than novel highs together with fewer novel lows than at the commencement of the month, precisely also to a greater extent than stocks closing below their lower bands.  Raw materials together with liberate energy shares are downwards over 3% on the week; healthcare together with fiscal shares are upward over 1%.  It is non clear to me that what we're seeing together with thus far is a wide based decline, equally opposed to a correction inwards a broader topping process.  Trending markets mostly cutting across sectors.  When sectors are doing really dissimilar things, that smacks to a greater extent than of rotation than outright trend--and that keeps me nimble.

Further Reading:  How Markets Looked Before the Oct Swoon
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Info!! Bayesian As Well As Static Reasoning Inward Markets: Trading Alongside An Opened Upwards Mind

In a recent post, I highlighted the make merchandise inwards the ES futures over the past times several months.  My signal was that the marketplace seat has been showing diminishing breadth at successive highs as well as also less weakness at successive lows during that range.  Generally, lengthier ranges Pb to lengthier directional moves, equally they are component division of longer-term marketplace seat cycles.  So the breakout from the electrical flow make should ultimately move a meaning one.  Will the marketplace seat interruption out of its make imminently, or volition the make proceed for only about other calendar month or more?  Will the ultimate breakout move to the upside or downside?  Will nosotros run across a fakeout, mistaken breakout prior to an eventual displace to novel highs or lows? 

My worst trading--and the worst trading I've observed of many traders--has been the resultant of what could move called static reasoning.  Static reasoning takes a diversity of evidence, assembles the show into a conclusion, as well as and hence places trades based on that conclusion.  Risk taking is ofttimes a component division of one's bird of belief inwards that conclusion.

Static reasoning is problematic for 2 reasons:  1) it is discipline to overconfidence bias, equally nosotros receive got a theatre opinion on a persuasion that nosotros own; as well as 2) it is discipline to confirmation bias, equally nosotros tend to procedure new, incoming data inwards the lite of our convictions.  When I've seen traders receive got larger than desired losses, it's by as well as large non been because they've held onto marginal views.  Rather, they receive got sized upward their preferred views, stuck amongst those views inwards the human face upward of opposite marketplace seat information, as well as ultimately lost the seat when drawdowns became uncomfortable.

I receive got institute my best trading to resultant from what could move called Bayesian reasoning:  a idea procedure that reflects a Bayesian, probabilistic way of thinking.  Bayesian reasoning begins amongst a hypothesis, but it is a flexible hypothesis that updates amongst new, incoming information.  One's confidence inwards the hypothesis waxes as well as wanes amongst novel information, as well as one's hypothesis tin chop-chop modify amongst novel information.

With static reasoning, a marketplace seat persuasion is something you lot receive got as well as merchandise with.  With Bayesian reasoning, a marketplace seat persuasion is fluid as well as continually evolving.  

Trading leading upward to as well as including this past times Fri was a practiced example inwards point.  We traded theatre for nigh of the week, amongst relative clit inwards modest cap shares.  Volume had been coming downward inwards recent sessions and, past times Apr 15th, nosotros saw novel highs inwards the wide NYSE Composite Index non accompanied past times an expansion inwards the discover of stocks registering fresh highs.  With each observation of depression book as well as diminished novel highs, my confidence inwards an upside breakout diminished.

Friday saw novel data come upward into the marketplace seat regarding Red People's Republic of China as well as Greece.  There was a rigid selloff inwards pre-market hours.  Volume expanded, equally did volatility.  New marketplace seat participants were joining the fray, as well as they were joining amongst a downside bias.  That led me to sell an early, pre-opening bounce inwards the ES futures.  At that point, the show tilted toward continuation of the make as well as a short-term handoff from bullish to bearish command of the market.  I reasoned at the fourth dimension that investors would non wish to request chances bad headlines over the weekend as well as hence would move probable sellers inwards early on New York trade.

That indeed materialized, but as well as hence something interesting happened inwards mid-to-late afternoon.  We had seen steady selling inwards stocks, equally measured past times the NYSE TICK.  When I ran a report of lopsided selling days such equally the i inwards progress, I noticed a style for the marketplace seat to bounce higher the side past times side twenty-four hours or two.  At the same time, I noticed continued selling pressure level inwards stocks (negative TICK values), but instantly the ES futures were asset inwards a higher house their lows for the day.  Selling was no longer able to larn cost higher.  I nonetheless liked the range-based persuasion but the merchandise no longer looked swell from a risk/reward perspective as well as I took profits.

Am I a bull?  Am I a bear?  Not actually either, as well as the enquiry presumes a bird of static reasoning.  What made Fri a practiced twenty-four hours inwards the marketplace seat was the fluid transitioning from waning bullishness to waxing bearishness to waning bearishness.  We could indeed gap lower inwards the nigh term as well as receive got out Friday's low, but that's non where the odds were at the time.  Let's allow the bulls receive got their plough as well as run across what they tin convey to the market.  Should nosotros larn a feeble rally as well as a lower high, at that topographic point volition move enough of chance to resume a downside merchandise targeting the lower destination of the recent range.  Should nosotros larn a to a greater extent than substantial rally, as well as hence nosotros tin update show for continued topping inwards the make or fifty-fifty upside breakout.

Bayesian reasoning agency trading amongst an opened upward heed as well as staying flexible inwards the human face upward of novel information.  Think of it this way:  we're inwards an ongoing conversation amongst markets.  In whatever conversation, if you lot rest locked inwards what you lot wish to say, you lot croak less sensitive to the other person.  H5N1 practiced conversationalist is a practiced listener, picking upward on subtle cues as well as adjusting one's ain musical note as well as answer accordingly.  In markets equally inwards conversations, unopen minds as well as rigid views Pb to tone-deaf interactions.

Further Reading:  The Importance of Emotional Creativity
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Info!! Even Out Briefing For August 20Th

* MARKET THEMES FROM THURSDAY: After around pre-opening weakness, stocks 1 time once again caught a bid as well as traded higher during the morning. Volume dried upwardly equally the solar daytime progressed, simply buying pressure level remained potent for the session. The S&P 500 e-mini (ES) futures made fresh highs slow inward the afternoon, simply at that topographic point were non-confirmations from several sectors, equally good equally from the advance-decline line. This had me questioning the vigor of the rally toward day's end. Another inquiry ambit was that, equally stocks made novel highs, nosotros did non encounter comparable line with commodities. Ten-year yields unopen off their highs, equally well. I proceed to sentiment the electrical flow activeness equally business office of an extended topping procedure inward stocks; if the non-confirmations examine significant, as well as therefore nosotros should likewise last seeing around short-term topping.

* OVERSEAS/OVERNIGHT NUMBERS: No major reports scheduled.

* EARNINGS: ANN, SJM

* WORTH READING:

-- Emerging economies Housing won't bottom until slow 2010?

-- Inflation not looking similar a threat;

-- No bottom inward sight for non-residential construction;

-- Recovery based on an addiction to debt;

-- Trading a intermission inward resistance;

-- Thoughts on a two-track economy;
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