Trading Choppy Markets

This was a post from a month ago -- seems especially relevant given the ups and downs of the last few days:

 

When you have a market that trades like this one it's time to dust off the stock trading systems cabinet,  pull out the oscillators, and forget moving averages and other trend following indicators.
 
I like the Stochastics %K to trade a choppy market. . .

Read the entire article here, Trading Choppy Markets

Stock Trading Sys Tells You The Truth About Trends

The transition from an up trend to a down trend doesn’t happen overnight.   It’s a process, not an event.   Tuck this concept into your stock trading system and once in awhile, when uncertainty strikes, reread it.

You can prove this principle.  Pull up a daily chart of the NASDAQ Composite.  Shrink your data so the price bars from 2006 through 2009 are visible and take a close look at the last quarter of 2007.  You will clearly see a top was building.

Through March 2008 price declined.  Yet if not looking past March 2008 it would have been possible to argue that price was consolidating and another move up could be developing.

May and June of 2008 was another topping process and the third area of lower highs since the top in late 2007.  It wasn't until late August 2008 that the final top-building process occurred followed by the long, severe, and swift decline into early 2009.

Price didn't turn on a dime after the sharp down move in late 2008.  It took four months of consolidating price action to form a bottom.  Finally, in March 2009 a new trend found momentum and climbed upward for thirteen months ending in April 2010.

After a long up trend the first sharp decline will always find traders willing to buy.  Conversely, after a protracted down trend the first snap up will find traders that will sell.

Here’s a trading tip -- after an uptrend don’t short the first decline, short the second high.

Conversely, after a long down trend, don’t buy the first move up, but buy the second.

Reversals take time and sometimes build at an excruciatingly slow pace.  The process can lull traders into a mental haze.  Keep your stock trading system data current with up to date trend lines.  Watch for price to give you clues with higher highs or lower lows.

Is this August 2010 market consolidating for another move up?
Or will the consolidation be like that in late August 2008 and usher in another severe decline?

If you can accurately answer those questions then there is money to be made by trading your convictions.

The Truth About Trends

Ticker
The transition from an up trend to a down trend doesn’t happen overnight.   It’s a process, not an event.   Tuck this concept into your stock trading system and once in awhile, when uncertainty strikes, reread it.

You can prove this principle.  Pull up a daily chart of the NASDAQ Composite.  Shrink your data so the price bars from 2006 through 2009 are visible and take a close look at the last quarter of 2007.  You will clearly see a top was building.

Through March 2008 price declined.  Yet if not looking past March 2008 it would have been possible to argue that price was consolidating and another move up could be developing.

May and June of 2008 was another topping process and the third area of lower highs since the top in late 2007.  It wasn't until late August 2008 that the final top-building process occurred followed by the long, severe, and swift decline into early 2009.

Price didn't turn on a dime after the sharp down move in late 2008.  It took four months of consolidating price action to form a bottom.  Finally, in March 2009 a new trend found momentum and climbed upward for thirteen months ending in April 2010.

After a long up trend the first sharp decline will always find traders willing to buy.  Conversely, after a protracted down trend the first snap up will find traders that will sell.

Here’s a trading tip -- after an uptrend don’t short the first decline, short the second high. 

Conversely, after a long down trend, don’t buy the first move up, but buy the second.

Reversals take time and sometimes build at an excruciatingly slow pace.  The process can lull traders into a mental haze.  Keep your stock trading system data current with up to date trend lines.  Watch for price to give you clues with higher highs or lower lows.

Is this August 2010 market consolidating for another move up?  Or will the consolidation be like that in late August 2008 and usher in another severe decline?

If you can accurately answer those questions then there is money to be made by trading your convictions.

 

Stock Trading Strategies -- The Scary Season

August is starting off with a very positive tempo. It got me to thinking about where the market has been this year, and where it may be heading. I do believe the stock market has seen the highs for the year.



The markets have a rhythm that revolves around the seasons. From November to May is when the bulls are apt to run. This is the prime time to trend trade. The summer months are usually a lazy sideways period that may throw a rally into the mix just to get your attention. The last quarter is the scary season.



August will often contain price peaks. Price will attempt to eclipse new highs, but fall back to lower levels and then start the process again. The hallmark of trading in August is lots of chop. That means dusting off the oscillators if you trade, or standing aside and avoiding the price whipsaws.



Reminders of the sickening drops that have occurred in September and October are enough to put any trader on edge. My goal for this season is to try and ensure that none of us give back what we have gained.



July was a good month for traders. Although I've heard that many missed the move or were convinced the market was heading lower. Those that tried to short the swing moves in July had their faces handed to them.



As August matures it will probably become evident that this move in July was the summer rally. There are headwinds blowing economically and politically that will likely make the last quarter a very interesting time to trade the markets.

Charting Software And Technical Analysis

Charting software comes pre-loaded with a tremendous amount of technical analysis indicators.  It’s fun to sift through the indicator tab and plot the various indicators looking for the one that best finds tops and bottoms or new trends.

For my style of trading staying as close to price is the best strategy.  Price is the essence of supply and demand.  Every calculation made on price tends to alter the information revealed by price.  For example, moving averages “average” data,  the stochastic oscillator attempts to define the current price in relation to price action over a certain period of time.  Attempting to define, quantify, or average price can create lag.

There is a place for a few indicators in a trading system.   Indicators can detect subtle changes that aren’t readily visible on a price chart.  Yet some traders have a tendency to become overly confident in this information and miss trades, stay in trades too long, or delude themselves that the losing trade is about to turn around and become profitable.

Perfecting a few indicators on a price chart can create a path to profitable trades.  Trend lines, and support, and resistance are my favorites.  Keep these simple indicators current and you can prove to yourself their value.

It doesn’t take a fancy system with complex algorithms to make money.  It takes discipline, repetition, and patience.  I think it was Jesse Livermore who is often quoted as saying, and I paraphrase — It’s not the “doing” that makes money, it’s the “sitting”.

I have had the privilege of coaching traders who wished to improve their skills.  One of the most common exclamations after our sessions is, ” I didn’t know trading could be simple AND profitable!”

Stock Charting Software -- What You Need To Know

Traders have options when it comes to technical analysis software:  either use what the broker offers, or buy a software package.  One way to decide which option may be best is to decide on the features necessary to implement your trading system.  Here are a few ideas --

Charting is the primary feature in most technical analysis programs.  The software allows the user to plot charts in a variety of ways: candlesticks, bars, and lines.  It should also allow you to draw trend lines and horizontal lines for support and resistance.  It's a nice bonus if you can write on your charts -- it helps to keep a few notes about reasons for the entry, stop, etc.

Back testing is very useful to test the viability of your trading system.  You'll need to learn the formula language the system uses in order to write the code to test your trading system.  Some formula language can be quite difficult.  See if it's possible to obtain a manual from the vendor and read through the section on creating formula code.  It's even a good idea to ask the sales person if technical support will help with this function.

Optimization isn't so important, but is usually  a part of the package if the software offers back testing.  Optimization is fine-tuning your trading strategy to find the best settings for the strategy's rules.  This could be an entire discussion by itself.

It seems to me that traders trade and formula writers code software.  In other words, you don't need to worry about optimization.  If you thoroughly back test your strategy it will become apparent if your strategy is sound, or not.  Test over many years, during up and down years, and during consolidationg markets.  If you can be honest with yourself you'll know if you have a good system.  Optimization can lead to curve-fitting that can lead to unrealistic expectations.

A scanner is a great feature to have.  It should allow the creation of a multitude of scans that can be saved, retrieved and executed with ease.

Alerts are helpful.  A simple alert could be a buy or sell indication on the chart.  More elaborate alerts are designed to go to an email account or a hand-held device.  It just depends on the level of “contact" you need or want if away from your computer for the day.

Indicators are something with which you don't need to concern yourself.  Most software comes brimming with bunches of indicators -- many more than you need or likely want.  What is nice is the ability to customize indicators.  For example, a custom indicator could be a weighted Relative Strength Index (RSI), or coloring rising price in one color and declining price, another.

Another feature, that is more common, is the ability to overlay multiple indicators in the same pane.  This is especially powerful if you have a system dependent on multiple indicator criteria.  For instance, it's nice to display a 7 period, 14 period, and 40 period RSI in one pane.  In addition, showing the moving average of the RSI would be another example of a multiple indicator overlay.

A good, clean, timely, data stream is critical.  You get what you pay for with data.  Free data is often error-ridden, late, or unreliable.  Purchasing data separate from the software program can be costly.  Try and find a bundle of software and data.  If it meets your needs it will save some serious coin!

Much of the software for sale, but not all, has a broker interface.  This allows order entry directly from the program.  It's not a necessity, but more of a personal preference.


 Visit our site if you liked these tips and techniques -- much more trading information and resources HERE.

ETF Trading -- Numerous Advantages For The Small Investor

The demand for exchange traded funds (ETF’s) expands each year.   There are nearly 1,000 ETFs available to trade including almost any asset class imaginable.  Some of the bigger ETFs are offered by ProShares, IShares, and the SPDRs.

There are numerous reasons for the increased popularity.  The primary attraction may be that ETFs are thought to be less risky than individual stocks.  Because ETFs are a basket of underlying securities the business risk of single stock exposure is reduced.  There’s no chance of corporate wrongdoing affecting an ETF like it would an individual stock.

Other advantages of investing with ETF’s are:

•    The market can be traded on both the long and short side.  This expands the opportunity for profits because an investor can profit from a rising and a declining market.

•    Some ETF’s are leveraged.  More assertive traders like the idea of increased leverage.  There are now ETF’s with not just double the added leverage, but also triple.

•    The capability to trade multiple markets is possible.  Oil, gold, silver are some of the possible commodity ETFs.  World markets are accessible – country specific investments like: Brazil, China, Japan, etc.

•    The currency market is available with many ETFs -- there is likely an ETF for all major world currencies.

•    Option trading --just as with stocks the same option techniques can be applied to ETFs.

•    Portfolio diversification is simple given the number of asset classes, sectors, countries, and currencies represented by exchange traded funds.

•    ETFs are not only popular with the investing public, but also with hedge fund managers and day traders.  One of the reasons, besides being great trading vehicles, is that they are useful as hedging vehicles..  Hedging with ETFs can protect the profits in a portfolio and it can be accomplished inexpensively.

As with single stocks, technical analysis strategies are suitable to use with ETFs.  It’s possible to successfully use trend following indicators and oscillators.  Charting the price movement is no different than graphing a stock.  The big index ETFs move very smoothly and are great to vehicles.  An active trader could make a good living trading only index ETFs.

One caveat – note the volume on each individual exchange traded fund.  Many such as the SPY, QQQQ, DUG, and DIG have plenty of volume.  Some of the more obscure, like some sector ETFs are thinly traded and should be avoided.

 

Learn how to build stock trading systems from a full-time trader at Stock Trading Systems where lots more information and resources is found.

Stock Market Trends And Trading Systems

To expand your success trading the market it’s beneficial to unite an appropriate trading system with the present stock market trend.  There are those that are very
skilled at counter-trend trading, but it takes a lot of analysis and experience. It’s much easier to work with the market — if the market is in an uptrend, go long –if the market is falling watch for shorting opportunities.

Think about devoting some of your chart-research time to following the trend on a few of the major averages.  A perfect combo to observe would be the S&P 500 and the NASDAQ Composite — a blue-chip average and an index of smaller stocks.  Another twosome may be the Russell 2000 and the Russell 3000.

Pu ta number of bars on the charts so you can get a perspective.  A daily chart of the last 6 months, 1 year, and 2 years will absolutely give you the market’s direction.  Transition to a weekly chart and see how the equivalent data is displayed with weekly bars. Note the location of tops and bottoms within the various trends.
Another good study would be finding those stocks that move in tandem with the indexes.  Finding those stocks that reliably move against the trend could develop into a good pairs-trading system.

The big indexes usually move quite fluidly.  As your market trend study develops it may be that your new skills will enable an ETF index trading system.  There are many good ETFs in this arena: DIA, QQQQ, IWM, etc.

Using a few moments to analyze the entire trend will keep you going with the flow rather than fighting the current. Using a sound trading system that reflects the trend’s movement will surely increase your odds of winning.

Karen Stanlake is a full-time trader that also writes about stock trading systems at <a href="http://www.tradingsystemssite.com" >http://www.tradingsystemssite.com</a> .