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Special Market Report: FOMC Prep – Bond Yield as FED Tool (George Cavaligos)

September 20, 2011 in Hamzei Analytics

George Cavaligos from the floor of the CME Group. I’m a broker with MF Global here in Chicago. Been on the trading floor for about thirty years. Fari Hamzei’s been kind enough to allow me to show you our trading floor and a little bit of our color from the bonds and notes here that we trade on the trading floor. Thirty and ten year notes are our strong point. That’s where we’ve seen a lot of activity over the last couple years as the Fed has pushed its zero interest rate policy. The short end of the Treasury curve goes out from zero to about two years what we call the intermediate sectors five years the seven years, then the long end is tens and thirties. We’re going to talk about tens and thirties today because we’re coming into the Fed meeting. Today is Tuesday, the meeting started today. The Fed announcement will be tomorrow afternoon about one fifteen Chicago time. Most of us think the Fed is going to try and come out with a new program to try and backstop the economy here and keep rates lo. We’re going to look at a specific sector of the curve. First off a little history lesson. If we look back at the financial crisis in 2008, we look at the end of the year we see that most of the Treasury curve from zero to ten made very low yields back then. Since 2008 bills perked up and now since early 2011 we’ve seen those rates go back down again as the economy has showed more weakness and the turmoil in Europe has caused this flight to quality. Where a flight to safety where people come and buy bonds and notes and Treasuries of any maturity to park their cash and safe place. There’s a little bit of an anomaly here where are the thirty year bond has not made new lows this time down. If you look at the thirty year chart see that the low in 2008 was 2.52%. Thirty year bonds which are around the recent low yields are only trading at 3.22% right now so we’re about seventy basis point, or seven tenths of a percent above those old Treasury yield lows in the thirty year.

I think the Fed sees this and that’s what they’re looking at as a sort of a layup but an easier place to try and maintain some type of stimulus in the economy by bringing down thirty year yields. There’s talk and most people in the financial markets are looking for the Fed to come with what they call an “operation twists” program where they will either buy thirty year notes and/or sell short term notes to keep their maturity, or to move their maturity is a little bit longer term duration. I think they’ll probably come with some type of program more than they’ll going to push the thirty year yields down and it’s an easy trade for them. It’ll tend to backstop the economy. I don’t think it’s a be all end all response to the financial crisis that we’re still going through. We need a little help from Congress in the administration, specifically in the housing market which is what most people in the consumer side are struggling with at this point.

We’ll take a look at a couple trades. The treasury yield curve. There’s a couple of opportunities here that we’ve looked at whether we’re gonna be selling 2 years of buying 10 years as a nice opportunity. It’s currently trading around one eighty if you look at the yield difference between those two sectors of the curve. Long term that trade, it’s already flatten quite a bit. The highs were made back in February at two hundred ninety basis points but historically we think that can go down more. We think over time here that should work its way down towards seventeen to ninety basis points if you follow historical trends. Also the NOBS spread, what we like to trade is between the 10 yr note and the 30 yr note. That is that at any kind of extreme levels here but we think that might be a spot where there’s an opportunity that hasn’t been seeing alot of flattening yet. We’ve already seen some tremendous flattening: 2′s, 10′s, five year. We have not seen a tremendous amount of flattening in the 10′s 30′s spread. We think maybe if you take a look at the NOBS spread, which is the notes over the bonds, selling ten notes buying bonds on a ratio basis will keep in the futures market will keep the yield differentials the same might be a great trader take a look at. thank you very much free time try to keep up with the markets through Fari’s great website (HamzeiAnalytics.com) here guys have a great day.

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by MarketHeist

What is Forex? Infographic

July 4, 2011 in CMS Forex

An infographic from CMS Forex explaining the basics of forex. If you’re new to investing in forex, or just curious about what and how currency is traded around the world, this Forex infographic is a great introduction.

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by MarketHeist

Futures Trading Guide: Order Types and How to Use Them

June 7, 2011 in Apex Futures

Exclusive trading order entry lesson by Craig Ross, Apex Futures

The purpose of this article is to explain the different order types accepted by the exchanges and also some advanced order strategies your trading platform can maintain for you. Since the electronic markets make up over 70% of all futures trading we are going to limit our discussion here to the three main types of orders accepted and most frequently used on electronic markets like the CME and the most popular types of advanced order strategies.

Market Order

This is the most basic and frequently used order type which tells the exchange’s computers to execute your order at the next available price. So, if you are buying your fill price will be the next available offer and if you are selling your fill will be the next available bid, therefore this does not mean you will necessarily receive the “last price” or last quote you saw. Many new traders will look at the market and might see a price of 995.50 as the last quote or trade and then they place a market order to buy which is filled at 995.75 and they wonder why they did not receive a price of 995.50. The reason is the last price of 995.50 is just that, the last price and not necessarily the next price. To get a better indication of where you might be filled you need to look past the last price and at the current bid/offer, which in our example may have been 995.50 bid at 995.75 offer. This means anyone who is buying at the market can buy at 995.75 and any sellers at the market will be filled at 995.50. This difference between the bid and offer is known as the spread and is typically one tick in a liquid market like the Emini S&P. Now, of course there is still a chance you may not receive the bid or offer price as your fill because the market can still move in the milliseconds between the time you click and the time your order reaches the exchanges computers, but this can work against you as well as for you. The advantage to using a market order is that you can always expect to get a fill (assuming there are buyers or sellers available) in the quickest way possible. The disadvantage to market orders is that in a volatile or fast moving market you may not get the last quoted bid or offer, but if things are moving fast you may not be able to afford to wait or work a limit order.

Limit Order

This is an order to buy or sell at a designated price, a limit to buy is placed below the current market price, while a limit to sell is placed above the current market price. If the last price is 995.50 and you only want to buy if the market goes down to 993.50, you can place a Buy Limit order at a price of 993.50. Since all orders are filled on a first in, first out basis (FIFO), this order will be placed in the queue on the exchange’s computers. In other words if you look at the level II quotes on your Depth of Market (DOM) you will know ahead of time the number of contracts that are in front of you and therefore need to get filled before you will receive a fill. For example, if you look at the DOM and at 993.50 it says there are 2,100 contracts already trying to buy, then your order to buy will be the 2,101st contract to be filled (assuming none of the existing orders to buy are cancelled). Keeping this in mind don’t expect to receive a fill just because the market falls down to 993.50 and trades there once and then pops back up. You will most likely need to see the market trade there several times, or enough times for there to be 2,101 contracts traded. Of course the same procedure holds true for Sell Limit orders but they would be placed above the current market price.

Stop Order

These are most commonly used to stop the loss on a position, which is where it obviously got its name from, but these orders can also be used to enter the market. A stop order to buy is placed above the current market price and a stop order to sell is placed below the current market price. Stop orders are price orders that turn into market orders once the designated price trades. Let’s say the last trade is at 995.50 and you want to sell if the market falls to 993.50, you would place an order to Sell at 993.50 on a Stop. If and when the market falls to 993.50 your Stop order will turn into a Market order to sell at the next available price. Once triggered, the order competes with other incoming Market orders therefore Stop orders do not guarantee you an execution at your Stop price, but in a liquid market under normal conditions you should expect to receive your Stop price of 993.50. But, let’s say a news report was just released and the market really falls fast on high volume, then you may receive a fill price lower than your intended price and this is called slippage.

The following advanced orders types are not accepted by the exchange’s computer which means they need to be managed by the Infinity AT trading platform software on your computer. These orders can be entered manually by the click of a button after you enter a position or you can set them to be sent automatically when you enter a position. These advanced order types are very useful and can be a very valuable trading tool, but it is important to remember that for them to be fully functional your DOM needs to be open and your internet connection active for them to be maintained by the trading platform. Therefore, it is important to contact us should your computer go down or you lose internet connection so we can check your account and do any required trade management for you.

Bracket OCO (Order Cancels Order)

A bracket order is actually two separate orders that are placed around or “bracketing” a position, one of the orders is your Limit order to take a profit and the other is your Stop order to get out at a loss. This type of order forces you to have a predetermined profit target and stop loss point and even though the stop price is not guaranteed, this is a much more reliable way to admit you are wrong and take a loss since this order is working at the exchange and not dependent on you to pull the trigger to get out since many new traders act like a deer in headlights when they rely on themselves to manually exit a losing trade. The other benefit of this strategy is that once the profit or loss order is hit, the trading platform will cancel the remaining order for you, this is the OCO part, or Order Cancels Order function. Let’s say you buy a contract at the Market and get filled at 995.50, and want to either get out with a 2.00 stop or 3.00 profit; the trading platform can automatically place a bracket order with a Sell Stop at 993.50 and a Sell Limit (target price) of 998.50. If the market hits your Limit price of 998.50 and fills you, the platform will then automatically cancel your Stop order at 993.50. Important: ApexTrader allows you set these levels before you enter the initial position and you will see these orders on your Active Orders screen with a State of “Held,” these bracket orders have been received by our servers and will be placed once you enter the market. This means if you lose your internet connection or have computer issues when your Bracket needs to go in, the servers will still place and manage the orders for you. This is important because most other trading platforms rely on your computer to place these orders, which means there is more of delay when they get placed and they will not go in at all if you are having computer issues.

Trailing Stop

A trailing stop allows you to enter a Stop loss order and have it move as the market moves in your favor based on your preset parameters. This allows you to lock in a potential profit if the market moves in your favor. I am sure you have seen a trade go in your favor, only to see it come back and stop you out for a loss, this type of order will hopefully prevent that from happening. Let’s say you are long from 993.50 and place an initial Stop at 991.50 and then the market moves in your favor to 995.50. At this point you can have the Stop moved up to 994.50 and then continue to ratchet up until it comes back down and stops you out, but don’t forget as stated above it does not guarantee you get out at your exact stop price. All of this Stop movement is done automatically by the trading platform based on predetermined parameters you setup before the trade even begins.

Multi Bracket

This advanced order type allows a trader who trades with multiple contracts to set up to three different targets and three different Stops which can also be set to trail, should you choose.

Please call me if you have any questions on these order types or if you need any help executing them on the ApexTrader trading platform.

Craig Ross
ApexFutures.com
800-208-6564
312-267-2278
Fax: 312-267-2266

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

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by MarketHeist

Trading Software Tip: Be Smarter Than the Black Box (Software) Analysis

June 7, 2011 in RiskDoctor

Options trading tutorial video by Charles Cottle, aka the Risk Doctor, showing how even the best stock market software can have glitches and errors even in the analysis of a simple covered call option with stock. The trading platform software used in this demo by the Risk Doctor is tradeMONSTER, and the Risk Doctor shows how you can catch and fix such an error just with good foundation understanding of options. Charles Cottle is a long time professional trader and options trading educator. Charles Cottle was the co-founder of online broker thinkorswim and author of such options trading books as Options Trading: The Hidden Reality.

Video Transcript:

There’s a glitch, or it’s not updating. (Referring to the tradeMONSTER options analyzer screen showing a short straddle instead of the covered call strategy). you got to be smarter than the machine. Look at what’s up there: it’s showing a short straddle. There might be a delay in the feed or because the market is closed. I don’t know what it is. But it’s not working, is it? Because long 1000 shares and short 10 calls is not short a straddle. So you have to be smarter than the analyzer. That’s why position dissection is so important: because sometimes your systems aren’t reliable. And I’ve used dozens and dozens of platforms, and every now and then something goofy happens.

What I’m going to do is exit out of it and reenter it. Maybe that will fix it. But don’t trust it. You have to be smarter than the black box. (Added long stock) So that’s right. I get that. That’s a slash. Now I’m going to add a call, and I’m going to sell it. And there we go, it’s fixed! The tools you are given just need to reinforce what you know. If you don’t yet know it, you have to study and learn it.

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by IndicatorWarehouse

Stock Market Guide: Support & Resistance Levels Simple Tutorial

June 7, 2011 in Indicator Warehouse

Exclusive Article by Adam Halpern, Indicator Warehouse

Support and Resistance

Understanding how support and resistance works is paramount to understanding the markets. Why? Because support and resistance is how the markets work! Support and resistance levels on a chart are just the graphical representation of supply and demand in action, and it is supply and demand that drives the markets.

When demand (buying) is greater than supply (selling) prices will go up. As prices continue higher they reach a point where either the demand for the commodity declines, or the amount of supply increases. Either way, supply ultimately catches up to, and exceeds demand. When this happens prices stop advancing. This is known as resistance. Resistance acts like a ceiling against prices going higher.

Conversely when supply (selling) is greater than demand (buying) prices will decline. As prices fall they reach a point where either the amount of supply decreases or the demand for the commodity increases. As a result demand overtakes supply and prices stop declining. This is known as support. Support acts like a floor keeping prices from going lower.

Identifying Support and Resistance

Since the market tends to move from one resistance level to another, knowing where the important support and resistance levels are can give us an idea of where the market is heading next. But how do you know where the market is going to form support or resistance?

Most traders calculate support and resistance levels incorrectly. Many traders will use an old high or low and assume they’ve found support or resistance, but it doesn’t work that way. Identifying the most important support and resistance levels requires you to examine the price action to determine at what price the market is most sensitive.

Simply put:

Support or resistance occurs when you have two or more open/highs/low/close, or combination thereof, occurring at, or close to, the same price. When the open/high/low/close intersect at a particular price this forms support or resistance.

Close Enough?

Many traders make the mistake of being too tight with their support and resistance figures. Ideally when looking for support and resistance, the combination of highs and lows will be at exactly the same price making it easy to determine the precise support or resistance level. Often times however this is not the case.

Sometimes the highs and lows will not be exact; rather the prices will only be close. The question then becomes: how close do the values have to be in order to still be considered support or resistance?

Prices can form two types of support and resistance:

Exact Price resistance – when the highs and/or lows meet at an exact price
Price Zone resistance – when the highs and/or lows are close enough in price to act as support or resistance but are not exact.

To determine if prices are “close enough” you need to look back into the history of the chart to see where the market has reversed off of support or resistance in the past. By examining how close the prices were when the market reacted before, you can get a feel for how close prices need to be to form support or resistance in that particular market in the future.

Counting – Might Makes Right

The strength of a support or resistance level is determined by how many times the market tests that particular price. Each time the price has been hit by either a high or low it counts as one point towards the strength of the resistance level. The more times a support or resistance area has been tested the harder it becomes.

Therefore if you have a price that has been tested 5 times as support and another price that has been tested 3 times as resistance, then the market will likely break through the resistance (3) since it is not as strong as the support (5).

This is a basic premise of trading support and resistance: that all things being equal, the market will always choose the path of least resistance.

An Easier Way

Understanding support and resistance levels is an extremely important skill in any market. Professional Floor Traders are aware of an entire range of major and minor support and resistance levels before the market opens each day. They also know how to calculate new levels as the trading day progresses. However, in spite of its importance, identifying the most important support and resistance levels is a skill that often eludes the retail trader. For this reason many traders will look to a Support and Resistance service to help them identify higher probability support and resistance levels.

It goes without saying that knowing where the market is most likely to turn can give you an incredible advantage during the trading day, an advantage that no trader can afford to be without.

Here’s an easer way to see and add Support and Resistance lines to your NinjaTrader charts.

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by nickfenton

How To Quick Scan For Day Trade Ideas

June 6, 2011 in TickerTank

Time is a major commodity when Day Trading. The quicker you can accomplish any given task, the better. Scanning for trades is among the most important tasks throughout the day, and the faster you scan the better your odds of finding something worth trading.

The ThinkorSwin Desktop Trading Platform provides many powerful features, one of which I utilize to quick scan for day trades. This method is limited, and often times you have to ignore several illiquid names included in the mix. That said, it has provided me with countless day trade setups that I have acted on and I continue to use this method of quick scanning on a daily basis.

Check out the video for more details on how to utilize this basic quick scanning method, and feel free to email nick@tickertank.com with questions.

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by MarketHeist

Beginner’s Guide to Placing Stock Orders on TradeKing

May 29, 2011 in TradeKing

Short video lesson showing how to place a stock order to buy and sell stocks on the TradeKing broker trading platform. To begin, find the “trading” tab on the TradeKing website menu and select “Stocks + ETFs” which will bring you to the stock order ticket. Choose an action, which includes

Buy
Sell
Sell Short
Buy to Cover

then enter the number of shares and the stock symbol. At this point, you can click anywhere outside the stock symbol box and the stock quote information will appear for that stock symbol. After reviewing the quote, choose a price to buy or sell along with an order entry strategy:

Market Order
Limit Order (including price)
Stop Loss Order
Stop Limit Order
Market on Close order

Finally, choose the time duration for which you want the order to be active:

Day order (order expires at end of the trading day)
GTC (good till canceled)

Extra features include qualifier orders such as

None
All or None (AON)
Do not Reduce (DNR)
AON/DNR

And advanced orders to further modify your order entry strategy and risk management:

Trailing stop order
Contingent order
One cancels other (stock-option)
One Cancels Other (Stock-stock)
One Triggers Other (Stock-Option)
One Triggers Other (Stock-Stock)

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by nickfenton

Stock Trading Basics: Understanding Market Breadth with Nick Fenton

May 23, 2011 in TickerTank

Contributed Exclusively by Nick Fenton, TickerTank

When day trading, it is very important to have your finger on the pulse of the market throughout the trading session. Over the years, I have experimented with several methods of accomplishing this goal. None have worked as well as the Breadth Analysis methods explained in this video.

But first, what is Market Breadth and why should we care? Market Breadth is a technical analysis method to get a feel for the direction of the overall market. Instead of looking at just whether the market is going up or down, market breadth is analyzed by looking at the number of companies advancing vs. the number declining. Market breadth positive when more companies are moving up than are down, suggesting that the bulls are probably in control of the momentum. On the other hand, when there are more declining securities, it is often taken as bearish momentum.

Breadth Analysis is not difficult. That said, this simple task is very valuable and rarely discussed in trading communities. The indicators used in this method of analysis are as follows:

TRIN (Trader’s Index), aka Arms Index - This can be charted on most platforms using ticker symbol “$TRIN”
NYSE Advancing Issues – This can be charted on most platforms using ticker symbol “$ADVN”
NYSE Declining Issues – This can be charted on most platforms using ticker symbol “$DECN”
Four Grid Intraday Chart of the Four Main Indices – Large Caps via Dow 30 (/YM), Mid Caps via S&P 500 (/ES), Small Caps via Russell 2000 (/TF), Technology via Nasdaq 100 (/NQ)

There are times you will find the first three breadth indicators leading the market by a minute or two, in which case you can position yourself short or long ahead of the broad market move if you catch the discrepancy in time. During sessions where these indicators are in line or slightly lagging the broad market, it is still very useful to track due to the clarity it provides in relation to the intraday market environment.

Keep in mind Breadth Analysis is only useful from an intraday time frame. We use these methods everyday inside TickerTank’s Live Trading Room, TickerTV, when day trading Equities & Futures. I have found Breadth Analysis to be exceptionally useful when trading the major indice Futures listed above, or ETF’s such as DIA, SPY, IWM, & QQQ.

Happy Trading,

Nick Fenton
President & CEO, tickertank.com
(502) 384-6554 office/fax

Twitter: http://twitter.com/ticker_tank
Facebook: http://facebook.com/tickertank
Click here to try us out: 5 days for $5!

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by MarketHeist

Beginner’s Guide to Stock Quotes on TradeKing

May 21, 2011 in TradeKing

An introduction to stock quotes on the TradeKing broker trading platform. Understanding a stock quote is one of the first steps to understanding how to invest in the stock market and trade stocks. Learning about the basics of stock quotes is also critical for making informed investing decisions. The simplest stock quotes tells investors what price something can be bought or sold for and what the last trading price was for that security (stocks, options, etc.)

There are 2 different ways to get a stock quote on TradeKing’s broker website. , which includes the TradeKing trading platform. At the bottom of most pages, there is the quick ticket that will show you the essential quote information. For more detailed information, use the “Quotes, orders and research” page, which could be found on the menu under “Quotes + Research”

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by MarketHeist

How to Know If You’re A Trader (In Securities): the IRS Way

May 18, 2011 in Shrink My Taxes

Exclusive Tip by Steve Ribble, ShrinkMyTaxes

You don’t have to be a pit trader or own a seat on the exchange to qualify as a trader in securities. However, there are certain requirements that the IRS looks for in determining if you’ll qualify as a securities trader. Meet these requirements and you’ll reap the favorable tax benefits of trader status. Miss any one of the following requirements and the IRS will likely deny your trader status, costing you thousands of dollars in lost tax deductions.

So what exactly does the IRS look for in determining if you meet trader status? Unfortunately there is no clear definition of how to qualify for trader status. Just like the “Pirate Code” in the movie Pirates of the Caribbean, there aren’t rules but more like guidelines on how to qualify. According to IRS Topic 429, to qualify as a trader in securities you must:

Seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation
Your activity must be substantial
You must carry on your activity with continuity and regularity

As you can see, the IRS does not clearly define what level your trading needs to be at in order to qualify for trader status (guidelines not rules). Fortunately, we’ve been able to gather what the IRS specifically looks for from the trader tax court cases over the years. These are the 5 Golden Rules of Trader Status:

Short holding periods (intraday or daily is the best)
Frequency of your trades (high frequency and continuous through out the year with NO LAPSES in your trading)
Dollar amount (significant portion of your liquid net worth tied up in trading)
Extent that you trade to produce income for a living (run it like a business)
Amount of time you spend trading or studying the markets (4-6 hours a day at a minimum)

Follow the above rules and you shouldn’t have to worry about whether you qualify for trader status. If you are still not certain, fill out our free Trader Status Evaluation form and we will help you determine if you meet the requirements.

In my next article, I’ll discuss the tax advantages of trader status and how it can save you thousands of dollars every year in taxes.

Steve Ribble
President / CEO
Shrink My Taxes

www.shrinkmytaxes.com
toll free: 877-62- NO TAX

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by zmoose12

Stages of Grief & Self Help with The Trading Circle

April 28, 2011 in MarketHEIST

Exclusive lesson by Zachary “ZMoose” Musso, YoungGunsTrading

As funny as the above picture may be, all traders go through this on a daily basis. A traders takes a trade based on a thesis, and the position goes against him immediately -POKER FACE.

“Not this trade, the offer will hold here, no doubt.”

The offer holds and the bid drops a little to sort out the weak longs, allowing the trader to relax and find some confidence. That’s when the buyers get heavy on the bid and cut through the offer like butter - ANGER. ”What the hell!? So what, I still have 10 ticks before my stop gets hit, the offer is giving a better opportunity sellers like me.”

Next, we see the trader find a way to balance their anger and attempt to find a way to take advantage of their situation, still in denial of their poor choice in getting into their position in the first place - BARGAINING. ”Pshh, check this – I’m going to get short ANOTHER contract and double my leverage. When this bad boy drops, I’m going to make double the profit I would have!”

So, the bid drops again, the same sense of confidence sets in, and then the offer gets railed again and the trader gets stopped out for a fairly large loss - DEPRESSION. ”How did that happen to me?!”

The trader looks at his PNL for the day - ACCEPTANCE. ”Okay…”

It happens to everyone, ladies and gentlemen. It’s a simple procedure, and the minute you recognize denial, the safest thing to do is get out of dodge and preserve your mental state of mind, especially if you’ve been trading well all day up to that point. Remember: everyone can make money, the tough part is keeping it. I can’t tell you how many times I’ve heard and read that phrase in the past week, and it’s truly beginning to set in. If you have a game plan and you trade your game plan, more often than not you’ll make money.

WHEN YOU DON’T FOLLOW YOUR GAME PLAN AND YOU LOSE YOUR HEAD, YOU WILL LOSE.

The way I saw trading over Q1 was probably much different than many others, and it allowed me to plan differently for Q2 and the rest of the year. Let’s look at trading like a pie chart:

• Risk Management: Stop loss, profit target, Risk / Reward, and position sizing.
• Trading Game Plan: expectations for the next session, Levels of Interest, and intraday tape reading.
• Psychological Health: Staying positive and keeping your head.

Notice the three green segments in the middle of the circle (that, as I was told today by a friend of mine, looks like the Google Chrome icon). These three segments are isolated to remind you how crucial it is to have ALL of those pieces full of their green color while you’re trading – if one of them is missing, the other two will have to compensate for its absence. If we took the above example, we would notice that the psychological health was damaged right away, as the trader immediately went into denial about the initial failure of his position. The trader then got pissed off, and risked more money in order to compensate for his initial loss, damaging both his trading game plan and his risk management. The center circle is now empty for this particular trader, and he has become a loose cannon.

The Trading Circle (a PH101 and Student Government meeting creation, might I add) can be used to diagnose your intraday trading habits to determine whether or not you should be at your desk putting money on the line – all you need a printer, some tape, and a wall!

~Zachary Musso
Co-Founder of Young Guns Trading
Founder of The Moose Outlook, MooseJaw Jabber: Technical Trading
Office Telephone: (312) 646-0866
Hempfield High School Class of 2010
Bentley University Class of 2014

- Computer Information Systems Major
- Quantitative Perspectives LSM
- Senate / Trading Room Group Project Leader, SGA

http://www.younggunstrading.com
http://www.themooseoutlook.com
http://www.mjtt.net

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by MarketHeist

Scaling Into Trades: Pros and Cons

April 25, 2011 in TraderSmarts

*Editor’s note: Examples in this lesson use futures contracts, but the concepts work the same for stocks shares. Most modern brokers have advanced order entry settings to allow you to set your buy & sell orders to scale into a trade.

Exclusive lesson by Tony, TraderSmarts

There are times that I scale into trades. There is a three-fold benefit to scaling in to a position and really only 1 pitfall.

Pros:

Potentially allow you to trade more size with the same risk.
Allows you to use a wider stop with the same risk.
Allows you to trade an AREA that you like without putting all your eggs on 1 price.

Cons:

Causes you to have smaller size on at times than your maximum position size. The pitfall is because you are scaling in you have to size accordingly. This is not always a bad thing – but it is the one drawback to scaling in.

Explanations

Benefit 1: Potential to Trade with Bigger Size (# of Contracts or Shares) but Same Risk

I can take (potentially) more size with the same stop point because I will have a better cost basis than if I entered the entire position at the first price.

Example: 6E trade we took previously in our TraderSmarts subscriptions service(Monthly), (Quarterly), (Annual), (Swingtraders).

Trade was long 1.4392, 1.4383, and 1.4375 stop at 1.4367.

If we were filled on all of the entries we would have a cost basis (average price) of 1.4384.

1.4384 – 1.4367 = 17 ticks

Say your max risk per trade is 5K.

17 (stop) X 12.5 (per tick value) = $212.5

5K / $212.5 = 23.52 so your max position size would be 23/24 contracts if you scaled in. So you could take 8 at 1.4392, 8 at 1.4384, and 8 at 1.4375.

If you wanted to enter all at 1.4392 you would calculate your size like this:

1.4392 – 1.4367 = 25 tick stop.
25 (stop) X 12.5 (tick value) = $312.5
5K = $312.5 = 16 so your max position size would be 16 contracts or 8 less than if you scaled in.

Benefits 2 and 3

The second reason why I sometimes scale into positions is if I have a range that I really like. This works two-fold.

Consider the Gold Futures contract (GC) trades I like to take where I scale in at 3 pts usually with about a 30 tick stop on the cost basis (average price).

For example, say I want to be short GC at 1471.1. But I also like short at 1472.8 and 1474.6. If I take a short at the first level of 1471.1 with a 30 pt stop I would need to put my stop at 1474.1. What could possibly go wrong with this strategy? This would give price an opportunity to move up to my 1474.6 number, stop me out for – 30, and then move back down but successfully taking me out of the trade for a loss.

Instead if I scaled in at all 3 entries I would have a cost basis of 1472.8 and could use a 1475.8 stop. That is a 47 tick stop on the first entry.

Scaling in also gives me an opportunity to finesse the position by trading around my fills depending on what happens. For example getting filled on entry 1, taking a scale or 2, then going risk free on entry 1 and working 2nd, or taking scratch on first entry and leaving other on risk free, etc. It just provides so many more options than having 1 entry and 1 stop.

Also it gives me the opportunity to actually get a fill. If I waited for the 2nd or 3rd entry instead of taking all 3 it

may not get filled
could hit first entry…give me a couple scales (that I am not in by waiting for the 2nd or 3rd entry) then blow through 2nd entry to stop.

Pitfall 1

Because you are scaling in instead of going all in you may only get 1 or 2 fills which will leave your position size on the trade smaller than what you would like.

Hope this makes sense and explains why at times I scale into positions

TraderSmarts
www.tradersmarts.net
www.tradersmarts.blogspot.com
www.twitter.com/TraderSmarts

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by MarketHeist

Trading the Trend in Downtrends: Cantos Charts Masterclass Lesson 3

April 20, 2011 in Cantos

Lesson 3 of Trading Masterclass Video Series: Trading & Technical Analysis Course

For this lesson, Sandy Jadeja teaches about downtrends and where a swing trader would look to sell the pullbacks. This continues the lessons for basic trading strategies, learning to recognize downtrends and how to trade correctly trade with the trend. This lesson was originally posted by Cantos on Youtube on November 9, 2009.

What is a Downtrend?

In the chart on slide 2, we can see there are lower highs and lower lows. That is a downtrend. For an uptrend to happen in this chart, we will need to see higher highs and higher lows. Until that happens, we will be looking to trade short (profit as the market goes down, not up). In other words, we will be trading with the market and only taking sell positions.

Definition of a Downtrend

For the chart example on slide 3, we can see the second high from the left (marked with the blue line) is lower than the first high. We’ve actually broken below the recent low, so we have a continuation to the downside. Waht do we do as a trader? It’s hard to pick tops and bottoms, so my argument here would be to continue with the trend. In other words, if I see a break below the most recent low (rightmost low marked by the red line), I would continue to sell in this market. And I would start placing my stops at the recent highs and lowering my stop-losses to protect my profits. Thus, as soon as we break below the Recent Low we expect a continuation to the downside.

Downtrend Example

Looking at the chart on slide 4 (CCMP in a downtrend), what is this telling us right now? Right away we can see the lower highs and lower lows and that has been continuing all the way until now, where we have a sideways channel, which we’ll talk about in the next lesson.

Would you say this market is about to turn and start trading higher? No. We would look to sell as soon as the market takes out the most recent low. And until we see this market break above the most recent high, this market is still in a downtrend.

As taught in the previous lesson, you want to learn to connect the lows to the highs and highs to the lows (using a pen and ruler for printed charts or the drawing tool on your stock chart software). Using red or purple colors will help tell you this is a downtrend.

Notice the Obvious

What about the chart in slide 6? We’ve seen a break towards the upside (the market break above the most recent high to make a higher high.) Has the trend changed? The first thing I suggest is that you wait to see continuation. In other words, you’ll want to see a series of higher highs and higher lows. In this example, we’ve taken out the minor low and made a higher low for the most recent low. And we want to see a break above the most recent high to make a higher high, and that would tell us that this market has turned into an uptrend.

Summary

Uptrends: trader BUYS the pullbacks or breakouts. In this lesson series, we looked at the breakout method.
Downtrends: trader SELLS the pullbacks or breakouts. Again, in the examples we used in this lesson, we looked at selling the breakouts.

Next Lesson: Learning to recognize a sideways market trend and how to trade it.

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by themarketsniper

Volume in Technical Analysis: What It Really Is and How To Trade Using Volume

April 20, 2011 in The Market Sniper

Why so few people don’t get value from volume data and the role Volatility plays in “Hidden Volume”

Exclusive lesson contributed by Francis Hunt, The Market Sniper

I wish to present my take on volume and its significance as well as provide an example of how I may refine my trading utilising volume information.

My take on Volume in any given market and its significance:

“Volume is the amount of trade conducted at any given time period typically daily but measurable across any timeframe.”

Volume is not a directional indicator on its own.

Extreme relative volume associated with a price move of some significance, however could be an additional validator to the price move.
By this I mean it is more significant than the same price move with light volume.

In short, high volume is similar to an amplifier. It does not make sound on its own, it just multiplies the significance of what moves are already made.

A friend once described volume’s effect as that of Alcohol: if you are happy, adding drink makes you very happy, if you are sad you will become a drivelling wreck when alcohol is added. I could not possibly comment on this

However a caveat to the price significance is also to do a detailed assessment of the intraday move itself that was experienced on the high volume day.

The additional significance implied on the high Volume day is at its best if a price opens at one extreme and closes at the other. In other words, opening on the high and closing on the low with high volume is additionally bearish and vice versa is bullish (in candlestick charting we call this “Belt Hold” days). In this example, aggressive selling throughout the day sought out all the lower levels of buy stops on the way down and the mass opinion of the market gave in to the assessment of the primary bearish view. (TIP: belt hold days often occur after news releases or new fundamental info becoming available)

If a big indecision day has taken place (high volatility, no price change) such that the price opened, ran up higher extensively intraday, then charged down past the open to an extreme low and came back up to the open level to close for the day (a candlestick pattern called a Doji), all this represents is extreme levels of indecision. No natural direction is necessary implied and hence the volume has no strict opinion to amplify the significance of, apart possibly from the appearance of Fear, Greed and indecision.

In short there may have been an intraday over reaction in either/both directions and ‘value based ‘ investors either sold at the extended highs or were confident enough to buy with some force at the extended lows at a significant enough way to counter the original move(s).
The only exclusion for any opinion being drawn from the above Doji example, being if the Doji came after an extended trend (up/down) or followed a Gap opening (either up/down). This is the element I referred to as the trade ‘environment’ that which precedes or states the context for the event.

In the case of a lengthy up trend followed with a volatile doji candle for price action may be official warning of a possible change in trend, one that remains to be confirmed by future downside price behaviour.

How To Use Volume to Support a Trade

What I refer to as “Hidden Volume of Significance” often occurs when pricing congests at a fairly tight range over a number of time frame units (Days, 4 Hourly candles, Hourly whatever your timeframe).

This is a relative comparison to a period where previously a market’s underlying price action and volatility may have been far broader in behaviour, this means without any exceptional single volume period an immense amount of trade (collective volume) has taken place over a tight price range over time (ie. low volatility environment).

This means the market has voted many times for the justification of current pricing and it may have more validity for now with the current information available than other price levels. This hidden Volume value can also sometimes be captured, when not normally easily spotted, by looking at longer term charts.

This is the foundation for Support and Resistance (S&R). People remember the level at which they traded and the current level all other prices are less important to an investor.

The greater volume that traded at a certain level the more inclined they will be to trade at that level again especially when accompanied by turning or reflex points (As they may just be going from profit to loss or vice versa at that level). This creates something I refer to as “Key Levels of Significance” which are more than just Support & Resistance levels (S&R), but often Gap Levels or Key Hunt Volatility Funnel Levels (my bespoke pattern that identifies key price levels that are not encapsulated by S&R yet provides early entries to break out moves).

Psychologically many people seem to see the level they traded at as the point of ‘truth’ and when price falls occur they automatically expect it to return like a homing pigeon, a failed fallacy.

A price on any given day is merely the markets best guess on that particular day and will be dictated by the perception of the fundamentals by the ‘lead steers’ or market collective as they express their views in action either buying or selling. The macroeconomic environment and view of the world currently in force on the day in question will also have a bearing.

In any market, a price level, if ‘Voted for’ by many (with high volume), the price level maybe deemed highly relevant as a price level. Invariably this is often tied to official news releases in shares it may be down to results season. Big volume in the absence of “official news” is even more interesting!

Break Out Trade Example: Volatility’s Role in Hidden Volume

Note the chart of Sunoco below. It features my primary “Hunt Volatility Funnel” Break Out Trade Pattern.

High Volume was encountered in the creation of the identified Gap or Window (labelled 1 and the first orange encircled area). Later again as support just after the window was closed in the down leg through the window (labelled 2). This confirmed to me a clear base being supported at the $32 price level (the volume was high in the second Orange encircled area).

Also In the Chart above, we could suggest that there was greater “Hidden Volume of Significance” by rule of summing up the aggregate volume each day between the 2nd encircled orange level (label 2) and the just before the 3rd encircled orange area (see Blue Box area and Blue arrows), as whilst no one day’s volume was extraordinary, each day traded in a tight range in around the Gap level which later generated our Funnel Entry (green horizontal dashed Line) and loss stop levels (orange dashed horizontal line) at the upper range of the Gap that was formed earlier.

This plays perfectly into my Hunt Volatility Funnel trading pattern, as price action is tightening yet we are over time accumulating additional volume significance at the current price levels for every day the market is in a state of “Tight Agreement”. This is the perfect set up for Volatility to return and for key levels to be distinguished so early capture of Break Out trades may be enacted.

Note how the upper level of the Gap/window later became our Midpoint to our Funnel when the funnel formed on the upside of the gap (tipping its hand on the direction of the break).

To be clear in HVF Theory, the Midpoint or HVF “Axis” level is that which splits the orange dashed and green dashed Horizontal lines in half – and the level from which we project our Targets from, as this is the pivot level around which price action was settling pre-Breakout.

Finally a 3rd spike of Volume occurred, confirming the significance of the break out upwards move at my identified Break out price level point.

However Note how the initial break at the Green Arrow (just sub $34) did not have much confirming volume and failed back into the Funnel (Dashed Green and Orange horizontal lines). The real confirming volume actually asserted 3 days later with the Green “Indecision Doji” (that candle directly above the longest vertical orange arrow labelled 3) and the price confirmation came in on the next day’s up moving candle, that took us through to the grey dashed line at $35.75. Later on, on trailing off volume, we were taken all the way to our target at the Purple arrow at the $38 level.

It may have allowed us to get additional information on our trade plan. For example as a variation the trade may only be taken when above average volume confirms the Break.

In this case you could have entered on the Doji candle day (Above labelled 3 vertical orange arrow) or even later on the takeout of the Doji high, the following day, when the price action confirmed what the Volume suggested the day before.

This would have avoided 3 listless days yet still secured the bulk, if not all of the move.

I hope this example on Volume and how using it within an existing strategy, has helped.

I run a Trading site where trade opportunities are shared for both basic and premium members feel free to join our High Probability, Fast Moving, Break out trading community.

~ Francis Hunt
TheMarketSniper.com
Director

Phone: +44 (0)1727 760 073
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Email: francis@TheMarketSniper.com
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by Infinity Futures

How to Add Fibonacci Extensions on Infinity AT Chart Software

April 18, 2011 in Infinity Futures

Simple video tutorial showing how to add Fibonacci extensions on charts for the Infinity Futures AT trading platform.

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by eradke

How to Be Aggressive: On the Football Field and Trading Desk

April 16, 2011 in TraderHabits

contributed by Eli Radke, TraderHabits

Learn to be aggressive.

Aggressiveness is not a personality trait it is what happens after a process. If you saw the football player me vs. everyday me, you would see two completely different people. While I was on the football field I was the crazy, screaming, I want to rip your head off guy. Although I am competitive I was only that guy on the field. In fact I am mostly relaxed, football was easy, life is much harder. Risks are different in some ways and competition pool is wider. Today I pick and choose my moments to be aggressive. Life, business, trading, etc.

This is my roadmap:

Do the work.

Educate myself. I have some idea what to expect and factors that lead to success. I know the risks and potential reward. One of the themes from football was “The harder you work the harder it is to surrender”. There needs to be some balance and do not mistake action for accomplishment. The most rewarding things in my life were the hardest to achieve.

Know where you want to go.

It is impossible to get anywhere if you do not know where you are going. Have you ever been behind the person who is attempting to turn at every intersection? Know where you are going, it does not matter if you end up where you planned. Take a decisive step to know you are going the wrong way. Many things you won’t know till you experience it. (See Eli Radke’s last lesson on The Discipline of Following Your Own Trading Rules)

Be willing to adapt.

Taking action based on perception and action based on reality are usually different. Change is ok. I am reminded that “No battle plan survives contact with the enemy”. Half-time adjustments are what usually win the game. Change with reason and before you “have” to.

Accept risk.

Once you start it is too late to think about risk. That is part of making an informed decision. Risk is something to look forward from not back to. That is not to say risks do not change. The way you see risk depends on when you acknowledges its existence. They say you will just know when it is the right time to do something. Love, business, trading. I will buy that. But the steps above will help you get there faster. They say it is harder to know what you want, than get what you want. This is list should help to speed them both along. This post is not from the pulpit but from the mistakes I have made.

What steps do you take?

We would really appreciate your feedback, if you like, hate, or think we are full of crap. Please leave a comment, a voice mail (312) 725-9121, email info @ traderhabits (dot) com or twitter, stocktwits, and facebook. Subscribe to Traderhabits

~Eli Radke

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by stockguy22

Position Sizing & Money Management: Stack the Deck, Improve Odds to Win

April 15, 2011 in StockGuy22

contributed by Frank Perry, StockGuy22

Money Management , Position sizing and Risk – Reward Analysis

When I was asked to do this article on Money Management in Trading, I thought about how to approach this important topic and how to convey how much it has helped me during my trading career. Money management and management of risk in trading is one of the most important skills a trader must develop if they hope to profit from trading on a consistent basis. A good money management plan must have two key components.

Position Sizing – the amount that you will be risking per position/trade.
Risk-Reward Analysis – A calculation of risk vs. reward on a particular trade.

Due to the short term fluctuations in the market, the results are essentially random. A trader or active investor must approach them in a similar fashion as a successful poker player and/or blackjack player that can count cards: they are essentially dealing in probabilities and uncertain information. They constantly must attempt to skew these numbers in their favor if they are to succeed in the long term. They can still have losses but be profitable overall. That same process can be applied and seen in successful traders.

The Novice Trader

Let’s look at an example of a Novice Trader: Let’s say this new trader has a $10,000 bankroll to start but he doesn’t have much experience trading. What will he/she most likely do ?

Invest that money into penny stocks & hope/pray for a big win.
Use a good portion of that money to learn from experienced traders ( books, seminars, webinars, chatrooms and learn as much about trading from trading websites, twitter, trading message boards and free trading sites).
Just trade blindly & hope for the best till he/she gets the hang of it. Trading can’t be that hard, can it?

I would hope that Novice Traders always choose Option #2 since will be the best time/money spent. But here in our example, lets say our Novice trader chooses Option #3 ( Trade Blindly & hope for the best)

I want you to try this exercise:

Take a deck of playing cards – You’ll see there are 13 cards ( Ace, 2, 3..King) with 4 suits ( clubs, hearts, spades & diamonds) – Total of 52 cards. Let’s put a value of % to each card so that red suits will represent a loss and black suits will represent a gain. Example: 4 of diamonds would be a 4% loss – 10 of Spades would be a 10% gain.

Let’s pretend since our Novice trader doesn’t have much experience and that he’ll be putting his entire bankroll into each trade and that he will most likely experience random results.

These are actual cards I pulled from a random deck of cards:

What can we learn from this?

Our Novice trader started with $10,000 and after 13 trades was down to $8,916.20 (before commissions). Our trader was a bit unlucky with these results, and while he could have perhaps had a good run and instead had a positive return, the point is that trading in this manner will result in very random results for a trader if he/she cannot develop a way of limiting the random statistical fluctuations of a normal market. So how can our Novice Trader increase the success rate?

Our Novice Trader can increase the success rate by Position Sizing & Risk-Reward Analysis.

Position Sizing

Let’s step it up a notch and add some money management to his/her random trading plan. One simple thing our Novice trader can do is reduce position size from $10,000 to $1,000-$2,000 per position. This would leave him/her with a maximum of 5-10 stocks at any one time that will spread risk across the board and help reduce the unexpected big losses. In trading surviving is critical so cutting those losses down is of major importance. My maximum position size is a bit larger than most new traders ( @ $50,000) but what that does is give me a good starting point on any new trade. As your account grows, you’ll have that flexibility and you can play around with that average size. For example, when I think a stock is more risky I will only play 1/2 or 1/3 of my average position size. On a stock where i’ve had more success I will increase my average size to 2 or 3x my average position. I also scale into positions into key support levels , for example buy $25,000 into support 1 and $25,000 into support 2. Even a trader with an average size of only $2,000 per position can follow this technique by buying $1,000 at a time.

Risk-Reward Analysis

A second thing the Novice Trader can add is risk-reward analysis which will compliment Money Management & Position Sizing to help minimize losses and maximize gains. May sound complicated but I will try to explain it in simple terms. If our Novice Trader is a swing trader and plans to risk $1 on a trade, he/she should make sure that there is the ability to make 3-5 times what they are willing to risk ( in this case $3-$5). If our Novice trader was just trading intraday (i.e. “daytrading” or scalping stocks) and was willing to risk .20 cents on a trade than he/she should make sure there is potential to make 60 cents -$1 ( 3-5x) on that trade. What this risk-reward analysis does is limit the number of stocks that he/she will trade since it will only produce potential trades with the maximum risk to reward ratios. It will also help take the some of the emotion out of the trades and help focus on potential bigger winners with low downside risk. This also has another benefit in helping to limit the maximum loss as a total of your overall bankroll when combined with position sizing.

A More Experienced Trader

Let’s change the above example a bit and we will look at a more experienced trader using the same strategy but who takes much smaller losses and let’s his winners run and/or maximizes gains. So we will take out most of the 8 , 9 10 J Q K of hearts & diamonds but lets leave 1 of each suit in there. Also we’ll take out most of the 2 , 3 , 4 of the clubs and spades but let’s leave 1 of each suit in there. This will simulate higher gains and lower losses: I dealt the cards again randomly again and this is what the results were:

What does this example show us ? After 13 trades our more Experienced Trader did much better. Experienced Trader definitely had an advantage since there were higher gains and lower losses, but in reality that is a big advantage an Experienced trader has over a Novice Trader. Does this mean Experienced traders will never have losses ? Of course not, since as we see above there are 5 losing trades out of 13 but by keeping losses smaller and taking bigger gains this trader was able to turn the $10,000 into $15,057.52 ( before commissions). Try the examples above with your own deck of cards and a spreadsheet and you will see this play out much better over time for the Experienced Trader vs. the Novice Trader.

So, Is it possible to stack the deck in your favor in Trading ?

Yes! By understanding importance of money management, risk reward analysis , market conditions, fundamental and technical analysis you can stack the deck in your favor when trading as you can see from the above simple examples. There are more complex money management techniques but for the purpose of this article I tried to keep them simple. In future articles I can address other factors that play a role in management and/or how to develop from an Experienced Trader to a Master Trader.

Hope this article was helpful in understanding the importance of money management and how you can stack the deck in your favor in trading. By using the 2 simple techniques of Position Sizing and Risk-Reward Analysis you can take the randomness out of trading and help you on your road to successful profitable trading.

Regards,

Stockguy22
http://twitter.com/stockguy22

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by MarketGauge

How Technical Analysis Patterns Work: Price and Volume

April 14, 2011 in MarketGauge

contributed by Michele “Mish” Schneider, MarketGauge

** This trading lesson originally published on April 4, 2011 on MarketGauge’s MG Prime titled “Volume and Price Patterns- Valuable Predictive Indicators.” We’d like to thank MarketGauge for allowing us to republish this valuable lesson here for MarketHEIST readers.

Questions or comments? Add them below!

The importance of volume depends on its location within the overall pattern. For example, heavy volume through a broken trend line suggests the start of a new trend, while the same activity after a long rally or decline predicts a reversal. This counterintuitive logic confuses traders and inhibits their ability to decipher volume at key turning points.

Volume is used for two major purposes:

To confirm price changes: if the start of a trend is not accompanied by an increase in volume it is considered to be weak and lacking commitment.
To anticipate changes in price: increases in volume often precede changes in price.

A series of up or down volume patters are defined as Accumulation and Distribution days. Both indicate who is in control of the market and often signal a reversal. Accumulation is when the market is controlled by buyers so if a downtrend stalls and accumulation in volume takes place, sellers have lost control and a reversal is likely. Conversely, distribution is when the market is controlled by sellers so if an uptrend stalls on high volume, buyers have lost control to sellers and a reversal is probable.

Trend Climaxes are yet another way to predict if a down or up trend is coming to a halt. In the case of a Volume Spike, we are looking for unusually high volume (at least 2 times the average) measured by the average daily volume of over the course of about 50 days.

Today, we are going to look at a Volume Spike that happened recently in SPY and compare that to a similar one that happened in July 2010. In both cases, there is a significant spike in volume at the end of its trend.

The Chart, Price, and Volume Analysis

What causes volume spikes? Anything and everything. Good news. Bad News. Lower-than-expected consensus earnings. Higher-than-expected sales. Analyst upgrades or downgrades. In the case of the SPY-the volume spike came after the Earthquake in Japan and the tensions in Libya. On a selling climax, there is likely to be a panicked volume spike due to heightened investor fears. Our first clue.

The chart represents 2 totally different periods of time for the same ETF with incredibly similar volume and price patterns. The chart on the left is from July 2010. After the “flash crash” last April, the volume spiked as the prices dropped to new recent lows, although not at the required two times the average, rather, after a long period of below average volume, it spiked to above average and two times the amount it had been registering daily at that point. The chart on the right, shows a dramatic drop in price in line with a classic spike in volume or the required two times the average daily volume. For the sake of this comparison, the volume pattern is different but the price pattern is similar.

After 5 Distribution days in SPY, March 16th 2011 began to look a blow off selloff, especially since it broke beneath a key support area of 126 but managed to close right on it. Comparing it to the action in July, the ultimate low was made on July 1 at 101.13 which was also the a spike in volume although not in the classic sense. Therefore, after the close of March 16th, we were looking for 126 to hold up and an open unchanged or higher because if the pattern was to prove repeatable, we saw that on July 2 there was an inside day followed by a progression of higher closes and finally the first Accumulation day on July 7 after a long holiday weekend.

Trading Strategy

On March 17th, the pattern does indeed repeat as there was an inside day with a higher close. Following the inside day in July, the preceding day had a higher closing price and an Accumulation day in volume. The following day in March, there was a higher closing price without an Accumulation Day in volume, so the signal suggested a possible bottoming action from the 16th, but not necessarily a buy opportunity or confirmation. Therefore, at that point, one would not necessarily go short but should certainly be extremely protective of any longs, especially ones that are not in the money. Plus, since we try to examine other indicators, notice the slope of the 50 day moving average (blue line). It was positive even as the market was going lower, which was a decent confirmation that the spike volume on March 16th might have been the blow off sell off we had hoped for. Then, on Monday, March 21st, after the prior Friday’s second higher close, albeit with volume continuing on the light side, the price gapped and closed higher. Once again, volume remained light. Therefore, even though the price action indicated a bottom along with a confirmed upward slope in the 50 day moving average, the anticipated Accumulation Day in volume-or a signal that buyers were back in control still eluded the market.

On March 22nd, the action was more of a drift than a selloff by the mere fact that the volume in SPY was even less than on March 21st. It couldn’t quite manage an inside day nor did it fill the gap that was left when it gapped higher the day before, which with low volume, was a positive. There is an adage that “One should never sell a dull market.”

Then, the moment we had been waiting for-an Accumulation day in volume in SPY on March 23rd. Going back to the analogy between July2010 and now, after the Accumulation day happened then, the price remained firm, the volume decreased as the week ended, and finally the following week it gapped higher and had its second Accumulation day. Now, a gap higher or stronger price action day the next day is a reliable and tradable indication that indeed, a potential bottom is in place.

On March 24th, there was a further departure in the analogy from July 2010 to March 2011, as SPY closed back above the 50 day moving average or back into a bullish phase. In July, the phase was still Bearish. Plus, it posted yet another Accumulation day in volume. Friday, March 25th was a perfect confirmation that the Volume Spike day from the March 16th was good. Even the most conservative traders should have been buying SPY above the 50 day moving average at 131.00 with a full ATR of risk. Fast forward to April 4th and SPY closed at 133.26.

For experienced swing traders a volume spike after significant price appreciation should be questioned. The swing trader should ask,

“Does the peak in volume also signal a short-term peak in price up or down?”

The answer is likely “yes” if price subsequently stalls and volume decreases. Such was the case the 4 days following the volume spike. But since the phase was still in warning, one might have waited for more confirmation. However, seasoned volume watchers might have bought at around 129 and risked to under 127. Regardless if you waited for a phase change or bought on mainly volume patterns, here is the bottom line:

MISH’S TIP: After spotting a volume spike, you should pay careful attention to the price and volume pattern over the next several days.

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