Friday, April 11, 2014

TechniTrader Weekly Stock Discussion for MetaStock “5 Tips to Avoid Front Running by High Frequency Traders HFTs”

MetaStock® SPRS Series - Week 166 – April 11, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

The new Flash Boys book has captured the imagination of everyone who invests or trades in the stock market. The fear that the market is “rigged” is everywhere.  The CEO of IEX is of course hoping his new exchange will benefit from all the news media hype and panic.
However, most investors and retail traders do not need to worry.  If your investments for your long term portfolio are with a large to giant mutual fund or pension fund, then these funds are using Dark Pools which are off the exchange transaction the HFTs can’t see and front run.
If you are a retail trader, remember that most of the orders placed with online brokers for retail traders are filled from that online broker inventory. So your orders never make it to the exchanges. If you are using an Electronic Communication Network ECN, most of those orders are not sent to the exchanges either.
Here are 5 Tips to Avoid Front Running by HFTs:
  1. Study your stock charts using volume large lot accumulation/distribution indicators.  These are uptick/downtick based indicators that track the larger lot meaning 50,000 – 500,000 shares, against the smaller lots which are usually 100 shares to as high as 5000 shares. Entering with the giant buying keeps you out of the HFT order flow, because the Dark Pool orders are hidden from HFTs.
  2. Remember that any order 10,000 shares and above is considered a “Large Lot” order and these tend to be sent more often to exchanges if inventories for your online broker are too low.
  3. If you are a day trader, you must accept that HFT activity is going to interfere with your trading. There is just no way of getting around it intraday. HFTs trade 1000-3000 times per second, YOU can only trade on the minute scale by law and by circumstance. Most retail traders could not afford a million dollar HFT trading setup of hardware and software.
  4. Do not use “At Market Orders.” An At Market order tells your broker to fill the order at the market price.  This can set up an opportunity for slippage and wider spreads which will give you a higher cost entry. In addition, At Market Orders send a message to the online broker and market in general that you are not an educated, experienced investor or trader.  At Market Orders are rarely used by experts and professionals. There are only rare specific purposes for such orders.
  5. Do not use a simple “Limit Order.”  Limit orders are the most common reason why retail traders, especially day and swing traders have constant losses.  Professionals stopped using Limit Orders years ago and have switched to more complex, multi-tiered controlled bracketed orders. You need to learn these new types of orders if you plan to swing or day trade so that you can avoid getting swept into an HFT downdraft or huge gap.

The charts below show HFT activity.  Huge HFT activity is usually a one day event in a stock based on news, arbitrage from another market or instrument, hedging, retail cluster orders caused by retail traders all using the same trading systems, strategies, MACD or Stochastic indicators, and some technical set ups.  One of the huge advantages you as a retail trader using technical analysis and stock charts is that you can see the activity of the HFT, Dark Pool, Smaller Fund, Corporate Buybacks, and many more patterns that tell you who is controlling price and thus how price will behave thereafter.
One final tip is that HFTs rarely shift the trend, so do not start selling short right after a huge HFT down day. C:\Users\Adrienne\Desktop\TechniTrader HFT Example.jpg
Above chart shows two HFT high volume and long candles.  The first attempted to drive price up but the stock did not alter its trend. The second tried to drive price down, but the bottom buy zone for Dark Pools had already been reached. The stock then commences a sideways action of an early bottoming pattern.C:\Users\Adrienne\Desktop\TechniTrader HFT #2 example.jpg
Chart above shows HFTs attempting to drive price up but the price quickly shifts sideways and then turns down again. HFT action did not reverse the down trend in the month of February.
Summary
Do not chase HFT activity, instead learn to enter before the HFT moves price. Learn how to interpret the stock and volume action to know when quiet accumulation is occurring, so you can buy into the stock before the big moves of the HFTs.
For information on Candlestick Patterns CLICK HERE
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner

©2014 Decisions Unlimited, Inc.  All Rights Reserved.
TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.


Monday, April 7, 2014

May the Math be Ever in your Favor

I have occasionally seen trading system ideas that I feel incorporate unnecessary risks.  I'm not saying the signal will not work, but rather, there is an element of randomness to them.
It is common to build systems that look for one or more indicators crossing above or below the prices or some other indicator.  However, sometimes such a system may look good but have a hidden vulnerability.  Consider the chart below: 




Willilam's %R and the Chaiken Money Flow(CMF) are common indicators.  Normally, they are used separately, however, if we overlay the CMF in the plot of the Williams %R, it looks like we have found a good signal:




Notice how the Williams %R seems to cross above the CMF at the start of up moves.  The opposite signal does not seem as good as it is sometimes delayed.  However, the chart above shows two long signals that should be profitable and a third that could have made money depending on the exit signal.  But is this really a good system?

Formulas require a mathematical test to find buy and sell signals.  The possible signals above are easily seen, but mathematically, the systems did not cross.  Here is the same chart with the indicators merged to use the same scale:




The CMF is essentially a flat line compared to the Williams %R.  Additionally, it's never really  very far from the zero line.

There are some calculations that try and normalize the scales of the two indicators. However, this logic is only accurate for the last bar displayed on the screen.  It also requires an exact specification of how many bars are visible in the chart.  This means any signals you get may not match what you see in your chart.  Consider the following two charts:



Both show the overlaid indicators for the Months of October and November.  The top chart shows data up to November 22nd.  The Williams %R is firmly below the CMF but has just risen to touch it for the second time.  The second chart adds another 8 days of data.  Now the CMF hugs the Williams %R, even whipsawing above it on November 4th.  It also shows a buy signal on 22 November that we did not take because it was not there on that date.

Sometimes a system that is overlaying indicators can resolve the math issue with a minor change to one of the indicators.  For example, the Williams %R usually plots in the -100 to 0 range.  If you add a constant to this, you can shift the range.  For example, adding 100 to the Williams %R will change the scale from -100 to 0 to 0 to +100.  The shape of the curve is the same but the values have been shifted.

In the chart below, I created a custom formula to add 50 to the Williams %R.  This shifts the scale so it is centered on the zero line like the CMF.  I also multiplied the CMF by 100 so it will have more visible swings when compared to the Williams %R:




The other advantage is that this will not change.  The value for any given bar will always be the same.  When the scales are fixed and not subject to the whims of zoom settings, it will remove one more chance for a trade to go against you.  Keep the math in your favor and your trading should be better. 

Friday, March 28, 2014

What is MetaStock and MetaStock XENITH?


For the uninitiated... In this brief video, I discuss what MetaStock is, and how it can help traders make better decisions.  It also touched on MetaStock XENITH, the real-time data and news platform which powers MetaStock Pro.

TechniTrader Weekly Stock Discussion for MetaStock: “Adjusting Indicators for Downtrends”


MetaStock® SPRS Series - Week 164 – March 28, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

The uptrend and downtrend are not mirror images of each other, nor can you use the exact same indicators, indicator period settings, or subordinate indicators.
Many retail traders assume that if they learn the upside price action that when the trend turns down it is just the opposite price action.  That is why so many traders struggle to exit stocks before the trend tops and runs down.  In addition it is why many retail traders who try to sell short as well as options traders who buy puts, take so many losses in their trading.
If you are a position trader, you will be trading the uptrend and sideways trend.  If you are a swing or day trader you must trade the uptrend and downtrend, and adapt for the sideways trend.
Swing and day traders must be able to take advantage of both the upside and downside price action to net profits, that are close to what a position trader can achieve.  However, the position trader will generally always have far higher returns.
The sell side or downtrend is very different from the uptrend or sideways trend because there are fewer market participants.  Giant pension funds and giant mutual funds do not sell short. They may buy option puts or ultra-bear ETFs, as a hedging or mitigating strategy when the market goes down as they are longer term investors.
Smaller lot investors, most institutions, corporations, billionaires and other wealthy individuals and foreign funds do not sell short.
High Frequency Trading Firms, Professional traders, and some retail traders sell short or use options to make profits during a downtrend.
That is why the downside trend is so very different than the upside or sideways trend.  The downtrend often has much steeper angles of descent immediately causing a severe drop in price, and often gaps as HFTs trigger on news events.  The Downside also has larger rebounds as it bounces off of support. 
How fast the price will fall is dependent on many factors but the most important factor is always the number of HFTs that trigger the sell-off.
The downtrend can drop with low volume, and can at times gap down through technical support levels. This is due to how and where the retail crowd and the smaller funds set their stop losses.
A common mistake that many investors and traders make is to use a percentage stop loss.  Since everyone in these groups all use the same percentage stop losses, there are many strategies used by HFTs and other professionals that cause these percentage stops to trigger.  When this happens many retail traders get very angry, because the stock usually hits the stop loss then rebounds back up.
Many retail traders assume this is the “market maker” searching for their orders and taking out their stops.  
Instead it is the “Cluster Order Syndrome” which triggers HFTs and other algorithms, searching for orders that are clustered around a percentage.  As a stock drops, stop losses are triggered and the stock plummets.

 


The above chart shows a how a 10% stop loss triggered a huge down day.  It was driven by very high volume, which is the foot print of HFTs and sell short automated orders. These trigger on algorithms designed to locate cluster orders.
Summary
The downtrend behaves very differently than the uptrend because not all of the 9 market participants sell short.  More than half of the market participants hold stocks for the long term.  On the downtrend, algorithms dominant and many search for anomalies in order flow called “Cluster Orders.”
When retail investors, retail traders, small funds, and other groups all use the same percentage such as an 8% or the more popular 10%, it creates a huge cluster order at that price range.  Algorithms can search for these cluster orders that then cause huge sell downs, because of the combination of selling short AND stop losses firing off at the same time. The stock plummets within seconds often when the stop losses trigger all at once.
For information on Indicators for Selling Short go to: http://goo.gl/Iuolx0
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner                                                                 

©2014 Decisions Unlimited, Inc.  All Rights Reserved.
TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Wednesday, March 26, 2014

Testing Seasonality in MetaStock

Does Target stock go up during holiday months?

Do Wheat prices go up during the summer?

Does the price of Oil rise during the winter? 

Are these trade opportunities?

In my travels, I've met lots of traders who are interested in trading based on seasonality.  MetaStock's system tester can be easily modified to test a security to find if there are profitable seasonable patterns. 
In this post, I'll show you how to create a seasonality test easily in Metastock.


In MetaStock, from the Power Console click on System test and then New:



On the General tab you will put in a name for the System Test.  In this example I named it Seasonality - Longs.



Once we've finished up the General tab we'll want to setup some variables that we can use during the test.  So click on the Optimization tab:

We are going to setup four different variables.  Click on New and Setup the following variables:

OPT 1 Month Buy- Mimimum 1 Maximum 12 Step 1
OPT2  Day Buy- Minimum 1 Maximum 31 Step 1
OPT 3 Month Sell- Mimimum 1 Maximum 12 Step 1
OPT4  Day Sell - Minimum 1 Maximum 31 Step 1

This will allow us to setup our variables for use in our System Test--We are almost done. 

Now we want to setup our Buy order. 

Under the Buy Order Tab you will want to put the following formula:

Month()=OPT1 and DayOfMonth()= OPT2

Under the Sell Order Tab you will put the following formula :

Month()=OPT3 and DayOfMonth()= OPT4

It should look like this: 


What we are telling MetaStock to do is to test Buying on January 1st and Selling on January 2nd.  Except with this simple code, we are telling it to test every possible combination and tell us what would be the most profitable. 

With the MetaStock data you can literally test this back decades to see if there is a seasonal correlation with the instruments you are interested in. 

Now you can type in all this information by hand.  If you'd prefer you can download a copy this importer file from my DropBox folder and automatically add my seasonality test to your MetaStock program.    Here's the link:


https://www.dropbox.com/sh/d0j5g56kc42bmu0/Yq41W5yoDB

Employee Spotlight: Scott Brown

Name: Scott Brown
Time with Company: September 2000 - Present
Area of company works in: I have worked in Sales, Product Management, Business Development, Events, Director of Sale & Marketing, President, Owner
Do you trade in your spare time: I don't trade much.  I don't have too much time.
Favorite part of your job: Working with our customers, employees and partners.  MetaStock has been at this for decades and we have some great relationships that have occurred.
Favorite Quote: "We can't help everyone, but everyone can help someone."  Ronald Reagan
Favorite Color: Red
If you weren't working with MetaStock what would you want to be doing: Teaching


Scott is pictured here with his family at a local ball game.

Friday, March 21, 2014

TechniTrader Weekly Discussion for MetaStock: “Why Bottoming and Topping Formations are Changing”

MetaStock® SPRS Series - Week 163 – March 21, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

In the past few years technical analysis has undergone some significant changes.  Many traditional technical patterns are either not forming as often, not as reliable, or are simply not found on the charts.
Bottoming and Topping Formations have undergone the most substantial changes.  Some Bottoms and Tops are rarely seen, while some do not reverse the trend or only reverse it for a brief period of time, and others that were once common do not form at all.
These changes have been subtle and have been going on slowing for several years so these changes are often missed by retail traders.  Not recognizing these critical trend reversal technical patterns and how they are changing can affect trading profits.
Why the traditional bottoms and tops are no longer forming as they once did, is just as important as recognizing which of the bottoming or topping formations have been altered or lost.
The Bottoming and Topping formations are critical areas of a trend, and recognizing these patterns early on is key to successful investing and trading.  If a top has started but a trader is unaware or doesn’t recognize that topping pattern, an entry at that point could cause a huge loss.
Conversely, not recognizing bottoms as they are developing often leads to missed opportunities as stocks tend to run faster and longer out of bottoms in the current market structure.
Bottoming and Topping patterns are most sensitive to changes in the Market Participant Groups and the Market Participant Cycle.  This is because these are major pivotal points where a Shift of Sentiment™ occurs for the most important of all the 9 market participants, which is the Institutional Investor.
Since there are two primary types of Giant institutions, the Sell Side Institution and the Buy Side Institution, these huge lot investors can and do alter technical patterns.
One of the patterns that rarely forms in today’s automated stock market is the Head and Shoulders Top.  The market is dominated now by Dark Pools who use targeted price zones and specialized orders that insure their giant lots do not move price, and the High Frequency Traders who use special orders designed specifically for millisecond trading that is intended to move price rapidly with huge velocity runs. These cause the Head and Shoulders Topping formation to be disrupted before it can fully develop.
The Dark Pools often are in total control of price at bottoms.  With their precise targeted price zone, price is so tightly compacted with their huge lot orders that bottoms have altered dramatically. Inverse Head and Shoulders are extremely rare, W Bottoms are shallower and harder to identify, and Triple Bottoms have disappeared.  New formations are replacing these older style bottoms.  
Basing Bottoms, U Bottoms, Velocity Bottoms, and Quiet Accumulation Bottoms are just a few of the new bottom formations that technical traders need to learn to be able to recognize that a bottom has commenced, to enter early before the huge momentum runs that follow.
The Chart below is an example for one of the new bottoming patterns, which when identified early  offers strong profit as it completes.

The Chart below shows the completed bottom and subsequent momentum run.



Using outdated technical analysis in the electronic marketplace keeps traders from earning the high profits that most professionals enjoy.  Of all retail traders 90% of them lose money trading, while 90% of all professionals are making excellent income.  The difference is that the professionals continually keep up on the changes that are occurring in technical analysis patterns.
For more information Candlestick Patterns go to: http://goo.gl/Rv9aal
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner

©2014 Decisions Unlimited, Inc.  All Rights Reserved.
TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.