Friday, January 31, 2014

Correlation: The Unsung Indicator


One of the real undiscovered jewels in MetaStock is the correlation analysis tools. In a nutshell, correlation analysis lets you see how closely two instruments move together.  For example, two stocks that move together in lockstep by the same magnitude will have a high correlation coefficient.  A value of +1 means a perfect positive correlation exists between the two stocks.  A value of -1 is a perfect negative correlation.  Generally speaking, values above 0.7 indicate strong positive correlation and values below -0.7 indicate strong negative correlation.

Correlation analysis is used by long-term investors wanting to diversify a portfolio.   In general, investors will seek asset pairs that are negatively correlated such as Gold and the US Dollar Index.  Short-term traders use correlation analysis to do what is called pairs trading sometimes referred to as convergence trading.  For example two highly correlated stocks are monitored for a  temporary divergence where the spread widens with correlation turning negative.  Traders will put on positions that profit when the two stocks converge back to normal positive correlation ranges.

The daily chart below shows such a situation between two stocks that typically have high positive correlation, Coke and Pepsi. Pairs traders would attempt to use simultaneous long and short positions to profit when the two diverge with negative correlations--such as the November-December 2010 timeframe--and subsequently revert back to positive correlation. Pairings between stocks within the same sector are often used for these trades (i.e., Walmart and Target, Exxon Mobile and Chevron, etc).   Note when overlaying instruments as shown in the MetaStock chart below, it is a good idea to change the y-axis scaling for both instruments to semi-log so that the magnitude of movement is comparable.



Now look at the 1-minute chart of Coke and Pepsi below.  Notice at this shorter interval over this particular time span, the periods of negative correlation are more frequent offering more short-term opportunities to exploit (i.e., around the 12:30 PM point on the 28th).



The chart below shows two instruments that are often negatively correlated, Gold and the US Dollar index.  A pair like this can offer long-term investors good diversification for their portfolio.



The next chart below shows the the Dow Industrials ETF (DIA) and the S&P 500 ETF (SPY) and a 50 day correlation indicator.  As expected these are very highly correlated.  Trading opportunities come when the correlation temporarily weakens as in the April 2011, April 2012, and November 2013 timeframes.



Pairs trading is just one example of how the correlation analysis tools in MetaStock can help your analysis.  Correlations between options and their underlying instrument are popular to track.  And of course using commodity traders can use correlation with spread trading between contracts (i.e., Live Hogs and Corn).

But one thing for sure, Correlation is one of the unsung indicators.  So give it a look.

Thursday, January 23, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Why Volume Indicators are more important than Price Indicators for Stock Chart Analysis”

MetaStock® SPRS Series - Week 155 – January 24, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Books and articles written for the retail trader or investor adamantly insist that price is the most important indicator.  This leads to a serious misunderstanding as to what that statement really means for stock chart analysis. Yes, price is the most important indicator as it reflects the current perceived value of that stock and its company at that particular moment in time, based on the market participant groups that are buying and selling it at that time.
However what is missing in this analysis is that there are 9 Market Participant Groups. During any period of time or “snap shot moment” of price action whether it is on the millisecond scale or a daily chart, not every Market Participant Groups is actively buying or selling.  Some are simply holding the stock, OR waiting for the stock to move to a certain price point before they buy or sell.
What matters most in the automated market is which Market Participant Group or Groups are currently controlling price as you, a retail investor or retail trader are about to buy or sell that same stock.  Volume at that moment tells you far more about what price is likely to do next, than any price aka candlestick pattern will reveal.
For example:  
In the chart below a classic downside candlestick pattern called a “Broken Step” by itself indicates more downside action.  Traders only using price and price indicators would react by moving in to sell short this stock, because everything based purely on price action points to more downside potential.

Now let’s study the chart with two powerful, easy to use and learn volume and quantity indicators. First of all, the Hybrid Volume Bar indicator clearly shows a lack of momentum energy for the downside action.  If this was a dominant sell short pattern, the Hybrid Volume bars would rise above the Exponential Moving Average.  The downside volume is well below the average lines.
Secondly, the Hybrid Indicator Balance Of Power BOP shows clearly that Giant and Large Lot Market Participants had been quietly accumulating this stock prior to the momentum moves up. The momentum aka volume and price action, show High Frequency Trading HFT volume patterns that are impossible to distinguish just from price.
In other words, price by itself fails to expose the following two critical aspects of this price action:
  1. Dark Pool activity that has continued
  2. High Frequency Trader activity that was the propulsion for the upward action
Understanding that these two powerful Market Participant Groups are controlling price in different time frames is vital information for both the retail investor and the retail trader.


The analysis of volume and quantity with price, clearly warns that this is not a stock to sell short. It is merely in a brief profit taking mode.


Price after the broken step pauses in a classic resting day pattern, for a stock in profit taking mode by High Frequency Traders and pro traders.  Then it has a classic reversal pattern which is followed by a short run up, then more Dark Pool buying, and then another run upward.  Selling short could have cost a retail trader a significant loss, and selling this stock would have taken a position or long term investor out of a stock that has plenty of upside potential left.
Summary:
Retail investors and retail traders often lack a complete education and the training, necessary to transform the information they have at hand into working knowledge and a trading process. Strategies are not enough information to be successful. Unfortunately most retail traders only learn strategies and are never taught the professional style processes that make pros successful, while retail traders struggle to break even at best.
Yes, price is important but without a good depth of education and knowledge on how to use volume as well, you are missing 50% of the analysis necessary to be successful in trading stocks, options, e-minis, Exchange Traded Funds ETFS, and other trading instruments.
Incorporating volume indicators is not just a necessity it is an imperative requirement for successful retail trading in our modern electronic marketplace, where 9 distinct Market Participant Groups trade.
For additional information and to view a TechniTrader video titled “Stock Indicators” go to: http://goo.gl/b3AMRr
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, January 22, 2014

Converting Charts and Layouts into Templates

There are times when you might need to turn your favorite layout or chart into a template.  This is good just to keep as a backup in case anything were to happen to the chart or layout, but it can also be helpful when you need to take the same set of indicators, expert advisor, etc. and apply them to a new ticker symbol.  The steps below outline the process for turning your chart or layout into a template, and then applying this template to a new symbol.

MetaStock Instructions

Converting a saved chart (.MWC file) or layout (.MWL file) to a template (.MWT file):

Converting

  1. Open your saved chart or layout (typically through the File-->Open menu and selecting the appropriate File Type in the File Type drop-down then double clicking on your saved file).
  2. Once your saved chart/layout is opened, click File-->Save As, then change the Save as type from Layout or Chart to Template.  Give the template a name on the File name line and click the Save button.

Applying the template to a new symbol
  1. Open the Power Console (P button or File-->Open Power Console).
  2. Type in the desired symbol on the Select instrument(s) line or select the symbol from a list.
  3. Click Next.
  4. If you are not using a multiple timeframe template, click the Browse button, select your template, click Apply, then click Open chart (skip steps 5,6,7).
  5. If you are using a multiple timeframe template, click Open Chart.
  6. Right-click on the chart and choose Apply Template.
  7. Ensure “Use Template’s Periodicity” is checked, select your template and click Apply.
Saving a single-symbol chart/layout
  1. Click File-->Save.
  2. Give the chart/layout a name on the File name line and click Save.
Saving a multi-symbol layout
  1. In the lower right corner of each chart in the layout, you will have a “Choose Instrument” button.  Click this button and click the “Options” tab.
  2. Make sure the option is set to “Use Chart as Template”.  You may want to checkmark “Keep Line Studies” if you have trendlines/symbols/text specific to the symbol you are changing to.  Make sure “Change All charts in layout” is not checked and click back to the “Instrument” tab.
  3. Type in the symbol you want to change the chart to and click the “Choose Instrument” button.
  4. Repeat the above steps for each chart in the layout that you want to change.
  5. Click File-->Save.
  6. Give the layout a name on the File name line and click Save.

Building a Watch List Exploration


I know a lot of MetaStock users are a little frightened of the formula language.  Here's a quick primer on how to build a Watch list exploration.  It 's actually quite simple. 

Let's say we want to create a watch list that consists of Stocks that are"

  •  Above $5
  •  Below $50
  • Traded at least 500,000 shares


To Create an Exploration, simply open up the Explorer and hit on new.  It should look like this :



Under Name we would title our Exploration.
Since this is designed to "filter" out stocks that we are not interested in  - we can go to the Filter Tab.

Creating basic Explorations is extremely easy.  In the case of our code above here's how we would say this in MetaStock:
  •          Above $5 = Close >5
  •          Below $50 = Close <50
  •          Traded at least 500,000 shares = Volume > 500000

In essence to create this exploration you would say the following in the filter tab:
close >5 and Close <50 and Volume >500000.

It will look like this when you are done: 






Friday, January 17, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “How to Trade Stocks Profitably in 2014 Using Stock Charts”

MetaStock® SPRS Series - Week 154 – January 17, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT


Most retail investors and retail traders do not realize that they have a huge advantage over the professional side of the market.    This is due to the constraints, restrictions, rules, and regulations the professional side must comply with on an ongoing basis.  It is also due to the fact that 80% of the professionals still do not use Technical Analysis.
Stock Charts are the graphical representation of what the market participant groups who use fundamentals understand about that stock and its company at that time.
What retail investors and retail traders need to learn is how to interpret the stock charts with the understanding that there are 9 primary market participant groups, and each one buys the stock at a different time during the up, down or sideways price action. Over a year or longer time period different market participant groups will be highly active, or not buying the stock at all.  When one or two market participant groups are heavily buying or selling a stock, this is called “controlling the stock price.”  Each market participant group controls price in a specific way creating easy to identify trendline patterns. When a retail investor or retail trader can identify who is in control they will know how to trade the stock, which trading style and strategy will work best, when to enter the stock, how long to hold the stock, and when to exit the stock.
Let’s study the chart below and learn how to interpret the candlestick patterns and trend line patterns, to learn to identify who is controlling price on this stock chart.
What is very obvious immediately is how precise and consistent the sideways pattern is over time. What is also noticeable are the gaps that follow the sideways pattern.




Sideways price action that is precise means that the buyers are dominant, have a huge amount of capital reserves, buy with a controlled bracketed order that contains price in a narrow range, and eliminates momentum action and volatility.  There is also an incremental pattern in the sideways action. Each sideways pattern prior to the gap or run up is nearly equal in time duration.
This is the pattern that giant lot institutions create when they use Dark Pool Alternative Trading System platforms to slowly accumulate millions of shares of stock. The more giant funds that buy the stock, the more consistent the platform pattern will be.  Dark Pools are buying in incrementally over time and control price during their accumulation phase.
Once the Dark Pools have completed their buying for that price level it is obvious that High Frequency Traders HFTs automated orders trigger, driving price up.  High Frequency Traders can also make mistakes as was the case in July with the attempted to sell down the stock during accumulation, as shown by the red volume spike that month.  The smaller funds always chase HFT action.  Often retail traders also chase HFT action too, not understanding the market participant group cycle and how it affects the trend, and trendline patterns that form over time.
The stock was under heavy accumulation at the time the HFT triggered order attempted to sell off. Since the giant funds have massive capital bases and a controlled order to buy incrementally their orders overwhelm the HFT sell short orders rapidly and the stock continues to move up many months after that attempt.
Learning to identify who is controlling price at any given time, tells the retail investor or retail trader a huge amount of information that is not available in retail news, guru recommendations, or friends and co-workers opinions about stock trading.
To be consistently successful, retail investors and retail traders must learn and understand the Market Participant Group Cycle and how that affects the stock trend over time. When you use this methodology, your success at investing and trading will improve rapidly and consistently.
Visit our TechniTrader Learning Center to learn more about Chart Training here: http://goo.gl/t60Vfh
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.

Tuesday, January 14, 2014

Thinking of shorting a stock making all time highs?

Shorting stocks that are making new highs can be very risky. Nevertheless, many undertake this strategy to try and profit when the stock tops out. And obviously if you are able to get short at that point and catch a significant downward move, profits can be very large. But it is nearly impossible to know when this will happen (indicators notwithstanding). In the mean time, losses can mount as a stock that looks 'top-heavy' continues it's meteoric rise. Is there a better strategy? How about an option straddle? A straddle is the simultaneous purchase of a put and call at the same strike price with the same expiration date. And since Implied Volatility, which affects option pricing is typically lower as stocks are rising, straddles can be bought for favorable pricing. If the stock continues to make new highs during the life the straddle you can profit on the call side, while if it does reverse significantly, profit substantially on the put side. And you're only risking the price of the straddle vs the margin required to sell short. The worst case scenario is that the stock flat lines, which would be very unusual for such stocks. Following is an example using Apple Computer, which reached an all time high of 705 in September of 2012 shown on this weekly chart:

 


Implied volatility (IV) of Apple call options reached a low in late July of 2012, as seen on this chart:




A 6 month straddle purchased at this time would have put options in place as Apple computer subsequently fell nearly 300 points (certainly large enough to cover the losses on the calls). Straddles purchased at previous IV lows would have likely profited from the continued rise of the stock. There are many more nuances to be understood about trading straddles, but they are certainly a viable alternative to to short selling stocks making new frequent highs. (Charts created in Metastock)

The products and demonstrations listed on this website are not recommendations to buy or sell, but rather guidelines to interpreting their respective analysis methods. This information should only be used by investors who are aware of the risks inherent in trading. MetaStock shall have no liability for any investment decisions based on the use of their software, any trading strategies or any information provided through other services such as seminars, webinars, or content included in the website.

Monday, January 13, 2014

“How to Choose the Right Charting Software for You”


Whether you are a independent investor, mutual fund investor, position trader, swing trader, or options player one crucial tool you need to succeed in today's institutional dominated marketplace is a good charting system. There are many charting software vendors including free internet based charting services, and many brokers now have basic charts as part of their online broker system.  The plethora of charting software has occurred over the past decade because it is the only way that the retail investor and retail trader can see what is going on in the hidden professional side of the market, where giant funds trade on Alternative Trading System platforms that are not in the exchanges and where High Frequency Traders control the open of the market. Often investors and traders are losing money not because they aren't capable, but because they are using inferior charting.
Without stock charts the average investor is trying to shoot darts in the pitch dark.  Even mutual fund investors must use charts to track the success of the mutual funds they select in an easy to use graphical format. For position, swing, and day traders stock charts are an essential part of trading. For Options players, charts are critical because the outdated options indicators no longer work. How do you choose the right Charting Software for your needs?
Professional charting systems are very pricey, often running in the range of one thousand to ten thousand a month for the charting service. Fortunately there are very low cost charting software that are excellent for retail investors and retail traders. Unfortunately many retail investors and retail traders try to use free charting services or the basic shell type charting system that comes with their brokerage account. Broker charts are not complete charting programs because they are not designed for trade analysis.  If you want to be highly successful and make consistently excellent profits from trading stocks, you need a charting program that can do the 7 things listed below.
  1. Scans: A Charting program must be able to scan all the stocks in the market at one time or in groups based on criteria which include leading indicators, not the outdated indicators written decades ago like MACD and Stochastic. Leading indicators expose where the institutions are buying or selling before price moves.  Scans must be extremely adaptable so that you can have custom scans which bring up specific stocks with candlestick patterns and leading indicators.  Free stock charts and broker charts do not have scans, or if they do there is not the ability to create custom criteria. Scans are a necessity and the better the scan the faster your chart analysis and stock pick selection. Without scans, you are stuck using news or broker recommended stocks which means you are trading stocks your broker has in inventory and wants to sell to you to make huge profits from your trades. Scans are a critical tool. They separate the truly serious and successful trader, from the hobby trader who constantly loses money.

  1. Leading Hybrid Indicators: The charting software must have all the modern new leading hybrid indicators, not just the old outdated indicators every broker promotes.  There's a reason why they don't provide leading indicators.  Indicators must capable of being modified and adjusted. In addition they must have different period settings and be capable of adding subordinate indicators or dual primary indicators on the same template.  Indicators are an essential part of highly profitable trading.  Tracking the institutions to know where they are accumulating and distributing, will be worth every penny spent on your charting software.

  1. Custom Indicators: The charting software should be able to have custom indicators that can be modified to your trading style, so that your set of indicators is unique to you.  Professional traders have their own proprietary indicators they do not share with anyone else, which keeps them unique and earns them higher profits.  There should be indicator templates that can be saved and used over and over every time you study stock charts.  Indicators must include not just stock indicators but also fundamental, financial, historical, and market indicators so you don't need to search for information but can quickly see how many institutions hold the stock, and what percentage of ownership of the outstanding shares is held by institutions.  A complete set of indicators that can be adapted and modified, with the ability to add new indicators is an essential tool for every trading and investing style.

  1. Conditional Sorts: Some free charting software and broker software have a few sorts, which are mostly very basic or completely outdated and not relevant for today. Sorts in the best charting software will have Conditional sorting capability, and multi-tier sort capabilities. Conditional sorts save huge amounts of time and keep the best stocks rising to the top of your Scans and Watchlists.  These sorts are a tool every professional uses because they save time, keep their workflow efficient, and present better stocks to trade than news, guru, or broker recommendations.  Superior stock picks mean superior results. 

  1. Watchlists, Lists and Alerts: Watchlists, analysis lists, etc. are another must have feature that most free charting programs do not have.  Being able to put stocks on a Watchlist for future study and monitoring is crucial to higher profitability and stronger stock pick selection.  Being able to have as many Watchlists as you want with all types of criteria and sorting capability is a huge asset to investors and traders. You want to be able to spend less time searching for stocks or listening to the news, and more time enjoying your profits from trading. Alerts are a new addition for many charting programs and function similarly to professional alert systems within charting software. Alerts keep you on top of stocks that may not be ready with the ideal entry at the moment, but will be a in a few days.

  1. Market Data:  If the data in your charts is not accurate or up to date, it can harm your trading without you even realizing it.  Data needs to be structured in a manner by the charting program that allows you to see various time frames, patterns, and layouts so that you can determine who controls price at that time. There are 9 major Market Participants all trading and investing at different times and on different order processing platforms; 54 Dark Pool Alternative Trading Systems ATS, 9 Electronic Communication Networks for Electronic Trading aka Day Trading ECNs, and 16 US Exchanges. Data must be gathered properly and accurately from a vast number of locations, so make sure the charting software you use has reliable Market Data.  Just because it is in your broker account doesn't mean the Data is properly structured, sorted, documented, and delivered timely.  Your software should also include other market data beyond just US stocks.  If you are trading in another country, you need charting programs which have that market data accurately displayed and readily available.  If you want to trade other instruments beside stocks, the charting software must include data for that instrument.

  1. Trading Style Customization: The Charting program must have the capability to be customized in every way for your trading style.  That means far more flexibility and customization than broker free charting programs.  Attempting to use charting software that is not designed and customized for your trading style increases risk with the probability of glitches, mistakes, and bad trades.  Your trading style is foremost when choosing a stock charting program.  Make sure the program has a feature for your instructor or mentor to write you notes and provide training within the charting software structure.  Having access to your teacher's education and training will help you improve as you learn to trade. Trading style customization allows you to trade without having to compromise your trading screens and monitors, because you can lay them out properly for maximum online instant analysis.
Most traders spend inordinate amounts of time trying to find stocks. By spending a small amount of money and investing in a complete charting software program with all the features you need to find the best stocks for your trading style and trading parameters, you are now trading like a professional and can earn professional level profits.
Sure you can continue to use that free basic charting program, but you are pinching pennies and throwing away huge dollars in profits. You are maintaining the status quo of mediocre retail trading results, and keeping yourself stuck in a system that is not designed to make you highly profitable. Take charge of your trading by investing in tools that can help make you successful.
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.