Monday, April 30, 2012

Dr. Elder's Trading Room

What Moving Averages Tell Us

MetaStock SPRS Series - Week 66 - TechniTrader® Stock Discussion for MetaStock Users - What Moving Averages Tell Us - April 30, 2012
By: Martha Stokes C.M.T.


Moving Averages were the first stock indicator ever employed to analyze stocks. Yet even today most traders don’t use moving averages or understand moving averages to the extent that they should.

Statistical averages are used everywhere, not just in the stock market. There are many types of moving averages. Averages provide a smoothing of the data to get a better view of what is going on.

Some moving averages drop off the oldest data as new data is added. This is the standard approach to most formulas for stock indicators. There are also cumulative averages which accumulate data as the average moves forward.


Chart 1

The Mode considers the distribution of price variances rather than the size of the price changes. The formula considers the location of the greatest concentration of similar prices as the typical value.

The Mode method requires a rather substantial amount of data to function properly, so a 5-day mode would not be effective. Mode discounts extremes in data and helps find the center, or commonly occurring value.

The Median defines the true center of data even when you have an incomplete set of data. The Median is not skewed by extreme variations but it is not readily adaptable to computational methods for use in formulations. The Median would be the accurate center or price of 5 days of variations, for example.

The Mean has several ways it can be calculated:

Arithmetic, Geometric, and Harmonic are the most common.

For most stock indicator formulas, the moving average uses the Arithmetic Mean and so everything is skewed or impacted whenever there is a significant price variation or price spike. Many stock indicators that use Price and Time use a simple moving average using the Arithmetic Mean calculations. The simple moving average also places the least importance on the most current price. Therefore, these indicators will ALWAYS lag regardless of the period settings. Tightening the moving average will only create a highly reactive indicator rather than a leading indicator for price.

So what CAN moving averages tell us? In the chart below, MEOH, what the moving averages are telling us clearly is that price has shifted sideways. The stock is no longer trending up. This is very useful information because it helps traders shift their trading style and their style strategies to adjust to the changing trading conditions for this stock. Moving averages are an easy what to identify that a price has shifted sideways. This alerts traders to look further to understand WHY the shift to a sideways pattern has occurred.


Chart 2

Why has this stock shifted sideways?

It tested its all-time high and backed off which is common. Note the TTQA is very strong during this sideways action AND also that the formation is a triangle.


Chart 3

Triangles are a compression pattern. All compression patterns end with a sudden breakout move, either up or down, depending upon the preceding price action, VOLUME, and accumulation/distribution patterns. A triangle is a dual compression pattern where the highs are dropping and the lows are rising in a symmetrical pattern. This creates energy. The tighter the price, the more energy that builds.

The breakout usually occurs prior to the conclusion of the triangle where the highs and lows would come completely together.

Triangles are usually, not always, continuation patterns for a trend.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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 23, 2012

Topping vs. Correction Pt. 2


MetaStock SPRS Series - Week 65 - TechniTrader® Stock Discussion for MetaStock Users - Topping vs. Correction Pt. 2 - April 23, 2012
By: Martha Stokes C.M.T.

This week we are going to define the areas where FAST, our stock from last week, is going to find support.

Support levels form both from technical patterns as well as fundamentals. This is an important fact to remember if you are strictly a technical pattern trader. Sometimes stocks will fall below a technical support level and then quickly rebound, sometimes stocks will stop well above a support level. Both of these instances are caused by fundamentalists reacting to fundamental price areas that are not technical in nature.

The strongest support areas will always be where technical and fundamentals meet.

FAST continued to slip downward from last week.

To determine where this stock will find support we need to use a weekly chart to see more of the historical data.

On the MetaStock Chart below for FAST weekly, we can see that the angle of ascent is far too steep for this stock to sustain the uptrend. Smaller lots drove price upward after institutions bought in during the sideways action. This is a common pattern. We can also see from TTQA that HFTs and other pros are trading this stock on a shorter term basis.


Chart 1

However, the correction is even steeper than the ascent so bounces are going to occur. It will not be a sheer drop. This stock is running down, not gapping down on news or panic dumping. It is likely to bounce around $48-45, and again around $40.


Chart 2

Weekly charts are not only valuable for seeing longer term support and resistance but also to clearly show how steep the run truly is. Here it looks far less steep than it actually is over time.

There is a broken step, which is a common sell short pattern that is not in the standard Japanese candlestick books because it seldom formed in their ancient rice commodity markets.

This is a pattern that forms in our western markets where institutions and large lots control price and dominate the price action. So different candlestick patterns must be used in our markets.

The broken step is a signal that the downside is gaining more energy and we can clearly see the RED TTQA which exposes when a fund or groups of funds are selling short or selling out. Volume would indicate smaller funds selling with HFTs spurring on the move down. But support is nearby at $48-45 due to a peak in that price range.

TTVA and TTFF also confirm that funds are selling this stock and moving out. If HFTs also start selling short in addition to the selling out, then more momentum action may occur. Bounces will precede runs down at even weaker support levels because we are not in a bear market.

The more important support that will halt the run down is around $42-$43 and again around $26-$28.

This support area information helps you sell short a stock while being aware of how many points are likely before a bounce and your profit to risk ratio.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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, April 17, 2012

Topping vs. Correction


MetaStock SPRS Series - Week 64 - TechniTrader® Stock Discussion for MetaStock Users - Topping vs. Correction - April 16, 2012
By: Martha Stokes C.M.T.

Our recent Webinar, High Performance Trading Simplified, was a huge success. I appreciate all of your thank-you’s and compliments. It was pretty packed with information so be sure and check out the video either at MetaStock or TechniTrader websites.

One of the more important technical skills a trader needs is to determine whether a stock is actually topping OR if the stock is merely correcting after running up too fast to sustain.

Today we are going to study FAST.

The goal is for you to learn to determine whether FAST is topping OR if this is a correction that will form a short term bottom and then start moving up again. Since stocks tend to run with momentum out of a short term bottom, this kind of analysis on stocks correcting can offer some quick swing trades as the market recovers and returns to upside action.

It can also help avoid selling short a stock that is not going to move down much.


Chart 1

As you learned in the webinar, hybrid indicators are critical to properly evaluate what is going on. You can also see on this chart all the icons I have set up so I can quickly move from trading style template to the next one. This allows me to analyze stocks at a very fast speed and with more accuracy.

TTQA is what we are studying today. We can see that TTQA started out with smaller bars, the size of the bars is important. So in April of last year the institutional activity was lighter than in November as an example. We also know that institutional traders were short term trading this stock.

Even while institutional investors were buying for a longer hold. That is what the green to red to green represents. We can also compare the size and duration of the green versus red TTQA and get information on who controls the large lot activity, the buyers or the sellers. Clearly there are more long green bars than red bars, so buyers are dominating even while the stock encounters retracements and corrections that instigate some selling patterns on the short term trend.

The last green TTQA is February to March and is smaller fund activity along with some trading activity. The candles are smaller and volume tells us that these are smaller lots. Then, FAST hits $55 and drops vertically with sudden red TTQA. This is the effect of High Frequency Trading formulas along with some pro traders selling against the smaller lots.

The bounce up occurs at a weak support level.


Chart 2

My next template has TTVA and TTFF on it to show flow of funds and volume accumulation or volume distribution.

Even before the stock started to drop with big black candles, there was some rotation going on. TTQA dropped below its oscillation sub-ordinate indicator (see the webinar to review this term) and dropped vertically.

So what is next?

This is your homework assignment: Determine the support areas that will hold price at that level for a bottom, either on the short term trend, or the intermediate term trend.

Also, is this a true top indicating a long term downtrend? Or is this just a short term correction?

More next week.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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 9, 2012

Gaps

MetaStock SPRS Series - Week 63 - TechniTrader® Stock Discussion for MetaStock Users - Gaps - April 9, 2012
By: Martha Stokes C.M.T.


Today we are going to study the formation of Gaps, why they form, and what the gap can tell us about near term price action. As a short term trader, gaps can be either highly lucrative quick gains, or they can be devastating losses.

Most of the time, traders miss out on the quick gains of a gap. This is because they are unable to see the price and volume action that indicates a gap potential is developing. To trade gaps, you must be in the trade prior to the gap event.

Most of the time, traders fail to see the inherent risk of a reversal gap before it occurs. The risk of a gap going against you means that your stop loss could be jumped over, causing you to have a much larger loss.

Traders need to understand the mechanism and catalysts that create gaps. When you understand gaps you will be able to anticipate them better and reap the profits of riding a gap trade.

A gap is a space in the price chart that is blank. Gaps are created by pre-market open adjustments to the price of a stock or ETF.

AKAM has a chart where many gaps have formed on the downtrend and again on the bottom to uptrend.

With so many gaps, it is important to understand why gaps are forming on this particular stock.


Chart 1

First, the analysis should answer the question: What kind of gaps are forming?

1. Common Gaps
2. Breakaway Gaps
3. Running (a.k.a. measuring) Gaps
4. Exhaustion Gaps
5. Island Gaps

For AKAM these are island gaps.

Why do gaps occur?

Market Makers adjust a stock’s price prior to market open due to:

a. Heavy overnigh at market orders by smaller lots.
b. Overseas markets price syncing.
c. News event triggers heavy order flow just prior to market open.
d. HFT orders triggering sudden price jumps.

Gaps are a pre-market price adjustment. They may occur intraday as well if there is a void followed by a higher or lower bid.

Common gaps are small gaps that fill easily. These occur all the time in many stocks and are of no consequence.

Breakaway gaps are significant gaps that occur in bottoms, tops, and mid trend. These are important gaps because they often precede major trend moves and breakaways can often occur in sequential patterns, repeating the gap over and over as is shown in AKAM.

Running Gaps form midway up a trend often after a breakaway gap and, like common gaps, tend to fill easily.

Exhaustion Gaps form as the stock trend is reaching a state of speculation and price exhaustion.

Island gaps are gaps that are occurring over and over. Usually a major reversal of trend is initiated by an island gap.

AKAM has many gaps. The stock likes to gap. That means it is a news-oriented stock that generates a lot of pre-market activity. AKAM is rebounding after a significant downtrend. The upside gaps are corresponding to the downside gaps.

Each downside gap area is resistance but, as with many stocks moving out of a bottom, these resistance levels are being jumped over after a short period of platform-building.

Gaps are something every trader needs to understand in-depth. We are entering a new market condition with a full contingent of Market Participant Groups. All 9 groups are trading and investing and this means more gaps are likely.

In order to capture the big gains of a gap, you must learn to identify the platform patterns that form prior to the gap, use institutional indicators that track the institutions who move in prior to the gap and enter at that time.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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.

Thursday, April 5, 2012

The Anatomy of an Emotional Hijacking

The Anatomy of an Emotional Hijacking
The Anatomy of an Emotional Hijacking - April 5, 2012
By: J. Rande Howell

“I don’t understand myself at all. I know what I am supposed to do. But that’s not what I do. Instead, at the moment I need to be disciplined, I get rattled and do exactly what I’m not supposed to do and that’s what I keep doing. I know the trading plan rules are good for me and my trading. And my bad feelings after breaking the rules prove that I need to be following my trading plan. During my review I see and realize what I should have done, but I seem to fall apart during the moments I need to be focused on executing my plan.”

Offensive Coordinator vs. Defensive Coordinator Psychologies

This trader had done a good job up until the moment he entered the trade. The trade met trading plan criterion for entry. The opportunity was there. The position size was prudent. He was ready to exploit the high probability, low risk trade that the market was presenting. All he had to do was execute his trade plan. But it is in this moment of transition from a psychology looking for opportunity (offensive coordinator) to a psychology of defending his position (defensive coordinator), and his ignorance of this difference, that kept leading him into emotional hijackings.

If you follow American football, you will notice that there is a vast difference in the mindset of an offensive coordinator looking to exploit opportunity and a defensive coordinator looking to defend turf. It’s similar in trading. In the trader quoted in the opening paragraph, his lack of understanding and management of his emotional nature when exposed to uncertainty became his undoing. His ignorance, over time, had led him into numerous emotional ambushes while he was trying to manage the trade he was in. His ability to pick winners was high, as evidenced by his win percentage. The problem was that he did not do a good job of defending his trade once in the trade – evidenced by his weak ratio of winners to losers.

The fear behind the emotional hijacking is common to traders attempting to manage a trade. It is a fear of missing out on profit. And it swept this trader into an emotional vortex that caused him to exit his trade long before it reached its target.

First, he didn’t know that he needed to shift his mindset from offense to defense at this particular moment. It was not in his trade plan. So he entered the trade and all was well until that moment. Then he ran into the flux around the entry point that commonly happens. The trade bounced around. It would come close to his stop, then it would go up and then, back down. But it was not establishing a trend yet. The drama was killing him. A mix of frustration and dread took over his mind as he watched, waiting for the trade to take off.

“How long is this going to last?” he asked himself as he tensed up. All he could think about was the money he could lose. He felt muscle tension and was hardly breathing. His eyes were fixated on the screen. Then the trade finally went into positive ground. A flood of relief coursed through his body. After he had been bounced around by this trade, he saw an opportunity to get out of the trade at a small profit. Rattled by what he had gone through, he took the profit before something bad could happen and wipe out the profit he did have.

Play by Play Analysis

Let’s take a look at how this drama unfolded and see what can be learned from it. First, notice this trader did not have a problem with pulling the trigger. As an evaluator of opportunity to the point of entry, this trader had followed his trading plan. However, what he had not built into his trading plan was a psychological plan. The Offensive Coordinator mindset was natural to him, so a need for emotional and psychological management didn’t occur to him because of this bias. He then, in his mindlessness, generalized this assumption of psychological competence from set-ups to actually managing the flux while riding the trade.

But when he was in the trade and the uncertainty of outcome was a real and present concern, he simply tried to push through the moment. He didn’t even acknowledge that the fear of uncertainty had triggered and was building up emotionally, physically, and psychologically in the mindset he was bringing to the trade. His historical way of dealing with this kind of circumstance was to hunker down and resist the feeling. By doing this, he accelerated the emotional build-up. Once the fear had become highly aroused, a trip-switch flipped. The emotional chemistry of fear coursed through his body and his thinking was contaminated. His capacity to think clearly and disciplined was compromised.

However, if he had been prepared for this transition between offense and defense, a very different outcome could have played out. And this is an important aspect of trader psychology training in both the DTSM self study course and the Ignite individual course.

A Mindful Approach to the Management of Uncertainty

Now imagine that a psychological trading coach is watching a film of where this trading play blew up. The major problem he would discover is that there was not an anticipation of the stress while moving from entry to trade management. Looking at the film, this coach would see the emotional arousal in the way the trade was handled (holding of breath, muscle tension, and fixation) that led to the blow up. In the aftermath, the concern for trade management was converted to a fear of loss that led him to get out of a trade early that had actually showed good promise.

Both physical and mental preparation could have remedied the way the deal was handled. First the transition from watching for set-ups to dealing with the uncertainty of being in a trade could have been practiced. Breathing and relaxation skills could have been employed to calm the bio-emotive system to prevent it from overwhelming his thinking. Then, intentional self-soothing could be developed, rather than resisting the stress. By anticipating the need for self-soothing and applying this skill as part of a trading plan he would have stayed calm and better able to manage the trade.

Finally, intentionally taking on the mindset of a defensive coordinator would have set up a mind rooted in disciplined impartiality. Like other skills, this mindset can be taught to be present to mind during the rigors of managing a trade. This mindset, built into the methodology trading plan, would have been practiced so that it could be called forward as a skill. You may give up some ground – but you’re not going to give up the big one. And you know when to go for the kill – target or stop. Here a psychological trading plan is integrated into the process of the rules that govern your trading.

Notice that the defensive coordinator brings a mindset to the performance of trading. It is in cultivating these emotional traits of discipline, courage, impartiality, and self-soothing that the mindset is developed. The energy of the defensive coordinator takes the field after the offensive coordinator provides the opportunity. Together, though very different, they produce a winning formula for a trader’s mind.

About J. Rande Howell

Rande Howell (MEd, LPC) helps traders develop a peak performance state of mind. He is both a licensed therapist and performance coach whose work is grounded in emotional regulation, mindfulness, and Jungian archetypes applied to trading. He has a clinical background in training people to master their emotions and to transform self-limiting beliefs into productive mindsets. His work centers on how to break the fear-based beliefs that imprison a trader's performance and that block the development of a trader's potential to achieve financial and personal dreams. By learning how to manage the biology of emotion, real and long lasting changes can then be made to the mind's core beliefs from which the trader engages the uncertainty, risk, and probability that must be mastered in trading. He is the author of four books including Mindful Trading: Mastering Your Emotions and the Inner Game of Trading.

Tuesday, April 3, 2012

Anticipating Price Action

MetaStock SPRS Series - Week 62 - TechniTrader® Stock Discussion for MetaStock Users - Anticipating Price Action - April 2, 2012
By: Martha Stokes C.M.T.


When a stock is running in a moderately trending mode, it is critically important to make sure your indicators are predominantly volume and quantity oriented rather than price oriented. Traders tend to use too many price and time indicators and not enough volume and time, or even better, volume, time, AND price indicators.

As an example: YUM.


Chart 1

Stochastic, the most popular of the PRICE and TIME oscillators, fails during a moderately trending pattern. Stochastic has trough failure patterns where the cyclical pattern fails to cycle down to the oversold line. This is due to the lack of sideways action in the moderately trending stock. With failure trough patterns, false exit signals are given which cause traders to exit prior to the runs upward on a moderately trending stock.

YUM has not gone speculative nor is the angle of ascent too steep to sustain for now. At some point, the angle of ascent will move too vertically for the stock to sustain and profit-taking will commence. For now, the intermittent profit-taking by HFTs, pro traders, and institutional traders has not impeded the run upward.

Quantity indicators provide far more valuable information than price and time indicators on a stock that is trending moderately.

Flow of funds shows a tapering off of money flowing into the stock. TTVA shows that the volume is becoming less consistent and more volatile as price continues upward, the earliest signal to watch for.


Chart 2

TTQA shows HFTs, Pros, and Institutional trading activity instead of quiet accumulation by the large institutional investors. These short term traders tend to move price rapidly, pushing price upward as smaller lots jump in excitedly. The volume indicator and TTQA expose the footprints of the short term pros of the market.


Chart 3

Already there is a divergence forming between candlestick prices and the quantity indicators which warns early that keeping tighter stops is wise.

Learning to use Leading Indicators and Hybrid Indicators instead of merely price and time indicators will improve your ability to detect subtle shifts of power and sentiment before price is impacted. The earlier you can see the shift, the more time you have to make decisions, and the more information you have for better decisions.

Your goal should be to always be able to anticipate price action well ahead of price. To do so, you must employ quantity indicators that lead price.

Why do quantity indicators lead price? Because the institutions dominate the trading activity on a short term and long term basis. They control over 80% of the trades these days. Price doesn’t necessarily move due to the institutional activity.

The only way to truly detect what they are doing is to use more quantity indicators.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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.