Trading Range Patterns

MetaStock SPRS Series - Week 70 - TechniTrader® Stock Discussion for MetaStock Users - Trading Range Patterns: PXD - May 28, 2012
By: Martha Stokes C.M.T.

Using TechniTrader® Volume Accumulation “TTVA” and TechniTrader® Flow of Funds “TTFF” to determine whether a stock has topped or is merely in a brief correction, can help traders earn higher profits.

PXD hit the whole number resistance of $120.00 which is a stronger whole number resistance than others. It stepped back and formed lower highs but not lower lows in March and April. Then at the end of April, it retested the highs of February, failed to overcome that resistance and proceeded to sell down beyond the previous lows support level.

Since this is a trading range pattern rather than a platform, highs and lows will tend to vary often by many points.


Chart 1

Since this stock has fallen rapidly into a support level, a bounce can be expected also. Notice that even though there are two black candles side by side, TTVA is angling upward, warning of a risk of a bounce up.


Chart 2

The question is whether this stock will continue to fall further, or if the support highs of July, November, and December along with the sideways consolidation of January, will be sufficient strength to hold the stock at that level.

This is the difference between planning for a sudden move upward with momentum, or continuing sell side strategies.

PXD has already moved easily through the first tier of support and is slightly above the next tier. Below this is a very strong support V bottom on the short term trend.


Chart 3

Although a bounce is expected, volume is heavier to the downside and TTQA has shifted to the sell side. You can see that even though it is not red on the weekly charts, it is red on the daily charts.

Is the downside over yet? Has the stock reached its lowest low prior to bottoming?

Probably not, since this stock is poised for a bounce up after the two black candles. But unless volume to the upside gains momentum, the stock is more likely to stall and test a lower low.

That being said, this stock has plenty of support levels it will catch on with bounces.

Since it has nearly 95% institutional ownership, this downside price action is mostly rotation by funds already holding.

The trading range formed because larger funds were using small funds buying patterns as their signal to sell to rotate out of the stock.

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.

Understanding TTQA shift of sentiment, HFT patterns, and small fund versus large fund action

MetaStock SPRS Series - Week 69 - TechniTrader® Stock Discussion for MetaStock Users - Understanding TTQA shift of sentiment, HFT patterns, and small fund versus large fund action - May 21, 2012
By: Martha Stokes C.M.T.

Hi Everyone,

I am going to be at the MetaStock® Users Conference in Las Vegas in October. I look forward to seeing many of you there. I will be doing another hands-on training session that will help you with short term trade analysis, speeding up your stock pick selection, and learning how to exit with higher profits.

Understanding TTQA shift of sentiment, HFT patterns, and Small Fund versus Large Fund action will be the topics of my discussion this week.

TTQA TechniTrader® Quiet Accumulation is the accumulation or distribution indicator for tracking the large lot activity, to determine which side of the trade the largest funds are on during a sideways pattern.

Sideways patterns are the most challenging of all for most traders. When a stock is trending, either up or down it is very easy to enter and ride the runs to profits. It’s the sideways patterns that catch most retail traders off guard, often surprising them as they enter just as a stock starts moving in a sideways pattern. Sideways action creates unreliable buy or sell signals, whipsaw trades, and lost profits if you are not expecting it to occur.

What TTQA does very well is to warn you early on that a sideways action has started. You can see that TTQA shifts from green to red to green to red on the chart below. Depending on the relation between volume, TTQA, price, and where we are in the trend you can discern who is trading on either the buy or sell side. Then you will be able to anticipate whether the sideways action will shift to the upside or shift to the downside.


Chart 1

In the chart above, we see that in November we had green TTQA followed by a period of small red TTQA. This was the area when some early distribution occurred as smaller funds bought and larger lots started rotating out of this stock.

Then in early January a pattern of green to red, green to red, green to red occurred exposing continued smaller fund buying with larger funds selling as the stock held in a sideways pattern that started to round.

So the big factor that tells us information about the TTQA pattern is the fact that this stock is at an all time high. Many stocks will step back as they enter a new all time high and this is the place where most rotation occurs for the largest institutions. As the stock runs up by smaller fund buying sprees, the large lots start selling to rotate out. The goal is not to disturb price as they rotate out but often a 100,000 share lot on a dark pool can cause the smaller funds 10,000-15,000 share lots to become overwhelmed creating downside pressure even before HFTs High Frequency Traders and Pros start selling short.

This is what happened to CFX in the chart above.

As the rotation increased and smaller fund buying decreased, the shift of power occurred and sell shorters stepped in to drive the price back down to moderate support levels.

When you can understand the internal dynamics of a sideways pattern you are better prepared for the breakout whether it is upward or downward.

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.

MetaSwing -- Presented by Kirk Northington

Around the Horn Pattern Scans - Presented by Dr. Adrian Manz

MetaStock Monitor MAY - JUNE 12: Main Article

Mysteries of Trader Tax Status
Contributed by Jim Crimmins

Just because you call yourself a securities trader doesn't make you one in the eyes of the Internal Revenue Service.

In fact, Uncle Sam is predisposed to consider you merely a hyperactive investor - and thus deny you more favorable tax status - unless you meet a number of criteria that are frustratingly open to interpretation.

You read that right: the tax code contains no actual definition of trader tax status.

Instead, the IRS has issued guidelines that the tax courts have expanded upon with case law, most of which denied tax appeals by traders.

What we're left with is a blurred image, like a photograph of a trader taken from a speeding car.

According to the IRS, to qualify as a trader:

• 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, and
• You must carry on the activity with continuity and regularity.

To help determine if you meet these three tests, the IRS considers these qualifiers:

• Typical holding periods for securities bought and sold;
• Frequency and dollar amount of trades during the year;
• Extent to which you pursue trading to produce income for a livelihood, and
• Amount of time you devote to the activity.

Swoosh, right? What is "substantial" activity? "Continuity and regularity?" And what's an acceptable holding period? Is a week too long? A month?

We know who investors are: They're our hardworking neighbors who buy securities and hold them for such long-term goals as a college fund or retirement.

Traders, on the other hand, buy and sell securities solely to take advantage of short-term market changes. Your profits come from price swings, not dividends and interests. Since your holding period is brief, often a day at most - hence the term "day trader" - there's no need to perform due diligence on the companies you trade.

Who cares how the IRS classifies you? You do!

Investors are subject to the 2% threshold for deductible investment expenses - and hence cannot write off most of their expenses - and are limited to a $3,000 capital loss deduction.

But as a trader, you write off 100% of your expenses, and if you elect the mark-to-market accounting option, you can offset all of your losses against your earned income.

Three Steps to Claim and Protect Your Trader Tax Status

Step 1: Prove beyond doubt that you are a bona fide trader - that is, you "seek to profit from daily market movements."

The best way to accomplish this is by showing a pattern of high trading volume and short holding periods. Keep your personal investments well separated from your trading business. The IRS is looking for "earnest intent;" that is, you work diligently to manage transactions, conduct strategy sessions and make frequent trades.

Step 2: Clear the "substantial activity" hurdle.

The hallmarks the feds are looking for here are "frequent, regular, and continuous" trading. That means volume. One court case ruled that 330 trades a year was sufficient to warrant trader status. The feds need to know that you approach this as a business, not a hobby. Fail to convince them of that and you're back in investor-land.

Step 3: Trade with "continuity and regularity."

If you want trader tax treatment, it only stands to reason that you must actually be in - and remain in - the business of trading.

Here's where the IRS is looking for a healthy flow of trades, significant dollar amounts, short holding periods - all the signs that you are at least attempting to make a living as a trader.

If you take the summer off or show other gaps in your trading, the IRS will be disinclined to grant you trader status. If you're a newbie and flame out after nine months, while it seems unfair, the IRS has made it clear: no trader status for you.

Once you obtain trader tax status, you're not entirely in the clear. Owing to the capricious nature of appellate rulings and the ever-evolving tax code, there are no guarantees that the trader status you enjoy today might not be gone tomorrow.

One good way to secure your trader status is to trade under the umbrella of a business. That's not only where the most lucrative tax advantages reside, but a legal entity such as a general partnership, Limited Liability Company or C corporation sends a strong message to the IRS that yours is an earnest and legitimate business enterprise worthy of trader tax status.

My recommendation is for you to maintain a day timer devoted completely to tracking the amount of time you spend each day on your trading activities. If you are audited by the IRS chances are it will be two or three years after you have filed your taxes. The day timer will service as proof of how many hours you spend each week on your trading activities.

About Jim Crimmins

Jim has become a nationally known speaker on tax strategies, entity structuring, and lifestyle change. He delivers over 30 talks a year throughout America as well as speaking in several chat rooms each month. You can learn more at TradersAccounting.com.

MetaStock Monitor MAY - JUNE 12: Support Tip

How do I scan Fundamentals and charts at the same time?
Contributed by MetaStock Support

Many traders use technical systems to help determine when to execute trades. You can ensure your technical indicators will give you the full picture with a little bit of fundamental analysis. For example, your trading indicators tell you a good trading opportunity is about to take place. Then when you place your trade, the market moves in the opposite direction because you traded right before a big news announcement. Your technical analysis will not tell you this information. By combining both of these types of analysis together, you can get a more complete picture of the market. Here's how to view both technical and fundamental information in MetaStock:
1) Start MetaStock.

2) Click "File", then "Open".


3)Select and open desired security. In this example, we'll use Thomson Reuters.


4) Once the chart is open, right click on the background of the chart. From the menu, select "Research". From the following menu, select "Financial Highlights".


5) After the page has opened from the MetaStock Window menu select "Column". Both the chart and financials should be displayed side by side.


6) Click the "Next Security" button and the chart will change to the next security in that solder, AND change the Financials page to match. You can also use other options on the Financials page to check other fundamental information, such as Snapshot. Continuing to use the Next Security function will rotate through all the securities in that specific folder.


You can also use the procedure above in conjunction with reviewing the results of an exploration:
1) Choose your exploration.


2) Select the securities for your exporation.


3) After you have run your exploration, select all the securities you wish to review from the results by highlighting them. Right click on the highlighted area. From the menu, choose "Copy Securities".


4) In the destination folder box enter the name of the folder you would like the securities copied to. (Name the folder with a reference to the exploration used and the date explored. For this example, we will use: MayJuneMonitor).


5) You may get a message saying "Folder does not exist! Create the folder?". Click "yes". This copies the data files for the selected securities to the new folder. Exit the Explorer.

6) Go to File, Open, and look in your MetaStock data folder. The newly created folder of securities should be there. The one we just created is highlighted in green.

7) Then repeat the steps in the scanning procedure listed to attach fundamental information, starting with number 3.

MetaStock Monitor MAY - JUNE 12: Power User Tip

Interpreting and Using the Performance Indicator
Contributed by Breakaway Training Solutions

In this short video, Kevin will show you how to interpret and use the Performance indicator. You’ll also learn how to quickly compare the performance of different securities against each other.

www.learnmetastock.com/FreeStuff/FreeVideos/PerfInd/PerformanceIndicator.html

For more MetaStock training, make sure to visit us at www.learnmetastock.com or email us at admin@learnmetastock.com.

About Kevin Nelson

Kevin Nelson is the founder of Breakaway Training Solutions, Inc. He has spent the last 17 years becoming an expert on MetaStock software and a serious student of technical analysis while working for MetaStock. Prior to joining MetaStock in 1993, Kevin was a stockbroker for a well-known NYSE firm. In his role as Sales Manager at MetaStock, Kevin interacted extensively with MetaStock customers via phone, webinars, and public appearances. His experiences while working at MetaStock have enabled him to gain a keen understanding of the needs of technical analysts worldwide. While with MetaStock, Mr. Nelson was a featured presenter for four years. During this time, he traveled the U.S. introducing the MetaStock program to thousands of people and teaching them how to use its many features. His easy-to-understand approach is considered by many to be the best in the industry.

©Breakaway Training Solutions, Inc. 2012

RMO ATM: The Power of Simplicity - Rahul Mohindar

Charting Types

MetaStock SPRS Series - Week 68 - TechniTrader® Stock Discussion for MetaStock Users - Charting Types - May 14, 2012
By: Martha Stokes C.M.T.

During my last webinar I talked briefly about the wide variety of chart types that are available to the MetaStock user.

Why are there so many different charting types available for trading?

Charting has evolved as the financial markets evolve. Some trading instruments require a different type of chart for more accurate analysis of the market data.

Some charts assist traders who have visual impairments or visual restrictions such as pattern identification challenges.

Some charts are pure price, some include price and time, and some include price, time, and volume combined in the price chart.

Each is useful for specific purposes.

Let’s examine these further so that you understand all of the types of charting available to you and how you decide which is right for you.

The most popular charting type at this time is Candlestick Charts. Candlestick Charts are easy for most people to read, give quick pattern identification and also give good support and resistance patterns.

Candlesticks also provide entry and exit signals when used properly. Although the Japanese used candlesticks mostly for reversal and continuation patterns, the candlestick patterns that form in the western automated marketplace also can be used for specific targeted entries and precise exits.

The ability to use price in the form of candles for entries and exits is a huge reason why Candlestick Charts are so popular and reliable for short term trading.


Chart 1

Equivolume is a chart type that depicts volume within the price over time. This chart type looks very similar to Candlestick Charts except that the up and down days are not white and black. There are also no wicks or tails, that are extensions beyond the body of the rectangle that define the highs and lows for the day, as there are in Candlestick Charts.

In Equivolume, only the open and close are identified. The size of the candle designates the volume for that day.


Chart 2

By showing the relationship between the length of price action and the dimensions of the rectangle for volume, a clarity is revealed with regards to the huge volume days. Whenever trading requires emphasis on volume for better analysis, Equivolume has advantages over simple Candlestick Charts.

The negatives for Equivolume are the lack of the high and low for each day, and the difficulty in using this chart type for price-based entries and exits.


Chart 3

The Candlevolume Chart combines Candlestick Charts in its pure form with the Equivolume. This chart type provides the distinction of white candles for up days and black candles for down days, where Equivolume does not, and it also has the wicks and tails of Candlestick Charts to show the entire scope of price action in each candle.

The problem with Candlevolume is that it distorts the candlesticks and, therefore, may make it more difficult for traders to interpret price action for candlestick entry and exit signals.

Adding Equivolume or Candlevolume charts shows you whether a down day or up day had high volume and provides a better significance to the price and volume relationship.

The combination of Candlestick Charts with Equivolume or Candlevolume can help traders who struggle to see volume in the bar or line form. It also helps traders see when volume is leading price and when price is leading volume.

As you develop your own unique trading platform using all of the wonderful tools available in MetaStock and take the time to experiment with the various charting types that MetaStock features.

MetaStock has more chart types than any other charting program.

To learn more about the various chart types, visit http://learncharts.com sponsored by TechniTrader.com.

All of the charts in learncharts.com are from MetaStock Charting Software.

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.

Leibovit Volume Reversal ToolKit - Mark Leibovit

Quantity Indicators and Your Technical Analysis

MetaStock SPRS Series - Week 67 - TechniTrader® Stock Discussion for MetaStock Users - Quantity Indicators and Your Technical Analysis - May 7, 2012
By: Martha Stokes C.M.T.

During my last MetaStock Webinar, we went over various indicators and how to set up your unique trading plan and process.

What I find most retail traders miss in their analysis is a complete set of data for analyzing their stock picks prior to trading.

Most retail traders have studied information from the internet, seminars, books and so on, that stress the importance of price. Price was the main analytical tool for both technical and fundamental analysis for nearly 100 years. Price was considered so important that the preponderance of indicators that were written for stock and option analysis are price and time indicators.

However, in the past few years, a major shift has occurred in the overall Market Structure for the stock market and other financial markets.

This shift has gone mostly unnoticed by retail traders and is the cause of most chronic losses retail traders continually endure.

What is lacking in most retail trading systems, strategies, and technical analysis is the reality that price is no longer the most important factor in technical analysis. For diehard price pattern analysts this can be a tough fact to accept. It can be even tougher to try and change from an all price and time indicator setup.

If you wish to compete and be successful in the new Market Structure, then you must employ quantity indicators in your analysis. If you want consistent success, the ability to enter before price moves, and the ability to exit prior to a retracement or correction, you must incorporate even more quantity indicators.

Below are two of the indicators that are essential for consistent success as a retail trader.

Volume bars colored to make it easier to read whether volume is rising to the upside or increasing to the downside.

TTQA exposes large lot dominance on the buy side or sell side for short term trade analysis.


Chart 1

Quantity indicators have several categories:

1. Quality which exposes whether there is sufficient volume and energy to sustain the move.
2. Flow of Funds which exposes whether the institutions are moving money into or out of a stock.
3. Hybrid Accumulation and Distribution Quantity based indicators which expose whether the institutions are quietly accumulating or quietly rotating out of a stock.
4. Volume Oscillators which expose the oscillation of volume patterns.

TTQA is designed to reveal the quiet accumulation or quiet distribution patterns on stocks. This is a unique indicator designed by TechniTrader for MetaStock exclusively. It is not a public domain indicator which protects it from HFT trading activity.

TTQA is an essential indicator because the giant funds who control the largest lots of stocks DO NOT move price. Rather, they buy in incrementally with a predetermined price range that keeps price tightly controlled. Since they use Dark Pools to buy or sell, their activity is not revealed as it once was, during intraday activity.

The only way to see where the big funds are buying BEFORE price moves, is in this type of indicator.

TTQA provides quick and reliable information to the short term trader than can make a huge difference in your profitability by exposing contrarian patterns before a sudden move up or down.

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.

The Illusion of Control: The First Step to Emotional Sobriety in Trading

The Illusion of Control: The First Step to Emotional Sobriety in Trading - May 4, 2012
By: J. Rande Howell

The Allure of Magical Thinking

It was the start of another trading day, and John was ready. “This day is going to be different. I am going to trade my plan – no matter what!” John said resolutely into his reflection in the mirror. He practiced visualizing and “feeling” the success that trading was going to bring him. He declared the affirmations that he learned from the success seminar he had just attended.

He felt the high-energy state that he now believed would create the "success mindset" he had been missing in his trading. And after all that modeling of a super trader, he knew he was attracting success. If he could walk on live coals, he had no doubt that he could conquer the fear that had been blocking him from success in trading. “I’m a million-dollar trader. I am going to conquer my fear. I am a confident and disciplined trader. I am going to win,” John confidently declared in his mind. And sure enough, self-doubt was nowhere to be seen.

All went well as he began his trading day. He felt great. His confidence was high as he watched a particular set-up heat up. This was the one he was looking for. It met his trading plan conditions for entry. With his new-found confidence as his guide, he pulled the trigger. Initially the trade trended as he had predicted. Then, WHAM, the trade went sideways on him and it stayed in flux for what seemed like an eternity. It nearly hit his stop a couple of times as it bounced around and it just would not refresh and trend as he had anticipated.

Suddenly, and without warning, he was not so sure. He was so sure just moments before. Now his confidence in the certainty of the trade evaporated like a mirage in a desert. Feeling knots in his stomach, all he could hear was the deafening roar of his thoughts, “You’re going to lose.” The self-doubt that moments before was "nowhere to be seen" was now front and center in his mind.

What seemed so certain just moments before was thrown into chaos. And out of that uncertainty came a fear of losing. He thought for certain that he could predict where the market was going. And with that certainty gone, fear of loss sprang from the uncertainty and he was no longer trading his plan. Instead he was trading from his fear of uncertainty. What happened that rearranged his thinking so quickly, so thoroughly?

The Trader’s Pursuit of the Myth of Certainty

The biggest problem I see that keeps traders stuck in mediocrity is their blindness to the need to change from a mindset rooted in predicting certainty of outcome to a probability mindset where the trader learns to live with uncertainty – literally becoming comfortable with not knowing with certainty what is going to happen. It takes internal courage to shift this fundamental biological and psychological bias in perception. Rarely is the mind that brings a person to trading going to be the mind that produces success in trading. The mindset that produces success in other domains of performance based on forcing a will upon the world or having a positive winning attitude does not translate well into trading success.

The evolutionary biological bias of your brain predisposes you to seek certainty and avoid uncertainty. (You can already see that this creates a problem in taking a brain designed for survival in an uncertain world and plopping it down into the world of trading without a significant reworking and override of primal directives of the survival brain.) This is your survival (emotional) brain at work. To your primitive brain, uncertainty, chaos, and the fear of death are linked (this is a serious glitch in the development of a trading mind). Add to this the fact that the untrained brain/mind cannot discern the difference between biological threat to the continuance of life and psychological discomfort. (This is a distinct problem in trading because there is always uncertainty and, therefore, psychological discomfort).

At its core the brain is a pattern-recognition machine that organizes the developing “you” into a set of beliefs that govern how you interpret and respond to a circumstance that is ambiguous in nature (like trading). Once your brain finds a random solution to a challenge you face, it habituates the solution into an automatic response that no longer requires additional thinking or problem solving. This produces hardwired neural pathways that automatically trigger when the organism (the trader) is exposed to ambiguity, uncertainty, or risk (threat). This mechanism is out of your working awareness and is reactive in nature. (For the trader, this creates a real barrier that compromises the capacity to work with the uncertainty found in trading.) The particular solution is not necessarily the best solution, but it is a successful short-time response to the environmental uncertainty your brain faced.

Then the brain takes another step – it generalizes the perception and response to a perceived threat (uncertainty) from one domain to similar ones. This is called response generalization. Suddenly the mind (and all its learned beliefs and behaviors) that the trader brought with him or her into trading becomes a liability to the development of a successful mind for trading. The mind that emerges from the biology of the brain does not separate uncertainty, ambiguity, confusion, and fear from one another. The emotional brain is biased to see the uncertainty found in trading as threatening. This brain and mind that you inherited was never built for the rigors of trading. It’s a liability that you, as a trader bring into trading as a biological bias – and you must retrain it to become a successful negotiator of uncertainty.

The brain, with its bias to create a sense of certainty (safe from threats to self), creates highly reactive patterns to keep the illusion of control of circumstance in place. There is even a name for this preponderance – cognitive dissonance. The brain you bring to trading will not accept facts or positions that do not support the current belief structure about its capacity to manage uncertainty (threat). The more facts to the contrary to which you expose the embedded belief, the more entrenched the belief becomes. This all exists so that the brain/mind can keep up its illusion of control.

It is this illusion of control that the trader brings to trading that must be altered for him or her to make the transition from certainty-thinking to probability-thinking.

Letting Go of the Illusion of Control

Trading effectively demands a probability mindset. There has to be a commitment to personal and professional development so that the trader can use the tools and skills of his trade, incorporating a set of beliefs that can manage probability and uncertainty. Otherwise, the trader stays stuck trying to produce certainty. This takes ontological change which most traders neglect, ignore, or avoid. (It represents change for which the outcome is uncertain.) Out of this resistance to challenge the myth of certainty, traders stay stuck in self-limiting beliefs that perpetuate the illusion of control. This is what has to change for a trader to make the jump from looking for certainty to managing uncertainty and risk.

The very first step towards reconstructing the beliefs about the management of certainty (trading not to lose) that the trader naturally brings to trading is to wake up to them. Most traders have been mindlessly attempting to force both trading and the markets into patterns that can be predicted with certainty – more commonly known as "trading not to lose". This is the bias that has been embedded into our perception for countless generations. Most traders talk the talk of working with probability, but when their trading account’s health is used as the basis of assessment, a different story emerges.

Fear of loss in the brain (and the confusion generated by uncertainty) is equated with the fear of death. This is what takes over the trading mind that is led by the prediction of certainty. When you look at serious hesitation problems in pulling the trigger or the hijacking of impartial thinking that happens while managing a trade after entry (like our friend in the vignette), this correlation becomes apparent.

Probability-thinking and perception does not come naturally. Traders generally go through a long learning curve to move from the mind that they brought to trading (rooted in certainty-thinking) to the mind that trades successfully. The first step is to wake up from the blindness that keeps the trader from seeing the self-limiting beliefs that hold him in a pattern-recognition bias that force the mind to seek certainty rather than the management of uncertainty.

It is this AHA! moment that opens the door to the possibility of change. What most traders discover is that the certainty bias is deeply entrenched and takes real work to change. They recognize that the comfort zone of the way they have been stands in the way of the mindset that is needed for success in trading. This is the first step in the new journey into the re-invention of the self. Only from there can the self be re-constructed from the inside out. In the opening vignette, this is the problem that the trader was experiencing. He was trying to change the self externally. By not grasping the power of biological pattern rooted in the need for certainty, he was never able to develop the skills and tools necessary to change the pattern-making machinery of his brain/mind. The pattern of belief was far more primitive and powerful than the puny tricks he used to try to change that pattern.

In truth, he resisted changing into the person he needed to become. Instead, he confused short-term “feel good” states with the mechanics of change. He remained "blind to what he was blind to". He missed the first step – recognizing the bias toward certainty. It "had" him and it was so familiar that he could not “see” it.

How Do I Use This Knowledge?

I make the following assumptions when I evaluate whether a trader is ready for true psychological change. First, that he has been trading long enough to know HOW to technically trade. Second, that he can trade successfully in simulation where the risk of capital does not trigger the fear of uncertainty.

So, look at your trading account. It will reflect the beliefs and biases that you bring to trading. If your trading account remains marginal or continues to need injections of capital, then you need to be asking yourself: What I am blind to that keeps me from achieving my potential in trading? Stay in that question. Then listen. What do you observe? Notice your resistance. Notice what happens to your comfort zone. Notice the tendency to pull back into your familiar pattern despite its lack of achieving success for you. What do you notice about your need to maintain a sense of certainty in the face of uncertainty? What beliefs (about the management of uncertainty or certainty) is this rooted in?

About J. Rande Howell
www.tradersstateofmind.com

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.

Trading the RMO - Jeffrey Gibby

The Sell in May and Go Away Myth

Tech Talk Discussion for MetaStock Users - The Sell in May and Go Away Myth - May 2, 2012
By: Don Vialoux

The investment community once again is talking about “Sell in May and go away”. The expression assumes that North American equity markets frequently move lower from May to September. However, the expression is a myth. Frequency of gains for North American equity markets from the beginning of May to the end September is random to slightly positive. During the past 20 periods, the S&P 500 Index has gained in 12 periods and declined in eight periods. The TSX Composite has gained in 13 periods and declined in seven periods. The main reason for random performance is a lack of annual recurring events that influence equity markets during this period.

The “Sell in May and go away” myth has escalated in recent years because the largest losses in the year frequently occur during the May to September period. Notable was a loss during the 2008 period of 16.0 per cent by the S&P 500 Index and 15.3 per cent by the TSX Composite Index.

Frequency of stock market gains is higher during the October to April period. The S&P 500 Index has appreciated in 16 of the past 20 periods and the TSX Composite Index has gained in 15 of the past 20 periods. Frequency of gains is one measure of stock market performance. Net accumulation of gains is another measure.

History also shows that more than all of the accumulated gains by North American equity markets have occurred during the October to April period. Thackray’s 2012 Investor’s Guide noted that a $10,000 investment in the S&P 500 Index from October 28th to May 5th since 1950 increased in value to $1,067,851. In contrast, a $10,000 investment from May 6th to October 27th since 1950 declined in value to $6,862. A $10,000 investment in the TSX Composite Index from October 28th to May 5th since 1977 increased in value to $200,778. In contrast, a $10,000 investment in the TSX Composite Index from May 6th to October 27th since 1977 declined in value to $6,674. The expression, that explains the best period for accumulated gains in North American equity markets, is “Buy when it snows (near the end of October for most of North America) and sell when it goes (after the winter snow storms finally have passed)”.

Higher frequency of gains and better accumulated gains from October to April can be attributed to a series of positive annual recurring events. Many of these events are tax related including year-end transaction, contributions to tax sheltered accounts, etc. Important events impacting equity markets at this time of year include release of annual reports and the holding of annual meeting that frequently occur with the release of first quarter results. Chief executive officers often use this series of events to announce dividend increases, share buy backs and stock splits.

An exception exists during the April to September period. One important recurring event influences equity markets every four years, the U.S. Presidential election. During that year, North American equity markets have a history of moving lower after the end of April, building a base in June and July and moving higher into early September. By early September, equity markets usually are slightly higher than the end of April. In April, traders respond to a ramp up of political rhetoric between the two presidential candidates that raises questions about future economic policy. When equity markets are ready to predict the Presidential winner in July regardless of the candidate, equity markets recover, move higher into early September and record additional gains after the next President is elected. This year, political rhetoric between Obama and Romney already has started to ramp up. A word of caution! A tight race between now and September could preclude the traditional recovery in equity markets after the end of July.

North American equity markets entered into a corrective phase earlier than usual this Presidential election year. U.S. equity indices peaked on April 2nd and have trended lower since then. Moreover, U.S. data released last week suggests that a recent growth spurt in the U.S. economy has stalled. In addition, investors frequently are responding to first quarter reports released by selling on news. Downside risk between now and July is significant.

Preferred strategy is to protect the value of your portfolio between now and July either by taking profits, by selling call options against existing positions with an expiry in July or by purchasing non-leveraged inverse equity index ETFs covering part of the value of your portfolio. Top inverse ETF choices for investors with U.S. equity investments are Short S&P 500 ProShares (SH US$36.40), Short Dow 30 ProShares (DOG US$35.91). Top choices for equity investments in Canadian Dollars are BetaPro, S&P/TSX 60 Inverse ETF (HIX $11.04) and BetaPro S&P 500 Inverse ETF (HIU $ 6.98).

Ironically, the Greater Toronto Area experienced its first major snow storm of the winter season on Monday. The snow will not last long. Remember: “Buy when it snows, sell when it goes”!


Chart 1

Happy Trading,

Don Vialoux

About the Author:
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.