Technitrader Weekly Stock Analysis: “Are Efficient Markets Good or Bad for Retail Investors and Traders?”

MetaStock® SPRS Series - Week 150 –December 20, 2013 - MetaStock Spatial Pattern Recognition 

Skills Series written by Martha Stokes CMT

Over the past 20 years, the markets have become more and more “efficient.” What is meant by this term is that the spread between the bid and the ask across all trading venues has shrunk to mere pennies.

Technology has been given credit for the new efficiency, creating more opportunities for every market participant group, all 9 of them.   However, this efficiency has come with a higher cost than most market participants want to admit.

There is no doubt that the markets are highly efficient, but this creates new order execution challenges and consequences not foreseen by those promoting efficiency.

First, there was the increased competition among venues, from new exchanges such as BATS and ICE, to more ECNs, and more and more Dark Pool or off-exchange platforms for order processing which totally altered the trading strategies and techniques of all professionals.

It also wreaked havoc on the day and intraday retail trader, although few retail traders understood that their inability to gain profits day trading was not due to some “conspiracy to get the little guy” by market makers, or Wall Street, but was an internal massive disruptive technology that was reshaping the very core of the market structure: how orders are processed and pricing structures across all venues.

Next came the elimination of fractions replaced by decimals which further aggravated the disparity between the professional side and the retail side.  Retail traders began settling for smaller and smaller profits which then forced them to choose cheaper brokers, abandon trading tools, software, charting, and other necessary and vital tools and aspects of their trading process.

What has happened is many retail traders are feeling the pinch of lower profitability even more.  Here’s what to expect in 2014.

Efficiency has destroyed the once lucrative trading style called “daytrading,” a term that covers many various intraday strategies used by stock, e-mini, and options traders.

Instead of taking advantage of the new market structure, most retail traders are stuck in a mire of outdated strategies continually promoted by retail vendors and, in particular, retail brokers.

The latest retail broker promotions are all about mobile order processing and using your mobile device to choose a stock to trade. This is reminiscent of the final days of the Wade Cook disaster when he started using cell phones to notify his followers of his buy or sell orders.

This caused a massive loss to a huge number of options traders and ultimately led to his imprisonment for fraud.

Back once again also is a new version of the red light/green light entry exit signals.

The problem with both strategies and new broker promotions is that neither considers what retail traders actually need to be successful, both promotions only go after what they presume retail traders want, not what will make them successful.

Sadly, most retail broker firms, vendors, and software companies that cater to the retail 

trader do not have a staff of traders actually trading stocks, options, or e-minis.  If they did, their entire marketing campaigns would be utterly different.

Instead of chasing the get rich-quick-schemes, traders need to focus not on what they think they want, but what they NEED to be successful.

Buying stocks while you are driving your car or eating in a restaurant via a mobile device is not something any highly profitable professional would do. Impulse buying makes retail vendors wealthy, but impulse buying of stocks is the main reason why so many retail traders are still not breaking even. Retail traders NEED to trade like the professionals do; unfortunately, very few retail traders actually have access to professional traders.  They only have access to retail traders teaching retail traders.   This is a fact most retail traders do not know.

For more information on trading go to How NOT to lose money in the market.

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                                                                 

©2013 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.

Rob Hoffman - My Favorite Trading Set-ups That are Working Right Now

In this important session Rob shares his favorite trading set-ups that are working right now for Futures, Stocks, Options, and ETFs. Rob is an internationally recognized speaker known for his willingness to trade live with students and who has used his work to win numerous real money only trading competitions around the world against other top traders from other countries. This is a rare opportunity to learn from a top trading professional in the industry.

About the Presennter
Rob Hoffman is the first American to ever win the live trading, real money only, International Salon du Trading Competition in Paris, France against top international traders. In another extraordinary feat, Mr. Hoffman just won the competition in Paris, France for the second year in a row in a stunning victory. Mr. Hoffman educates thousands of institutional and retail traders from around the world on a daily basis. He has been an affiliate member of the Market Technicians Association since 1998. Mr. Hoffman offers his students a unique live trading experience where students are able to look over his shoulder and ask questions as he trades in real-time. With Mr. Hoffman traders watch a professional trader as he trades his live account right on the screen in front of them using the same techniques he uses during all of the domestic and international competitions that he has won around the world.

Divergence and the Parting of Ways

RSI and Stochastics are perhaps the two most popular indicators.  I think part of the appeal lies in the simplicity of their interpretation. Buy when they are oversold level and turnup and sell when they are overbought and turn down.  However the performance of these indicators can be improved by introducing divergence analysis into the mix.  

Simply put, divergence is a “parting of ways” between prices and indicators.  Bullish divergence occurs when prices move down as the indicator moves up (see the green trendlines below).  Bearish divergence is just the opposite; prices continue up as the indicator turns down (see the red trendlines).

In the chart above, the RSI crossed above 30 at point B1.  This represents a typical point where a buy trade based on a traditional oversold signal would occur.  The corresponding sell signal would have occurred at point S1 when prices crossed below 70.   However, by waiting for a divergence confirmation at points B2 and S2, both the entry and exit could have been improved.

So take a look at your trading systems that have overbought/oversold-based signals and consider parting with tradition by introducing a bit of divergence.    

Technitrader Weekly Stock Analysis: “The Most Important Stock Indicator”

MetaStock® SPRS Series - Week 149 –December 13, 2013 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Often traders will ask what indicator is the most important for stock trading. Regardless of whether you are an intraday trader, swing trader, position trader, intermediate term or long term investor the most important stock indicator is not MACD, it is not Stochastic, or any other price indicator.

The most important indicator is Volume.  Candlesticks are your most important price indicator, however candlesticks do not complete the chart analysis which is a crucial aspect of successful trading.

There are 3 data that come from the market:

Price

Time

Quantity

Price is represented on the chart by the candlesticks, time is represented by the chart timeframe, and quantity is represented first by volume bars.

Volume bars are often the least used and least understood of the 5 essential indicators for optimal consistent success trading stocks. Volume leads price in most instances in our modern markets, and that leading quality is what makes volume so important to all types of trading.

Quantity the data stream has 2 primary types.  The total number of shares traded at that time whether it is a millisecond or a year, the total number of shares is usually represented by volume bars. Quantity also refers to the number of shares per transaction. This becomes imperative when traders need to track the institutional activity.

Today the discussion is about volume bars.

Volume bars should be represented on your charting software with green bars for up days and red bars for down days.  If you use a solid color such as blue and do not differentiate up or down days, your analysis will be impaired and will take much longer.  Coloring the volume bars provides exceptional analysis easily and quickly.

Each volume bar on a daily chart represents the total number of shares that traded hands that day, therefore one side of the trade not both are represented in the volume bar. Also if you use daily charts and analyze end of day volume, then you are analyzing the CONSOLIDATED tape volume. This volume differs from intraday as it includes all volume from every trading platform and venue, not just the exchange volumes. ATS Dark Pools, ECNs, Regional exchanges all must report their data, and this is called the consolidated tape which includes the total volume from all sources.

Having the total consolidated volume is an important part of making sure your stock chart analysis for selecting stocks is correct. With the consolidated volume provided at the end of the day from your charting software, you can quickly go through stocks with the basic criteria of at least 100,000 shares traded per day average.

There are many stocks that are illiquid stocks. What this means is there are so few shares traded per day that buying the stock can be very risky.  Without sufficient volume, there is a lack of interest by the market participants and this can lead to weak picks, poor trading profits, or even losses.

Always make sure that you check the volume for any stock you trade. Be aware that the green and red bars represent the total number of shares traded that day, and all of the volume is applied either to the upside if the stock moved up from the prior day’s price level, or all of the volume is red and applied to the downside as price moved down that day.

WCPS is an example of an illiquid stock, see chart below.

There is insufficient volume for this stock to move up or down and provide good trading profits.  The illiquidity also skews any indicator you might apply to the stock, and the lack of volume makes the price action extremely volatile and unreliable. Avoid trading stocks that are illiquid. To determine if the stock has sufficient liquidity always study volume bars first before checking any other indicators.

Go to http://goo.gl/NbrM54 for more information on Stock Indicators.

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

©2013 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.

TechniTrader Weekly Stock Analysis: “The Best Stocks for Swing Trading”

MetaStock® SPRS Series - Week 148 –December 6, 2013 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

There are over 5800 listed stocks that investors and traders can choose to trade. Often retail traders use various stock recommendation services but that is the worst way to find stocks to trade.  The reason recommended stocks are not ideal for trading is that these stocks have already run up for many months before they are chosen for recommendation lists.

Choosing the correct price range for your swing trading requires some forethought about several areas of your trading including, risk tolerance, capital base, and experience.

As an example, AAPL is around $550.00 currently.  Because it is so high priced it can and does move 12-15 points in a day, but not every day.

For the average retail trader, buying even a small lot of 100 shares is a huge capital drain.  In addition big blue chip stocks are prone to smaller lot activity intraday and day to day, which makes them more volatile.  AAPL is also a higher risk trade given the price and the risk of sudden profit taking.  It also requires extensive experience to trade it successfully.

For swing trading, you want to avoid volatility and find stocks that will move with velocity.

On the other side of the price equation, many retail traders who have very small capital bases try to swing trade under $10.00 or even under $5.00 stocks.  These stocks however do not usually have strong swing trading style price action, and their patterns are frequently choppy rather than momentum action.

AA as an example below seldom moves even 1 point in a day. With such miniscule gains, the risk of swing trading rises inordinately in relation to the capital required to trade AA.  That means that the risk of a whipsaw on an attempted swing trade is very high, because price doesn’t move sufficiently to create enough profits to offset trading costs, fees, and your time. Remember that you must consider your time as a cost factor for trading.

Therefore AA is not a good candidate for swing trading either, because it doesn’t moves sufficient points in a single day or even during a run that would provide the necessary profit to cover all of your expenses. Remember, just because you make a tiny gain of a few pennies on a trade doesn’t mean the trade was profitable. You must consider all of the costs of trading.

For Swing Traders, the middle range priced stocks tend to be the best. These are not too expensive and they also run better with more points in a run.

When choosing stocks for swing trading selecting a good price range as one of your trading parameters, allows you to screen down the thousands of listed stocks to a much smaller group. This insures that you are then looking at stocks that have sufficient energy to move well, but also are not so pricey that you are putting too much capital at risk on any one trade.

Many traders are lured to the higher priced stocks, over $100.00 because these stocks move 10-30 points in a single day. The problem is that the same stock can quickly reverse and move down 10-30 points. This causes many retail traders substantial losses that did not need to happen.

When setting your swing trading rules and parameters, one of the first tasks is to select your price range that you will use to trade. This is a step that many novice and new swing traders do not realize they must do before they begin trading.

Your price range will define many aspects of your swing trading including personal criteria for scans and sorts. Establishing a price range also will help you find better picks faster.

For more information on Candlestick Patterns go to http://goo.gl/c2fQSI

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

©2013 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.

TechniTrader Weekly Discussion: “Market Voids - The Invisible Sink Holes for Retail Investors and Traders”

MetaStock® SPRS Series  Week 146 – November 22, 2013 - MetaStock Spatial Pattern Recognition Skills Series  written by Martha Stokes, CMT

Market voids were once rare events, now are occurring more often as the use of Dark Pool  ATS platforms increase.  Market voids are when the most important and influential long term market participants stop buying stocks and sit on the sidelines.

When this happens suddenly there is a massive void of buyers, who typically buy giant share lots of 100,000 – 500,000 at one time via Dark Pools.  The cessation of the giant and large funds buying is a buy side phenomenon that is not mirrored in bear markets.  It occurs in Bull Markets and is uniquely tied to speculative trading activity.

The problem for most retail investors and traders is that this void occurs without warning and creates whipsaw action, gap downs, and slip-slide price action. Often these sink holes appear just after retail investors or retail traders have rushed in to buy a stock due to news or other good information about a company.

Voids are a primary cause of losses for retail swing traders, day traders, and at times position traders.  Therefore understanding why they occur, how long the void can and will last, and how to recognize that a void is beginning, helps traders make better decisions to circumnavigate the sink hole before they are swept into it for a big loss trade.

Unfortunately all Market Indicators such as High/Lows, Market Breadth, and Advance/Decline do not reveal market voids in advance. Rather these indicators all lag due to the outdated formulas that were written prior to the Dark Pool ATS platforms.

The ideal way to discover potential market voids before they occur is to use a group of Scans to reveal the momentum bias and other factors.  Scans developed to expose market condition analysis is a leading indication of when a void is about to occur. This gives retail investors and traders a heads up that buying stocks will be a much higher risk during the void.

In early November a void pattern appeared on the TechniTrader Market Condition Analysis Scans.  A few days later the S&P500 had a sudden down day, please see the chart below.  

Nothing in the candlesticks specifically exposed that a big down day was coming.  Many retail traders were on a buying spree. Many retail investors were rushing to buy stocks as news spurred them back into the markets. The one down day caused many whipsaw trades.   The run down was not due to High Frequency Traders, market makers, or any of the commonly blamed factors it happened because those giant and large funds that are the largest buyers stopped buying for a few days.  

Many new retail investors and retail traders feel that a charting program is an expense they do not need. Instead they opt for free charting services and online broker charts, which were never designed to be used as trading charting programs.

By not having the proper tools, new retail investors and retail traders actually increase their risk of losing money. They pinch pennies and throw away dollars of profits, and have more losses because they are not using proper investing and trading tools.

Scans that expose when a void is about to occur help protect your capital and profits.  To build scans that can do this requires the proper charting software tools. Otherwise you will find yourself suddenly in a sink hole, losing money rapidly and wondering why that great buy signal didn’t work.

Find out what Students say about TechniTrader training at http://goo.gl/enPil1

Trade wisely,

Martha Stokes CMT

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

©2013 Decisions Unlimited, Inc. dba TechniTrader.  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