Market Dynamics 2013 - HFTs in Focus

MetaStock SPRS Series - Week 107 - TechniTrader® Stock Discussion for MetaStock Users - Market Dynamics 2013 - HFTs in Focus - February 25, 2013
By: Martha Stokes C.M.T.

The financial markets are undergoing dramatic changes right now that most retail traders are totally unaware of, and this can be hazardous to your profits.

The dominance of High Frequency Trader activity during the earnings season in January and February, continues to frustrate many retail traders who are unable to take advantage of these huge price gains.

Some retail traders used the older style earnings strategy which is to “exit before the news event,” and watched as their stock picks gapped and ran hugely while they were sidelined.

This is one area that most traders who use intraday, day, and swing trading styles need to really focus on understanding.

HFTs are algorithmic trading that are all computer generated orders with no human involved. The trigger occurs automatically and orders are routed on the millisecond scale. These high volume trades are often smaller lots than the Dark Pools use, and create a flurry of activity from smaller lot retail traders and smaller funds who chase the HFT action only to get whipsawed out of a trade or lose money.

The goal should always be to enter the stock prior to the HFT action. The question for most retail traders is how do you do that if you don’t know where the HFTs are going to trigger next?

Understanding HFT action starts by realizing you have all the tools you need right in your MetaStock Charting Software to track these super speed trades.

HFTs as a computer program are not going to behave like a human trader. The parameters are going to be narrow, and the trading patterns remarkably consistent from one stock to the next.

As an example, HFTs tend to create exhaustion volume patterns in one day. Their volumes are so huge that it creates extreme volume surges on the Volume Bars. Seldom do HFTs trade the same stock the next day. They are in and out within one day or less.

Also, nearly all HFT action is preceded by a compression pattern after the Dark Pools have bought all the stock they intend to buy. Track the Dark Pools and you will find HFTs following a few days later on. This allows you to plan your entry rather than chasing HFT action.

Many retail traders consider HFTs or Dark Pools to be their nemesis, but the opposite is true. Algorithmic trading creates consistent reliable patterns that occur over and over again. Whenever that happens, stock charts reveal these patterns. Using you MetaStock Charts to find HFT action before it occurs requires that you focus less on price and time indicators and more on volume indicators, volume oscillators, volume large lot 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
©2013 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.

What To Do When A Position Trade Moves With Velocity

MetaStock SPRS Series - Week 106 - TechniTrader® Stock Discussion for MetaStock Users - What To Do When A Position Trade Moves With Velocity - February 18, 2013
By: Martha Stokes C.M.T.

Many times position traders will suddenly find themselves in a stock that is moving with velocity, running strongly out of a platform while they are holding the stock as a position style trade.

This can be exhilarating and worrisome at the same time. You need to make a decision to protect these sudden profits as most of the time, these big runs will encounter profit taking by large lot traders that can cause big drops in price quickly.

The chart example below is a position style trade. It has been building very nice platforms as it moves up steadily, but during this rally it ran quickly out of the platform and is at risk of profit taking.


Chart 1

This chart example is a young company that started its public debut well with a minor correction after its IPO date and has steadily climbed afterwards, but the recent run is too fast and too steep to sustain. Some large lots are likely to take profits.


Chart 2
Percentage stop losses should never be used for a position style hold, because you are likely to get taken out of a trade prematurely.

The first thing to do is to check the position style Financials and Fundamentals to determine what is driving price so suddenly.

Two things are driving price:

1. The company announced it is buying back some of its outstanding shares. This is a positive announcement indicating strength in several areas of key importance to position trading.
2. It tendered an offer to buy for cash debt notes from a lender. This also is a strong statement by the company.

Now that we know what the move has been about, we can determine a plan of action to deal with the price movement caused by these positive announcements.

Position traders always have several choices:

1. You can sell and take profits.
2. You can hold with a trailing profit stop that is swing style support levels.
3. You can hold with relaxed position style profit stop.
4. You can hold with a tighter position style profit stop.

The most important thing you need to do in these instances where price suddenly moves with strong velocity is first:

1. Identify why the price has moved fundamentally as this will tell you whether to exit immediately or to continue to hold.
2. Consider all of your held strategies for dealing with the gains and choose the one that suits your particular risk tolerance, rules for trading, and goals for this stock.

If you plan and prepare, research, evaluated and THEN make a decision on your position trades you will be far happier with the results.

Never react with a knee-jerk action, always know the facts before making any decisions.

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
©2013 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.

Take Your Trading to New Heights with ACT for MetaStock - Michael Bur...

Upside and Downside Action

MetaStock SPRS Series - Week 105 - TechniTrader® Stock Discussion for MetaStock Users - Upside and Downside Action - February 11, 2013
By: Martha Stokes C.M.T.

Many retail traders make the mistake of trying to trade the sell side exactly the same way they trade the upside. This can cause chronic problems and disappointing results.

Uptrends and downtrends are NOT created equal. Price moves up in a certain way with specific patterns, and price moves down in a certain way unlike how it moves up. The upside and downside are NOT mirror images.

The first thing to learn is why price moves differently from the upside to the downside. This has to do with who buys and who sells, and why they buy or sell.

There are more people who buy stocks than traders who sell short. Even though the number of traders who sell short or “trade both sides of the market for short term profits” has been growing over the past few decades, there are still more buyers than sell shorters. This causes an imbalance in order flow right from the start, and imbalances always alter price action.

As an example the huge pension funds and mutual funds who control vast amounts of market money and stock holdings, generally do not sell short. They are buyers holding for the long term with charter requirements, in other words they MUST hold certain stocks by regulation. So even if they know the markets are due for a technical correction, they do not dump their big name stocks.

What they do instead is hedge either by buying puts, or by finding other offsetting derivatives trading instruments to buy or sell. In this way they can mitigate any short term losses for their funds without selling their stock or selling short.

High Frequency Trading firms on the other hand sell short all the time, intraday and whenever an opportunity presents. They are so sophisticated in their trading models that they can sell short an intraday retracement. Most retail traders can’t because HFT trades fire off in the millisecond and most retail traders trade at the minute level.

Below is a chart showing several of the key differences between upside price action and downside price action.


Chart 1

1. The first day down in a downtrend is usually an extraordinary long candle or a big gap down.
2. The first up day in an uptrend is a smaller candle. This is the opposite of the downside.
3. As price moves up the white candles get longer and longer during a momentum move.
4. As price moves down the first day is a big momentum day followed by smaller and smaller candles until the final day before a bounce.
5. To the upside, momentum patterns will form stair steps at the start and move to a velocity run.
6. To the downside, momentum patterns will form vertical drops with minor peaks and valleys more often.

These are just a few of the differences between upside and downside price action. Yes, there are exceptions but most of the time you will find upside momentum behaves quite differently than downside momentum.
When you can see these patterns more easily then you will be able to identify a topping pattern sooner, even before the top completes.

Practice studying the two different trends to learn to identify the differences.


Chart 2

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
©2013 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.

Mean Reversion Trading with the Adaptive Cycle Toolkit (ACT)

By: Michael Burgess, creator of ACT

In order to succeed at trading, use a simple approach with a statistical edge. It should be simple, or the trader becomes confused in the heat of trading. It should have a statistical edge, or the trader is simply gambling.

One powerful trading technique uses statistical principles of reversion to the mean. This is a sophisticated way of saying that a price that moves too far from its average tends to return to its average. Variations of this technique have been widely written about by such noted traders and authors as John Ehlers and Larry Connors (ACT is not associated with or endorsed by John Ehlers, Larry Connors, or any of their entities). This reversion to the mean is often the most powerful and probable in the direction of the dominant trend. Buy valleys in an uptrend, sell peaks in a downtrend.

Sounds simple, right? Ok, so how do you dynamically measure trends while avoiding market whipsaws, and how do you identify valleys and peaks quickly enough to capitalize on them?

The powerful methods included in ACT allow us to answer these questions. First, let’s explore how ACT can help, and then we will develop a specific mean reversion technique. The approach is simple, and consists of only three plots: a price chart, and two indicator plots.

ACT achieves these results because its methods are dynamic. As traders, we know that markets change -- they trend, cycle, and drift. ACT applies advanced signal processing concepts to rapidly identify this change, and allows a trader to adapt to the market. ACT is based on the research of renowned quantitative analyst, John Ehlers, as described in Rocket Science for Traders and Cybernetic Analysis for Stocks and Futures.

Applying methods available in ACT, a trader may:

• Identify trends quickly
• Know when the market is cycling
• Know when the market is noisy and perhaps stand aside
• Pinpoint extreme prices with the Fisher transform

A Simple, Adaptive Mean Reversion Approach

The approach consists of the following steps:

1. A plot of the security for the time interval to be traded (e.g. intraday, daily, etc).
2. An inner window with a plot of the ACT MAMA/FAMA nonlinear averages. MAMA is the faster average; FAMA is the slower. These averages rapidly adapt to abrupt moves, but often remain apart during market drift, thus reducing whipsaws.
   The custom algorithm for adaptively calculating these averages is based on mathematics described in the Cybernetics book. To our knowledge, this formulation of MAMA/FAMA is only found in ACT, and not in any other discussions on the web or in print. Earlier methods rely on less responsive techniques to recover cycle measurements. These averages are discussed in more detail in the ACT manuals available with the add-on.
3. A second inner window with special 3 bar statistically normalized Laguerre Stochastic. The Laguerre Stochastic applies an unusual mathematical approach to very short data lengths, and is discussed in the Cybernetics book and the ACT manuals. The result is a very smooth, responsive oscillator.
   Concepts related to the Fisher Transform are then applied to normalize the oscillator within +/-3 standard deviations. The Fisher Transform is discussed in the Cybernetics book and the ACT manuals.
4. The trading approach is simple. If MAMA is above FAMA, look for oscillator values below -2.5 standard deviations as potential entry points to “buy” If MAMA is below FAMA, look for oscillator values above +2.5 standard deviations as potential entry points to “sell short.”
5. Maintaining a trade size that keeps each trade’s exposure to about 1% or less of account size should the trade hit the trader’s “stop loss” point is often advisable.
6. That’s it. The images below show the plot of IBM from 2000 to 2007 with the indicator plots so you can visualize the process. The approach is intuitive, and should be almost immediately apparent.
7. MetaStock code for this approach using the ACT tools will be included with each ACT purchase.

Conclusion

Thank you for spending some time with us today.

ACT is based on the realities of market dynamics, and the mathematics behind it are solid. You can apply its features to measure trends, cycles, market noise, and adapt to market conditions. The features and practical applications are discussed in comprehensive, yet understandable manuals.

You can apply its features to create or support your own approach. If you want a quick start, take a look at the mean reversion approach described above. We think you will like it.

It is now available to our domestic and international MetaStock users in a convenient, downloadable format!


Chart 1 - IBM March 2002 - November 2003
Chart 2 - IBM August 2005 - March 2007

Hybrid Indicators

MetaStock SPRS Series - Week 104 - TechniTrader® Stock Discussion for MetaStock Users - Hybrid Indicators - February 4, 2013
By: Martha Stokes C.M.T.

I have been asked to give some instruction on how to interpret and use the TechniTrader® Indicators written specifically for MetaStock Software Users.

First let me explain our methodology for the use of stock indicators. We group indicators together based on obtaining a complete and thorough analysis of all the market data available. These are typically 5 hybrid indicators we have created. Each group is called a TechniCator™ and there are TechniCators™ for each trading style based on market conditions.

Most traders use price and time indicators such as MACD, Bollinger Bands® or Stochastic, and other price/time indicators.

This leaves a gigantic hole in their analysis because they are only analyzing half of the data necessary to be consistently successful. TechniTrader® education focuses on consistent success and you will hear that theme throughout our training. This is totally contrarian to most systems and strategies that preach you can be successful taking a zero sum game attitude. The fact is that a 50% success rate won’t give you consistent monthly income you can rely upon.

Therefore our indicators include all of the analysis needed to select only the optimal and most ideal picks for that MARKET CONDITION.

There are 6 Primary Market Conditions which tell you:

1. How price will behave
2. How fast price will move
3. What entry signals will work best
4. What exit signals to use
5. What indicators to use
6. What trading style will reap the highest profits

Market Condition Analysis comes from the TechniTrader® Scans. These are part of your TechniTrader® Tools for MetaStock.

In order to have a complete analysis of a stock for short term trading or even long term investing you must in addition to price, trend, and pattern analyze the following:

1. Volume Hybrid: in relation to recent volume activity comparing the upside volume and the downside volume. That is why we use color coded volume bars with a special moving average for the various market conditions, speed of price action and volume action.
2. TTQA Quiet Accumulation Hybrid: The secretive incremental buying patterns of Dark Pool institutional investors. Dark Pools have grown in popularity and this behind the scenes huge lot action affects price in ways not easily seen with mere price/time indicators.
3. TTFF Flow of Funds Hybrid: to tell you if money is flowing into or out of the stock. Mutual Funds buy and sell stocks based on charter requirements, but are also based upon new Mutual Fund investors buying into the fund OR as we saw in July and August, huge redemption demand by Mutual Fund investors which forces the Funds to sell stock.
4. TTVA Volume Accumulation Hybrid: again we are tracking the institutional activity: Dark Pool versus HTFs High Frequency Trading Firms as well as Professional Traders trading for the buy side market participant or the sell side market participant. This is an oscillator but it is unique as it is not based on price but on volume.
5. TT RSI/RSI Hybrid: Many of you use MACD or stochastic or Bollinger Bands and there is nothing wrong with these indicators UNLESS you use them in the wrong market conditions and then you will get false exits, false entry signals, and poor profit results. Our RSI/RSI is a hybrid indicator that can be used in more market conditions than the other indicators and exposes strength or weakness in price BEFORE a major gap, rundown or shift of trend.
6. PRC/ROC Hybrid is another indicator developed by TechniTrader® which is a hybrid indicator designed to be used in market conditions where MACD and stochastic tend to fail. It is easy to use and interpret, and many traders prefer it because of its flexibility with a variety of trading styles.

All of our indicators are available in the Tools for MetaStock.

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
©2013 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.