HFT Price and Volume Patterns

MetaStock SPRS Series - Week 130 - TechniTrader® Stock Discussion for MetaStock Users - HFT Price and Volume Patterns - August 2, 2013
By: Martha Stokes C.M.T.
 

We have been studying the High Frequency Trading price and volume patterns in the last few discussions. High Frequency Trading orders are triggered primarily on news during earnings season. These low latency high speed trading platforms often cause big gaps that seem to have no predictability.

However when Relational Analysis™ is applied to the Price, Volume Bars, and TechniTrader Quiet Accumulation TTQA then patterns are revealed, that are difficult or impossible to detect with just price and price indicators alone.

If you were to just use price and price based indicators all you would see is a very choppy sideways pattern that whipsaws swing and momentum traders frequently causing losses on trades. MACD is a price momentum indicator that fails dismally when charts have this new type of sideways pattern called a "Platform." The platform is a very specific type of sideways pattern that first started forming in 2005 and has become increasingly more common as more and more giant and large funds use Dark Pool ATS.

To be able to anticipate what price is going to do and when it is most likely to trigger HFT orders that run and gap hugely, it is imperative that volume and quiet accumulation indicators be used.

What volume and TTQA show is that there was quiet accumulation going on in this stock that created the Platform sideways pattern. HFTs gapped the stock up as the Dark Pool quiet accumulation ceased and smaller funds chased the HFTs. During the next platform Dark Pools returned quietly adding to their holdings. Several attempts to sell the stock down created a flurry of smaller funds dumping this stock. Notice how TTQA diverges from volume and that most of the Volume is green during the red TTQA period. This exposes Dark Pools buying once again. Subsequently the sell down fails because the giant funds are buying, while smaller lots are trying to sell short against the huge lot buy orders. The compression pattern just prior to the gap up, along with the fading TTQA angling up, and lack of sell side volume all point to HFT trigger opportunity.

The stock gaps as HFTs automated orders react to the Dark Pool buying earlier.

Being on the right side of the trade requires that you not only use price indicators but that you also use volume indicators, that not only show volume action but also large lot versus small lot activity.

These indicators are more sophisticated as they are the new TechniTrader® Hybrid Indicators™ but learning to use them will dramatically improve your trading results.

Trade wisely,

Martha Stokes, C.M.T.

For more information email: info@technitrader.com
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.

The 7 Key Ingredients for Successfully Trading for a Living

MetaStock U - Week 2 - The Naked Traders - The 7 Key Ingredients for Successfully Trading for a Living - July 27, 2013
By: Chief Trader Bruce E. Dinger
 

Trading in the stock market can be challenging if you do not have a clear roadmap and recipe for success. The purpose of this article is to provide some key structure in selecting your investments or trades. Follow this process and your chances for finding high-probability successful trades are likely to increase.

1. Industry Group

The most common mistake that investors make is looking at an individual stock without reviewing the industry group’s performance. It is key that investors start their due diligence by examining the performance and trend of the overall industry group. Savvy investors understand the importance of a “top-down” analysis approach and know that old saying “a rising tide lifts all boats”. So if you truly want to increase your chances for success in the stock market, start with the attraction or trend of the industry group before identifying any individual stock.

Industry or sector analysis is very similar to a real estate investor purchasing a property. The real estate investor first focuses on the surrounding neighbor because they know the importance of associated properties and how they will have an impact on the valuation of their identified property. Trading and investing in the stock market is very similar. If you develop the habit of checking the surrounding “neighbor”, understand the attraction or valuation of those related properties; you will increase your chances for successful investment selection.

2. Fundamentals

The 2nd thing you need to do BEFORE you think about pulling the trigger and placing that trade is to check under the hood, what is better known as the “fundamentals”. Many investors think they need a degree in finance, but even a simple look at the company’s basic fundamentals will give you a sense for the strength and viability of their business.

Key Fundamentals

Here are some key trends to note and compare to the company’s closest competitors.

• Revenue
• Net Income
• Profit Margin
• Return on Equity

3. Trends of Interest

Critically important is to look for trends of interest. This means starting with the “footprints of the elephants” and noting if the big investors are putting their money on the line with your stock of choice. While the investment from a big money manager is no guarantee that your stock is going to do well, it does increase the probability. Another trend to watch for is “insider buying”. There are many reasons that executives of a company sell their shares, but there is usually one main reason that they buy shares of their company – they believe it is undervalued.

It is also important to note global trends for the company’s supply and demand of their products and services. Successful investors and traders understand the importance of noting trends and classifying them as “cold, warm, hot, and explosive”. Yes, analyzing global trends does take time and a commitment to serious due diligence, but the payoff can be HUGE.

Finally, under “trends of interest”, an investor should focus on the leadership of the selected company. Determine if the executive team are seen as visionaries, great business leaders, or under performers. If they have major followers, chances are great that the stock valuation has solid upside potential.

4. Analysts

Many investors dismiss analyst ratings but this is a mistake. After doing your above due diligence and your findings support a high-probability rocket ship stock, but then you notice that the consensus amongst the analysts is a “hold”…this could be the set-up for a future catalyst. How, you might ask? If everything else is equal and your findings support a good buy, and then later the analysts begin to revise their ratings from a “hold” to a “buy”, this typically serves as a catalyst to help catapult your stock’s valuation to new heights.

5. Earnings and Conference Calls

There is much that you can learn by listening to the company’s conference call. You will find out not only the company’s outlook and possible concerns, but you will also uncover what is important to the analysts. The questions being asked could signal a trend of what the analysts are seeking and provide insight to you as an investor of what is really important. Listen to how the executives handle the questions….are the questions handled with confidence? Are there other companies in that group that perhaps have a better foothold on the trend of interest to investors and analysts? Listening to the earnings call or reading the transcript is key in this process of becoming a successful investor or trader.

6. Technical Analysis

After all due diligence has been completed, one of the true barometers of the market’s interest in a stock is “Price Action”. The supply and demand of a company is ultimately reflected in the price. An investor or trader of the market must learn how to recognize KPPs (key pivot points) that reflect the emotional patterns of market participants. As you become more familiar with the price action, price patterns, support and resistance areas, and other technical aspects of chart reading, your ability to effectively manage your risk and identify low risk/high reward opportunities will increase.

Regardless of whether you are a short-term trader or long-term investor, to effectively recognize price patterns and distinguish between ‘major’ and ‘minor’ reflection points of supply and demand, it is important to use multiple time frame analysis. This means viewing a chart from not only a standard one-year time frame, but looking at all major time frames including a 20-year, 10-year, 5-year, and 3-months, and various intra-day charts.

Viewing a chart utilizing multiple time frames will ensure that you gain a better understanding of key pivot points and the major and minor waves of a chart. This helps you to make better decisions on both your entry and exits.

7. The Plan

One of your finals steps before placing the trade is to plan your entry, your exit, and the strategy you intend to utilize that will not only help increase your probability for success, but also eliminate as much of the risk as possible. Architecting a trade with the idea of reducing your exposure and providing the highest reward is the true sign of a Master Trader.

Follow the 7-steps outlined above and you should see a higher degree of success in the market and come closer to your pursuit of trading for a living.

About Bruce E. Dinger

Chief Trader Bruce E. Dinger, CEO and Chief Trader of TNT Trading the Stock Market, formed the The Naked Traders with the concept of teaching other independent traders how to "strip themselves of all emotion" when they trade or invest in the stock market.

Mr. Dinger has spoken on some of the largest stages around the globe, including CNBC, BusinessWeek, SuccessMagazine, The Women's Financial Conference, Rich Dad's, On-Line Trading Academy, Success Resources, and many others. He has one of the best reputations in the financial markets for helping students achieve their goal of becoming an independent trader or investor. Mr. Dinger can be reached at info@TheNakedTraders.com.

Volume Spikes Continued

MetaStock SPRS Series - Week 129 - TechniTrader® Stock Discussion for MetaStock Users - Volume Spikes Continued - July 26, 2013
By: Martha Stokes C.M.T.
 

High Frequency Traders create most of the "Volume Spikes" that form on your charts nowadays. This is due to their high speed, low latency trading platforms that execute as many as 3000 trades per second. This is way beyond the scope of retail trader's minute trading platforms.

HFTs can control price for one day, and sometimes for 2 days. Their volume patterns are easy to identify on the charts and can give you a leading indication of what to expect the next day.

If you are a swing trader, learning these patterns is crucial for your success. If you do not understand whether the HFT volume is a continuation or a reversal pattern, and why it is a continuation or reversal pattern then you are most likely to find yourself on the wrong side of the trade most of the time.

Studying the chart above with colored volume to indicate an upside price day versus a downside price day, it is easy to pick out the HFT volume days when the HFT trigger orders are moving price and volume.

Remember that not every HFT buy or sell is profitable for them. This is a computer generated high frequency order system. The computer is far from infallible.

The first HFT action is out of a bottom. Smaller funds and retail traders who use share lots above 5000-10,000 lot size are trying to sell down this stock. TechniTrader® Quiet Accumulation TTQA shows this smaller fund and large lot selling effort. However Dark Pools are moving in at this level so price holds steady. HFTS discover the Dark Pools and trigger a gap up day on higher volume. As the Dark Pools shift the sentiment to the upside, seen by the red to green TTQA in December, the HFTS once again trigger causing price to move up again.

When HFTS are tracking Dark Pools the trend continues.

As the Dark Pools activity evaporates smaller funds and HFTs are driving price. Dark Pools have stopped buying. When HFTs discover this they start selling short, triggering the smaller funds and retail side to chase on the sell side, either selling out of a losing trade or trying to sell short.

However, the Dark Pools are NOT selling, distributing, or rotating. They simply stopped buying because price moved out of their buy zone. So as the price enters their buy zone, the Dark Pool orders start firing off again and this forms the bottom.

HFTs once again discover this, driving price up again for one day end of April. Since Dark Pools are still in the buy mode price moves up slightly in May. HFTs try to drive price up further but fail at the end of May. So the HFTS switch tactics and try to sell short, unfortunately for the HFT computers which are not able to see what you can see in your charts, the Dark Pools are triggered just as the HFTs try selling short again based on their computer algorithms.

Smaller funds chase the HFTs and lose money, because Dark Pools are consistently buying incrementally which now drives price.

The final long volume and green TTQA is a result of HFTs triggering after the Dark Pools have completed their buying for the moment.

The dynamics between the two largest and most dominant market participants in the market is important. By understanding how they move in and out of a stock and what patterns they create on the charts, you can learn to enter before the huge HFTs moves and avoid being on the wrong side of the trade.

Trade wisely, 

Martha Stokes, C.M.T.

For more information email: info@technitrader.com
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.

The Most Reliable Technical Indicator I Have Ever Used

The Power of Covered Calls

MetaStock U - Week 1 - The The Naked Traders - The Power of Covered Calls - July 20, 2013
By: Chief Trader Bruce E. Dinger
 

Writing covered calls is a very powerful cash flow generating strategy for both individual investors and professionals. It is a straightforward strategy that allows you to collect a premium when you sell someone the right to purchase your stock. Typically, a covered call is executed with a one or two month timeframe, but this can vary depending upon the investor’s investment goal.

Covered Calls Defined:

• The ability to sell a call option on a security you own
• Give someone the right to buy your stock at an agreed price
• Typically done with a 1 - 3 month timeframe
• You may be obligated to sell your stock if certain price points are hit

Options Basics

There are two types of options; CALL and PUT. Covered calls involve the use of CALL options, but instead of buying calls, the focus will be on selling calls. When you sell a call option, someone has the right to buy your stock at a pre-determined price on or before a set date (expiration date).

When doing a covered call, we sell the right to another investor to buy the stock we own for a pre-determined price.

Covered Calls – A powerful cash flow strategy used to generate income on stocks we own. When entering a covered call, we are paid in advance by the markets. The other investor is someone we’ll never know or meet. It is like having someone write you a check for the opportunity to own your property.

Think of covered calls as a lease on a house. Suppose you find a house for sale for $300,000. You ask the owner if you can give him $10,000 right now for the right to buy his house sometime between now and the next six months. He agrees, and you give him a check for $10,000. In this example, the homeowner is like the “covered call writer”…he owns the house and is willing to sell his property for a fixed price ($300K) on or before an expiration date (6 months), and in exchange for giving the investor the right to buy his house sometime in the future at this fixed price, the investor pays him a premium ($10K). 

Let’s say the home goes up in value prior to the 6-month expiration date – and it increases in value to $350,000. The investor has the right now to buy the property for $300,000…why? Because he had paid a premium earlier that set the contract giving him the right to purchase the property for $300K. He just made $50K minus his initial investment of $10K. Not too bad.

The owner is OK with this deal too – because he originally wanted to sell it for $300K and he also took in an extra $10K for giving the investor the right to buy his property between the date of the contract and 6 months.

If the property value would have languished around $290K at expiration, chances are the investor would not have bought the property, but the homeowner would have still made $10K on the deal for just giving the investor the opportunity.

This is the basis of a covered call. Let’s bring it back to the stock market. Say you own a stock and are willing to sell it, but rather than sell it right away, you decide you want to generate some cash flow. You can sell a call option to an options market maker, which gives him the right to buy your stock in the future at a set price. In exchange for this contract, an options market maker will pay you a premium -- cash money.

If the stock goes up, the market maker will likely buy your stock at the set price (strike). If your stock stays flat or even pulls down a bit the market maker may not buy the stock and you would keep your stock AND the premium. Either way, you make a profit on the stock or on the option premium.

DETERMINE YOUR STRATEGY FOR WRITING COVERED CALLS

When selling a covered call, you can use it as a strategy to sell your stock or keep your stock and receive a monthly premium.

To help in timing the selling point of the call option, you will likely refer to technical analysis. These are covered in greater detail in the Mentorship Program or Advanced Technical Analysis.

If the goal is to keep your stock and generate cash flow each month, then the time to sell the call option is when the stock is just about to take a breath to the downside and drop in value.

Covered Calls in Action

As an example, let’s say you purchased 1,000 shares of stock ABC at $24.00 per share and now it is trading at $29.01. You see it made an attempt to rally to $30 but failed with the demonstrated exhaustive wick. You decide to write a covered call on the stock, allowing the market maker the right to purchase your stock at a higher price ($30) – as you choose the OCT 30 CALL. In our example, when you sell the OCT 30 CALL against your stock position, the market pays you $1.16 per share or $1.16 X 1000 for a total of $1,160.00 (minus commissions).

This money goes into your account immediately and can be taken out the next trading day to be used however you see fit. Keep in mind; the premium collected is yours to keep no matter what happens…this allows you to profit on the income from the CALL if the stock moves higher, sideways, or down*.

*In this example, if your stock trades below your chosen strike price of $30 on the OCT expiration date, chances are that you will keep your stock and have the ability to write another covered call for the next available month. Covered Calls are a true cash flow generator.

Simple 7 Step Process

Step 1: Identify Optionable Stocks in Your Portfolio

Step 2: Determine the Market Forecast

Step 3: Check the Options Chain

Step 4: Calculate the Numbers

Step 5: Sell the Call Options

Step 6: Monitor the Position

Step 7: Close Out the Trade if Necessary

Risks

• There is a chance of selling your stock – so be willing to sell it
• You give up the opportunity to profit if the stock rises above your chosen strike price (the price you agreed to sell it for)

Advantages

• Allows you to generate monthly cash flow from stocks you own
• Serves as downside protection in the event the stock drops in value
• It can be a growth or income strategy

About Bruce E. Dinger

Chief Trader Bruce E. Dinger, CEO and Chief Trader of TNT Trading the Stock Market, formed the The Naked Traders with the concept of teaching other independent traders how to "strip themselves of all emotion" when they trade or invest in the stock market.

Mr. Dinger has spoken on some of the largest stages around the globe, including CNBC, BusinessWeek, SuccessMagazine, The Women's Financial Conference, Rich Dad's, On-Line Trading Academy, Success Resources, and many others. He has one of the best reputations in the financial markets for helping students achieve their goal of becoming an independent trader or investor. Mr. Dinger can be reached at info@TheNakedTraders.com.

Volume Spikes

MetaStock SPRS Series - Week 128 - TechniTrader® Stock Discussion for MetaStock Users - Volume Spikes - July 19, 2013
By: Martha Stokes C.M.T.

"Volume Spikes" a few years ago often signaled the end of a run up, or the final exhaustion pattern for a fast moving Swing style trade stock. Volume Spikes didn’t occur every day and the price action after a Volume Spike was very predictable, and so trading in anticipation of how price would behave after that spike was easy.

Since the increasing presence of High Frequency Trading HFTs firms over the past few years, Volume Spikes have become commonplace and do not necessarily represent the end of a run or a reversal pattern after a Swing speculative run. In order to understand what a Volume Spike means nowadays with HFTs creating these volume surges frequently in the most popular stocks Retail Traders prefer to trade, you must use Relational Analysis™ and understand more about what is actually going on.

Let’s start by explaining what a Volume Spike is and how it looks on a stock chart.

By the way if you truncate your volume, you will not have an accurate view of Volume for our markets of today. So do not truncate your Volume Bars.

Volume Spikes are just what the name implies. This is not a technical pattern that you will find in the old, outdated Technical Analysis books because the Volume Spike is a newer pattern. It used to be that mostly Price was studied in Stock Chart Analysis, and in particular End of Day price and Volumes were mostly ignored.

Since the advent of Online Brokers and Retail Trading, Dark Pools and High Frequency Traders HFTs, Volume now is often more important than Price analysis in many instances.

Below is a Volume Spike on CSCO, as the chart example. Relational Analysis™ is to combine both Price and Volume. Price gapped on a Volume Spike which means HFTs triggered the gap pre-market with their orders, which can automate with fill queues before market open getting in ahead of the smaller lots. Remember queues fill by the three requirements of "Price" first, "Time" second, and "Quantity" third.

So let’s go over how that works so you can understand why the huge order flow of Volume from HFTs, caused CSCO to gap on that particular day.

"Price" is the first element of the queue so if a Retail side order is for 20.00 and an HFT comes in at 20.01 the HFT order is placed ahead of the Retail order. If three orders come in at the same time, one at 20.00 for 100 shares, one at 20.00 for 1000 shares, and one at 20.00 for 5000 shares the order with the largest shares gets filled first. This maintains an orderly market flow. So the pre-market queue fills the placement in the queue based on "Price," then "Time," and finally "Quantity." So your order can get shuffled back if a big Fund wants to buy pre-market with a Large Lot order.

Therefore on this particular day, pre-market open news caused HFT computers to trigger orders in such high numbers that the stock gapped at market open. This can cause a lot of problems for Retail Traders who may not want to buy CSCO at that price.

Also HFT Volume Spikes are not predictable in terms of what is going to happen after the spike. You need to understand the relationships between Price, Volume, and TechniTrader® Quiet Accumulation TTQA before the HFT Volume Spike, to be able to accurately determine what price will do after that Volume Spike.

Therefore any time you see a volume spike on a chart, you must pause and evaluate what that Volume Spike means for near term price action. In this instance it did not mean a reversal, due to the Volume, TTQA patterns, and Price patterns that preceded the HFT Volume Spike. This is because the TTQA and Price exposed Dark Pools quietly accumulating.

We will continue our discussion of Volume Spikes next week. Be sure and register for the July 24th MetaStock and TechniTrader® Partner Webinar, in which I will be giving much more training on Indicator Analysis.

Trade wisely, 

Martha Stokes, C.M.T.

For more information email: info@technitrader.com
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.

Main Article: MetaStock Monitor JULY - AUGUST 13

Main Article

Using the "Dr. Stoxx Trend Trading Toolkit" to Trade Mean Reversions

Contributed by Dr. Thomas K. Carr

The Mean Reversion setup has impeccable credentials. Versions of it are used by some of the best known and most successful technical traders and analysts. It has been tested and back tested every way imaginable, proving itself profitable in all market conditions on all security types and derivatives. When the Mean Reversion system is done properly, there is no more exciting, more profitable, and yet more (nearly) mechanical trading system out there.

The key thesis of the Mean Reversion system is stocks that trade a statistically significant distance in price away from their mean, measured in our case by a moving average, tend, once a point of equilibrium is reached, to revert to that mean in short order. What we are adding to this thesis is that when we limit stocks that have travelled far from their mean to only those showing strong growth potential (for longs) or the lack thereof (for shorts), we improve our odds significantly of a successful reversion. This reversion is what we trade.

INTRODUCING THE SYSTEM

The Mean Reversion concept came into its maturity with market technician and financial analyst, John Bollinger (b. 1950). Bollinger swapped out Keltner Channels' use of ATR (Average True Range) for standard deviation (2.0). With this revision, Bollinger created trading bands that both envelop most of the price action over time, but are also dynamic enough to show changes in both volatility and directionality.

The Mean Reversion system I teach uses Bollinger Bands as its primary technical tool. On the longs side of the system, we are looking for stocks that have traded outside of the lower Bollinger Band, and which are trading significantly under their "mean" (the 20sma). I also apply a fundamental filter which favors those stocks that show strong earnings growth, low debt to equity, and recent institutional and/or insider buying.

On the shorts side of the system, we are looking for stocks that have traded outside of the upper Bollinger Band, and which are trading significantly above their "mean". Our fundamental filter on this side of the system looks earnings deceleration, and institutional and/or insider selling.

The Mean Reversion system detailed below is one I recommend you always trade in market-neutral pairs. This means for every long position you take you will need to find a short to mate it with; and for every dollar you have in that long, you should put a dollar into the matching short. The long/short pairs are treated as a single position: they are entered at the same time and exited at the same time. When done well, this system can hand you double digit monthly returns, and triple digit annual returns, regularly and reliably. The spreadsheet shown below (Figure 1) is my trading log for an eight week test (2012) of the system using a real-money account of $10,000. The average gain per week, including the losing weeks, was +3.3%. This is about in line with subsequent tests of the system. The total ROI was over 28%, or roughly +170% annualized with the compounding of gains.

TRADING THE MEAN REVERSION SYSTEM

Before you begin trading the Mean Reversion (MR) system, please remember that no claim is being made that following the step by step procedure as stated below will lead to profitable trading. It has in my case, but it may not in yours; nor in mine going forward. With that disclaimer out of the way, let's get down to work. Here are the tools needed to trade this system:

• Use MetaStock's "Dr. Stoxx Trend Trading Toolkit" if you do not want to program in your own scan. You will find both the long and short version of this system preprogrammed into the "Long + Short Mean Reversion Scan" in the TTTK add-on. With a single click of the mouse, you can scan the markets in real time for current MR setups. 
• You will also need to bookmark the following website. We will be using this free service to perform a basic but very thorough fundamental analysis on whatever stocks pass our technical scan:
  • Navellier's "Portfolio Grader" (Google the name and you'll get the URL)

RUNNING THE LONGS VERSION

STEP 1: Open MetaStock and go to the Power Console. Click on the "Explorer". Select "STTK - Long + Short Mean Reversion Scan." From the "Select List(s) to Explore" table, highlight "U.S. Optionable Stocks" or any other list you wish to scan. Click "Next", then click "Start Exploration". Make a watch list of charts for all passing candidates.

You should get 6 to 10 passing candidates each day. Since this scan targets price extremes, you will normally have more long candidates than shorts in downtrending markets, more short candidates than longs in uptrending markets, and fewer candidates of both sorts in less volatile markets. When the general market is itself outside the upper or lower Bollinger Band, you may get dozens of passing candidates come through the scan. In this case, it is best to modify the moving average filter. When you open the "Edit" function for the "STTK - Long + Short Mean Reversion Scan", you will see the following code line:

• C< Mov(C,20,S) * 0.9

Simply change the "0.9" multiplier to 0.87 and run the scan again. Keep lowering the multiplier if needed until you attain a list of only 10 to 15 passing candidates.

STEP 2: Take your list of passing candidates and input them, one by one, into Navellier's "Portfolio Grader". When you do so, you will see 11 categories each with a grade ranging from "A" (best) to "F" (worst). There are three general categories: "Fundamental", "Quantitative" and "Total". We are only interested in the "Fundamental" grade.

Your best candidates for the long side of the MR system will show an "A" or "B" for its "Fundamental" grade. If you have a number of "A" and "B" candidates, give favor to those with the highest grades in the first four "growth" categories: "Sales Growth", "Operating Margin Growth", "Earnings Growth", and "Earnings Momentum". Two or more "A's" is a good indicator that we have a strong candidate for this system.

STEP 3: Do further discretionary analysis on any passing candidates from Steps 1 and 2. At the least, this should involve checking the headlines for any possible "deal breaker" story about each company. Stocks usually hit extreme prices for good reason, but these setbacks often provide trading opportunities as they bounce back to the mean. What we want to avoid in this important step is getting into any company that is experiencing systemic problems. These can include things like accounting scandals (remember WorldCom?), an unexpected FDA rejection, mines and wells that run dry, and so on. We want to avoid these things.

This system works best when traded in market-neutral fashion with long-short pairs. Thus once you have completed Step 3, you will want to run Steps 1, 2 and 3 for the shorts side of the system (simply reverse the "Portfolio Grader" requirement to favor stocks showing "D" or "F") and trade accordingly.

STEP 4 (position management): There are a number of ways to manage the paired positions in the MR system. The one that generates a higher win percentage is as follows:

• Exit any MR system long/short pair using a "Market on Close" order after 3 full trading days have passed since entry, if and only if either the long or the short position is trading at or beyond the 20sma (above the 20sma for the long, below for the short), or
• 10 trading days have passed since entry, whichever comes first

CHART EXAMPLES

Hawaiian Airlines, Inc., (HA) began as a regional airline back in 1929 with two small planes serving residents of the islands. Today it serves 8 million passengers a year who fly all over the Pacific Rim. Though hard hit in 2013, HA has been known as a strong growth stock with its acquisition of new planes, hubs, and destinations. It is also a prime study in Mean Reversion: it has signaled ten MR longs since January, 2009, eight of which were profitable. In the chart below (Figure 2), you will two of those signals straddling either side of a downtrend. Note that the MR system returned +20% going long over a period when the stock itself traded down:

Biolase, Inc., (BIOL) is a medical equipment maker that among other things makes dental lasers, pain treatment applications, and 3D imaging machines. The shares of the company, long the target of the momentum day trading crowd, have a way of getting ahead of themselves. Its chart looks like a silhouette of the Grand Tetons. Once these peaks reach equilibrium, where supply and demand match up evenly, it is time to put on the short position. The MR system is designed to catch these reversals of momentum. In the chart below (Figure 3), you will see three such shorting opportunities totaling over +38% ROI.

About the Author:

Aka "Dr. Stoxx", Dr. Thomas Carr is the founder and CEO of Befriend the Trend Trading, and author of two bestsellers: Trend Trading for a Living and Micro Trend Trading. He has been actively trading the markets since 1996 following several years of studying technical analysis. He is also the Founder and CEO of Kingdom Capital, LLC, and a General Partner of The 8:18 Fund, LP. He is the developer of the strategy used by the 8:18 Fund and is sole manager of the Fund's portfolios.

Dr. Carr earned Masters and Doctorate degrees in Philosophy from Oxford University (UK). He is a tenured Professor and has over 16 years of investment, trading and trader training experience. In 2002, he founded Befriend the Trend Trading, LLC, an investment advisory service offering three daily market letters and various trading seminars. He is also the author of two bestselling books, Trend Trading for a Living (McGraw-Hill, 2007) which has been translated into Korean and Chinese, and Micro-Trend Trading for Daily Income (McGraw-Hill, 2010). Dr. Carr has been interviewed by the Wall Street Journal and the US News and World Report for his expertise in market psychology. He also had a series of articles published in Stocks and Commodities Magazine.

Support Tip: MetaStock Monitor JULY - AUGUST 13

Support Tip

Where are the exploration options?

Contributed by MetaStock Support

In prior versions of MetaStock, the Explorer had two sets of options. One set was for all explorations and accessed from the Options button when viewing the list of available explorations. The other set was specific to each exploration and accessed from the Options button in the Exploration Editor. Both of these options screens have been combined in the current MetaStock. To access the Exploration Options:

1) Open the Power Console. (When you open MetaStock, the Power Console automatically opens for you.)

OR

2) Select the Explorer on the left side.

3) Select an exploration and click "next." For this example, we chose the "Equis - MSU-Rank" exploration.

4) Select any list(s) to explore and click "next."

5) You will now see the exploration options.

6) If you want to refine your exploration, do so here. Once you are satisfied with the set parameters, click "start exploration."

Slauson's Slant: MetaStock Monitor JULY - AUGUST 13

Slauson's Slant on Trading

Forecasting with Grandpa's Trick Knee

Contributed by John Slauson

Since the late 19th century, weather forecasters have measured barometric pressure to predict the weather. The earliest barometers were invented in the 17th century. They were made of a basin of water and a glass tube. As the atmospheric pressure changed, the level of water in the tube fluctuated up and down. Since then, more accurate methods of measuring barometric pressure have emerged. Even so, my grandpa swore that changes in the pain level of his trick knee were more accurate than any of the fancy instruments used by meteorologists.

As technology has advanced, so has the reliability of weather forecasts. Forecasters have developed a wide assortment of new tools. They feed data into complex computer models that provide increasingly accurate forecasts. The key to their accuracy is using a wide variety of tools to analyze the data such as barometers, radar, satellites, and weather balloons. If their computer models were limited to data from a single tool like a weather balloon, then almost certainly their forecasts would be pretty dismal.

Forecasting the weather and forecasting the markets have many similarities. I learned an important principle from John Bollinger many years ago that I later used in the ICE add-on for MetaStock. Mr. Bollinger emphasizes the importance of avoiding technical indicators that have collinear variables. What does this mean? Here's how he explains it: "A cardinal rule for the successful use of technical analysis requires avoiding multi-collinearity amid indicators. Multi-collinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example."

In practical terms for MetaStock users wanting to build reliable trading systems, it means they should use indicators that measure a variety of market behaviors rather than many that measure the same behavior. For example, the two most popular technical indicators are RSI and Stochastics. With only slight variations, these two indicators are almost identical. The chart below shows a 14-day Stochastic and a 14-day RSI along with the correlation of the two in the top inner window. Note: the correlation coefficient is extremely high, ranging between 0.80 and 0.90. They are almost perfectly correlated. Even without using correlation, it is visually obvious that the two rise and fall in unison.

While two indicators being highly correlated (like RSI and Stochastics) does not necessarily mean they cannot be a valuable part of a trading system, in this case with the mathematical formulation underlying each indicator being so similar, you can be sure that there is little to be gained using both in the same system. So just like weather reporters, you should use a variety of different tools, not variations of the same tool.

One of the reasons we get sucked in to using collinear indicators is they optimize very well. The optimized results of a set of collinear indicators almost always show better historical performance than does a set of non-collinear indicators. Why? Because it is much easier to "curve fit" a system comprised of three highly correlated momentum indicators than a system comprised of different categories of indicators. A system that is curve fit to the past will rarely perform well in the future. Unfortunately you can't make money trading the past.

A better approach is to combine indicators that measure different dynamics such as momentum, trend, volume, and volatility. When building a trading system consider using indicators from at least three of these four categories. The table below shows some of the MetaStock indicators categorized into these four categories:

For example, RSI, Chaikin Money Flow, and Bollinger Bands when carefully combined into a system will provide non-collinear input that will likely perform better in the future. RSI measures momentum, Chaikin Money Flow measures strength using volume, and Bollinger Bands measure volatility.

And if you can figure out a way to work grandpa's trick knee into your system, then perhaps you will have found the holy grail!

About John Slauson

John Slauson began his career with MetaStock in 1988. In 2000, he left and started Adaptick, a company that provided training and developed popular MetaStock add-ons ICE, FIRE and PowerStrike. Over the years, he's worked closely with industry experts like John Bollinger, Steve Nison, John Murphy, and Greg Morris. In 2008 he returned to MetaStock as a Product Manager.

Power User Tip: MetaStock Monitor JULY - AUGUST 13

MetaStock Power User Tip

Bollinger Bands - Part 3

Contributed by Breakaway Training Solutions

In this third and final video on using Bollinger Bands in MetaStock, Kevin Nelson will show you how to color-code your price bars when you get a Bollinger Band squeeze and how to get buy and sell signals when the prices break outside of the bands.

http://www.youtube.com/watch?v=eCYpebJ0LvY

For more MetaStock training, make sure to visit Breakaway Training Solutions at www.learnmetastock.com or email Breakaway Training Solutions at admin@breakawayts.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.

How to Trade High Momentum Breakouts in MetaStock

Spatial Pattern Recognition Skills and Technical Analysis for H&S Tops Part 2

MetaStock SPRS Series - Week 127 - TechniTrader® Stock Discussion for MetaStock Users - Spatial Pattern Recognition Skills and Technical Analysis for H&S Tops Part 2 - July 12, 2013
By: Martha Stokes C.M.T.
 

We are continuing our discussion of topping formations. Last week’s analysis was asking the question of whether the S&P 500 was a true Head and Shoulders Topping formation, or whether it was not an H&S Top and why.

A Head and Shoulders Topping Formation is a very old style of top which used to form frequently before the PC industry and computer technology revolutionized the financial services industry. It formed because the market had only 3-4 market participant groups and these groups were easily seen in the charts. H&S Tops were the culmination of the “smart money” as they were called decades ago, starting to rotate out prior to a major topping and subsequent bear or correction.

The criteria of the classic text book H&S Topping Formation was:

1. A Stock or an Index that had been trending upward, typically a long term trend as these were mostly considered longer term tops in a market where most investors were holding for many years.


2. The left shoulder formed on strong volume with some speculation in the price action, meaning volume began to not lead price.


3. The head was often 2-4 times the height of the left shoulder, and as price rose volume steadily declined. A key element was the height of the head Angle of Ascent, and the declining volume. The head for a text book perfect H&S formed on lower upside volume, lower than the volume present for the left shoulder.


4. The right shoulder was at about the same level or lower than the left shoulder. So the highest high of the right shoulder should be lower than the left for a text book perfect H&S pattern. The right shoulder formed on significantly lower volume than the head.


5. The neckline was determined to connect the trough from the left shoulder prior to the head formation and the head trough to the right shoulder. At times the neckline is horizontal and at times it is angled downward.


6. The high of the head down to the neckline center is the classic text book estimate of the correction for a H&S Top. This means that the pattern was supposed to represent how far the correction or bear market would go for the top.

Answers to last week's discussion:

The S&P 500 pattern is not a true Head and Shoulders Top. The left shoulder is barely identifiable as a shoulder. The “head” is very shallow, too shallow for a true text book pattern. The right “shoulder” is not a true shoulder as it has no true peak to price, and it forms too high on the head for a true H&S pattern. The index quickly recovers as it finds support at the prior lows of the sideways action that some may interpret as a left shoulder. It rebounds well to test what is now resistance from the prior step down pattern.

In addition, volume doesn’t decline for the head formation or the right shoulder and in fact, High Frequency Trader HFT volume patterns disrupt volume during the topping formation.

This is not a true Head and Shoulders Top. Why is this important to recognize? Because too often retail traders see a pattern like this and assume it is the older style Head and Shoulders pattern. They attempt to located a neckline and then calculate the downside only to sell short into a rebounding index pattern.

The reason the Head and Shoulders Tops are no longer common or reliable even when they do form, is the fact that there are now 9 Market Participant Groups active in the stock market. At the time the original Head and Shoulders Top was identified, documented, and then written about in numerous technical analysis books there were only 3 Market Participant Groups.

The addition to Dark Pools, High Frequency Traders, Professional Independent Traders, Retail Traders, and Small Funds create a much more dynamic and diverse marketplace. These new groups have altered traditional technical patterns and have created entirely new technical patterns not seen before.

Often times when a true Head and Shoulders pattern starts to form with a good solid left shoulder and a sizable Head formation, the right shoulder never forms but instead HFTs trigger and the stock or index plummets without ever forming the right shoulder.

The S&P500 weekly chart which is more often used by professionals for studying the development of potential Head and Shoulders patterns, shows clearly that this was not a short term H&S pattern.

Sometimes retail traders are so eager to try and find the older style technical patterns that they ignore the requirements for these technical patterns. It is important to not misinterpret a topping formation because it can lead to losses and riskier trades.

As a retail trader you must learn the new technical patterns that are created as 9 different Market Participant Groups trade at various times during an uptrend or downtrend.

There are many new patterns that are becoming increasingly common and are easy to identify once you learn what to watch for, as well as understanding the relationships between price, quantity, and time.

Trade wisely, 

Martha Stokes, C.M.T.

For more information email: info@technitrader.com
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.

Spatial Pattern Recognition Skills and Technical Analysis

MetaStock SPRS Series - Week 126 - TechniTrader® Stock Discussion for MetaStock Users - Spatial Pattern Recognition Skills and Technical Analysis - July 5, 2013
By: Martha Stokes C.M.T.
 

Today's discussion is a practice of pure price action only for technical Retail Traders, which is your trading group. Let’s see how you do.

If a group of professional technical analysts gather in a room together, they may agree on the broad view of an index, but the finer details seen bring out the individuality of the analyst. Each technical expert is going to view the chart somewhat differently establish different trends, support, and interpret the action that is yet to come with varying results.

This is due to the interpretation of what constitutes an established, popular chart pattern.

Take for example the S&P500 chart below. Clearly and all professional technical analysts would agree, this index is in a correction. The debate comes in whether this is a true Head and Shoulders Top or not, and if it is a H&S then how each analyst interprets critical aspects of this pattern to determine where the index would halt its downtrend and find support, is where the variations of interpretation would occur.

Above is a daily chart for the S&P 500 without any aids such as volume or other indicators. This chart is for practicing a pure price analysis for Retail Traders. Take a moment now before continuing this lesson to draw in your own lines for the top, determine what kind of top this is, and how far the index will drop before commencing a bottom.

Many technical analysts use a variety of assumptions for the interpretation of this topping formation. Some would immediately assume the Head and Shoulders Top. The neckline would create many disagreements and 3 different locations could be debated. This is the critical aspect of the H&S top, IF this is a true top. You must decide in this lesson if it is a true top or not. Next week I will give you the answer.

Based on the assumed neckline there are several dramatically different scenarios as to how far this correction could go, assuming the H&S top calculations. One analyst may choose to use the highest high, another could choose to use the closing price of the highest high price, still another might use the open and eliminate the inside day action. This alters the calculations for the depth of the correction.

Then the neckline which can be considered at 3 different levels, makes a huge difference in where the analyst would find the bottom of the correction. The amount of the correction is vastly different based upon where the technical calculations are for the top and the neckline. This is the traditional method of calculating how far the correction will be for this index.

Your task is to study the chart. Is this a true H&S or is something wrong with the pattern? Where is the traditional peak value for determining the first value of the correction? Where is the true neckline?

We will continue this training next week.

Many times if you do a lot of internet reading, you will find a wide discrepancy between what each professional analyst is saying for a correction, topping, or bottoming action. This is due to the nature of charts, price, value, and trend action.

Learning to read charts properly, and to correctly identify tops and bottoms is crucial to your success in trading. These patterns appear easy to interpret but they are not. There are rules involved and structures to study closely. Which price is the best to establish the peak high and the neckline?

Good luck, more next week.

Trade wisely,

Martha Stokes, C.M.T.

For more information email: info@technitrader.com
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.

Fibonacci Magic - Avramis Despotis