TechniTrader Weekly Stock Discussion: “Candlestick Charts”

MetaStock® SPRS Series - Week 160 – February 28, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Candlestick Charts continue to rise in popularity however most traders and investors are unaware of the fact that many of the Japanese candlestick patterns, taught in books and generally around the internet in articles no longer form or are as reliable as they were 20 years ago.

What has happened in the past 5-6 years is a dramatic shift in the overall Market Structure on the professional side. While retail traders and investors have not seen much change to their trading platforms, online broker accounts, or charting software, the professional side has had a major overhaul of every facet and aspect of their trading platforms.  This includes broker/dealer professional orders available to them, analytical tools, and especially their trading and investment strategies, algorithms, and automated trading systems. The changes are massive on the professional side but few retail traders know about them.

Where these huge changes are having the most impact for retail is in how price patterns form on the charts, what candlestick patterns are forming, and how indicators behave.  These are critical areas for all retail traders to keep up with and to recognize, if they are not to be left behind as the evolution of the stock market internal structure continues in the next few years. The changes are only beginning and most institutions are still adapting and modifying just about everything they do in entering orders, processing orders, and share lot quantities in different trading venues.

Candlestick Charts are the first area of the stock chart that have shown major changes in patterns in the past few years. Some patterns rarely form, while others have become less reliable and inconsistent. New entry and exit signals have emerged that are not mentioned in the traditional Japanese candlestick books because they never formed until a few years ago.  As more and more institutions use different buy and sell orders developed exclusively for the professional side, and retail traders should be learning what this means for candlestick patterns.

One of the most common mistakes retail traders make is not identifying the very common Platform pattern that forms often in the automated marketplace.  Platforms develop when giant lot orders are placed off of the exchanges in ATS aka Dark Pools or Twilight Pools.  The specialized orders that the ATS have developed for these giant lot investors, controls price and candlestick patterns in a way that is unique.

Unfortunately many swing, momentum, and day traders do not recognize this pattern and try to swing or day trade the Platform sideways action.  This is one candlestick sideways pattern that causes many whipsaw trades and often chronic losses, especially for retail traders who are relying upon red light green light or other retail side trigger orders. These retail side automatic signals to buy or sell are not sophisticated enough to recognize the Platform pattern, and cause many traders to lose money trading short term.  Below is a chart example of a Platform pattern.

The Platform is just one of many new Candlestick Patterns the retail side of the market needs to learn.  .  Most of the time price bolts out of the platform running with strong momentum energy for excellent swing and momentum profits. However it is important to not only be able to quickly identify when a Platform has started, but also to recognize when it is completing.

For more information on Candlestick Patterns go to: http://goo.gl/iLs9WG

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

©2014 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.

Employee Spotlight: Heidi B - Support Representative

Name: Heidi B

Time with Company: Feb 2007 - Present

Area of company works in: Support

Do you trade in your spare time: No

Favorite part of your job: Getting to help customers fix things

Favorite Quote: Live like today is your last day, Love like you have never been hurt, Dance like no one is watching.

Favorite Color(s): Pink & Yellow.

If you weren't working with MetaStock what would you want to be doing?:

Working with abused children.

TechniTrader Weekly Stock Discussion for MetaStock: “7 Tips for Choosing the Best Indicators”

MetaStock® SPRS Series - Week 158 – February 14, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Stock Indicators are one of the most useful tools for chartists and technical traders.  However choosing the right indicators for your trading style and strategies can be a daunting task because there are over 250 indicators available for stock, index, market, and options analysis. Most novices simply use what they hear about in a weekend seminar, or read about on the internet.  Unfortunately, just because an indicator is popular does not mean it is the best indicator for your trading style.

More often than not when a trader uses an indicator that is widely promoted, they are unknowingly setting themselves up for whipsaw trades and chronic mediocre trading profits.

Here are 7 tips for selecting the best Indicators for trading the automated marketplace:

1. What is the Market Condition?  This is not the uptrend or downtrend, but the overall condition of the market which is derived from the Market Participant Cycle. There are 9 distinct Market Participant Groups.  Where, when, and how they buy or sell dictates which of the 6 Market Conditions is present at any given time. Usually a Market Condition will dominate for several weeks to several months or longer.  The Market Condition above all else dictates what indicators will work ideally at that time.
2. What was the indicator writer’s intent?  This is critical to know because each indicator writer developed their indicator based on a specific Market Condition that was present at that time.  They saw price and volume behaving a certain way, and wrote an indicator to expose that pattern and what it meant for trading or investing.
3. What are the limitations of the indicator? Every indicator has strengths and weaknesses. As an example, it has been proven empirically that MACD only works during a momentum uptrend.  It fails dismally for selling short trading, and creates whipsaw trades during trading range and platform market conditions. Knowing the limitations helps traders avoid using that indicator in the wrong Market Conditions.
4. What Market Data is present and used in the formula? Traders do not need to be mathematicians or learn how to write indicators, but they do need to know what data is included in the indicator. Price and Time indicators tend to lag as price must first move before the indicator can display the pattern in a line or histogram.  Volume and time indicators in our automated marketplace tend to lead to some extent due to how large lots buy and sell nowadays.  Volume, Price, and Time indicators which are the new Hybrid Indicators lead price as they incorporate all of the market data in their formulas.
5. How old is the indicator or when was it written?  Indicators written 50 years ago were written for an entirely different Market Structure.  On balance Volume and Stochastic were written during a time when there were no retail traders, online brokers, or internet. There were no pension funds allowed to invest in the stock market.  There were far fewer institutions, and the average person only invested for the long term. Therefore these older indicators are not designed for the automated marketplace, and are not appropriate for many modern trading styles and strategies.
6. Do High Frequency Traders use the indicator in their HFT algorithm strategies?  This is a huge factor many retail traders never consider. HFTs use the overly popular indicators such as MACD, stochastic, or moving averages in their algorithms to find cluster orders that they can exploit on the millisecond time scale. Since retail traders are not allowed by law to trade on the millisecond scale and since their trading platforms do not show the millisecond tick or price, using these indicators is significantly higher risk.  Cluster orders are anomalies that form when many retail traders are all using the same indicator, trading strategy, trading system or other popular entries.  Cluster orders are easily recognized by the HFT algorithm and used to trade against the mass of retail traders all trading the same way.
7. Does the indicator expose where the giant lot institutions are quietly accumulating?  With the largest institutions now using Dark Pool venues for their transactions, it is imperative that retail traders use indicators that reveal where the giant institutions are quietly moving in or out of a stock. Specific indicators written in the past few years can identify these important market participants.

The Chart example below shows the quiet accumulation of Facebook FB prior to its earnings release.

Summary

Choosing indicators should not be about using what is most popular, what your online broker recommends, or what your charting software promotes but what is best for your trading style and strategies.  If you use an overly exploited or very popular indicator, be aware that HFTs are now employing algorithms that quickly identify large groups of retail traders all trading with these indicators. Learning the new hybrid indicators written for the automated market and the new market structure will lower your risk and increase your potential profits.  

The Market Structure has changed more in the past decade than in the prior 100 years. Using outdated indicators leaves retail traders struggling with chronic whipsaws, weak stock picks, and disappointing results.  Improve your trading by taking some time to update your trading indicators to the modern indicators. If you spend time learning to use these new indicators, it will be worth it.

For more information on Stock Indicators go to http://goo.gl/NbrM54

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

©2014 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 Discussion for MetaStock: “Technical vs Fundamental Support Levels”

MetaStock® SPRS Series - Week 157 – February 7, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

One of the most wonderful aspects of studying charts and learning to read them properly is that the technical trader has the viewpoint of all the traders both professional and retail, who are employing technical patterns for their buying or selling decisions. In addition, anyone who is able to interpret and understand chart analysis also is able to see what the fundamentalists are doing.  Fundamentalists who do not use technical analysis have many blind spots in their analysis which can be problematic.

There is a distinct difference between how price reacts to fundamental support, and how price behaves at technical support levels.  By understanding whether fundamentalists created the support level or if technical traders created that support level, the chartist can easily and quickly know who controls price and how price is most likely to behave at those levels and in the near term.

This is a particularly important skill to develop for downtrending markets.  Identifying the difference between fundamental support levels and technical support levels will help a trader prepare for buy-to-cover price action, buy-on-the-dip price, bargain hunters moving in and disrupting sell short patterns, as well as the all important reversal patterns that are critical to recognize for both closing sell short positions and for entering stocks before they blast out of severely oversold conditions.

Many technical traders make the mistake of assuming that all support levels are driven by technical patterns and fail to consider the fundamentalist dominance in many price areas.  Simply applying Fibonacci, Gann, regression, speed or other lines or patterns to a chart will not provide the reliability when fundamental support dominates over technical support.

Some fundamental support levels are obvious and easy to identify, such as all time highs, 52 week highs etc.  Other fundamental support levels can only be identified by using indicators and price action analysis in a relational approach that reveals Dark Pool and other large lot activity. Contrary to popular myth among technical traders, support levels are not precisely distanced.  Support levels can and do occur at inconsistent percentages rather than precise percentage ranges.  

Often times technical traders will set up a series of levels for support, only to find these support levels do not hold up and that price often dips into these support levels during corrections or retracements. This can cause serious problems with stop losses, especially percentage style stop losses that are frequently hit due to fundamental buying or selling patterns not recognized by the technical trader.  An example of such price action dropping through technical support levels is shown on the chart below.  

It is very common for fundamental support to not hold at the highs of that support or precisely at the lows of that support, however technical support levels tend to be very precise.

When a technical trader recognizes the influence of fundamental buyers and sellers on price action and where these levels are developing, the trader is then able to adjust and modify their support analysis and place stop losses at appropriate levels that will not be at risk of whipsaw action which takes out many retail trader stop losses.

Learning to read charts properly involves far more than just reading a book on technical patterns or watching a webinar on various technical theories.  To be an expert trader you must understand the intrinsic dynamics of the fundamentalists and the technical traders, where and why they buy, what orders they use, their share lot sizes, and how this creates support levels.

For information on Technical Analysis go to: http://goo.gl/PkzfkF

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

©2014 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 Discussion for MetaStock: “Why Stock Market Corrections can be a Good Thing”

MetaStock® SPRS Series - Week 156 – January 31, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

After any big down day for the stock market, most of the retail investors and retail traders are very negative.  Most of the time any kind of down day, large or small is viewed as a “bad thing” something to be upset about and worried about.

However this viewpoint is not the perspective of the professional side in many instances.  To gain a proper objectivity on the polar opposite viewpoints of the retail side versus the institutional side, consider the way the retail news reported the Dow dropping versus the professional news. Retail news and retail comments were “Worst week since 2011,” “Meltdown,” and “Good riddance for that week!”

Professional comments were “The markets had been overbought and need to correct,” “Pricing had been speculative for some time,” and “A correction will provide better pricing.” Clearly the two sides of the market view corrections completely differently.  The professional side accepts that corrections are necessary and even good things when viewed in terms of the viability, sustainability, and duration of a Bull Market.

As you can see in the weekly view of the Dow 30 below, whenever the Angle of Ascent™ exceeds the long term sustainable angle of ascent, the market needs to correct in order for the long term trend to continue upward.  If the angle of ascent becomes too steep too quickly the correction will be deeper. If the angle remains stable without excessive price speculation, then corrections are shallower.  At the end of the year 2011, a deeper correction was necessary due to the shallower correction in 2010.  In 2012 plenty of speculative buying occurred that moved the market upward at an ever steepening angle of ascent, with more shallow corrections.  

The steeper the angle is, then the higher the risk of a deeper correction. When the angle becomes extremely steep as was the case for NASDAQ in 2000, than a massive bear market becomes inevitable.

What most technical traders forget is that the over 80% of the market participants who buy stocks are fundamentalists.  They control price most of the time. Their buying and selling dominates charts and sets many levels of support and resistance.  The Dark Pool giant lot investors are predominantly long term investors, and not day traders. That is something most retail traders often forget.  Their goal is to buy stocks that are undervalued based on fundamental research their firms do independently of anything the retail crowd has access to. By the time earnings season is underway, Dark Pools are usually sitting on the sidelines.  

Fundamentalists create their own resistance levels during speculative market action.   The Dark Pool giant lot investors are unwilling to pay more than what they perceive is fundamentally a correct price to pay for that stock.  That fundamental principle dictates for retail and professional chartists where they are most likely to see a cessation of giant and large lot buying.  It also defines how and where the speculative emotional buying of smaller lots instigates a correction or a topping formation.

By understanding the underlying dominant force of the fundamentalists, technical traders can more easily determine when a true correction will be the beginning of a bear market or when a correction is merely a short term event.  Certainly the retail news will always find some reason to explain the correction, however all corrections start first with the giant and large lot investors halting their buying for that stock, index, or market.  Without their buying activity, smaller lot buyers with their smaller capital bases will be unable to sustain the runs.

The advantage retail technical traders have is the ability to see the angle of ascent rising too steeply indicating speculative smaller lot buyers, instead of giant lot buyers who do not ever create speculative runs. Dark Pool giant lot investors are wise and do not buy into speculative runs, instead they start selling into speculative runs.

For more information on Technical Analysis go to: http://goo.gl/PkzfkF    

Trade wisely,

Martha Stokes CMT

“Angle of Ascent” is a proprietary trademark of Martha Stokes CMT and is available only at technitrader.com

http://technitrader.com

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

©2014 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.