HIGH FIVE: USING INDICES AS INDICATORS - Mohan
I want to share with you a very unique approach to staying on the right side of the market when you are daytrading the SP500 futures. I call the approach the "High Five". It is a group of important indicators which when synthesized together, becomes vital to calling market direction. The best part is the method follows the KISS approach to the markets ... you know, "Keep It Simple Scalper", and is so effective that you can watch it work tomorrow along side of your current, primary trading tools.
In addition to the "High Five" indicators, I want to review the 10-Day "Pit Bull" moving average, named after Marty Schwartz and his unique way of calculating this important market directional reading tool. Marty Schwartz is the author of the book "Pit Bull" and swears by this moving average saying in his book that it is one of his favorite indicators. I have been using these indicators successfully for years and we follow them daily on our web site, dayTradersACTion.com
The "High Five" are the NASDAQ Composite Index, the $TRIN, the $VIX, the $TICK and MER (Merrill Lynch Stock). Together these five indicators can be used to paint a clearer picture of market direction for the day session. When they all point in the same direction, you will be ill advised to fade them and when they give a mixed picture you can often save time and money by staying flat. The best way to view them is in conjunction with a particular market action.
Let's use as an example a bullish opening after a previous, rather average, bullish day where the Dow closed up about 55 bucks, the NASDAQ composite index was up around +35 points and the SP500 futures were up 8 handles on the close from the previous session's closing price. On the next trading day you perhaps are feeling bearish overall but with a solid close the previous day and a higher open today, you are concerned about getting short too soon.
This is where the "High Five" come to the rescue. Remember this is an example only. It takes many trading days of watching these indicators in action and in relation to this example along with both similar and opposite setups. However, if you watch the "High Five" in tomorrow's session, you'll see quickly what I mean. So in our example, the market has now opened Gap Up 5 handles and is rallying with the Dow up another 40 bucks but the "High Five" signals caution! Here's how.
When you see the $TRIN above 1.10, the $VIX moving above +60, the $TICKS up+500 to +700 and MER is flat to lower, not only will it be very difficult for the market to rally much further, but the stakes are excellent that getting short under these conditions is where you want to be. Now keep in mind that this type of reading must be synthesized to paint an overall picture and will take some practice and keen attention to details of the movements of the DOW and S&P500 in relation to these indicators.
A Mega Bearish or what I call BEAR UGLY tape using the above indicators is as follows: The overall market is lower with a heavy feeling of downside pressure. You see the $TRIN 1.20 or higher, $VIX +1.00 or higher, $TICKS down -500 and stretching lower on each drop of the market, MER down -2.50 or lower, and the NASDAQ composite index down -50 or more, you can often just get short on any reflex rallies and hold short, because the S&P500 and the rest of the market are most likely going down.
On the bullish side with the market rallying or starting to rally when you see the NAZ composite index up +40 or more, $TRIN below70, $VIX-1.00 or lower, $TICKS up +200-500 (particularly after a previous down tick day) and MER doing very nice being up +2.00 to +4.00, then get long on any pullbacks because the market is most likely going higher. A quick note on MER (Merrill Lynch stock). This little indicator is pure magic. I learned it from a former floor trader who "moved upstairs" and he convinced me to check it out. I've used it for years and I never promised him I'd keep it secret, so no oaths violated here by telling you what I learned and have seen work in the markets.
Don't take MER lightly. If MER is down -3.00 or more, but not on any special news about the company, just day-to-day trading, the overall market is going to have a hard time rallying. Watch it for a week and see. Then email me to thank me for the tip. If the overall market is flat to down after a couple of hours into the session but MER is up 3 bucks, they are going to have a problem taking the market down significantly further and in fact we will probably get some kind of rally.
It is that powerful, but don't ask me why ... just watch it tomorrow and see for yourself. If the market is trying to rally but MER is flat to -1.00 lower, it's going to be choppy on the upside. Does it work every day? Of course not. Is it a very handy indicator in relation to the whole picture? You betcha! Often when I'm long or short the S&P500 and something doesn't feel right with my position, I go look at MER and often may flatten out a position on the basis of MER alone. If you take notes on the "High Five" indicators and keep them on your desk tomorrow, carefully watching the nuances I've described, I think you will be pleasantly intrigued to say the least.
Now on to another old reliable, the 10-day "Pit Bull" moving average. If you are an SP500 trader and haven't read "Pit Bull" by Marty Schwartz then log on to Bridge Traders bookstore at http://www.futuresource.com and order it now. Marty is the real thing when it comes to trading and being a former marine tells it like it is. My favorite part of the book (other than the 10 Day Moving average I'm about to describe) is when he advises traders who are stuck in a mental rut to get on the top of their desk, look up at the ceiling and start screaming like a lunatic. I wonder what the trader psychologists think of that method!
You want to listen to a guy that really trades the SP500, has made millions from it, and tells you one of his all time favorite indicators. This brings us to the next very relevant part of our discussion on staying on the right side of the markets when day trading. Mr. Schwartz calculates the 10-day moving average by hand every day (according to the book) by taking the last 10 days of the current SP500 future price and dividing by 10. You keep a running chart of it by taking the current 10 Day "Pit Bull" number that you calculated yesterday, multiplying it by 10, then adding today's closing SP500 futures price to that figure.
You then count back 10 days starting with yesterdays SP500 close and subtract that number from the total. You then divide that figure by 10 and round up or down to the nearest 10 Now you have the 10 Day "Pit Bull" moving average for today's trading action. It is not the same as the conventional 10 day moving average or exponential moving average that can be quickly tapped into a computer. This is not to say a computer can't calculate it but Marty does it by hand and recommends doing it by hand. That's good enough for me! The guy has made millions trading the SP500 and you may not want to fade that advice. Besides, it keeps you on your math toes.
To use this 10 Day MA, you want to view the market as Bearish below the number and bullish above. Again, Keep It Simple Scalper. I have used this MA number, calculated Marty's way, since reading his book years ago and it is astounding to say the least. I've added my own methodology of trading with it after observing this number for years, watching it like a hawk while in the market, and paying dearly for trying to fade it. Here's what I do now. You take the number and consider bullish above and bearish below as a general "read" on the markets.
When the SP-500 futures price gets close to it (within 15 handles) I note on my daily trading homework "Caution ... 10 Day Pit Bull MA ... CROSSOVER". That's the key word ... CROSSOVER. If the market has been bearish but has now rallied up to that number you are going to see some amazing things happen. If the overall market is in a bullish trend it's going to blow through that number to the upside and probably leave it behind in the dust.
You obviously want to be long at or even (ideally) before that number if you are convinced we are going higher and of course, if you have the guts. If the market is unsure or genuinely bearish, you are going to see the area around that number look like a thick wall of resistance to the upside. If you reverse the previously explained scenario then the number works the same way on the downside.
If we have been bullish but the market is faltering or showing some internal weakness and the SP500 futures drop down to the 10 Day "Pit Bull" moving average number, there will be some serious attention on that number by a lot of astute traders and your attention should be there too, especially if you are long. Just as in the upside resistance scenario, if the market is not genuinely bearish as it moves lower, it may hit the "pit bull" 10 day moving average, hover within 5 or 10 handles come back and cross over it again remaining bullish.
What I'm demonstrating here is that you can use this indicator tomorrow by calculating it tonight and get a good picture of which side of the market you want to be on. When you see it starting to "Crossover", take some extra time with your own personal trading homework to determine if we are going into a trend change and consider that you may want to hit that trend on or before the 10 Day "Pit Bull" moving average plows through that special number leaving traders on the wrong side of it in the dust.
I hope some or all of these ideas have been valuable for your trading introspection. Carefully watch them daily in different market scenarios and you may find that they will become an important part of your trading arsenal.
Mohan is an educator and daily commentator on the SP500 futures for Day Traders Action Inc. He can be reached via the web site http://www.DayTradersACTion.com
DO SEASONAL TRADES MAKE MONEY? 3rd in a series
Basically, I use 2 types of trading methods (a short-term breakout method and a long-term method). My long-?term method is based on seasonal trading patterns. In this article, I'd like to discuss the pros and cons of using seasonal trades.
First, please allow me to provide you with a definition of seasonal trades. Seasonal trades are repetitive price patterns that occur at approximately the same time each year.
Personally, I've been using seasonal trading patterns since 1992. Overall, my trading results have been quite positive. However, seasonal trades (like other trading methods) are not perfect. For example, some of my seasonal trades have a tendency to experience "contra-seasonal moves." In other words, they move in the opposite direction of their "normal" seasonal pattern. Obviously, these trades will lose money.
Why do "contra-seasonal moves" occur? They occur because "outside forces" cause these markets to "abandon" their normal seasonal patterns. Examples of "outside forces" are droughts, floods, early freezes, wars, and anything that disrupts the natural flow of the "commodity channel" from producer to consumer.
The good news is that contra-seasonal moves do not occur very often. The bad news is that we never know when an "outside force" will enter the market or how long it will last. However, sooner or later the markets will return to "normalcy" and the seasonal patterns will begin to work once again.
As most traders know, there are a large number of vendors who sell seasonal trades. Some are better than others. However, the major problem with most "seasonal vendors" is the fact that they offer an excessively large number of individual trades. It's not uncommon for a seasonal vendor to include 200 to 500 trades per year in his/her "seasonal package." A trader who purchases this information is overwhelmed by the number of trades. Obviously, it would be virtually impossible to take every trade (unless you had a extremely large trading account).
The trader who purchased the list of seasonal trades is now faced with a major dilemma. Which trades should be taken and which trades should be ignored? At this point, most traders simply pick one or two trades and hope for the best. As is usually the case, the trades that were picked end up losing money and the trader quits in disgust. Unfortunately, the trader is now convinced that seasonal commodities trades don't work.
In order to reduce my seasonal trading list, I adhere to a very strict rule which each trade must posses. Specifically, each of my seasonal trades must have an "accuracy rating" of at least 700 over the past 20-years. In other words, these trades have shown a profit at least 70% of the time over the past 20-years (or longer).
By using this "rule of thumb," I have managed to reduce my list of seasonal trades to 25 or 30 per year. Therefore, I generally establish about 2 or 3 new trading positions per month.
Based on my research and experience, I have found that seasonal trades will perform best during periods of moderate economic growth (2% to 3%) and moderate inflation (2% to 4%). It also helps to have a "calm and peaceful" trading environment (i.e. no wars, droughts, floods, or international crises).
I've also found that "industrial commodities" contain the most accurate seasonal price patterns. Examples of "industrial commodities" include: Copper, Cotton, Crude Oil, Lumber, and some other commodities.
In conclusion, seasonal trades are certainly worth looking into (based on my trading experience). However, seasonal trading methods do require a great deal of patience and commitment.
LOW RISK TRADING IS KEY - Rick J. Ratchford
There are plenty of methods available that a trader can use to enter trades. Some may be good, some bad. What is important when looking for a method of entry is whether the risk exposure is manageable for trader using it. Not every trader can or wishes to trade a method that exposes him to excessive risk. There are those with small accounts just trying to get an edge, and there are those whose psyche simply finds exposure to possible large losses unacceptable regardless of how deep their pockets happen to be.
Some approaches to trade entry, such as many trend following systems expose the trader to potential losses that are quite large on average. If you couple this with the low win-to-loss ratios of many of these systems, you could find yourself in some pretty big drawdowns that may be very discouraging. So it is important that the method one chooses to use for entering a trade exposes the trader to low acceptable losses if the trade does not turn out as expected or hoped.
Having a low risk entry method of course is not all that is important for trading success. For example, a method could basically suggest that your stop-loss be no more than x amount of dollars away from your entry to keep the initial entry risk low. But then if the method has a poor timing model for entry to begin with, you may find that your stop-loss orders get hit more often than not. Lots of low losses can add up to one big loss if the win/loss ratio of such a method is low.
It is common knowledge that the lowest risk entry location with the greatest potential for profits happens to be within points of a new major top or bottom. However, in an attempt to enter from a major top or bottom early enough requires many to guess. This type of approach is considered to be 'top or bottom picking' and very dangerous to do. This is because the market has yet to show that it intends to form a top or bottom at that time.
Now there exists methods to isolate the day or week that a daily or weekly top or bottom will likely occur. But note the word 'likely' used here. A high probability turn is just that, a high probability. No man knows with 800 certainty that it will indeed occur. The wise trader will recognize this with whatever method is used for anticipating these tops and bottoms and realize that steps should be taken to at least 'confirm' the expectation before entering the trade.
With my preferred method of anticipating market tops and bottoms, isolating these tops and bottoms are done on a regular basis. Because of the nature of market cycles, a future top or bottom can be isolated with a high degree of accuracy. Once a particular top or bottom is expected to form, the trader with insight will then look for some indication that the anticipated top or bottom is occurring as suspected. It would be at that time that the trader can plan his entry with the least amount of risk exposure.
The basis of my work is on market cycles. Not of the fixed duration variety you may see advertised by some big name cycle gurus. Individual time cycles may be of fixed intervals between tops and bottoms, but the market patterns we see on price charts are the 'composition' of several cycles. The resulting cycle pattern will not be fixed. To learn more about this phenomena, consider the works of J M Hurst. Electronic Engineers are well aware of the effects of combining two or more Sine waves (cycles) together. The result looks just like your price charts.
So with my particular method of isolating high probability future tops or bottoms, the next task is to keep the risk low when entering the trade in the event that the turn does not materialize. By studying thousands of charts over the last 13 years, I've noticed a very consistent pattern that helps in keeping the risk low upon entry. This pattern is based on the very fact that EVERY NEW TREND starts with first the extreme (i.e. top or bottom) and is soon followed by a correction of some kind. This correction can be simply a one-day affair or take several days to unfold. But regardless of the duration or magnitude, a correction WILL occur.
Noting this consistent pattern, it became obvious that if the method can isolate the high probable time period for a major top or bottom, confirming this as early as possible could be done by determining the next short-term correction using the same method of timing and allowing the market to fill you into the trade if indeed it occurs. If the anticipation is not correct or too early, the likelihood of having your order filled is extremely low. Additionally, upon having the order filled because the anticipated turn does indeed occur, the risk exposure would only be the difference between the fill and the extreme of that correction, normally only the range of one price bar.
Obviously, if it is a weekly bottom that is anticipated for a particular time period, the trader would look for a new weekly low to form within that expected time period. From there, the trader would note that price will start to move higher as that is the only way a weekly bottom or new bullish trend could possibly start. Viewing this from a daily price chart, at some point price will start to drop again (correct). If a new bull trend is to actually form, this correction should fall short of moving lower than the original weekly low that started this possible new bull trend. Where it stops correcting is the LOWEST risk entry location to go long if you are anticipating a weekly bottom is being formed and the trend is turning up.
Of course, during the correction phase following a new weekly low, for example, the trader would need to use his timing method to anticipate where this correction may likely end. He knows that it must end before moving lower than the current weekly low if his expectations are initially correct. This may be done by looking for corrections of 38%, 50%, or 62% of the initial move off the weekly low. Or as done with my cycle timing method, to simply look for the correcting bar to enter the daily cycle turn time frame before considering entering the trade.
Upon entering that daily time period, an entry order in the way of a BUY STOP above that price bar's high would fill me only if price starts higher the next day. To be filled this way allows the market to make that correction low price bar now a bottom itself, and most importantly, a bottom that is higher than the weekly bottom you anticipated early on to be the beginning of a new bullish trend. The range of that new correction bottom is your initial risk exposure, so you know in advance how much you need to risk for the trade. If acceptable, you'll know this up front.
In addition to waiting for the correcting price bar via the daily price chart to move into my cycle turn time period, following a new weekly bottom, I like to note if that particular price bar reaches some pre-calculated support value. For example, more often than not a correcting price bar that is destined to become a new daily bottom itself will usually occur not only within a certain time period as discovered via my cycle analysis, but will fall on support as well. Such support can be calculated using various methods available today, such as the Fibonacci ratios I provided in the previous paragraph, time and price squaring, Gann Angles, or simple trend lines for example.
To stay in this business of trading for the long-term requires that we keep our risk exposure low and plan to enter trades with the best potential for profit. I've provided the approach that I've found to be low-risk by letting the market prove our expectations as correct before our order is filled, and to allow us to know in advance what our initial risk exposure will be. Whatever timing model you choose to use, always keep in mind that that bull trends and bear trends have certain patterns that persist over time. New bulls will form higher correcting bottoms and new bears will form lower correcting tops. Know this and trade well. Cheers!
Simplicity in Your Trading - Mark Anderson
I have to agree with (Simplicity Article In Prior Issue By Mark Crisp) on this one. I've only been involved with trading for 15 months. Made some and lost some. Initially I bought a system based on being safe in the market place. I wasn't convinced that it could take advantage of all moves in a market and sought to find out more.
Like many, my journey took me to some weird and wonderful places via the internet. I came across systems that used planets, complex mathematics, universal laws and myriad variations of indicators. The result was that I fell into the trap of picking bits from some of these that I thought I understood and tried applying it to my overall plan. Sure I got some good trades in but lost a few too. I still did not 'feel' that I had a proper plan that I could stick to.
I actually found I was applying too many techniques of analysis to a market at any one time. Consequently I got contra-signals from certain indicators which clouded any trade decision I would make.
To cut a long story short, I have recently started from scratch - almost. I am now using very simple indicators that I am comfortable with. These tools were under my nose right from day one but I thought I needed some complicated mechanism to attack the markets. So I overlooked them.
At present I'm back-testing a few futures markets using the plan and rules I have formulated. So far it looks positive.
As far as simplicity goes, it takes me only 5 minutes per market per night using my charting package to asses whether to consider a trade or stand aside for the next day.
It may be far from being able to take full advantage of all market moves but one thing I have learnt after a run of losses from previous methods is that I don't need to be in the market all of the time and I certainly don't have to get in/out at the extreme low or get in/out at the top. There's plenty in between.
So to a large degree I've gotten over a psychological hurdle that I had to get everything the market offers. With that pressure off I've been much more accepting of the market and more content with a definite plan I can stick strictly to. Cheers to successful trading.
Real Success Trading Course - Bill Lumley
As a new subscriber to CTCN and interested in corresponding with someone who has taken the Real Success-2 Video Tape Trading Course in the last 6 months. I am a MetaStock user as well and would appreciate hearing from anyone who has programmed any of the Pivot Points or other indicators from the trading course. Thanks.
P.S. I am growing pretty skeptical as I have fallen into a number of advertising traps in my search to learn how to trade. Where there is potential for significant profit there are wolves at the door ready to pick your pockets. Sad, but human nature. As an engineer I like many of us (I understand many wantabee traders are engineers in my age bracket) are a bit naive when it comes to the ways of the business world.
Rhythm of the Markets - Anthony Venosa
Looking for any information or articles on Ed Moore's S&P 500 trading system called Rhythm of the Markets?
How To Make a Good Trade 8 of 10 Times! - Lanne Terry
Regarding Trading Simplicity Article. It's Easy!! Just find out whatever I am selecting and (entering), then you do the opposite. This is never wrong and I guarantee it!
Eleven To One Profit Margin Thanks to Trading Simplicity! - Jerry W
Re Trading Simplicity - Exactly. My thoughts parallel yours (Mark Crisp). I bear it out. My first trades were bad with lots of complicated doodling. Now I have an 11/1 win/loss ratio with $20,000 profit in about 8 days trading. This is accomplished by psychological handling of myself instead of fancy systems. Good trading.
Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
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