Friday, September 25, 2009

What is the Trend for the Day?

Is the day trending or is it trading in a range? Is it breaking out of a range, or will it stay within? Those are some of the key questions I ask during each session.

Henry Carstens has been tweaking a couple of tools to address this question. He tracks a large basket of high volume stocks and investigates whether each one is moving directionally higher, lower, or non-directionally during the trading day. On that same page, he's also tracking directionality sector by sector, so that traders can see if we're in a general trending environment or a mixed one of sector rotation.

While I can't disclose Henry's methodology, I will say that it is directly derived from the strategies he utilizes in managing money with his trading systems. The idea of the tools, however, is to use the system-related research as decision support for discretionary traders.

In my own research, I'm pursuing a similar purpose, but with a different method. I'm tracking a different basket of stocks and investigating how they are trading with respect to their volume-weighted average prices (VWAP). The idea is not just to track the absolute numbers, but to identify significant shifts in those numbers. Trade Ideas offers the ability to screen stocks for how they're trading relative to VWAP; the key is filtering moves above and below VWAP, so that you're not just catching random noise around a particular price.

When we see large shifts in these indicators, we have validation of a breakout move. Breakouts without large shifts offer a look at possible reversal moves.

These are indicators with considerable potential.