How To Trade: Blog Linkfest Volume Two

Last week I prepared the first volume of blogs that feature "how-to" trading information on their sites. My intention was to introduce readers to sites they might not have been familiar with. I also assembled a collection of TraderFeed posts dealing with trading methods. This week we'll look at some sites you might be familiar with, but some features of those sites that might surprise you.

* The Kirk Report - Many readers know Charles Kirk's work from his wide ranging collection of links. He also researches hot sector ideas on his site and conducts screens of promising stocks. These are great ways of developing stock ideas for trading and investing. What many readers don't know is that The Kirk Report also contains a site-within-a-site for members who have made a modest donation. (That member site is being upgraded, BTW, and will be rolled out later this week, including a new stock screener. More on that later). Included in the members' site are Kirk's trading notes--including specific stocks he's tracking and trading--and his open positions. He maintains a set of links to stock screens and conducts monthly Q&A sessions for readers. A resources page introduces readers to the tools he uses in his own trading. This is not a daytrading site. Rather, it focuses on stock selection for swing trading and active investing. If stock picking is your edge, this is a fine resource.

* Trader Mike - Readers are familiar with Mike's market recaps and his regularly updated links. Recently, he has also featured very well written how-to daytrading articles from Michelle B. Mike breaks down his trading methods for readers and shares the tools of his trade. He offers perspectives on day trading and outlines his trading results. The "Key Posts" on his home page outline many of the trading ideas he holds near and dear. These provide quite a trader education in themselves. His posts are also broken down in a cloud of "frequent topics", making it easy to seek information on the topics that most interest you. I like the fact that Mike emphasizes risk management and position sizing, not just trade ideas. Great resource.

* Trader X - Trader X offers one of the very best pure how-to daytrading sites on the Web. His style of trading is radically different from my own, but it is very clear that he has a method that he follows consistently, the method exploits stock momentum, and it works for him. Numerous charts on the site illustrate setups and also grade those setups for trading purposes. The site maintains a collection of "key post" links, which describe the essentials of the trading style. He uses candlestick patterns, with an emphasis on price, volume, and Fib levels. Although he shares his trading rules and responds to questions about his trading, he makes it abundantly clear that the way to learn this kind of trading is to study thousands of charts. Grading his setups gives X a high win percentage. Clearly he has thought his methods through and has provided a fine resource for traders by illustrating these methods each week.

Volume Three of the How-To Linkfest is on its way. There are many more sites that offer fine trader education. In my opinion, the sites I'm highlighting offer more practical, actionable content than most high-priced trading seminars. What you learn after scouring them is that there is no one best way to trade. There are many methods and many timeframes. The key is finding models out there, reading about them, trying them out, and seeing which best fits your ways of thinking and your risk profile.

Here Are Wednesday's Blog Links, Pivot Targets, and Market Views

Three Steps To Take If You're A New Trader Losing Money

A reader recently declared herself at wit's end losing money in trading. The learning curve can indeed be very frustrating. In my book Enhancing Trader Performance, I tried to present a framework for thinking about that learning curve and navigating the trail from being a novice to being competent to being expert. Here are a few steps that are worth considering if you're a new trader frustrated by losses:

1) Stop Trading - The first law of developing yourself as a trader is to survive your learning curve and preserve your capital. First develop your trading style by trying out different trading approaches in paper trading mode, preferably through the simulation mode of a trading platform. (Ninja Trader has a free simulation engine worth considering). Make all your mistakes on paper before they eat up your capital. Yes, paper trading is not the same as trading real money, but if you can't make money on paper, you surely won't do it under the heat of real time risk and uncertainty.

2) Look for Guidance - I encourage beginning traders to learn Market Profile theory as a way of thinking about markets. There are also good trading books out there by such folks as Linda Raschke, James Altucher, Curtis Faith, and John Carter. There are excellent trading blogs that detail trading methods and patterns; check out posts from Trader Mike, Trader X, Charles Kirk (including his members' site), Brian Shannon, and some of the ones on this site. Woodie runs free trading rooms, with an emphasis on mentorship. Check that out. There are many resources out there.

3) Keep Meticulous Records - Review which kinds of trades are working for you and which aren't. Keep tabs of your mistakes, but also identify what you're doing that's working. Use each trading session as a learning experience. Your goal is not to make money. Your goal is to learn markets. Expertise takes years to develop. Don't pressure yourself to trade your capital against pros until you're sure you're ready.

Lots of observation and immersion in markets and plenty of experimenting with different markets and trading styles--all are important in advancing the progression toward expertise. When new traders are frustrated with losses, it's usually because they've tried to short-circuit the learning curve.

What You Should Think About Before Seeking A Trading Coach

I'm getting a flood of emails regarding traders' desire/need for coaching in response to the recent posts on self-talk and information-processing biases.

Before a trader seeks coaching, I would encourage a thorough self-assessment. These posts may aid such an assessment:

* Trading Psychology Checklist

* Five Things to Know About Trading Psychology

A trading coach can be helpful for such problems as performance anxiety and tuning out distractions from trading. These tend to be situational problems that specifically impact trading performance.

What trading coaches in the psychological sense *can't* do is teach you how to trade. Nor can they help traders eliminate frustrations that stem from inability to trade well. Psychology cannot substitute for skill-building.

Nor can most trading coaches adequately address long-standing psychological problems that interfere with multiple spheres of life--not just trading. There are licensed therapists and medical professionals far more experienced in such matters.

Some years back, I had a trader at a large firm talk with me about problems focusing, concentrating, and executing trade ideas. A brief assessment found that this was happening in other areas of life. I recommended a full medical workup, and the results showed a hypothyroid condition. The answer to the problem did not lie in counseling or trading. That trader could have spent thousands of dollars and many hours in "coaching"--all to no avail.

Coaching has its value, but also its limits. Before you seek help for a problem, make sure you accurately assess what the problem is. The best treatments are of little value if they're not preceded by solid diagnoses.

Countering Information Processing Biases In Trading

In a post a while back, I likened consciousness to a radio dial, with the various frequencies constituting our physical, cognitive, and emotional states. Powerful emotional experiences create very strong signals that dominate the radio spectrum, subsequently placing us in states that may interfere with our functioning. When those powerful experiences are positive, their dominance is crucial to the creation of addictive behavior patterns. When they are negative, their dominance is manifested as psychological trauma. One of the most important reasons for not trading too large for one's account size is the avoidance of roller-coaster emotional experiences. These lead to self-inflicted patterns of addiction and trauma that disrupt sound decision making.

On a smaller scale, markets create emotional experiences for traders each day. They do so with sudden large movements and shifts in volatility. Memory is not a democracy: not all memories are processed equally. We tend to place undue weight on what has occurred recently, and we tend to overweight emotional events. No doubt there are evolutionary reasons for these cognitive biases: cave man probably needed to focus on threats in the here and now to aid survival. The downside to this legacy is that, as traders, we can place more emphasis upon recent, emotional market events than is warranted by an objective look at market probabilities.

A great example of this is when we're stopped out of a good trade and then fail to take the next good trade because of fear of loss. Another example recently mentioned to me by an experienced, successful trader is getting excited by the recent volatility during the market decline and then overtrading the reduced volatility of the subsequent market bounce. I've been guilty of this myself: becoming so lulled by a slow, rangebound market that I take my attention from the screen and miss the subsequent, tradable breakout move.

Perhaps worst of all, recent emotional experience in markets can provide us with a negative edge in trading. I've written about short-term reversal effects in bull trends and bear trends: markets that have consistently risen over a multi-day period have yielded subnormal returns; those that have consistently declined have risen the most. When we overweight recent market experience, our thinking runs precisely counter to the market's own tendencies. Ever sold the exact low in a market or close to it? That's often a reason why.

I recently mentioned talking out loud as a way of changing our internal dialogues. If you follow my reasoning to this point, you'll see that talking out loud can also be a powerful technique for changing our biased thinking about recent market events. I suspect this is one reason many traders seek coaching: they're looking for someone to talk with to reprocess recent events and start with a relatively clean mental slate. But the efficacy is not in the coach, but the talking! In giving voice to our big picture market views and research, we consciously counteract any tendency to overweight recent market moves and P/L swings.

The same verbal recordings that can be helpful in rehearsing trade plans before trading and in reviewing performance after trading can be of help during market sessions--particularly when we make ourselves listen to what we've recorded. When we become the listener, we gain a measure of distance and objectivity with respect to our information processing. It is much easier to challenge a biased assumption when we hear it out loud than when we're identifying with it implicitly. The idea is to become a skilled observer of your own state shifts, so that you can consciously decide when to act upon them and when they are leading you astray. An audio trading journal can be a very helpful tool in developing this observing capacity.

Here Are Blog Links, Pivot Targets, and Market Views For Tuesday

Call For Trading Coaches And Mentors: Upcoming Linkfest

I recently mentioned some of the factors that contribute to success in performance coaching. In the trading world, the terms "coaching" and "mentoring" are used in a variety of ways, as John Forman has perceptively noted. That makes it difficult for traders to find the kinds of helping that are right for them.

To address this challenge, I'm collecting links to experienced coaches and mentors who work with traders. In several days, I'll post a linkfest that will highlight coaching and mentoring resources.

For purposes of clarity, I'm using these terms in the following way:

1) Coaches - People who help traders with the mental/emotional/psychological aspects of trading, including techniques for improving self-control and trading consistency;

2) Mentors - People who help traders with the actual mechanics of trading; the "how-to" aspects of defining setups, setting stops and price targets, position sizing and risk management, etc.

By this definition, coaches function as counselors for traders; mentors function as trading teachers.

If you are a coach or mentor and would like your website or blogsite to be included in the upcoming linkfest--or if you're a reader who would like to recommend a coach or mentor--please email me in the next few days. My email address is at the bottom portion of the "About Me" section of my blog home page. Feel free to include in the email a brief synopsis of the services you provide and your specific areas of expertise.

My hope is that this will provide a useful resource for traders seeking assistance.

Also stay tuned for Volume Two of my linkfest covering blog sites that teach How To Trade. There's some great stuff out there for traders seeking ideas for self-mentorship!

Thanks as always for your interest and participation--

Brett

Neurofinance and the Anthroscopic Measurement of Trader Performance

In past posts I've written about biofeedback and hemoencephalography as methods for monitoring one's physiological arousal and cognitive focus during real-time trading. By tracking such measures as heart rate variability, a trader can assess--and potentially extend--his or her self control under conditions of risk and uncertainty.

Indeed, this is just the tip of a much larger iceberg regarding the use of computers to aid decision making and performance. Research from Sandia Labs finds that real-time computer feedback about everything from perspiration, heartbeat, vocal inflection, and facial expression aids participants in team-based tasks. Their idea is to turn the computer into an "anthroscope": a measuring instrument of global human functioning. A particularly interesting application is defining those states that occur during "personal best" performance, so that these can be replicated.

Research that I recently cited from Andrew Lo found that biofeedback readings during real time trading distinguished between experienced and novice traders. The latter showed greater arousal during such market events as increased volatility. Might it also be the case that "anthroscopic" readings of traders would find signature patterns of personal best performances, distinguishing traders at their best from when they're at their worst?

David Edwards distinguishes neurofinance from neuroeconomics, defining the former as a direct application of cognitive neuroscience to trading practice. Citing the Sandia research, Edwards compares anthroscopic measurement of traders to the practice of assessing VO2 max among runners and cyclists. Zack Lynch argues that, as sophisticated trading organizations find diminishing returns from their data mining research, they will be drawn toward another source of competitive advantage: traders' computer-based management of their own decision-making performance.

If anthroscopic measurement can aid team-based performance, might it aid the performance of trading teams? Could biofeedback measures be linked to traders' screens to deliver pop-up alerts when traders are out of their optimal performance zones? Are there signature blood flow patterns in the brain or biofeedback patterns that distinguish successful traders from less successful ones, and could these be incorporated into realistic trading simulations to help firms hire promising candidates?

This, surely, is one of the great frontiers in trading psychology. In the near future, I will track my own biofeedback readings during a trading session and post here. Can simple desktop applications assist a trader in real time? Let's see if we can find out.

Here Are Monday's Blog Links, Pivot Targets, and Market Perspectives

Four Insightful Studies From Dr. Andrew Lo

Dr. Lo, a distinguished Professor at the Massachusetts Institute of Technology and Director of the MIT Laboratory for Financial Engineering, has contributed mightily to both quantitative and behavioral finance. He has been generous in sharing his articles online. Here are four that strike me as particularly relevant for readers.

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation - In this study, Andrew Lo and colleagues show that it is, indeed, possible to create objective definitions of technical trading patterns and test their efficacy. Their study, conducted with data from the 1990s, found that some patterns do offer unique information to traders. David Aronson's more recent work casts doubt upon the validity of most technical patterns. This is a fascinating area of research and one that I hope to address, albeit in a more modest way, in the near future.

The Psychophysiology of Real-Time Financial Risk Processing - Dr. Lo and his team hooked traders up to biofeedback equipment to actually measure the degree to which emotional arousal impacts trading. It's a great look at how experienced traders differ from novices, and the study concludes with a thoughtful discussion of the role of emotion in trading.

Fear and Greed in Financial Markets: A Clinical Study of Day-Traders - Dr. Lo and colleagues (of which I was one) examined the role of personality in trading results. The results extend the findings of the earlier study regarding the role of emotion in trading, but raise questions as to the importance of personality traits in trading success.

Reconciling Efficient Markets With Behavioral Finance: The Adaptive Markets Hypothesis - Here Dr. Lo offers his alternative to the Efficient Markets Hypothesis by drawing upon evolutionary theory to show how markets adapt to a variety of conditions over time. This is an unusually insightful paper, and it makes a strong case that the market's risk premium varies according to the recent path of the stock market. Lo draws upon cognitive neuroscience to explain behavioral biases in financial decision-making. Ultimately, he argues, evolution determines market dynamics.

Changing Your Self Talk By Talking To Yourself

From the time we become self aware, we conduct an internal dialogue. We question ourselves, berate ourselves, congratulate ourselves, and make plans for ourselves. As I emphasized in my book, our self talk represents the "I" speaking to the "me". Just as we have relationships with others, our self talk is a manifestation of our relationship to ourselves.

I often ask traders to conduct their self-talk out loud. Sometimes we even record it. The playbacks are eye-opening. That's when we hear what we sound like when we talk to ourselves. Is the talk friendly and supportive? Is it angry and perfectionistic? Is it abusive? Is it constructive? When we hear our internal dialogue, we lay bare our self esteem: how we truly feel about ourselves and how we actually treat ourselves in this relationship between "I" and "me".

A cornerstone of cognitive approaches to change is that, to change the way we feel and act, we need to change how we process information. Much of our self talk occurs automatically, without our even being aware that it is occurring. When we keep a cognitive journal, we are making the internal dialogue explicit: writing it down so that we can be aware of it and gain some distance from it. Change begins, I find, when people recognize their self talk in real time and come to the realization: "This isn't how I want to talk to myself!"

This is especially relevant to trading. How we talk to ourselves about a trade will affect how we manage that trade. When we "lose discipline" and fail to adhere to a trade plan, it's often because the information processing we engaged in to develop the trade idea has been hijacked by a very different kind of self talk during the trade.

Here's a very simple method to alter our patterns of self talk:

Recall our visit to the expert trader Marc Greenspoon. Marc keeps with him a pocket recorder for dictation. He talks to himself through the recorder, reviewing his performance. In many of the tapes, Marc sounds like a coach talking to a player. He is both critical and motivating. His tone is no-nonsense, and he hones in on what he needs to do to improve his trading. Most important of all, Marc uses the taping to achieve a certain level of emotion and motivation. Like a half-time talk from a coach, Marc's talks to himself help him sustain the alert information processing that he needs for his kind of trading.

I believe Marc's technique--talking to himself as a way of rehearsing desirable self talk--has a great deal of promise, not just at the end of a trading day, but at the start and the middle as well. The key rule when doing the taping is to not stop the tape until you have truly hit an emotional level that represents the kind of relationship you want to have with yourself.

A major shortcoming of written journals is that they can be emotionally sterile. They don't shift us into different ways of processing information and relating to ourselves. The best way to change our self talk might just be to practice talking with ourselves. We're always going to have a relationship with ourselves. The only question is whether or not that relationship is within our conscious control. Taking the time to consciously talk to ourselves is a great way of making our self talk conscious.

Background Reading From TraderFeed:

Becoming Your Own Trading Coach

More On Becoming Your Own Coach

More On Brief Therapy Methods You Can Use

Articles on Trading Psychology

NASDAQ Volume As A Sentiment Measure

What does it mean when NASDAQ volume greatly exceeds volume on the New York Stock Exchange? One interpretation is that the more growth oriented, volatile NASDAQ stocks are attracting enhanced interest relative to established blue chip, value-oriented companies. That would be a sign of enhanced speculative sentiment. On the other hand, when NASDAQ volume drops relative to NYSE volume, traders and investors might be shunning these growth-oriented stocks. That might provide us with a sign of risk-aversion. In my last post, we found that risk aversion, reflected in patterns of last hour trading, was associated with superior stock market returns going forward. Does this pattern hold true for the ratio of NASDAQ to NYSE volume as well?

Going back to 2004 (N = 165 trading weeks), we have 82 occasions in which the weekly NASDAQ volume was more than 20% greater than the NYSE volume and 83 occasions in which NASDAQ volume was below this level. When weekly NASDAQ volume has been relatively high compared with NYSE volume, the next five weeks in the S&P 500 Index (SPY) have averaged a gain of only .09% (45 up, 37 down).

Conversely, when NASDAQ volume has been relatively low compared with NYSE volume, the next five weeks in SPY have averaged an impressive gain of 1.32% (57 up, 26 down).

What this tells us is that, when weekly speculative sentiment is high, returns over the next five weeks has been subnormal. When we have signs of low speculative sentiment (risk aversion), returns over the next five weeks have been superior. This mirrors my earlier findings with the separate put and call volume data, as well as with the joined options data and relative options ratios.

At present, NASDAQ volume has been running above average relative to NYSE volume in the wake of the bounce from recent lows--about 33% higher than NYSE volume. Let's see if that constrains gains going forward.

The Last Hour Of Trading As A Sentiment Measure

When a trader or investor chooses to buy or sell in the last hour of trading, often that reflects a decision to either hold or not hold a position overnight. Over the past several years, almost all of the stock market's gains are attributable to moves that have occurred overnight: between the close of the prior day and the open of the current day. Indeed, since the beginning of 2004, we have gained approximately 32.96 dollars in the S&P 500 ETF (SPY), or about 330 points in the cash index. Of those, 31.58 occurred during overnight trade prior to the market open. From open to close, the total gain in the S&P 500 Index during the recent bull market has been 1.38 SPY points, or about 14 S&P futures points.

When a trader or investor thus decides to avoid the risk premium built into the overnight trade, this could be taken as a sentiment measure: a sign of risk aversion. Similarly, a persistent buying in the last hour of trade might reflect aggressiveness regarding the ownership of equities. If so, might we see historical patterns based upon such sentiment?

Going back to 1990 (N = 4329 trading days), I found 435 occasions in which there was net gain in the Dow Jones Industrial Average during the last hour for 14 or more out of the last 20 trading days. This reflects persistent buying of the last hour. When we look at the Dow 20 days later, the average gain has been a healthy 1.39% (304 up, 131 down).

On the other hand, when we have had net gains in the Dow for 8 or fewer out of the last 20 trading sessions (N = 666), that reflects a persistent desire to stay out of the overnight market. Twenty days later, the Dow also averages a respectable gain of 1.30% (448 up, 218 down).

By contrast, all other occasions in the data (N = 3228) average a 20-day gain of only .60% (1952 up, 1276 down).

What that tells us is that it's been a good time to own stocks when traders and investors have been risk assuming (persistently buying the last hour), but also when they've been particular risk-averse (persistently selling the last hour). It's when those market participants have been more wishy-washy in sentiment that returns have been less impressive.

Here Are Saturday's Blog Links And Sector Money Flows

A Tale of Two Stock Market Sectors

Here's an update on some of my research on dollar volume flows within sectors. A prior update on eight sectors within the S&P 500 stock universe found considerable variation in the dollars flowing into the various sectors. In the charts above, we can see a particularly strong contrast between two sectors as of 4/5/07: the consumer staples stocks and the financial stocks.

Note that relative dollar volume flow for the staples stocks barely pushed below zero even during the recent market decline. Recall that a zero level reflects a level of money flow equivalent to the 200-day average for that sector. What the chart of the Consumer Staples stocks is telling us is that we've had consistently above average flows into those issues. As a result, it's not surprising that we're knocking on the door of bull market price highs for the XLP ETF.

When we look at the Financial sector, however, we can see that dollar volume flows have stayed below average, even as the general market has bounced from the recent decline. Price of the XLF sector ETF has also stayed well below its highs as a result.

As a matter of contrast, over the past ten trading sessions, nine have shown above average dollar volume flow among the Consumer Staples issues. Over that same period, only two sessions have resulted in above average volume flow for the Financials.

Volume flows do seem to make a difference. According to the Decision Point site, about 78% of Consumer Staples stocks are trading above their 50-day moving averages. Only 49% of Financial stocks are trading above that benchmark.

What I take away from this is that we have a defensive market. Perhaps out of fear of continued housing weakness, recession, and subprime loan challenges, investors are shunning financial issues. They are putting their money to work in relatively recession-resistant sectors, such as Staples and Materials.

A rising tide is supposed to lift all boats. While we're not seeing outright dollar outflows from Financials, we're also not seeing meaningful participation in market strength. Given the importance of the financial sector to the S&P 500 Index, I suspect we'll need to see some broadening of those volume flows if we're to get another leg to the bull market.

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What We Can Learn From Trading and Poker

A Google search for "poker and trading" yields quite a few articles on the topic. Indeed, I've found that many short-term traders enjoy poker and are quite good at it, including the world-class trader I recently wrote about. Let's take a look at some of the similarities between Texas Hold'em poker and trading and explore their implications:

1) Both are high-frequency performance activities - What this means is that motivated students have many opportunities to play many times in the course of a day. The high frequency nature of poker hands and short-term trades means that performers see many patterns in a relatively short period of time. This accelerates the learning curve. It also enables most poker players and short-term traders to be self-taught. They learn through repeated observation and experience. Seeing many hands in many different game situations and learning from your betting successes and mistakes is a great teacher in both fields.

2) Both combine elements of statistical edge with discretionary judgment - In trading, you can think of the markets leading up to your trading session as the cards you've been dealt. Sometimes your cards provide you with a strong edge. When the market recently sold off on record put/call volume, for example, there was a strong edge to the upside. Similarly, drawing two aces offers far better odds than drawing a 2 and a 9 unsuited. Neither the short-term trader nor the poker player will slavishly follow these odds, however. It's important to see what is happening in the moment; that is where discretionary judgment enters. A steep selloff on unexpected economic news will alter a trader's willingness to bet on a bullish market pattern. Subtle tells around the table will tell the poker player it's OK to bluff with a relatively weak hand. Poker players and short-term traders need to have an edge and know what it is, but they also have to be able to use real-time judgment as to when to proceed with so-so odds.

3) Both fields require disciplined money management - In poker, going "all in" can bring a quick score, but also a quick exit from the table. Sizing bets (trades) too large for one's stake can bring ruin on a series of losing hands (markets). On the other hand, both poker players and traders know how important it is to press an advantage when it's there. A large percentage of profits will come from a relatively small number of hands (trades). Staying in the game is key, but winning also requires aggressiveness when you've got the "nuts": the strongest hand.

4) Winning in both fields requires a willingness to not play - This is important. If you think of the prior market action as the cards you're dealt (the hole cards), market behavior as you're trading represents the new cards that are revealed (flop, turn, river). At any point, you can decide to bet or not bet, and you can decide how much to bet. Good poker players "muck" many hands; they don't bet when odds aren't on their side. Similarly, good traders will stand aside if they don't see a market that provides adequate volume and volatility. Knowing when to play--and how aggressively to play--is a major element in success for both professionals.

5) Winning requires that you know who you're up against - In poker, you'll bet differently at a small table than a large one. You'll bet differently in a local casino, playing against amateurs, than during the late rounds of a professional tournament. Over time, poker players learn the patterns of their adversaries and use these to make betting decisions. Similarly, short-term traders become sensitive to the impact of large market participants. They see if volume is entering the market on buying or selling and adjust their strategies accordingly. In that sense, both poker players and short-term traders must be shrewd psychologists: they try to get inside the heads of competitors.

Is this a hand I want to play? As the game is progressing, how is my edge changing? How much to I want to bet on this hand? Who is participating at the table with me and which way are they leaning? These are fine questions for poker players and traders alike.

Here Are Friday's Blog Links and Market Perspectives

International Trading Perspective From Especulacion.org

From Brett: I recently put out a call for English language summaries of international blog posts written in other languages. Jesus Perez Sanchez of the Especulacion site was kind enough to offer this interesting trading perspective. Here is the original post in Spanish; below is an English language summary. Jesus is a computer science engineer in Spain and has built his site into one of the most visited in Spain. Although he writes about discretionary trading, he has an interest in trading systems and their development. He welcomes questions and comments to his email address: jesus.perez.sanchez at gmail dot com.

The Spanish Market is the only market where you can know who is buying and who is selling in each transaction (the agency). Those data are huge, and it is very difficult to extract information to make trading decisions. There are some people that are focussed on particular stocks. They have learned which are the more important agencies that manage the price of the stock.

After thinking how to extract information from those data, I decided to generate some graphics that relate the stock price with the stocks that have an agency. My idea was to try to identify when an agency is begging to take position in a stock. As you know, some agencies manage important amounts of money and can´t buy all the stock only in one operation. That kind of agency needs to accumulate stock little by little. That is very well reflected in the graph and allows me to be able to buy at that time. That process of accumulation will make the value rise or at least to stay in the same level. This also happens when the agency decide to sell.

You can see in the BBVA graphic how Morgan Stanley stock reflects this process.

You can read the post that I published in Febraury:

http://especulacion.org/bolsa/index.php?p=545&more=1&c=1&tb=1&pb=1#more545

The data in red colour are the stock price and the data in the blue colour are the agency volume.


From Brett:

This has some interesting similarities to my own research on dollar volume flows. It is also relevant to research on large block trading. I've consistently found that one factor that separates professional traders from non-professionals is that the former group has a good feel for who the players in the market are and what they are doing during the day and day to day. This post from Jesus reflects such an awareness. He is able to track the volume of specific market participants and use this information to ride their coattails. While there are differences between the U.S. and Spanish markets, the underlying idea holds for both markets. If you can isolate the large trades in a given stock and track whether those trades are occurring more at the bid price (aggressive sellers) or at the offer (aggressive buyers), you can gain a very nice picture of the sentiment of the market's largest participants. Reading this volume distribution in real time provides a very useful edge. Many thanks to Jesus and Especulacion; I look forward to providing further summaries of his posts.

Performance Coaching: When It Works, When It Doesn't

A large body of research literature on the topic of short-term behavior change suggests that a variety of methods are quite effective. Indeed, compared to control groups, people who utilize cognitive, behavioral, and solution-focused techniques improve on average by a full standard deviation in their target goals (more well-being, less distress, better functioning). As a psychologist, my general leaning is to teach these methods directly, so that each trader can be his or her own trading coach. Sometimes, however, it is difficult for people to maintain the objectivity to direct their own change efforts. In such cases, it can be useful to work with someone familiar with the psychological methods that are most effective.

It's currently fashionable to distinguish "coaching" from "counseling" or even "therapy". In part the distinction reflects differences in training: many "coaches" are not trained in such fields as clinical or counseling psychology, psychiatry, or clinical social work. Too, coaches see themselves as working with people who are dealing with normal life issues, not psychological disorders.

The reality is that two-thirds of all people who seek outpatient therapy benefit from short-term assistance and deal with such normal concerns as adjustment problems, work stress, and relationship conflicts. The principles of behavior change are the same regardless of who seeks help and what we call the helping process.

So what are these principles, and how can they help traders seeking a performance coach? Below I outline a few key ideas that might be helpful if you're looking to make changes in your patterns of thinking, feeling, or behavior:

1) It's all about the relationship - The outcome literature is emphatic on this point. The specific change techniques that are used are less important than the quality of the relationship that develops between the parties in a helping relationship. In fact, studies suggest that, if a positive relationship hasn't formed within the first couple of meetings, the odds of success are dramatically reduced. Why? People are less likely to confide in someone they don't feel close to, and they're less likely to take advice and direction from a person they either don't like or respect. Many times people make changes because they really like their counselor/coach and don't want to let that person down. As with any relationship, it's worth being choosy until you find the absolute right match.

2) Change begins when people learn to see their situations positively - This is very important. Few people seek a coach or therapist as their first option. Usually we try to solve problems on our own and by consulting friends or family. By the time a person gets around to seeking professional assistance, a great deal of time and effort have been spent without adequate results. This means that it's common for people to be discouraged and demoralized when they first seek help. The experienced, effective coach or counselor has "been there, done that". A situation, such as debilitating performance anxiety, that might seem overwhelming to a trader is a plain vanilla helping problem to someone schooled in behavioral techniques. By communicating to the trader that this is, indeed, a solvable problem and that there are very specific methods that have a superior track record in dealing with the problem, the coach introduces a new element into the equation: hope. Research tells us that the first thing to change when people seek assistance is a rise in well-being. When people find the right helper and realize that change really is possible, they feel better simply because of that.

3) Change accelerates when people see their problems differently - One key idea--and perhaps the most important one in this article--is that we are constrained by how we define ourselves and our problems. Many times we repeat patterns of behavior because of our limited definitions of what's wrong and what we can do about it. A trader might say to me, "I'm defeating myself at every turn. I break my rules and dig myself into a hole each day." A good coach, however, won't accept this definition of the problem and, instead, will observe carefully what is going on to propose an alternative view. For example, I might say to that trader, "You know, I don't think you're self-defeating. I just think you're telling yourself how *awful* it would be if you had a losing trade. Your self-talk is leading you to become anxious, and that's leading you to bail out of good trades and not take promising signals. If we can alter your self-talk, maybe your feelings and actions will follow along." By translating the problem into new terms, the effective helper opens the door to potential new solutions.

4) Talk is cheap - It's surprising: the most effective brief therapy methods are ones that actively engage people in *doing*, not just talking about problems. Change occurs when people shift out of the state they're in and process new information about themselves more deeply as a result. For that reason, I always prefer to work with traders *as they are trading* or couples as they are interacting. It's when problems are "hot" that people can make active attempts at altering how they think and what they do. Change can occur quite rapidly under such conditions. For that reason, I am extremely skeptical of counseling/coaching that occurs over the phone. It doesn't maximize the power of the helping relationship and it rarely hits problems with immediacy. The more actively involved a person is in the change process--both in behavior and in emotions--the more likely it is that the helping will be effective. Talking about problems in the abstract doesn't create the new experiences that are essential to rapid change.

5) Change requires repetition - It's common to think that people change suddenly, as if a light bulb goes off in their heads. The reality is far more mundane. People change by building new habits. They stop doing the old things and keep doing new things again and again until the new behaviors become automatic. As a result, much of the change process can become a bit boring. Often, people make initial changes but don't sustain those gains because they don't put in the time and effort to make their new behaviors automatic. In athletics as in psychology, a superior coach doesn't just show you what to do, but helps you sustain the motivation to do it. The greatest enemy to change is relapse; we're all most comfortable doing what's familiar. But what's familiar is often what brought us for help in the first place.

Coaching, counseling, therapy: call it what you will. Successful change, like being a religious person, takes more than a once-a-week commitment. The truly effective helping approaches map out specific things to do every day. In that way, they instill those new modes of viewing and doing until they become habits. On the field and in the consulting room, where you see good coaches, you'll see solid game plans, researched and tailored to the specific situation. You'll also find someone fanatically dedicated to your success, born of a bond between the two of you.

When those conditions are present, performance coaching works and it truly becomes possible to make important changes: in trading and in life.

Here Are Thursday's Blog Links, Pivot Targets, and Market Indicators

A Follow-Up On New Highs And New Lows In The Stock Market

My recent post noted that, following a surge in the number of stocks making new five-day closing highs, we tend to see follow through strength over a three-session period prior to subsequent reversal at a five-day period. An alert reader wrote and asked if the same pattern applies to surges in the number of stocks making fresh five-day closing lows.

The answer is yes, but the time frames are different.

Recall that we're looking at a portfolio of 40 stocks evenly divided among and highly weighted within eight S&P 500 sectors. Going back to 2004 (N = 813 trading days), we've had 38 occasions in which the net number of stocks making new lows over new highs reached 25 or greater. We'll call that the "weak day".

The following day, the S&P 500 Index (SPY) broke below the low of the weak day on 26 of the 38 occasions, for an average drop of -.28%. Across the entire sample, the low of the current day actually exceeds the low of the prior day by an average of .03% (443 up, 370 down). That tells us that, in the short run, broad weakness tends to spill over into the next trading session.

Interestingly, however, if we look on a close-to-close basis, we find that the day after the weak day, SPY averages a *gain* of .12% (22 up, 16 down). That is stronger than the average one-day change for the entire sample of .03% (444 up, 369 down). This tells us that follow-through weakness the day after a surge of new lows tends to reverse by the close of trade.

If we look five days out, we can see strong evidence of a reversal effect, as noted in a prior post. Following the weak day, the market is higher on 30 out of 38 occasions, for a solid average gain of .74%. By contrast, the average five-day gain for the entire sample is .16% (462 up, 351 down).

Once again we see a pattern of follow-through weakness followed by reversal. Notice with the days of surges in new lows, however, that the subsequent weakness tends to evaporate more quickly and the reversal effect is more pronounced. This is an important distinction between strong rising and falling markets that has important implications for trade planning.

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A Call To International Financial Bloggers

If you are writing a blog in a language other than English and have some good posts that you can summarize in English, I would be happy to share your summary (along with the link to the original post and an overview of your site) with TraderFeed readers. I believe that traders and investors can benefit greatly from international perspectives and would be happy to help facilitate a sharing of ideas. Similarly, if you are interested in translating any of my posts into your native language for summary on your blog, feel free to contact me. My email address is at the bottom of the "About Me" section of the TraderFeed home page.

I greatly value the international friends and colleagues I've made through the blog over the past year and look forward to getting to know more trader/bloggers in South America, Asia, Europe, and beyond! Thanks--

Brett

What Happens After A Surge In New Highs?

Let's revisit a post from a few days ago in which we took a look at the number of stocks making five-day closing highs. That post focused on reversal effects after we see a large number of stocks making new lows. Indeed, we have gotten just such a reversal. Now, however, we have a situation in which we saw a surge of new highs on Tuesday. What can we expect going forward?

Recall that we're looking at a basket of 40 S&P 500 stocks divided evenly among eight sectors. These sectors include Materials, Industrials, Consumer Discretionary, Consumer Staples, Energy, Health Care, Financial, and Technology stocks. When we see a large number of these stocks simultaneously making new highs, it means that we have market strength that extends across these sectors.

Going back to 2004 (N = 813 trading days), we've had 35 occasions in which we've had 25 or more net new highs within the basket on a given day. (Tuesday's level was 25). We'll call that the strong day. The next day's high exceeds the high of the strong day on 23 of those 35 occasions by an average of .23%. If we look three days out, the high of that day exceeds the high of the strong day on 27 of the 35 occasions, by an average of .45%. By contrast, the high three days out exceeds the current high by only .09% (465 up, 348 down) for the entire sample.

If we look on a close to close basis, we find out that, three days later, we close higher than the strong day on 23 of the 35 occasions, with an average gain of .26%. By contrast, the average three-day gain for the entire sample is only .09% (454 up, 359 down).

What this is clearly telling us is that, after a broad market rise, the market tends to drift higher over the next three trading sessions. Strength begets strength, near term. As I mention in my most recent Weblog entry, it makes sense, when you get a broad-based breakout move, not only to hold to the close, but to leave at least a piece on for further strength.

When we extend the look to five days out, however, a different picture emerges. Five days after the strong day, the market closes higher 18 times and lower 17 times, for an average gain of .12%. For the sample overall, the average five-day gain is .16% (462 up, 351 down). In other words, we lose any bullish edge after a strong day if we hold beyond three trading sessions.

This is a common market pattern. Very strong upside markets tend to produce further strength in the near term, but tend to reverse subsequently. Knowing these patterns can aid you in setting profit targets and maximizing profits on breakout trades. Knowing the patterns can also help daytraders frame their trading ideas, as they will want to think about buying dips immediately following surges in new highs. Knowing historical odds is no guarantee of market profits, but trading in ignorance of the odds is an unattractive alternative.

Here Are Wednesday's Blog Links, Pivot Targets, and Market Stats

Yen and Stocks: What's Carrying This Market?

Not quite perfect mirror images, but pretty close. We have the S&P 500 Index Futures (top) and Yen/Dollar (bottom). Note that Yen strength has been associated with U.S. stock weakness, as it becomes more expensive to borrow the cheap, lower-yielding currency to purchase higher yielding assets. This morning we're making multi-day lows in the Yen, and the S&P 500 Index is knocking at the door of the top end of a several-day range.

The other intermarket relationship I'm watching is oil. Hints of resolution in the Iranian detention of British sailors would take some risk premium out of energy and should support stocks. Continued price strength in oil (we've already risen about 10% in the last two weeks) would not only take a toll on the economy, but also signify further geopolitical tensions.

When you're in a trading range and contemplating a breakout, it helps to stand back and see where the market stands vis a vis the big global/macro influences. Trader sentiment governs the next few ticks, but shifts among world economies create trends.

How To Trade: Blog Linkfest Volume One

I recently assembled a collection of TraderFeed posts that deal with some of the "how-to" aspects of trading. Now, however, it's time to turn the tables and look at how other bloggers trade. A number of trader/bloggers have responded to my call for posts; other sites were suggested by readers. My hope is that this collection will provide you with a variety of models that can assist your own trading. Indeed, I believe you can learn more by following these blogs than by attending most any of the common trading conferences. So let's start with Volume One and see how others are doing it!

* Sites posting their trade ideas, including targets and stops for trades, includes Apex Trader and Alpha Trends. I like how Apex Trader clearly maps out the risk:reward for each trade, and Brian Shannon of Alpha Trends makes especially strong use of video to explain his trades. That's particularly useful, because it enables viewers to follow his thinking. The Market Speculator offers clear perspective on stock screening and part-time trading; lots of good information, including setups, on the site. The Lauriston Letter also illustrates its trading methods and offers market perspective. Company-specific information, along with point-and-figure charts, illustrate trade ideas at Bob's Advice.

* There are a number of sites that post their trades, how they performed, and what was learned. This enables readers to learn from the experiences of others. One of the most thoughtful is NYSE Scalper. The Trading Digest makes a particularly effective use of video to illustrate trades that were placed; some very solid material on the site. Other worthwhile sites include The Chart Strategist, Trader Cowboy, Dinosaur Trader, Misstrade, and JimmyBees. I like the detailed description of trading method in High Probability Trader.

* Here are sites that take a broad look at the market, along with specific trade ideas. There are very interesting ideas in Stockbee, including how to find big moving stocks. Trading On The Edge shares specific trading rules and provides market overviews. Yaser Anwar looks at specific companies, as well as the economy, and also shares how he trades. The Afraid to Trade site has a number of useful posts relevant to trading psychology, but also details the author's trading approach. See also the Trader's Narrative site, which posts trading methods as well as market views.

Oh, but we've just begun. There are many more fine sites and posts offering trading perspectives. Volume Two of the Linkfest is soon to come!

Here Are Tuesday's Blog Links, Market Indicators, and Pivot Targets

Dissecting The Morning Trade

Recall from my recent post that we ended Friday with an inside structure. We also had a situation in which the overnight range dipped below the structure low before returning to the end of day trading range. As noted in the recent post, the inside structure gave us a pivot value of 1431.25 in ES, with R1 = 1434.5 and S1 = 1428.75. If we consider the overnight/preopening range a single bar, then we obtain the following pivot targets: pivot level = 1431.25; R1 = 1435.5; S1 = 1428.75. Notice that these separate calculations provide us with very similar targets.

You can see in the 2-minute chart above (blue = ES futures; red = NYSE TICK) that we traded in the narrow range of the preopening market until 10 AM ET, when we had the release of the ISM Index. Note that the positive TICK was unable to move the market to new highs. That's the condition of inefficiency that frequently precedes market turns. With the release of the data, we saw a breakout move to the downside: a move outside the opening range on enhanced volume and much weaker TICK. The general rule on such breakouts is to enter the market on the first bounce (in a declining market) or pullback (in an upside breakout). The weakening or strengthening market will follow through in the short run to provide a profitable trade. Notice how we took out the S1 target handily. Notice also how selling volume dried up before we could hit the S2 target of 1425.50. That was our first sign that the down move was losing its legs.

After a bounce, we had renewed selling and a new low in the NYSE TICK a little after 10:40 AM ET. This time, however, the selling could no longer take us to new price lows for the day. Again we encounter inefficiency, this time to the downside. The immediate idea that you wanted to entertain was: Selling is drying up above Friday's low; we're in a trading range and will return to the midpoint of the range (1431.25). That made a great trade.

These are the setups and supply/demand shifts that you want to train your eye to see daily. As we saw in the post about Marc Greenspoon, such training requires intensive exposure over time and a willingness to view and review markets and their patterns. It's a particularly nice feeling when you not only see *that* a market move is happening, but also understand *why* it's occurring. There is more to markets than price. Understanding shifts of volume and the tendency to trade at bid vs. offer helps us apprehend the supply/demand dynamics that tell us why a market is moving.

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Marc Greenspoon: A Visit With A World-Class Trader

In past posts, I have tried to describe the qualities that I have observed among very successful traders. I've also attempted to outline specific steps that traders can take to make themselves more successful. In this post, let's make the discussion more concrete by taking you inside one of my visits with a trader I consider to be among the best in the world.

The name Marc Greenspoon won't be familiar to you unless you've read my book Enhancing Trader Performance. He doesn't speak at conference events or advertise himself as a guru. What he does do is trade every day of the week, average between 50 and 100 trades per day in the equity indexes, and make millions of dollars a year. Not just one year or two years, but year after year. He doesn't trade with a mechanical system, and he doesn't trade with quantitative research. Nor does he manage a portfolio. He trades with his mouse and his computer, accounting for several percent of the day's total volume all by himself.

I'm grateful to Marc for giving me permission to write this about him, because it illustrates the sheer level of skill needed to be a great trader. Imagine the commissions of trading so frequently, even given the lower commissions available to a trader at a firm that is an exchange member. Imagine how the slippage adds up over the course of, say, 80 trades in a day. Now realize that Marc's profits are after the costs of paying for his overhead at Kingstree Trading, his trading firm, after all the slippage, and after all the commissions. He would be a fine trader simply by trading that often and breaking even at the end of a year! To make millions of dollars a year, year after year, trading that frequently makes it transparently clear that markets are not random.

Marc called me on Friday and asked, "What are you doing today?" He wanted to set up a meeting. Friday didn't work, but Margie and I had plans to be in Chicago on Saturday, I told him; we could meet then while markets were closed. Sure enough, Marc was up early Saturday morning to greet us.

What did he want to meet about? He wanted to review his first quarter performance and set goals and take specific steps to improve during the second quarter. Not that his first quarter was bad. He made a significant amount of money, certainly in keeping with his past earnings.

But he knows he can do better.

That's one of Marc's defining features. He's not just an expert trader; he's a continually improving trader.

Marc studies himself as diligently as he studies markets. His daily journals, religiously kept, go back years in notebooks that are always at his side. Sometimes he illustrates a point for me by going back to an entry in last year's notebook. He knows the entries--and the markets--that well that he can jump back months and find exactly what he's looking for.

Similarly, Marc keeps a large TV monitor and recording device in his office. He records his trading day by capturing everything on his trading screen, and then he archives each day for reference. The screen shows how the market was trading at the time, where he placed his orders, and where he entered and exited trades. At times Marc will get excited and go back to one of the recordings to show me a specific moment in a specific day's trading. He knows the market so well--and his own trading--that he selects the right day and fast forwards to the right spot in the tape.

Quite simply, he's reviewed so many more of his performances than other traders that he's learned more than others. He is a one-man study in implicit learning. And it's all driven by his desire to improve.

Also by his side are small dictation devices. Marc records his thoughts about his trading and then plays the tapes for review. Many of the tapes focus on what he needs to do to make himself better. He never trades better than when he is thoroughly disgusted with his own performance. Listening to his first tape, my first thought goes to Coach Bob Knight--another professional who hates losing and is driven to win.

Indeed, there is similarity between Marc and Coach Knight. Both are aggressive competitors who wear their emotions on their sleeves. Both are generous to a fault and inspire both admiration and loyalty. And, yes, both can push the envelope too far in frustration and sheer determination. If non-emotionality were a necessary ingredient of trading success, Marc would have gone belly up long ago.

But Marc succeeds for two other reasons:

1) He knows that winning is guaranteed to no one. Look at it this way: let's conservatively say Marc trades 60 times per day with an average of 400 contracts per trade. That's 24,000 contracts per day. It's also about 6,000,000 contracts per year. Do the math: if he makes several million dollars in a year, his edge is far less than a single tick of profit per contract per trade. That razor thin edge, replicated many times, is what makes him a success. It is like the razor thin edge of a NASCAR champion, battling with his pit crew for every fraction of a second. All it takes is a small flip to turn that small positive expectancy into a small negative one and put a trader like Marc into severe drawdown. Marc knows that. That's why he calls me. That's why he keeps recordings and journals. He works as hard on himself as on his trading. Indeed, for Marc, those are one and the same.

2) He has the support of a superior organization. To use one of Marc's phrases, he has "balls" when he trades. But that is, in part, because he has a boss who has the brass ones. Chuck McElveen, also featured in my book, makes it a point to develop large, successful traders. If you don't have a goal of making a very solid six or seven figures a year, Kingstree isn't interested in you. (Of course, if you don't have a track record of success with smaller size, Kingstree isn't going to enable you to trade thousand lots in the ES contract. Indeed, you wouldn't even get hired.) But once a trader is successful at one level, Chuck encourages a raising of size. A trader like Marc can take risks because Chuck can take risks. As a firm owner, he understands that you only learn to take risks by taking risks. You only learn to trade large by growing your size.

Marc is living proof that you don't need a huge edge to be successful, but certain factors are necessary for success. You do need to have an edge; you need the consistency to replicate that edge; you need the drive to continually adapt to changing market conditions; and you need enough capital. I have never met a successful trader who makes money by doubling his or her money every year. The successful traders start with meaningful capital and earn a respectable, but reasonable return upon it. Their success is measured in their consistency, not in their ability to make occasional big scores. The small trader who tries to make millions is forced to take undue risk by trading imprudent size. When the inevitable strings of losing trades occur--as they do for the greats--the account cannot weather such drawdowns.

If you have the drive of a Marc Greenspoon to trade tick by tick every day, review markets in video, keep journals and audio recordings, and sustain a learning curve, just focus on sustaining profitability. Don't try to develop a mad edge. Instead, sustain the edge you have and then seek out those organizations that will bankroll your success. Marc is a constant reminder for me of what can be accomplished with determination and skill. For that I am both grateful and proud.

Here Are Monday's Blog Links, Pivot Targets, and Market Indicators

Trading Techniques: A Collection of Articles

The response to my recent call for articles regarding the "how-to" aspects of trading has been quite positive. Bloggers have submitted their own work, but I've also had readers suggest sites and posts to me. As a result, I'll begin the first round of a "How To Trade" linkfest on Monday.

As an opening course for that meal, I went through the TraderFeed archives and pulled out the posts that I felt were most helpful in illustrating trading patterns and fundamentals. There's a lot to read here, so you'll want to pull out the topics of greatest interest to you.

Want even more? You'll find that the articles page of my personal site also has a dedicated section to trading techniques. Here are the TraderFeed posts. For the most part, earlier posts come first in the order:

* The NYSE TICK and why it matters;

* Tracking participation in falling markets and also in rising markets;

* Small cap stocks and the S&P 500 Index;

* Using Market Delta in trading;

* TRIN and market efficiency;

* NYSE TICK extremes over swing periods;

* Volatility in the VIX and what it means;

* VIX and put/call ratios: when both are elevated;

* Stock index performance from open to close;

* End of month trading bias;

* Smooth vs. choppy moves and what comes next;

* The role of large traders in the market;

* Tracking intraday new highs and lows in the market;

* NYSE TICK and momentum effects;

* Identifying market breakouts;

* Using NYSE TICK to think dynamically about markets;

* Identifying short-term demand and supply;

* Trading with the NYSE TICK: Part One, Part Two, Part Three;

* NYSE TICK and short-term sentiment;

* What we can learn from new highs and lows;

* The pattern of market reversals;

* The challenge of stop-loss exits;

* Blending system and discretionary trading;

* Analyzing market volume for short-term trading;

* Participation as a key market variable;

* Intraday new highs/lows and putting the indicators together;

* New highs/lows at swing time frames;

* What low volatility tells us;

* New lows and market momentum; here's a look at new highs and market change;

* The importance of the trajectory of market moves;

* Tracking the behavior of large traders;

* When to exit a trade;

* The importance of where we close;

* Tracking divergences when markets are at highs;

* A different way of looking at options data;

* Using data from the opening minutes of trade for trading ideas;

* What to look for during flat markets;

* Gauging whether the market is likely to trend;

* Momentum and reversal at swing time frames;

* Setting price targets for short-term trades and using pivot targets in trading;

* Oil prices and stock performance;

* Trading gaps to the upside;

* The importance of dollar volume flows;

* Principles of short-term trading;

* Using the trend of sentiment to frame trading ideas;

* What happens to stocks when option volatility is low;

* Testing trading ideas;

* Identifying and trading breakout moves;

* Tracing the participation of large traders in the market, especially through the use of volume;

* What to look for in good trade execution;

* Understanding market efficiency;

* Reversal effects at swing time frames;

* Understanding shifts in the distribution of sentiment;

* More on new highs and lows on a swing trading basis;

* Intraday new highs/lows and market turns;

* Opening range breakouts: identifying and trading them.

* Using NYSE TICK to trade short-term breakouts.

* Catching market changes with TICK.

* Using participation to qualify market moves.

* A useful trading principle.

Trading Principles: Inside Structures and Breakouts

I've blown up the Friday chart (hourly) of the S&P emini futures (ES) to illustrate the trading pattern of inside structures and the trading principle of breakouts.

As I noted in my recent Trader Performance post, 80+% of all bars--pretty much regardless of time frame--are not inside bars. I've found that a little over 80% of 5-minute, 30-minute, and 60-minute bars either exceed the high of the prior bars or extend below the low of the previous bar. When we look at daily and weekly bars, that proportion becomes even larger. Because volume correlates so well with volatility, we end up having *very* high odds of breaking above the high of the prior bar or below the low of the previous bar when we're trading at average volume or better.

An inside structure is a situation in which 2 or more consecutive bars lie within an immediately preceding bar. As the odds above suggest, these are relatively rare. They occur during consolidation periods when there is relative consensus regarding market value. Our job is to utilize information from the larger time frame (larger market trend; historical patterns covering the longer time frame) as well as information during the consolidation (individual stocks making fresh intraday new highs/lows; dominance of buying or selling sentiment in the NYSE TICK or Market Delta) to help us handicap the odds of breaking either above the high of the inside structure or below the low.

Indeed, think of the entire inside structure as a single bar. By identifying the high/low/close of the entire structure, we can use our pivot formula to identify short-term pivot targets for an eventual breakout move. Thus, for instance, we see an inside structure extending from Bar A in the chart above through the market close. By collapsing those three bars into one for a single H/L/C, we obtain a set of pivot-derived profit targets: the pivot point is 1431.25; R1 is 1434.50; R2 is 1437; S1 is 1428.75; and S2 is 1425.50. Given that the high and low of the inside structure are 1433.75 and 1428, respectively, I'll be looking for information from the overnight market and from early AM trade (volume, compared to average; TICK relative to 20-day average) to help me determine the likelihood of breaking those extremes and hitting these targets.

Observe that there can also be inside structures on a longer time frame. One extends from Bar B through the market close; the other, which also captures the data from the daily bar, extends from Bar C through the close. These larger inside structures provide us with longer-range pivot targets. For instance, the R2 resistance level derived from the first inside structure (Bar A; 1437) is similar to the R1 level from the second structure (Bar B; 1437.75). All things being equal, if we saw evidence of large market participants leaning to the buy side in early trade, that 1437-1438 level would be a natural profit target.

The underlying principle here is that markets are constantly probing price levels to establish value. In so doing, they naturally test previous highs and lows. If those prior highs and lows attract buyers or sellers, a trend (and a breakout from the prior bar) emerges. If those highs and lows don't facilitate trade, we move back into the range of the prior bar. In the course of probing value, we don't always *sustain* highs and lows relative to the prior bar, but we generally move beyond them at least temporarily to see how trade is facilitated.

This breakout principle tells us that it's just a matter of time before inside structures give way to a move beyond range highs or lows. By monitoring what individual stocks are doing within the range and noting shifts in volume and sentiment within the range, we can handicap the direction of the move and get on board for a rise or decline to one of our pivot targets. Also, by focusing on the inside structure, we can limit losses when we're wrong by setting stops when--for instance--we're long and price moves back below the pivot level for the inside structure.

I will follow up with a future post to explain how I traded the inside structures on Monday. What I've found is that, before trading these patterns, I needed to spend a good amount of time retraining my eye to collapse multiple bars into a single bar and then think about what would be likely to happen in the next period of the collapsed time frame. As my next post will indicate, one way of anticipating the break from the inside structure is to track what the individual stocks are doing. But that's a trading principle for another day: Follow The Leaders.

Here Are Sunday's Blog Links and Market Views