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At the End of the Year, a Time for Reflection

by Adam on 21/12/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders with 1 Comment

As we come to the end of the year, I want to encourage and challenge my readers to think about their trading performance. Working toward trading competence is a path, not a destination. Whether you are an experienced trader who is very pleased with your performance, a struggling developing trader, or someone who has just begun her journey, I’d like you to spend a few hours in self-reflection and ask yourself a few simple, but profoundly important questions:

  • What is your edge in the market? How do you know?
  • How stable/strong is your edge?
  • What do you need to work on to improve your performance?
  • What do you do best?
  • What can you do better?

Thinking a bit deeper about these questions: What is your edge in the market? How do you know? If you are going to be successful trading, you absolutely must have an edge in the market. Money management is not an edge. Psychology is not an edge. An edge is something that lets you pull profits out of an extremely competitive market environment, that gives you some edge over the randomness that dominates price movements. How do you know what your edge is? If you can’t answer these questions, you don’t have any business putting risk on in the markets. You do not have an edge because you bought a book or took a training course, no matter how much money you paid or who taught you. You must have sufficient math skills to understand probability and randomness and truly understand your edge in the market.

How stable/strong is your edge? There are very, very few persistent edges in the market. Most come and go, and may not be reliable in the future. How is your edge on this scale? Again, how do you know?

What do you need to work on? Most people tend to focus on what they do best, and to avoid focusing on their weaknesses. This makes sense in some cases, and it certainly is easier psychologically. However, from a performance perspective, and especially for someone developing skills, finding and working on your weaknesses is often the key to the fastest progress. If you are a beginner, you may be doing many things wrong, but a good mentor or coach can point you to the most pressing issues you should address first. Commit to finding your weaknesses and improving them, and watch your overall performance grow by leaps and bounds.

What do you do best? Yes, I think the majority of your time should be spent on addresses your weaknesses, but don’t neglect your strengths. Chances are, there are a few things you do really well. Know what those are, protect those strengths, and work to improve them. For beginners, it probably makes sense to focus most of your attention on strengthening weaknesses and improving faults. For more experienced practitioners, the path to improvement is often marked by your strengths. Find them, nurture them, and watch your performance grow.

What can you do better? No matter who you are, how good of a trader you are, or how good your year was, there’s always something you can improve. Make a concrete list of the three top things you want to work on, and focus on those early next year. This is not a vague “New Year’s resolution”—it is a concrete action plan for growing as a trader.

Know Your Tools

by Adam on 21/12/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders with No comments

As an author, sometimes you don’t realize what part of your work will resonate with readers. This is one reason that it is so gratifying to get feedback from readers—it’s always nice to know when the circle is complete and someone has found something of value in your writing. Reader Anthony sent me an email saying that this paragraph from The Art & Science of Technical Analysis, or rather the philosophy that I was advocating in it, completely changed his perspective on his trading:

It is critical that traders understand the subtleties of every tool they use. They should know how they react in every possible market environment, and furthermore, must understand the complex interactions between multiple tools. This may lead to an approach that disregards a lot of information that many traders assume to be useful, but, for instance, why would you use indicators that do not add to your analysis? Why would you listen to news that is old news and is already fully priced into the market? Why would you try to guess how complex fundamental factors might influence the price if you do not have the skills to fully understand those fundamentals? Why would you solicit opinions from traders who may trade with completely different styles and may be less competent and knowledgeable than you are? Traders do all of these things, but most of them do not make sense. Limit your scope to tools that truly add value.

I am setting the stage for a number posts that will expand on this idea. I’ll show you examples (like the Santa Claus post), and give you tools and techniques you can use to understand what’s happening in the market. We’ll also look at a number of very commonly used tools that show no quantifiable edge (maybe we’ll start with moving averages or Fibonacci retracements), and we will find some things that do.

Yes, Virginia…

by Adam on 14/12/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Market Math with 2 Comments

It’s nearly impossible to go a day in December without hearing the phrase “Santa Claus rally.” There is an impression that the market tends to rally into the end of the year, and that we can count on that. Many explanations have been proposed, ranging from managers marking their books to holiday goodwill to more quantitative reasons. In an earlier post, I made the arguments that the market was not a math problem, and that you don’t have to use a lot of advanced math to understand the markets. This is true, but math is a powerful tool. Used properly, it can help us see what is real in the market. To illustrate this point, let’s look at the Santa Claus rally, and ask two questions: First, is it real? Meaning, does the market really tend to go up into the end of the year? Second, if it is real, how has it performed over time? If we find something that has persisted for many years and appears to be stable, it’s probably much more likely to work this year.

To run this test, I used about 90 years of the Dow Jones Industrial Average because of the long data history. It is a reasonably good, but not great, proxy for the broad market—good enough for this purpose. I first took daily closes, then converted them to percent returns. Since daily returns tend to be small, I went one more step and converted them to basis points, just because it is easier to deal with a number like 2 than .0002. (A basis point is one one hundredth of a percent, so 1% = 100 bp, 0.1% = 10bp, etc.) Let’s work first of all with recent data. Here are some summary stats for all daily returns:

Be sure we understand what this table is telling us: There have been 3,019 trading days with an average daily return of 1 basis point (=.01%). The worst day was -7.87%, and the best day saw the market go up a little over 11% on that day. The important thing here is to understand the thought process: we need to know what “all” days look like as a control group, so we can contrast them with the days that have the specific condition we are interested in. In this case, let’s compare them to trading days in December, since that’s when Santa comes.

Now, this is getting interesting. December shows an average return almost seven times the average of all days in the year. Another thing to notice is that the standard deviation, which is a measure of how widely spread out values are, is smaller (though let’s not focus on the standard deviation for this post.) Not only are the daily returns larger, but we seem to know where they will be with more certainty (if this dataset shows tendencies that continue into the future.) Conventional wisdom (and seasonal analysis) tells us that volatility tends to contract into the end of the year; this table seems to support that. Let’s dig just a bit deeper, and look at what happens if we break out the last two weeks and the last week of the year separately.

Maybe we are a little bit less impressed here, but the effect does appear to hold. (Also not shown in this table is the closing print for the year has been higher than the open of the previous 4 weeks 75% of the time.) So, yes, Virginia, there is a Santa Claus rally, but wait… we are not done yet. Take a look at the following table, which reproduces this table in roughly 2 decade segments.

Now we start to see a clear pattern, and the truth is ugly for the Santa Claus rally. Each segment shows a weaker and weaker effect—the last week of the year, which since 2000 has yielded an average daily return of 0.05%, gave a 0.25% return in 1940-1959, and a whopping 0.4% (per day) in 1922-1939. By comparison, today’s effect is anemic. Probably the best way to put this is, “Yes, Virginia, there has been a Santa Claus, and if you were a good investor he probably brought you money. He probably even did this for decades and decades, but he seems to be getting tired, and I’m not sure we can count on him showing up next year, or the year after that. If we hang our hopes on Santa Claus in the market, it seems like we might be frustrated. There must be a better way.”

The Art & Science of Technical Analysis

Simplify, simplify, simplify…

by Adam on 05/12/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Psychology, Trader Development with 5 Comments

Some of my readers know that I studied cooking formally—it was something I’d always wanted to do, and I arrived at a spot in life where I could pursue a culinary degree and apprenticed in the kitchen of one of the top French chefs in America (who was a disciple of Paul Bocuse, but that is a story for another day.) I remember my early days as a trainee chef; I cooked dinner parties for friends often and I had a box that I carried with me that had about forty five different herbs and spices. I also had a set of maybe 15 knives that I took with me—a knife for every possible purpose. Today, fifteen years or so later, how has my cooking changed?

First of all, it’s better. I would put many of the things I make up against similar dishes made by any restaurant kitchen anywhere, and keep in mind I live in a city with restaurants like Craft, Per Se, and Le Bernardin. More to the point, I have simplified, simplified, simplified everything to bare essentials. Rather than forty five different herbs and spices, now it’s usually salt and pepper, parsley, garlic and fresh thyme. I almost always have one of two knives in my hand, and I might pick up the paring knife for small jobs. My long study of Japanese cuisine means that when I cook something, I try to express the essence of the thing. For instance, for steak, hot cast iron, salt, pepper and a little butter when it’s finished will do the trick. Less can be so much more.

It has been the same with my trading. In nearly twenty years of trading, I’ve been around the block a few times in a few different ways. I have used multiple indicators with hundreds of lines of code each. I’ve had complicated systems with rules that fill two pages for bar counts, indicator crossings, and action in related markets. I’ve traded every possible timeframe from scalping to building baskets and portfolios for monthly/quarterly timeframes and beyond. I’ve build multifactor econometric models to forecast rates and asset class returns, looked at cross correlations between higher moments of return distributions, and screened for trades across a universe of thousands of assets. Much of this journey was a legitimate part of my learning, but I have realized something over the past year and a half as I’ve finished my book, The Art & Science of Technical Analysis—I have truly become a minimalist.

Gone are all the complicated indicators and rules, and, in their place, is a simple system with rules I can explain in five minutes, and two indicators that are non-essential and only used in a supporting role. I do not look at a huge number of supporting (complicating) factors and I try to limit my inputs to only those that I know are significant. The end result is that I can make a trade decision in a matter of minutes, and trade and risk management rules are clearly defined. What’s more, I find I can trade this system with absolutely no emotional involvement, so total, objective control is easy to achieve. The more I have simplified and removed garbage, the better my results have become. You probably don’t need 75% of the things you look at or use in your trading. Your results might even be a lot better if you just focused on the things you really do need. “Hack away at the unessential”, as Bruce Lee said. What is unessential in your trading? What can you simply?

Some hard questions.

by Adam on 29/08/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders with 3 Comments

I want to share a few thoughts today on technical trading in general. The points in bold come from the end of the first part of my recent book, The Art & Science of Technical Analysis. I expanded each of those with a little more commentary. These points and ideas apply to all pattern-based or technical trading systems. Take a moment, step back, and look at your own trading from this perspective. Many times technical traders struggle because they are either using patterns that don’t actually have an edge, or they do not understand the importance of waiting for a clear entry. Making some small adjustments to your trading plan can have a big impact on your bottom line.

Markets are highly random and are very, very close to being efficient.

If you are a new trader, trading is probably harder than you think it can be. If you’ve been trading a while, you know this. Financial markets are one of the most competitive environments in the modern world. New information is quickly processed and incorporated into prices. This means that you cannot outsmart the market consistently. You cannot invest based on what you think makes sense or should happen because you are up against investors with superior access to information, knowledge, experience, capital and other resources. Most of the time, markets move in a more or less random fashion; you can’t make money if market movements are random. (“Efficient”, in this context, is an academic term that basically means that all available information is reflected in prices.)

It is impossible to make money trading without an edge.

There are many ways to create an edge in the markets, but one this is true—it is very, very hard to do so. Most things that people say work in the market do not actually work. Treat claims of success and performance with healthy skepticism. I can tell you, based on my experience of nearly twenty years as a trader, most people who say they are making substantial profits are not. This is a very hard business.

Every edge we have is driven by an imbalance of buying and selling pressure.

The world divides into two large groups of traders and investors: fundamental traders who base decisions off of financial analysis, understanding of the industry and a company’s competitive position, growth rates, assessment of management, etc. Technical traders base decisions off of patterns in prices, volume or related data. From a technical perspective, every edge we have is generated by a disagreement between buyers and sellers. When they are in balance (equilibrium), market movements are random.

The job of traders is to identify those points of imbalance and to restrict their activities in the markets to those times.

Since we cannot profit consistently (i.e., above the probability of a coin flip) in random markets, it makes sense that we should limit our exposure to times where there is a clearly-defined imbalance of buying and selling pressure. When this occurs, which is often visible in certain patterns in prices, we now have the possibility of creating trading profits. This, identifying the imbalance, is the first step in any technical trading.

So, ask yourself some hard questions: Do you understand how to identify points of imbalance in the market, and do your trading patterns respect this reality? Do you believe that markets are usually random? Do you understand that no profits are possible in random markets—that nothing will help? Not money management, exit strategies, or positions sizing. You must wait for an imbalance to emerge on your timeframe, and, only then, take action in the market.


A little mental trick…

by Adam on 27/08/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Psychology with 5 Comments

I want to share a quick thought with  you today–a little trick in thinking that made a big difference in my trading a few years ago. One of the problems with traders is that we can be stubborn. This happens to everyone, and no one is ever immune to it. It takes a lot of confidence to pull the trigger, and sometimes much analysis and hard work has gone into justifying the trade. What do we do when contradictory information emerges? Well, sometimes the shock of seeing that the trade is wrong can even cause traders to freeze, with disastrous consequences.

I developed a little trick that might seem trivial, but it is very important. Simply put, anytime to you put a trade on, assume that the trade is going to be a loser. No matter how much analysis, how many supporting factors, or how perfect the pattern is, assume that the trade will lose money. This creates a profound shift in your focus because, rather than searching for and possibly discounting contradictory evidence (which can sometimes be as simple as “I just bought and now it’s going down…”), you will be open to and will readily accept contradicting information. Of course you will, because you assumed the trade was wrong to begin with. When you find confirmation for the trade, it is almost a pleasant surprise. Shift your thinking into this mode, and you will be much less likely to overstay your welcome in suboptimal setups that are not working out–you’ll be far more likely to do the right thing, which is usually to pull the plug on the trade (time stop) and look for a better opportunity.

Now, there’s another piece to this puzzle. A lot of writers focus a lot of attention on confidence in trading, and this is important, but it is a different kind of confidence. You must have confidence in your method and know that a profit is virtually assured over a large enough set of trades, and be able to separate this knowledge from the outcome of any one trade which is, more or less, a coin flip.

I’ll write more on this later, but, for now, see if you can subtly push your thinking in this direction and see what  impact it has on your bottom line. For me, at least, this is one of the keys to emotional control in trading.


Working on Exit Skills

by Adam on 20/08/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Psychology with 3 Comments

One of the challenges developing traders face is learning to manage positions effectively. Think about it for a minute—how many books do you know that show patterns and setups for trade entry? Now, how many do you know that focus on position management? We probably put too much emphasis on entry techniques, when much of our edge as traders comes from the decisions we make in managing positions.

I’m going to suggest an exercise that everyone can do to work on position management, but let me first share a few thoughts. Position management means several things: limiting the risk on your initial entry, taking partial profits (and losses, if you do that, though I present a very compelling case for not booking partial losses [edit: a type said "profits" in the first version of this blog entry] in my book, The Art & Science of Technical Analysis), looking for spots to add, and getting out entirely when the edge is gone out of the trade. Especially for newer traders, this is extremely difficult because of the emotional issues involved. One solution is to spend some time focusing only on the exits.

Many professional traders work in teams. In fact, when I was at the NYMEX, Mark Fisher went so far as to say that nearly every long-term successful trader he knew, on or off the floor, worked with a partner or a team. (Ari Kiev devotes quite a bit of space in Trading to Win to the importance of teamwork.) I worked closely with another trader for a few years, and we developed a technique that worked very well for us: whichever one of us generated the entry idea and got into the trade, the other one was responsible for getting out of it. Many times, a trader is very attached to an idea by the time we actually execute the trade because a lot of analysis and thought has already gone into it. You have visualized several scenarios and possible ways the trade might play out, and it is very easy to justify overstaying your welcome, or getting stubborn in a trade. If you are only responsible for the exit, you have no emotional attachment to the trade, and can see much more clearly. It’s a lot easier to read the market and to make decisions.

Linda Raschke and Andrew Lo created a similar experience for a number of traders in Linda’s chatroom in the early 2000′s. Several times during the trading day, Linda would call out a trade. If you were participating in this study, you were obligated to take the trade, but you could manage it however you saw fit. You could even get out immediately (usually for a tick or two loss), but you had to take the trade. Many traders participating in the study were surprised to find that they were remarkably profitable on the set of trades even though many of the entries were truly random. The message is simple—exit techniques and position management skills have as much or more to do with profitability than entries.

So, how can you work on developing these skills? I would suggest something like this. Now, because you’re dealing with psychological issues, papertrading is probably not very effective. I’d recommend doing this exercise with real money and actual positions. I’m going to make a separate set of suggestions for daytraders and intermediate term traders, but you can adapt the concept to your own situation.

  • Pick one specific instrument (stock, futures contract or currency pair) that you are already familiar with and know reasonably well. Plan to trade it on smaller size than you usually would. If you trade an equal-risk position sizing plan (more on this later), perhaps do this exercise on 10% of your usual 1X risk. If you are the kind of trader who usually trades a fixed size, perhaps trade 10% – 20% of that size on each trade. You do not want to nervous doing this, but you do want to experience the emotions involves with having real risk in the market.
  • It probably makes sense to be aware of reports that could have a major impact on the instrument you’re trading and avoid them. Know your market.
  • There are two parts to generating the random entries: a trigger for whether or not you take a trade at all, and a decision whether to go long or short. If you are a daytrader, perhaps check for a possibly entry every hour. If you are a position trader, check every day.
    • You can decide how often you want to trade, on average, and then rig a system that will generate that trade frequency. For instance, let’s say you’re a daytrader who wants to check every hour the stock market is open, and you want to take, on average, two trades a day. In this case, you need something that gives you an entry 1/3 of the time, so perhaps roll a six-sided die and take an entry if it’s a 1 or a 2. If you have basic programming or Excel skills, it’s pretty easy to do something with a random number generator instead of rolling physical die.
    • For the long/short decision, either bake that into your first filter (for instance, the guy rolling the six-sided die could go long on a 1 and short on a 2), or flip a coin after you have the yes/no on the entry.
  • The only other rule is you must take the trade indicated immediately and without question. Don’t think, and don’t hesitate. If you want to get out right away, still do the entry and immediately execute the exit. Otherwise, manage the trade appropriately.

This is a worthwhile exercise, and it might be a good idea to budget a certain amount of risk to it over a period of a few weeks to months. Remember, the whole point of this exercise is to remove any emotion associated with the entry or trade idea. How can you be attached to a trade you generated through a flip of a coin or a roll of a die? Exactly, you cannot, so now you can focus all of your attention on trade management and learning to respond to the message of the market as patterns unfold.


Reader question: Color Rules

by Adam on 09/08/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Uncategorized with No comments

Reader Jayram asks, “Can you tell what is the significance of the blue & red bar coloring in your charts on the blog?”

Sure, Jayram. I use various color rules on my charts, but I do not use them in any systematic fashion (for the simple reason that I have not found any systematic trend indicators that give an edge to my discretionary trading.) This particular rule set does actually have a small quantitative edge, but it is mostly there to provide another layer of structure on the chart. Chart setup is something I discuss in detail in The Art & Science of Technical Analysis, and one of the overriding principles is consistency—I think it is important to use the same indicators on all charts and to change them as rarely as possible. (An important exception to this rule might be if you were using something like Alexander Elder’s Triple Screen system, as described in his excellent book Trading for a Living, which requires different indicators on different timeframes.) Having said that, I do change the colors displayed (e.g., red/blue, orange/green, purple/blue, etc.) from time to time to keep the eye fresh.

There are many ways to set up these color rules. A simple one might be blue above a moving average and red below. A more complicated rule set could be a gradient depending on where the close or midpoint of a bar is in a set of channels or bands. The particular rule set I use is adapted from Linda Raschke’s work, and has its roots in Welles Wilder’s Parabolic system. Specifically, it looks back over 40 bars and marks a “trend change” (flipping colors) when price moves 2.6 ATR’s off the highest high or lowest low of that lookback period. Don’t get too caught up on specific rules, but consider if adapting the concept of some kind of trend indicator wrapped into color rules might help you see charts more clearly. If so, use it. If not, go for clarity and keep things as simple as possible.


Trading Pattern: the Failure Test

by Adam on 24/07/2012 in Failure Test, General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Technical Patterns, The Book with 1 Comment

I want to do a small series of posts looking at some of the most important trading patterns I’ve used over the years. Rather than go in-depth with multiple examples, I’ll keep these posts as a high level, introductory overview and will focus only on the most important points of the patterns I’ve found most useful in my own trading. Today, let’s begin with the failure test.

There are many names for this pattern. Victor Sperandeo immortalized in his excellent books (here and here) as the “2B” pattern, and many other authors have since used that name. Wyckoff used slightly more confusing terminology, calling a failure test below support a spring (prices “spring” back above support) and a failure test below resistance and upthrust. (The latter term is confusing, but prices “thrust above” resistance and immediately failed. Furthermore, if you’re interested in Wyckoff’s work, this little volume is an excellent introduction.) In The Art & Science of Technical Analysis, I used the term failure test for trades both at support and resistance, in the interest of simplicity.

Figure 1

The failure test is a simple pattern. Take a look at Figure 1, which shows a theoretical market bouncing around in between support and resistance. At point A, prices poked above resistance, and immediately failed back below in a classic failure test or Wyckoff upthrust. (Don’t worry about exact triggers or entries at this point, just understand the fundamental concept.) At point B, the market traded briefly below support, and quickly recovered back above, triggering another failure test (or a Wyckoff spring.) Note also that the short trade at A would have probably been very profitable, while a long trade entered at B might have been a loser. It’s always important to build awareness of how patterns can resolve—both for and against the intended direction. In other words, study many examples of losing patterns.

Figure 2

The best way to enter these failure test trades is often the simplest. Look for a point where price trades above resistance and immediately fails back below on the same bar, and enter short on that bar’s close with a stop just above the high of that bar. (See figure 2.) It is also possible to enter on the following bar (i.e., a bar closes above resistance, but the next bar reverses and fails back below resistance); in all cases, the stop must go at or just beyond the new high set on the movement. For long entries, simply flip everything to a test below support and close back above.  Conceptually, one of the main reasons markets exist is to create trading activity. Think about that for a minute–markets exist to create trading volume, so they will naturally seek out levels where there may be orders clustered. (This is also tied into the reasons that markets are essentially designed to cause traders to make mistakes.) Many of those forays to find volume will discover nothing more than a few stop orders with no conviction beyond the level. This pattern lets you take this potentially treacherous market tendency (to seek your stops) and turn it to your advantage with a tight entry against a clear risk point.

One final, and perhaps the most important consideration, is risk management. I tend to trade failure tests in two main contexts: in trading ranges, on pure tests of support or resistance; and in trends, as counter-trend entries—essentially an attempt to catch the reversal off the high of an uptrend or the low of a downtrend. Both of these situations are potentially risky: liquidity can be low in trading ranges, so it’s not uncommon to have a gap opening against your positions. In trends, “gap and go” beyond the trend extreme (and, ahem, your stop) is also a possibility, and these are gap openings that do not tend to reverse. You must be prepared to accept larger than expected losses on some subset of these trades, so I suggest trading them on smaller size and risk than most of your other setups. Also, if you have an adverse opening against your position, be prepared to take action, as things often only get much worse as the trading day goes on.

I’ll follow up with a post tomorrow looking at some examples of this pattern in action.


 

 

Tracking the Stock Market Intraday

by Adam on 19/07/2012 in General Comments, Individual Self-Directed Traders, Institutional Mangers/Traders, Relative Strength, The Book with No comments

One of the main challenges for stock traders is understanding the ebb and flow of the broad market on the shortest timeframes. There is so much noise in price movement at this level, and so many instruments are traded, that it is hard to know what is important. Some traders have their go-to bellwethers and market leaders that they track, but this can result in a process that is a little myopic and subject to the whims of that trader’s taste and experience. Other traders simply watch the broad indexes, but a lot of detail is lost at that level.

This screenshot shows a tool that I have found to be very useful for understanding strength and weakness on the shortest timeframes. This information is less useful on a multi-day horizon, but, for understanding what’s driving the market on a particular day, there’s no better tool. This tool presents broad market and sector indexes (though not shown, it also extends down into sub-sectors. For instance, some sectors are divided into 15 sub-sector indexes.) ranked by their percent change on the day (first numerical column.) Next, a volatility-adjusted standard deviation spike number is listed along with a rough overbought/oversold (on the daily timeframe) measure. Last, and perhaps most important, is a graphical representation of where the instrument sits within its current day’s range. (This tool, with exact steps to produce it, is discussed in the book.) Basically, the vertical line shows the current price within the day’s range indicated by the dashes. The colon, for reference, shows the opening print of the index, though this is often less useful in cash indexes.

This tool allows you to see what is driving as the market presses to new highs and lows. (Combine with audio indicators for new highs and lows on the major indexes and you have a very powerful tool.) You can also see, at a glance, where indexes are trading relative to their opening print. This tool has implications for traders trading broad indexes—for instance, the market just made a new high, but what if we only see 1-2 sector indexes also pressing to new highs, and, furthermore, we see that they are very defensive sectors? This would be a warning to be careful of longs. It also can give both swing and daytraders some insight into what is actually going on with specific positions, though this requires some finesse and artful understanding of how to balance many competing factors.

It is not important that you replicate this screen exactly, but you may want to at least consider the following core concepts:

  • Intraday strength and weakness can be gauged by where a set of related markets sit in the current day’s range.
  • When the broad market makes a new high or low on the day, seeing what sectors are also making highs and lows can give some good clues to market direction.
  • Simple percent change on the day can be a misleading measure of strength and weakness.
  • The move off the opening print is also a valuable tool.

Tools like this can give a trader a much better perspective and can round out the information already provided by other tools.


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