| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
For anyone who trades individual stocks, ETFs (exchange traded funds) such as the QQQQ (Nasdaq 100 Trust), DIA (Dow Diamonds Trust) or SPY (Standard & Poor's Depositary Receipts for the S&P 500), or stock index futures intradayTHE STOCK MARKET IS NOW OPENSEVEN KEY INTERNALS TO GAUGE INTRADAY MARKET DIRECTION Unless you enter the tiger's den you cannot take the cubs. JAPANESE PROVERB MUSICIANS KNOW HOW TO READ MUSIC; TRADERS MUST KNOW HOW TO READ THE MARKETS For anyone who trades individual stocks, ETFs (exchange traded funds) such as the QQQQ (Nasdaq 100 Trust), DIA (Dow Diamonds Trust) or SPY (Standard & Poor's Depositary Receipts for the S&P 500), or stock index futures intraday, this is probably the most important chapter in the book. Not understanding this chapter and then going on to trade these instruments intraday is like not knowing how to swim and then trying to qualify for the 100-meter backstroke. Although I will swing trade almost anything, a large percentage of my intraday trading is confined to instruments that reflect the movement of the stock indexes. There is a good reason for thisthere is a ton of data available during the trading day thai will show a trader what is happening behind the scenes in the stock markets. By understanding how to read and interpret these data, a trader will have a better feel if the predominant pressure in the maikets is on the buy side or the sell side and can make trading decisions accordingly. There are plentv of traders out there who have only the vaguest idea of how to interpret these tools, and an even larger group of newbies that has no clue they even exist. This represents a large pool of cash that is ripe for the plucking, and knowledge of this information gets traders closer to the front of the handout line. There is another critical reason for thoroughly understanding this material. Every single trading day is going to present setups on the long side as well as setups on the short side. By understanding how to accurately interpret these internals, a trader will know the following: Which days to ignore all short setups. Which days to ignore all long setups. Which days 10 focus on setups that do best in choppy markets. Which days to focus on setups that do best in trending markets. This knowledge is critical and has a big impact on whether a trader is going to have a winning day or a losing day, and, as the weeks and months progress, an upward trending equity curve or something, well, less amusing. Let's get started. TICKSTHEY CAN RUN, BUT THEY CAN'T HIDE The NYSE (New York Stock Exchange) ticks (TradeStation symbol STICK) summarize the number of stocks on the NYSE that are increasing in price versus those that are decreasing in price from the previous price quote. Many times this is not purely buying and selling as an uptick may represent only that the ask was hit, while a downtick may represent only that a bid was hit. This type of information is like learning that Britney Spears might be pregnant. In other wordswho cares? Yet I've watched traders stare at the ticks, mesmerized by a move from -300 ticks to +200 ticks, and think this was a positive thing for the markets. In reality, this type of move is not positiveit's immaterial, and the information is useless. This brings us to the first rule I follow when watching the ticks: Any tick reading that is below +400 or above -400 is noise and should be ignored. I start paying attention to the ticks on any readings that are over +600 or under -600. These types of moves tell me that there is sustained buying or selling pressure hitting the markets. This doesn't signal any actions on my part, but it does give me a heads-up. If the ticks continue and hit +800 or -800, this does trigger specific action on my part, because only a sustained buy or sell program can move the ticks to this level. This brings us to my next rule in using the ticks for day trading; If I'm long intraday and my stop hasn^t been hit and the markets generate a -800 tick reading, I will close out my position at the market. Conversely, if I'm short and the markets generate a tick reading of +800 and my stop hasn 't been hit, I will close out my position at the market. Readings this high are telling the traders loud and clear that, on an intraday basis, they are either right or wrong, depending on their position. If I'm short, and the market is telling me I'm wrong with a +800 tick reading, I take the hint and close out my trade. This also has the nice benefit of increasing a trader's risk to reward ratio, as it is possible in many instances to get out of trades early that would otherwise have been stopped. I want to make one thing perfectly clear before I move on: / never exit a trade early just because I think I'm wrong. I have learned the hard way over many years of doing this to stick to my original parametersunless I have designated a specific, measurable event that alens me to get out of the trade early. A reading of +800 or -800 ticks is one of these specific events. My deciding to get out of a trade early has nothing to do with gut feel or interpretationI've already discussed in Chapter 2 how woefully inadequate human beings are at making objective decisions while in a trade. Luckily, there is no way around a tick reading of +800 or -?00. The markets either hit that level or they don't. There is no emotion involved. I'm emphasizing this point because I've had the opportunity to sit next to many traders who come to visit me at my trading office. We trade next to each other, side by side, for one week. For the first two days it's straightforward and low key. 1 do my trades; they do their trades. It may seem relaxed and laid back, but there is a very specific reason I do thisI can learn more about people in one day watching them trade live, with their own money, than I can learn about them through normal conversations over the course of five years. In mere talking, people put their best face forwardthe image that they think they are or should be. However, with their money on the line, this facade lasts about 12 minutes, and the underlying, dominant personality springs forth. Sometimes this ain't pretty. In working with this many other traders, Tve seen firsthand the reason most people never make it in this business. In the final analysis, most traders are atrocious at managing their exits. This is indisputably the one thing that prevents most people from making a living as a trader To put it simply, many traders manage their exits by how they feel about the trade. Worse, if they are down on the day, they will manage trades differently from the way they do when they are up on the day, and they don't even realize this. To illustrate this point, there are also many times when 1 will take a trade, and they will take it with me. We will get into the same trade at exactly the same time, and five minutes later I will see them selling out half their position. Of course, I'm perplexed by this because they &aid, JC, I'm going with you on this next trade. The ensuing conversation goes something like this. ME: Steve, 1 thought you said you were going to follow me on this one. Did you just sell some of your position? STEVE: Uh, well, no, I... ME; I heard the software execution platform say sell. STEVE: Oh, that, yeah, well, I'm selling some here to book gains- ME: Why? STEVE: Didn't you say it was a good idea to scale out of your position as it goes your way? ME: Yes but I said only if you had to have a specific exit strategy. You can't exit a trade based on your gut feelings. So why did you sell? STEVE; Uh, the ticks were going higher, and 1 wanted to sell into strength. ME: The ticks are only at +300. STEVE: But they were at +284. This goes on for some time. As a matter of faith I let these traders try to convince me they are justified in their actions, but my eventual goal is to get them to admit to what they are doingselling because they are nervous or scared or excited or whatever, and that surge of emotion is what made them push the button. In other words, there was absolutely no rational reason to take the action that they did. Trading is an extremely private world for most people, with friends and spouses kept totally in the dark of the emotional ups and downs that traders feel and experience each and every trading day. Getting a trader to admit to what's really going oti internally is like trying to pry open a walnut with your fingers. It's challenging because most traders are masters at masking what they are really feeling. Whether a trader is up $25,000 or down $25,000, many times the outside world will never know. I've been there and know the feeling. Armed with this knowledge, 1 go on the friendly attack and eventually get most of them to fess up. 1 don't pull any punches. I tell them that no one is ever going to understand their trading journey like another trader. Speak now or be stuck in your rut forever. Usually this works, and it gets traders to open up and confront their trading demonstrading therapy 101. Let's look at the rest of the tick reading rules 1 follow. The next thing I'm looking for in the ticks is if they hit +1000 or -1000. This k the most important reading of the day for two reasons: First, this usually represents the maximum amount of sustained buying or selling pressure the market can handle. lt*s like a sprinter getting to the end of a 100-yard dash and having to stop and gasp for breath. Second, it represents a specific new trading opportunity. These extreme readings set up a fade play that I follow. If we get a reading of +1000 ticks, I will set up a short. If we get a reading of -1000 ticks, I will set up a long. I discuss this play in detail in Chapter 9. This brings me to the next rule I use with the licks: If lam long and the Markets hit +1000 ticks. I will use that as a signal to exit the remainder of my position. Iff am short and the markets hit -1000 ticks, I will use that as a. signal to exit the remainder of my position. Figure 5.1 is a snapshot of the ticks from March 29,2005. This is how I have them set up on my TradeStation charts. I use a five-minute chart, but the interval is not importantthe key for me is I want to be able to see a full trading day's worth of data. (Side noteall the charts you see in this book have a white background. This is for printing purposes. When I'm watching these on the screen, 1 set the background to black, and the chart colors are usually blue or green on up moves and red on down moves.) In this chart we can see at points I and 2 that there are horizontal lines placed at +1200, +1000, +800, and +600 ticks, as well as at -1200, -1000, -800, and -600 ticks. These horizontal lines serve a very specific purpose, which brings me to my fourth rule in using ticks: set up audio alerts ot all the key tick levels. This way I don't have to stare at the chart, and I never miss a move. These audio alerts are a key part of my trading plan. I can be on the phone, down the hall, or in the bathroom, and I will hear if the ticks make a move. Remember that at the 800 and 1000 levels I take action, so 1 don't want to miss them, no matter what Tm doing. Yes, there have been times when I've had to initiate a new trade with my pants around my ankles, as I'm stumbling out of the bathroom. I spend a lot of time staring at computers, so I like to make these alerts halfway entertaining. When ticks hit +1000, I hear Daffy Duck screaming 'Tin rich! Pm rich! and when the ticks hit -1000 1 hear the Wicked Witch from the Wizard ofOz crying, I'm melting! I'm melting! Visiting traders raise their eyebrows when these alerts first start to hit, but they get their attentionwhich is the whole idea. I want to point out that 1 specifically use a bar chart or candlestick chart for anything having to do with audio alerts. Another popular chart* the line on close, is also good when watching the ticks, because it helps to show a trader when they are rolling over or hooking. However, these types of charts can, and do. miss many audio alerts because the line is literally created on the close of the bar, and misses the high and low fluctuationswhich is what sets off the audio alerts. In this chart we can see that at point 3 the ticks hit +800. On this day I had a short in the mini-sized Dow with a 20-point stop. When the ticks hit +800,1 covered my short for a nine-point loss. When the ticks hit +1000 ticks 25 minutes later, I heard the audio alert for this level, and I set up a new short in the YM (This is a trade setup that is covered in Chapter 9.) Between about 10:30 a.m. EST and 12:30 p.m. EST nothing happened. The ticks were twitching back and forth like a freshly caught tuna on a boat deck. At around 1:30 p.m. the action picked up enough to the point where the ticks registered a reading of -800, and they even hit -1000 later in the day. Let's take a look at this same chart with the actual market action overlaid on top of it 1. The ticks are usually quiet at the open, and at point 1 we can see that the ticks just flopped back and forth for the better part of an hour. The markets did a whole lot or nothing during this time. 2. By 10:25 a.m. we get the first notable tick reading at +600, and this drives the markets higher with ticks eventually hitting +1000. (Remember, this is a shorting opportunity that is discussed later in the book.) 3. The mini-sized Dow futures hit 10542 when the ticks move over +1000, and this ends up being their dead highs of the day. 4. I like to watch how the markets react when the ticks start stair-stepping and making higher highs or higher lows. The ticks shot up to +600 at around 12:00 noon, EST, but the markets did not move higher. Yet when the ticks started making lower lows, so did the market. This is key information. If high ticks of over +600 can't move the markets higher, then that is a tip-off that the selling pres sure is predominant. 5. This series of lower lows in the ticks leads to an eventual steep sell off. The market generally works up to abrupt rallies or sell oflsthe ticks can clue a trader in which way the out of the blue move is likely to be. 6. Here we see the ticks make higher highs, forming an uptrend. 7. Yet when the ticks made higher highs, the YM made lower highs. This is a bearish divergence and a signal that the rally can be sold because there isn't enough juiceT* to gel things rolling. There are rare days in which the markets rocket higher and keep on going, or gap down and keep on selling. On these days consistent extreme tick readings, are generated, usually in the neighborhood of 1200 to 1400. These consistent high readings are rare, but when they happen. I don't fight them. This brings me to my last rule regarding the ticksthis is something I take into account after 10:30 a.m. EST and watch throughout the day: When the ticks spend 90 percent of their time above zero with repeated extreme high tick readings, I ignore alt day trading short setups and focus on tongs. When the ticks spend 90 percent of their time below zero with repeated extreme low tick tendings, I ignore all day trading long setups and focus on shorts. The ticks are a great way to see what is going on underneath the price action. The charts can tell you if prices are going higher or lower, but they can't tell you if the buying or selling pressure is merely fleeting or unrelenting. Leave that job to the ticks. TIKIWHEN ONLY THE FASTEST HEADS-UP WILL DO The tiki (TradeStation symbol ST1KI) is similar to the ticks, but it measures the net upticks versus downlicks on the 30 Dow slocks instead of the entire NYSE. Because this reading follows only 30 stocks, it is the first thing that fires off when a buy or sell program hits the markets. (See Fig. 5.3.) Tiki charts are filled with noise and at first glance they look useless to watch. The key with them, however, is to set up alerts in the same fashion as the ticks. On the tiki, I set up alerts to fire offal +26, +28, and +30 on the upside, and -26, -28, and -30 on the downside. When buy or sell programs hit the markets, these alerts fire off instantly. In general, small programs generate the 26 levels, medium programs hit the 28 levels, and massive programs hit the 30 levelmeaning that all 30 Dow stocks are moving in the same direction. These readings are rare and highlight significant and sustained periods of buying or selling. Surprisingly, I don't use these signals for any actionable exit strategies. If I'm short, and a +28 tiki level is generated, I'm probably wrong on the move, but I will wait until the ticks get to +800 before 1 exit. This is because a buy or sell program can be swift and over in a blink, causing the tiki movement to be erratic. This brings me to my first rule with the tiki: For exits, tiki readings are only the heads-up; ticks are the confirmation. Figure 5.4 shows the tikis on March 29, 2005. When comparing this to the ticks, the first thing that is evident is that the tiki looks like it's all over the place and hard to read. However, upon closer inspection, immense value can be found. 1. I always like to see what type of program hits the market firsta buy or sell program. This represents the first real try of the day, and I want to see how it pans out. In this chart, the first program of the day is a buy program that hits at 10:25 a.m. EST. 2. This sends the Dow to new highs. 3. The next program is also a buy, and it hits at 11:30 a.m. 4. However, this time the Dow does not make new highs and in fact continues to drift lower. This is a heads-up that even a buy program is not able to move the market higher 5. There is another buy program at 12:45 p.m., and this one is after the First sell program hit the markets. 6. This buy program causes a small pop in the markets, but this buying dries up quickly. 7. At points 7, 8.9, and 10 a series of sell programs hits the market, and each time a sell program hits, the markets make new lows. When this happens, the next opposing signal is a fading opportunity. 8. At point 11 there is an opposing signal with a buy programan opportunity to go short. This brings me to the next and last rule I use in following the tiki: If buy programs are driving the markets to new highs, then the occasional sell program is a buying opportunity. If sell programs ore driving the markets to new lows, then the occasional buy program is a shorting opportunity. I like to see where most of the programs are hitting. Are they mostly buy or mostly sell programs? This is important because most of the time markets are doing nothing. They are chopping back and forth. If most of the programs on the day are buy programs and these programs are pushing the markets up to new highs, then 1 want to use the quiet selling oppor^ tunities to get long. This way I'm getting into the market when it's quiet, before the next move higher, instead of chasing it higher A good example of a setup that works well in this situation is the pivot plays I discuss. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |