Do Or Die

I think I read somewhere on this page... :rofl:

wow... thanks for the pointer... so when are you going to sell me that magic forecasting mirror PS: think calmly sometimes later can you make a more useless statement ever :rofl:

1. A similar drop like past 10 days (more than 10% decline in a healthy bull market) is a very unusual event. This has occurred so seldom since great depression that you can count the instances on fingers. Technically this indicates a very high probability for negative returns for next few years. Date/Time 10 day change 8/4/2011 -10.54 3/21/2001 -11.58 10/27/1997 -11.29 10/15/1987 -10.76 10/27/1978 -10.15 9/3/1946 -10.74 5/14/1940 -13.58 9/8/1937 -10.43 5/11/1934 -10.1 7/21/1933 -15.79 2. Relative Strength of financials has peaked out considerably. Note that financials are usually the leading sector to turn down at a peak. 3. Fundamentally stocks are NOT undervalued- there is sufficient room for price stagnation for few years or a further decline of around 20%. 4. The NY Fed's Treasury model suggests a recession probability less than 1% (0.97%); and for July of next year the recession probability is even lower, at 0.80%. This data will soon be significantly updated with the recent fall in treasury yields. I have a hunch that this model in hyped being in public domain and has lost its edge. In any case, we may not see a typical recession but the chances of slow downtrend on weekly charts cannot be ruled out. (The model uses the spread between the yields on 10-year Treasury notes and 3-month Treasury bills to calculate the probability of a U.S. recession up to twelve months ahead) 5. This crash is unlike any similar past instances in the sense that it is triggered by global events and not just the US economy. The recent fall is most likely triggered by Europe’s dire crisis, with Italy and Spain joining to the list of troubled economies. ECB rate hikes expectations (until very recently anticipated for autumn 2011) have suddenly vanished, and the September 2012 Euribor contract prices them at slightly below those for 2011. The biggest consumer’s market, China, is slowing down. Japan currently is a distinct case study 6. The US Economy has just grown by 0.4% in the first half of 2011 and all major economic indicators continue to point slow economic activity. According to the National Association of Realtors home prices will likely drop another 10 % nationwide, and according to the Mortgage Bankers Association, 70% of all loan applications are refinancings. Rapidly rising prices have (and will) hit the confidence of consumers. ISM data suggests that new orders will be dropped off and firms appeared to have tightened down on inventories. Recent PMI number indicates that manufacturing is barely above the zero line. 7. Institutional Funds are flowing from relatively riskier assets to relatively safer assets (from stocks to treasuries and gold). The market has made a strong opening today reacting to yesterday’s price action which looks like a climactic bar. I have marked yesterday’s lows and currently working to liquidate my investment portfolio (wrote most of this stuff yesterday evening).

Hi, In Trading Regime Analysis Using Chart Patterns- Part 1 I discussed how regime analysis can be done with familiar chart patterns which indicate a trading range compression. Let’s look now at some other popular chart patterns. Again, these are the main points to consider: The patterns mentioned in this article differ a lot in form and duration, so please refer to a particular pattern for trading it. For the sake of Trading Regimes, a lenient definition of the patterns will do; i.e. you do not need to go strictly by the books in marking them. The price target for a breakout (magnitude of a following move) is usually the broadest part of the range of the chart pattern. If prior to any of these patterns, a distinct extended move (trend) exists, then it favors the outcome; i.e. the move after the pattern will be stronger in magnitude. Broadening Triangles usually occurs at long-term turning points in the market, be that at whatever time fractal the pattern occurs. Mark these patterns on one time frame higher than the time frame you trade. So the practical implication is to trade using a trend following strategy on one time frame lower. Broadening Wedges are more common than broadening triangles and can be traded similar to them. The only difference is in the internal structure; wedges tend to have more overlapping retracements and are not so distinct in shape. The period of price action when the Head and Shoulders pattern is forming is more often than not a range-trading regime. When the neckline of the head and shoulders breaks down, the market accelerates down on that particular week and the trading regime analysis is skewed strongly to a trending regime developing. The most important thing in identifying a H&S pattern is existence of a prior trend. You can be ready to take full advantage of the regime switch by, for example, increasing risk on trend following models/methods or by reducing risk on range-trading models/methods. Double tops and bottoms again are skewed to the trending regime rather than ranging regime. However, please note that a double top may lead to triple top which can further lead to a trading range (lol!) and regime will be skewed to range bound. For a double bottom to be confirmed, we need to see the market rally up past the reaction high which is the level it reached after making the first low. Until that high is broken, the market has a lot of potential to carry on in the downtrend and could be in the making of a descending triangle. Diamond patterns usually form over several months in very active markets. Volume will remain high during the formation of this pattern. The Continuation Diamond (Bullish) pattern forms because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Breakout occurs when trading range compresses to complete the ‘diamond’ shape. Price Shock based patterns are either caused by 1.) huge gaps, 2.) wide range bars, and 3.) reversal bars. Mark these patterns on TWO time frame higher than the time frame you trade. So the practical implication is to trade using a trend following strategy on 2 time frame lower. For example, if you are trading on hourly TF, look for these patterns on weekly TF. Examples of Gap based patterns are island tops/bottoms and dead-cat-bounce. Examples of wide range bar patterns are one day reversal, pipes and climactic bars. Example of reversal bars are hammers, shooting star, hanging man, dark cloud cover, harami etc. (most of the classic candlestick patterns). Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

KNDI looks good SCEI looks like a wild beast USBI - wild beast NEWN - wild beast GRO- why buy? AERG- buy with caution ABAT- buy with caution Anyways, since you asked for a scaling strategy, a good approach could be: -Decide a stop price at which you will exit all of your position no matter what -Calculate risk and no. of (tentative) shares if you were to exit at initial stop price -Buy 40% of position at CMP -Add 20% at a level close to your initial stop - add 40% only at a very comfortable price when the stock has moved up significantly and your trailing stop is above the buy price. Regard this as a separate trade when you get such chance. For example in KNDI, suppose you can risk maximum 1000$ and your initial stop is 1.90. Say current price is 2.74. You can buy 40% of 1000/(2.74-1.90)= 475 shares at 2.74 1.99 looks a good level so you can add 20% of 1000/(1.99-1.90)= 2000 shares aprox 3.0 looks a good level so if the stock moves around 4, you can raise your stop to 3.00 and add remaining shares. PS: add minimum 2 cent slippage for all trades in calculating no. of shares (slippage can bleed you out in such stocks). This is only a raw example, every time you move your stop re-asses your risk.

I need to study those techniques in the first place to agree or disagree

I never bothered to read/study about Gann techniques, but would agree with you to disagree on that statement written with hubris.

Hi, Most of the trading techniques overlap in some form; none of them exist in isolation. For example, a Bollinger bands breakout strategy may overlap with chart pattern breakout strategy. Similarly, trading regime analysis can be carried out discretionary through chart patterns. I am writing few articles which will hopefully be helpful to Price Action traders (those who do not use indicators). Related articles are Trading Regime Analysis Using RWI, Trend Following Vs Mean Reversion: Trading Regimes, Introduction to Understanding Volatility, Trading Regime Analysis Using RSI and Relative Strength - Internal. For the purpose of Trading Regime Analysis, we can categorize patterns into Trading Range Contraction (coiling) Trading Range Expansion Price Shocks There are few things I will like to highlight regarding trading regime analysis using chart patterns: When we see a coiling in price action it usually means that the current trading regime is a range and the next trading regime will be a trend. Mark these patterns on one time frame higher than the time frame you trade. So the practical implication is to trade using a trend following strategy on one time frame lower. For the sake of Trading Regimes, a lenient definition of the patterns will do; i.e. you do not need to go strictly by the books in marking them. The price target for a breakout (magnitude of a following move) is usually the broadest part of the range of the chart pattern. For Time Frames (TF) I’m referring to the popular ones in the order- monthly, weekly, daily (eod), hourly, 30 minute, 10 minute and 5 minute. Suppose you are trading on 60 minute TF, in that case you will need to look for patterns on EOD TF. These are generalizations only and you may like to pick one depending upon your trading style. Range Compression Chart Patterns: Ascending triangles generally occur when the market has been in an uptrend (or experienced at least a partial up move before the pattern). They are indentified by flat topside resistance and rising uptrend support. Descending Triangles generally occur when the market has been in a downtrend (or experienced at least a partial down move before the pattern). They are identified by flat support trend line and falling downtrend resistance line. Symmetrical Triangles generally occur after the market has been in trending period either up or down (or the market has experienced at least a partial up or down move prior to the pattern developing). They are defined by converging levels of support and resistance, leading to a classic coiling of the price. Wedges are similar to triangles, except that they are not so remarkably bounded by trend lines. Corrective wedges tend to follow the double or triple zig-zag structure. Rectangles can occur anywhere as in an uptrend, downtrend or during reversal. The price action during a rectangle is identified by prolonged period of sideways action where the upper and lower bounds are horizontal or very slow sloping. Flag is another range-trading regime that comes after a strong trending move, and it usually leads to a continuation of the trend. It is basically a rectangle marked on one time frame higher. One of the important elements in identifying a flag consolidation pattern is that the preceding move is a strong, almost vertical move. Pennant is similar to a flag in that it is occurs after a strong move and will therefore generally occur in the shorter time fractals. It can be regarded as a scaled down symmetrical triangle although, as with the flag, it can have a slight slope. Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

Same logic: http://www.traderslaboratory.com/forums/tech-analysis/10448-trading-regime-analysis-using-rwi.html#post124510 Same logic :haha: http://www.traderslaboratory.com/forums/technical-analysis/10120-relative-strength-internal-2.html#post122239

re-validate my mean PS: don't know though if its distinct/atypical. with zillions of perceptions and opinions thrown around forums I feel everything I do is distinct :rofl:

Well, I think leaving one-liner opinions is similar to leaving tips where to buy/sell. Some markets tend to show 'less random' cycle of stationarity, but they all cycle in and out of stationarity. In that sense, RWI will not be useful at all. I only mentioned RWI as a general trend strength indicator comparative to ADX. I also think that anyone who has done these kinds of studies will be using custom indicators.

May I request you to elaborate on why you hold that opinion? forums are for discussions. thanks.

Sorry about the delayed reply. I have been on a family vacation for past few days; will post examples shortly. Don't bother, I suggested RWI for regime analysis only. You can use RSI or many other methods for regime analysis. Once you get hold of a strategy software you can go ahead playing with custom indicators. Yes. You can try on 60 min or EOD timeframe with one of the utility/transportation stocks. As a little exercise try paper trading with overbot/oversold levels when a stock is range bound or moving in a congestion area. Cheers.

I'll point to some resources soon on what is optimization. FYI, it's not optimization. Also, optimization is not just helpful, but essential for automated trading. What does not works is curve-fitting. Cheers.

Hi Phantom, No particular reason, as mentioned I wanted to plot: 1. Longer-term RWI for trend strength (on EOD most traders use the mid-MA as 40 or 50) 2. Short-term RWI for overbot/oversold levels (I would suggest a value 7-10 trading days because thats usually the period on EOD during which stocks get over extended or struggle in retracement). If someone trades on Weekly charts, he may like to use 200 and 40 perios RWI. In general, the ratio between short-term and long term may not be greater than 1/3 because retracements arn't supposed to be mroe than 30% in a healthy trend. thanks, DD

Yes, you can use RWI for selecting a particular stock or futures to trade. Every stock within itself goes through different trading regimes.If you refer to the RS-internal thread, and regime shifting example using RSI, you can use almost any oscillator to shift regimes from and trade appropriately. also replied to your PM.

Hi Umfan, As I previously mentioned, for beginner traders it is good to understand one technique/indicator before moving to another. The other day I was discussing with Phantom about divergences- most oscillators behave in same way. You do not need to research each of them to learn about trading overbot/oversold levels. Studying one will be sufficient. You can stick to only one (say RSI) http://www.traderslaboratory.com/forums/technical-analysis/10120-relative-strength-internal.html Once you are fully comfortable with it, you can tweak them to suit your trading style (example Trading Regime Analysis Using RWI

Hi, Michael Poulos shot into fame in early 90’s when he published an article about RWI. He showed that Corn has the strongest tendency to trend while Wheat has the least. RWI is not talked about much because Poulos was more interested in his trading rather than writing books to commercialize it. It can be used to rank stocks for their trend strength. As a comparison, RWI is conceptually better in mathematical construction than ADX. RWI ‘ranks’ an instrument’s tendency to trend by comparing it to a random walk. This is very useful for Regime Analysis because traders can apply trend following strategies to instruments which show a greater opportunity to trend. Similarly traders shift to mean reversion strategies for instruments which tend to move around a mean (‘more stationary’). The earlier articles in this series are: Trend Following Vs Mean Reversion: Trading Regimes Introduction to Understanding Volatility Trading Regime Analysis Using RSI Relative Strength - Internal Note that within an instrument, regime shifts may appear favoring trend following or mean reversion strategies. However, in this article I want to discuss the trending tendency of an instrument in general. Some instruments tend to exhibit stronger trending tendencies than others always. Take the stocks for example. Which sector stock do you think are most trending on EOD? Consumer Goods and Technology are the most strongly trending, while Utilities and Transportation are least trending. This ofcourse is drawn on ETFs, but a similar model can be drawn for individual stocks. The general conclusion here is Technology stocks favor trend following strategies while Utility stock favor mean reversion strategies. The above chart shows RWI averaged over 100 periods for some ETFs. Since RWI shows a trending tendency, the wilder the RWI extremes for an instrument, the greater is it’s tendency to trend. Let’s look at now what makes RWI effective for such conclusions: It compares trends directly with random drift Objectivity is maintained by not requiring an arbitrary lookback interval (for example, the length of a moving average) RWI has two components- Random Walk Index of Highs (measures uptrend) RWHI= (H-Ln) / (R*sqrt(n)) Random Walk Index of Downtrends (measures downtrend) RWLI= (Hn-L) / (R*sqrt(n)) Here ‘Hn’ and Ln’ are Highs and lows n days back respectively and R is the average range. The sqrt comes into picture from Mathematician W. Feller’s proof that a “random walk” generated by tossing a coin (one step forward if heads, one step backward if tails) would show a displacement from the starting point, depending on the square root of the number of tosses. RWI is calculated as the difference between RWHI and RWLI. It therefore effectively measures the tendency to trend compared against randomness. The closer the RWI value remains around Zero, the lesser the tendency of an instrument to trend. Here are some major indices ranked according to their trends over past one year: Index Ticker Index Name RWI Average IXUT NASDAQ Telecommun 0.02 HUI AMEX GOLD BUGS IN 0.11 XAU PHLX Gold/Silver 0.13 TYX Treasury Yield 30 0.16 IXBK NASDAQ Bank 0.19 AORD ALL ORDINARIES 0.22 DJU Dow Jones Utility 0.30 DJT Dow Jones Transpo 0.36 IXTR NASDAQ Transporta 0.37 IXIS NASDAQ Insurance 0.40 DJA Dow Jones Composi 0.43 IIX AMEX INTERACTIVE 0.45 NWX AMEX NETWORKING I 0.50 SOXX PHILADELPHIA SEMICONDUCTOR INDEX 0.52 DJI DOW 30 INDEX 0.53 IXFN NASDAQ Other Fina 0.56 N225 NIKKEI 225 0.57 VLIC Value Line Geomet 0.66 XAX AMEX COMPOSITE IN 0.67 NYA NYSE COMPOSITE IN 0.68 RUT Russell 2000 0.70 IXK NASDAQ Computer 0.72 RUI Russell 1000 0.73 SML S&P SMALLCAP 600 0.73 NDX NASDAQ-100 0.74 RUA Russell 3000 0.75 IXIC NASDAQ Composite 0.76 PSE NYSE Arca Tech 10 0.77 BTK AMEX BIOTECHNOLOG 0.78 OEX S&P 100 INDEX 0.78 DWC DJUS Market Index 0.79 GSPC S&P 500 INDEXRTH 0.80 MID S&P 400 MIDCAP IN 0.82 XOI AMEX OIL INDEX 0.82 NBI NASDAQ Biotechnol 0.89 IXID NASDAQ Industrial 0.91 The RWHI and RWLI indices are calculated over a range of lookback lengths using the largest value returned for today’s indicator. Thus, we let the market determine the lookback interval, rather than use a fixed arbitrary one as many current indicators do. Now we know, trends exist in all freely traded markets. The swings in RWI are cause by short-term exception to the rule that trend exists. This leads us to other very important use by plotting a short-term RWI against a longer term. The short-term is a good over bought/oversold indicator while the longer one is a good trend indicator. Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

Hi Phantom, Definitely yes, it's a very useful observation. I once met an ES trader who would draw next 4-5 candlestick bars on a notebook every time he felt a reversal is about to happen. He used to trade on 5 minute time frame. There is so much to properly reading the market, now people can see how tough it can be to automate trading. However, you may like to rethink about your explanation on what causes divergences. Indicators such as RSI or MACD take only closing prices into account and candlestick shapes will not effect their outcome. I think we agree other than on candlestick shapes. I explained it in the terms of prices closing towards the limits of their past n days trading range Construction of RSI If fact, Relative Strength in context of RSI means simply the measure where a stock is trading in reference to its past range.

Hi Phantom, I was referring to discretionary short-term trading (holding time 30 mins to 3 days). Since last year I have been working on automating my strategies. I'm a Amibroker user- and believe it or not- it took me almost 6 months to get a 'satisfactory' support/resistance code. I'm talking about basic S/R which any discretionary trader will be able to mark. When we mark these levels we are quick to adjust for gaps, spikes, stagnated prices. I'm talking about stuff which may appear common sense to a discretionary trader; but when coding everything need to be quantified. It's a little over 100 lines. Take the divergences for example for which I gave a link in previous post. There is a method for ranking these based on the conditions which make them occur, and related to how accurate they may be. If you go through that post I factor several things like previous trend and price shocks for ranking them. The ranking method alone will receive quotes around 1000$ from programmers.

Divergences using RSI They can be quantified to a good extent (the analysis can be automated). but the problem is that coding them requires more than just familiarity with ninja/tradestation. I personally know people who have automated their discretionary trading systems and their code runs into thousand of lines.

Hi Tams, It's pretty much like saying do chart patterns work. Mostly subjective. They work if someone reads them in correct context.

Divergences using RSI

Phantom, I have a large number of trader friends; part of which comes from my experience of trading on a floor for 4 years. Just wanted to say your discussion style is great. Yes, my threads make a perfect example I have turned to writing articles rather than posting; it does not hurts if there are 1000 views and not a single comment or thanks.

Hi, This article is a build up on the previous one- Trend Following Vs Mean Reversion: Trading Regimes. I will now try to clarify the meaning of Trading Regimes using RSI as an example, before we move to more sophisticated methods. This is a discretionary method, but conceptually strong, and can serve as an intro to quantitative methods. We will gradually shift to the crux, "Big moves are often preceded by contraction,and followed by expansion in volatility, this works across all time frames." There is also significant academic research on regime shifting, and you can find papers on SSRN. Two other relevant links are Relative Strength - Internal and Introduction to Understanding Volatility Most trading strategies can be categorized into two different camps: Trend Following and Mean Reverting. An example of trend following is buying when prices cross above a moving average. For trend following systems or strategies, simply buying and holding the market has it's benefits. First and foremost - It's simple and when markets catch a trend, it can run and run. However, Trend following relies on directional moves. Your strategy will lose if the market is sideways; and, the markets CAN remain in a sideways mode until you go bonkers. You can make a trend following strategy howsoever complicated using MACD, ADX, Parabolic SAR. But if the strategy is "trend following" it will not perform in sideways market. An example of mean reverting will be- buying when a oscillator tuns upwards from a oversold stage. Mean reverting strategies relies on the assumption that market cannot continue in one direction for prolonged time; it will "revert" back to a theoretical mean. The "mean" is always shifting ofcourse. The moving average is a good example of a mean around which prices move around. Trading using price bands (eg. bollinger bands) and channels is also an example of a mean reverting strategy. These strategies lose money in trending markets. The aim of these articles is to establish a method of switching between strategies as they blow hot and cold, so you don't continue to follow the strategies that aren't adapting to current market conditions. Shifting Strategies using RSI A sharp and extended move to either the overbought or oversold area signifies the start of a directional move. Refer to Mega Overbought stage at Relative Strength - Internal. The opposite conditions qualify for a Mega Oversold stage which indicates the start of a new downtrend. An uptrend is marked by the fact that RSI will not reach the lower parts of its range. RSI typically moves in the range >40 in an uptrend while touching >70 area often. A downtrend is marked by RSI does not reaches the upper part of its range. In a downtrend it will tend to remain below 60 and move toward <30 area often. A sideways trend is marked by RSI moving >70 and <30 area. When the market is trending, the Moving Average Crossover with price is used to generate signals. When the market is sideways, the oscillator turning up (down) from a oversold (overbought) stage is used to generate signals. Note the period where all signals are discarded, whether they come from a trend following or a mean reverting method. This is because the regime shift is not clear, as per the definition above. From a historical perspective it looks more like a sideways market and should have given money from a mean reverting strategy. The improvement by switching strategies should be very apparent in this example. The productivity of your trading system/methodology can improve dramatically by including a 'regime analysis' or 'adaptive layer' on top of strategies. I currently use a custom indicator for regime analysis, however, it can be achieved through many techniques. Please post a comment- they encourage me to provide better examples.