Do Or Die

That chart does not says anything at all. Could have mentioned a word about their philosophy/approach, makes better sense.

Hi Umfan92, I'm using your stock S for examples- will look forward to more examples from your side in this thread ----------------------------------------------------------- Case Study- The RSI Indicator The RSI has been one of the most popular indicators over a decade. A lot of chartists have talked about its peculiar ability to turn up and down in patterns which can mirror precisely the price behavior. However, like most other oscillators in its category, people start to doubt it for the trouble it gave in trending markets- going up the limits of its excursion and bouncing around there for weeks or months until the trend finally reversed. The common adage is- use oscillators for sideways markets and other indicators for trending market. But the problem is- the market does not make announcements about its price behavior. “Hey DD, I will start trending from next week, so please find other set of indics.” And the adage turns to theoretical BS. We will take a fresh look at what RSI captures from the background of above posts on RS. Calculation: RSI is calculated as 100 – 100/(1+RS). This is a smart formula which takes care of: Too frequent whipsaws and erratic movements are eliminated. The RSI remains remains amply responsive to price movement because an increase of the average close up is automatically coordinated with a decrease in the average close down and vice versa. The question of how high is high and how low is low is answered because the RSI value must always fall between 0 and 100. This allows measuring the momentum of any number of instruments on the same scale for comparison to each other and to previous highs and lows within the same instruments. The most active instruments can be filtered by the criteria that RSI is showing the greatest vertical movement— either up or down. (RSI > 75 or RSI<25) The formula is quite simple unlike Commodity Channel Index. This helps in relating easily to the basic concept of relative strength in prices. You can relate the above diagram to charts of any liquid trading instrument. The RS illustrates changes in momentum (note that the slope in RS curve can be much sharper than price change). The terms ‘RS Internal’ and ‘momentum’ can almost always be used interchangeably. I’m sticking to using RS Internal to relate it to the broader picture of market analysis which I will gradually share. The direction of RS (price acceleration) can be increasing or decreasing. Decreasing RS in a downtrend may be sustainable. But in a sideways trend it will indicate exhaustion of current price move; in an uptrend, decreasing momentum will signal the trend reversal with a good probability. From this observation we can conclude the following: In a healthy uptrend, the RS will not reach the lower parts of its range. RSI typically moves in the range >40 in an uptrend while touching >70 area often. In a downtrend it will remain below 60 and move toward <30 area often. If it’s moving up and down frequently to 35/65 levels, perhaps the market is not trending at all. (attached img1 & img2) In an uptrend if the RSI sharply decreased to below 30, it will indicate a reversal. Similarly for a downtrend, if it suddenly rises above 70, it will indicate a reversal. These conditions are called ‘Mega Overbought’ and ‘Mega Oversold’ respectively. In an uptrend if momentum decreases gradually but significantly over time, it indicates a reversal. This condition is called Divergence. After a uptrend in prices make a double top or triple top, it shows up in RSI as Failure Swing. For trading in a congestion area or slow trend, RSI peaks and troughs can be used for buying/selling. Since RSI directly mirrors turns in prices, we can use it for marking trendlines similarly as in prices. Pennants and Flags are important patterns, and if you can find them distinctly (occur rarely) on RSI, most likely the stock will start a fresh move in the direction of RSI breakout. In the examples note that in img1 everything looks perfect for a trend reversal; but actually if you check the following price action the stock gets stuck in a range before resuming downtrend. This will happen all the time; no indication can assure certainty, you cannot give a prophecy about future prices. Yet you can see the RSI indicated very strongly to close any long positions before prices resumed downtrend (img3). The analysis turned out perfectly for the reversal in uptrend (img4) Implementing the Theory: Suppose you are trading in a sideways/congested market. If the RSI rises into the 65 area you may liquidate 50% of your position. If the RSI rises into the 75 area, you can liquidate remaining position. These RSI levels have a history of indicating exhaustion of the buying for the price run. Your stop-loss orders can also be tightened in a similar fashion; at the RSI 65 level, they can be moved just over the 5-day moving average; at the RSI 75 level, they will be just at the lowest price of previous day. Similarly for trending markets, you can use divergence to liquidate half of your position and tighten your stops for remaining of position. A mega overbought condition can be used to reverse your position. For tightening the stops, you can use a shorter term time frame such as 120-minutes with a moving average of higher period. (In general, trend following trades are of a longer duration than mean reversion trades). I have used RSI with 15 periods because it falls in the most commonly used parameters. I will use the most common parameters in other examples too. You will need proper experience and/or backtesting to arrive at a system. The parameters will also depend upon the time frame used. Short-term investors (holding periods 2-18 months) may like to note that the area for very tight stops in a bear market will not be at same ratio as in a bull market. The reason is bears march at more than thrice the speed of bulls (markets falls at >3x speed than it rises). The markets have a tendency to be more protracted while bottoming out. Knowing this allows you to tighten your stop-loss orders or to liquidate your positions at levels that are not as steep in bear markets as in bull markets. Over the years, this method will ensure that profits can be taken when the market has had an extended run or a very steep price increase. It will be good to take up some examples from other instruments and other time frames. There is some more stuff on divergences which I will elaborate soon. :missy: DD

Hi, The RS is probably calculated by comparing to market index & peer stocks/etfs. I will have to study atleast 20 charts of her to decrypt it- doubt if it will worth the effort. The "Money Wave" is nothing more than a slight variation of popular stochastics :rofl: (see attached) :missy: DD

I'll elaborate on RSI today evening or tomorrow with examples. Two good free sites are: FreeStockCharts.com - Web's Best Streaming Realtime Stock Charts - Free Free Stock Charting Software | Technical Analysis As per your overall approach; I'll say pick up one thing, and do not move to another unless you are acquainted with it. Going through several indicators/techniques can be confusing. Try gather as much concepts as you can, before jumping to conclusions (I will follow same approach in my threads). For generic questions, I will be happy if you can post here: http://www.traderslaboratory.com/forums/stock-trading-laboratory/9918-getting-started-stocks.html DD :missy:

A basic example to get started: In a rising market, most stocks will be dragged along with it and continue to rise. However, there RS may start showing weakness, which means that there is a loss in actual demand (buying) which is being marked by the favorable price increase of the stock. In reality the stock is not keeping with the rest of market, not even costing on the free ride given by the general bullish sentiment in the market. How serious this warning sign can be depends from case to case, because in longer time frames, each market cycle may be different from past ones. In general the stock is likely to ‘roll over’ down once the buying enthusiasm vanishes. In extreme cases, the stock will drop down like a stone once the market tops out. Stock groups behave in a similar fashion. To profit from this analysis, you can exit with profit when the stock is peaking out and safeguard from the cash. Alternatively you can find good short/ultrashort ETFs and enjoy the crash. The best example is the finance stocks which peaked out way before the market during the credit crisis. As seen in attached chart of BAC, its RS started to decline mid-2006, while the market peaked in late 2007. The second chart is of YRCW, picked from discussion in the other thread: http://www.traderslaboratory.com/forums/technical-analysis/10184-am-i-doing-right.html#post121967. From prices alone it may seem that the stock is just moving up and down wildly, but the crushed RS indicates that the stock may be in BIG trouble. :missy: DD

Hi, In my other thread http://www.traderslaboratory.com/forums/technical-analysis/10120-relative-strength-internal.html, I introduced the concept of RS. That one will be open for discussions relating to internal relative strength of a stock. In this one I will share some RS concepts which are used by professional investors worldwide. Unlike most of Technical Analysis, RS has been validated and accepted by academicians (the other two important concepts being momentum and mean reversion). For Stocks RS is used to gauge their strength against the entire stock market (through SnP 500, DOW), or against their peer group. CANSLIM is a popular method which uses RS for investing. RS for an industry group/sector is measured against the broader index to measure its upside potential. Sector Rotation Model is the most important work in this regards which shows how different stock sectors perform in different stages of the market. There is a lot of stuff I plan to post related to RS; not just about stocks but all important asset classes; and not just about investing but different time frames for trading. :missy: DD

I will just start a new thread on RS and will post YRCW chart (in this TA section only) in few minutes. Its RS was crushed before it tumbled down earlier this year. In many aspects the chart reminds me of crisis ridden stocks in 2008. So either the chart shows what happening in the company. OR the management is playing a nasty game and it can be bought for 4x+ returns target. The third case of the stock trading at these levels for a year before moving up or down seems less probable. :shrug: DD

Technically it could be a great mean reversion candidate. But you can only buy it on good fundamentals. From the chart it looks like the company can go bankrupt.

It is testing evens of 5... looking worse. Whether it goes up or down... get out as fast as you can.

Relative Strength (Internal) Continued... RS internal can be measured as 1. Size of Upward movements vs Downward movements 2. Momentum of Upward movements vs Downward movements It will be worthy here to look at Aroon indicator. The Aroon indicator is unique because it focuses on time relative to price, while typical momentum oscillators focus on price relative to time. It measures how much time passed between the highest (up) or lowest (down) since the beginning of a period (in percents). A 14-day Aroon-Up measures the number of days since a 14-day high. A 14-day Aroon-Down measures the number of days since a 14-day low. The value of Aroon declines as the elapsed time between a new high (low) increases. The difference of Up & Down Aroon lines is called the Aroon Oscillator. It's positive value indicates an upward trend (or coming trend), and the negative value indicates a downward trend. There are three stages to an emerging trend signal. First, the Aroon lines will cross. Second, the Aroon lines will cross above/below 50. Third, one of the Aroon lines will reach 100. :missy: DD

Relative Strength (Internal) Consider Two Stocks: 1. A stock which is trading ‘relatively stronger’ than its movement last week 2. A stock which is trading at same levels as last week (range bound) The first one is obviously a better buy candidate than the second. I will talk about measuring RS using few indicators and PA practitioners may wonder whats the point behind maths for such simple things. Well, this thread is just about concepts and for those using (or looking to use) indicators will find this useful. To measure this RS we can simply start with the crux behind RSI. Wilder, the founder of RSI based it upon RS of a stock which can be defined as: RS = Average of Up days price movement / Average of Down days price movement The raw RS moves too fast so we can smooth it using SMA(20). The Amibroker formula for RS is: // Code for plotting Wilder’s Relative Strength function RS_Raw( period ) { P = N = 0; result = Null; for( i = 1; i < BarCount; i++ ) { diff = C[ i ] - C[ i - 1 ]; W = S = 0; if( diff > 0 ) W = diff; if( diff < 0 ) S = -diff; P = ( ( period -1 ) * P + W ) / period; N = ( ( period -1 ) * N + S ) / period; if( i >= period ) result[i] = P/N; } return result; } Plot( MA(RS_Raw( 14 ), 20), "20 Day Smoothed RS", colorBlue ); You may like to plot RS and RSI in same window and notice similar charecterstics: In uptrending market, both RSI and RS move in upper half of their range. Similarly, for downtrending market they move in lower half of range. Divergences and Reversals Sharp movements indicate that market is overbought or oversold Infact, many indicators measure the same under different names. The ADX suggests buying when +DI crosses over –DI. The Plus Directional Movement (+DI) equals the current high minus the prior high, provided it is positive. Similarly, Minus Directional Movement (-DI) equals the prior low minus the current low, provided it is positive. Conceptually this means that the stock is changing from downtrend to uptrend; OR, it trading ‘relatively stronger’ to past week/month. The ADX itself is used to measure the strength or weakness of a trend, not the actual direction. I will stop writing now and wait for comments to explore other ways to measure internal RS. :missy: DD

Hi, Relative Strength (RS) is one of the most basic concepts in Technical Analysis, like trend analysis or mean reversion. However, it is seldom talked about in discussion boards and often ignored by beginners. Some people might be acquainted about RS in reference to CANSLIM and similar investment screening (Intermarket approach). However, RS is a generic concept which can be used for trading in all time frames and implemented with almost any technical strategy. I’ll discuss it with basic examples here, looking forward for comments from fellow traders. :missy: DD

Sorry for this delayed reply- if anyone was kept waiting. Open range trading is done on shorter time frames: 1-5 minutes charts. For prevailing trend we can check 60 minute charts and for important support/resistance levels, the EOD chart. See the chart of BBY today. I've attached today's & daily chart. Prevailing trend/momentum: The stock has risen sharply in past week from it's 52 week low. The trend is strongly up. It has significant resistance at 32 Price Shock: Opens gap up by more than 4%... almost 1 ATR Opens above the resistance where on can expect large number of sell orders Breaks down on the lower side I can't be more clear at this point. Mention any open-range(OBR) strategy and we can check details on how these gaps increase the odds. Such strategies are hard to execute profitably in futures. Will look forward for comments and more examples to discuss. :missy: DD

Hi, For analyzing any gap there are two main things to look for: 1. Prevailing trend/momentum when the gap occurs 2. The price shock that the gap delivers For gaps people usually look for white space between two bars. I'm referring to all gaps- those which occur when Open is significantly different than previous Close. For example a full green candle for today -> next day the stock opens near the base of candle. For open range trades... this can be very useful. I'll write more and take a example on Monday. In the meanwhile comments can keep me motivated :missy: DD

Can't agree more... the stocks market-microstructure helps in distinguishable price patterns and prominent regime shifts.

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Should bounce a little till 5.47... get rid of them at that price. Sell them off... get out of the pit. Get your money out of the stock and in your pocket... you will get better opportunities.

Hi, Use LOO or MOO orders with SMART as routing option. A regular day order will not get you the exact opening price. I've seen a lot of open strategies but not sure on why you want to get the open price. For liquid stocks the opening imbalance is hard to exploit. You are welcome to discuss it at: http://www.traderslaboratory.com/forums/f25/getting-started-stocks-9918.html DD

Hi SIUYA... "trade stocks and options for the intellectual buzz"... well for me it's all about the robustness of trading as mentioned in my other thread. DD

OK guys... sorry about the brevity and your questions are most welcome. And please don't mind if I'm slow in responding (habitual laziness). DD

1. It is purely Technical If you read my say on regime shifts, you will appreciate that it is good to know what is happening in the underlying. 2. Stocks Trading is for newbees only I know several millionaire traders in stocks, and have personally met few. 3. Stocks Trading is for wimps LOL, I’ve heard that from futures traders. Again, it’s all about the money you’re making 4. Stocks trading is difficult because stocks are highly manipulated Bears are manipulative to bulls and vice-versa. Suppose two playful brothers have to divide a cake between them; isn’t that one of them will try to get a bigger piece? You just have to turn things in your advantage and avoid ranting. DD

1. Each stock has its own characteristics And not just each stock, each stock group has its own characteristics. The SnP has its own as a market index. Gradually you start picking them. This gives you edge against randomness, and a base for defining a set of strategies. 2. Regime shifts Stocks show regime shifts remarkably clear. There will be phases when you will make money in every trade, and there will be phases you won’t get a clue about what’s happening. The phases usually occur when there is a fundamental shift in underlying. 3. Diversification Diversification isn’t simply buying uncorrelated instruments. For professional traders, a much better form of diversification is trading uncorrelated strategies. This is easier done in stocks than futures. 4. Gaps and Pre-market trading Gap trading in stocks is still one of the easiest plays for a beginner. There are many types of gap patterns to play and thousands of stocks to choose from. You can choose stock screeners such as Trade-Ideas and get started. 5. Event- based Trading 5 years back things were very easy for scalpers and daytraders (the time I started trading). You could make money just by trading on news only- using a premium news service, of course. Even these days, trading around news events in stocks is easier than in futures. Option spread strategies can be used to their full potential around such events. 6. Trading as well as Investing Once you start trading profitably in stocks, chances are high that every couple of years you will pick 5-10 great investment stocks. This comes automatically as insight after day to day trading for a long time. Having your investment portfolio is a great way to park your investments. DD

Hi As mentioned in my introductory post, I am very much a stocks person. TL has rich material on almost everything, but I see little activity in these sections. I will share a few things in this thread which beginners will find useful. The experienced stocks/futures traders will also see my perspective on why I prefer stocks over other trading instruments. DD

Hi, I have a good experience on trading with candlesticks (so called price action) My first advice is that we do not make judgements based on single patterns. It's a study of supply and demand. Could you please share the whole chart- atleast 300 bars- then it will make more sense. DD

Hi Guys! I'm a long time lurker- finally glad to writing here and hope to interact with all. I am a stocks guy. Been trading for 5 years very actively, tried almost all markets, but trading stocks short-term is my love. I've done OK with my trading so far... made enough money to pay for a comfortable lifestyle. I'm a discretionary trader and idea person- keep note of hundred trading strategies in my secret vault. DD