Novice Trader Journey

Breakout of the Day - IMOS

2012-02-24T19:37:00.000-06:00

Stock =Chipmos Technologies Bermuda (IMOS)
Industry group = Electronics
Sub-industry group = Semiconductor Equipment & Materials
Industry group ranking = 9 out of 31
Price per share (<$20) = $10.63
Price percent change today (>4%) = 18.11%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 794,000
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 8.17
Dollar volume (>100,000) = 8.5 million
Latest float (<70 million) = 18.9 million
Percent shares owned by institution (<70%) = 39%
Breakouts in past 5 days = Yes

Breakout of the Day - HOLI

2012-02-23T18:12:00.000-06:00

Stock = Hollysys Autmation Tech Ltd (HOLI)
Industry group = Manufacturing
Sub-industry group = Industrial Electrical Equipment
Industry group ranking = 4 out of 31
Price per share (<$20) = $10.66
Price percent change today (>4%) = 8.00%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 1.0 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 4.17
Dollar volume (>100,000) = 10.6 million
Latest float (<70 million) = 40.3 million
Percent shares owned by institution (<70%) = 40%
Breakouts in past 5 days = No

Breakout of the Day - TGE

2012-02-22T17:44:00.000-06:00

Stock = TGC Industries Inc (TGE)
Industry group = Energy
Sub-industry group = Oil & Gas Equipment & Services
Industry group ranking = 15 out of 31
Price per share (<$20) = $9.23
Price percent change today (>4%) = 7.33%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 316,000
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 2.72
Dollar volume (>100,000) = 2.9 million
Latest float (<70 million) = 13.7 million
Percent shares owned by institution (<70%) = 58%
Breakouts in past 5 days = No

Breakout of the Day - CLUB

2012-02-16T20:39:00.000-06:00

Stock = Town Sports International Holdings Inc (CLUB)
Industry group = Leisure
Sub-industry group = Sporting Activities
Industry group ranking = 21 out of 31
Price per share (<$20) = $10.13
Price percent change today (>4%) = 12.93%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 516,000
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 6.69
Dollar volume (>100,000) = 5.2 million
Latest float (<70 million) = 16.4 million
Percent shares owned by institution (<70%) = 65%
Breakouts in past 5 days = No

Trading Thoughts - Renko and Range Bar Volatility

2012-02-16T06:06:00.010-06:00

I believe that stops, profit targets, and position sizing should be adjusted for volatility. This is a common practice among many traders to help manage their risk. I also prefer to use renko or range bar charts when trading. These charts are great because every bar is the same size and it helps weed out low volatility behavior. Unfortunately, the strength of renko and range bars is also their biggest weakness. The big down side with renko and range bars is that you cannot use average true range to determine volatility because all the bars are the same size, so the charts are already adjusted for volatility. This makes it difficult to size stops.

Would it be practical to use a fixed size stop when using range bar charts? It does not seem so. The price action still has some volatility in its movement, its just volatility that can't be measured by individual bars. You have to account for the behavior of groups of bars and not just single bars.

So how do we go about measuring the volatility of range bar charts? Perhaps using something like Bollinger bands that utilize standard deviation to calculate a measure of volatility is the answer. Maybe calculating the difference between the 10 bar high and the 10 bar low is the answer. Maybe using the three bar low or high to set stops is the answer. The thing that was great about average true range is that it was a very elegant and simple solution to the volatility issue. I would prefer to find a method that is similar in its practicality.

Any suggestions?

Breakout of the Day - VIP

2012-02-15T17:23:00.000-06:00

Stock = Vimpel Communications (VIP)
Industry group = Telecommunications
Sub-industry group = Wireless Communications
Industry group ranking = 30 out of 31
Price per share (<$20) = $11.98
Price percent change today (>4%) = 6.39%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 3.8 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 2.03
Dollar volume (>100,000) = 45.5 million
Latest float (<70 million) = N/A
Percent shares owned by institution (<70%) = 43%
Breakouts in past 5 days = No

Trading Thoughts - Relative Strength Bond Strategy

2012-02-15T06:31:00.000-06:00

I spend a lot of time reading books or blogs on trading and investing. I really enjoy exposing myself to different perspectives on the market. During my journey, I have come across countless sources that have discussed a rotational stock trading strategies. Relative strength is a popular method for capturing the returns of the best performing instruments. You will commonly see this strategy applied to different stocks or stock sectors. It often generates much better returns with less risk than a traditional buy-and-hold strategy.

In all of my research, I have never seen a relative strength strategy applied to bond funds. I have seen many relative strength strategies that include a bond fund among its many asset classes, but never a relative strength strategy that solely focuses on bonds. It could be a popular topic that I haven't come across yet or it could be that bonds are not sexy enough to be considered for relative strength algorithms.

I think that bonds are an even better candidate for relative strength than stocks. Think about it for a second. Bonds have very low volatility and have a tendency to trend much more consistently than most stocks or asset classes. This should make it much easier to identify which bonds are performing well and which bonds are not. Also, when a bond goes from poor to good relative performance, it would have a better tendency to maintain that relative performance for longer periods of time, resulting in fewer performance whipsaws you may see with stocks. One final point, bonds typically produce better returns during bear markets. Therefore, if you have a stock trading strategy that is only well suited for bull markets, a bond relative strength strategy could be a fantastic compliment to your stock trading strategy during bear markets.

I am going to apply a simple relative strength analysis to my two favorite bond funds, FGMNX and FNMIX, to evaluate the potential of a bond relative strength strategy. I think most people assume that bonds have small returns compared to stocks, which in most cases is true. There are some exceptions though, especially when the stock market has been range bound for over the past decade. I believe you will find that the results of the strategy will be very enlightening.

Breakout of the Day - TNGO

2012-02-14T20:09:00.000-06:00

Stock = Tangoe, Inc. (TNGO)
Industry group = Computer Software & Services
Sub-industry group = Business Software & Services
Industry group ranking = 20 out of 31
Price per share (<$20) = $17.69
Price percent change today (>4%) = 13.69%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 1.6 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 7.49
Dollar volume (>100,000) = 27.8 million
Latest float (<70 million) = 11.8 million
Percent shares owned by institution (<70%) = 49%
Breakouts in past 5 days = No

Trading Thoughts - Two Bonds are Better Than One - FGMNX and FNMIX

2012-02-14T06:09:00.009-06:00

I showed in previous posts how FGMNX is a bond fund that gives your portfolio domestic exposure with monthly dividends, linear returns, and very minimal risk during market drawdowns. FNMIX gives you the power of increased returns of foreign (emerging market) exposure with less volatility than a stock equivalent, while also providing consistent monthly dividends. Combining the performance of both of these funds could be a simple strategy to include bond exposure in your investment portfolio to provide some diversification while maintaining reasonable returns versus risk.

For this analysis I am assuming that you will allocate a certain percentage of your portfolio to bonds, for example 20%. With that assumption, you would allocate 10% of your portfolio/contributions to FGMNX and 10% to FNMIX to compose the 20% exposure in your account. Obviously, each person's asset allocation will very with age and risk tolerance. The point of this analysis is to compare the performance of the combined average strategy to the individual performances previously reported as well as to the overall performance of a buy-and-hold strategy on the S&P500.

Let's take a peek at the numbers and the past performance of combining the returns of FGMNX and FNMIX (I will call it the AVG strat). The AVG strat has an average annual return of 6.95% over the past 18 years. It pays a monthly dividend and the max drawdown over the past 18 years was -23%. The equity curve is fairly linear with a few sizable drawdowns during overall market retracements. Below is a chart of the equity curve for AVG strat compared to the equity curve of SPY, a surrogate for the performance of the S&P500. The AVG strat performs well compared to the performance of SPY which had an average annual return of 6.04% with a max drawdown of -55%. Both curves are dividend adjusted.

Like its individual components, the AVG strat has done a good job of providing consistent returns comparable with the market, yet with less risk as indicated by the smaller drawdowns. There have certainly been times during bull markets when the SPY has outperformed the AVG strat by a considerable margin (internet bubble, real estate bubble, financial crisis rebound). Where the AVG strat really shines is during bear markets where it has often produced good returns compared to SPY. This is typical of bond performance. Below is a chart of the equity curve drawdowns for the AVG strat and SPY that highlight the improved risk performance of the combined bond strategy.

Let's see what you can expect from the fund's historical performance. The one year rolling returns have averaged a return of 9.7%. What this tells me is that had I chose to invest in the AVG strat anytime in the past 18 years and held it for one year, I would have averaged about 9.7% returns on that one year investment. Also, 89% of the 4250 rolling one year returns were above 0%, so the odds are good that you will make money on your investment over the course of one year. Below is a chart that shows the one year rolling returns for AVG strat (green) with the average of all the rolling one year returns shown in blue.

The rolling one year max drawdowns shows that there have been three substantial (around -20%) drawdowns. The average rolling max drawdown was -2.1%. This tells me I can expect a drawdown of at least -2.1% when I hold this investment for an entire year. Also, 90% of the rolling one year max drawdowns were -5.1% or better, which is much better than the SPY (90% are -22.1% or better). Below is a chart that shows the one year rolling max drawdowns for AVG strat (red) with the average of all these drawdowns in blue.

It is always important to remember that things can change in the future. Regardless, this average bond strategy has done an exceptional job of providing consistent returns through some rough times. The SPY has had a total return of about 288% over the past 18 years because it has been range-bound for most of that time. If you were an exceptional market timer, you could have made much more during this period. For a simpler approach, the average bond strategy has a total return of 337% over the past 18 years with smaller comparative drawdowns (-23% AVG strat compared to -55% SPY). You would have made almost 7% a year using the buy-and-hold average bond strategy, which is a very good return considering bonds are supposed to be a conservative investment.

Breakout of the Day - ICA

2012-02-13T17:23:00.001-06:00

Stock = Empresas ICA Sociedad Controladora SA de CV (ICA)
Industry group = Materials & Construction
Sub-industry group = Heavy Construction
Industry group ranking = 1 out of 31
Price per share (<$20) = $7.62
Price percent change today (>4%) = 8.24%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 0.9 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 3.24
Dollar volume (>100,000) = 4.2 million
Latest float (<70 million) = N/A
Percent shares owned by institution (<70%) = 6%
Breakouts in past 5 days = No

Trading Thoughts - Combined Bond Performance

2012-02-13T06:03:00.002-06:00

I recently posted a historical analysis of two quality bond funds, FGMNX and FNMIX, that have produced consistent returns over the past 18 years. These two bond funds can serve multiple purposes in your portfolio from providing foreign exposure to helping your savings generate reasonable returns. You can check out the posts in the following links:

Best Bond Fund in the World - FGMNX
Another Great Bond Fund - FNMIX

I was thinking that it may be interesting to study the combined performance of the two funds. Most financial advisers suggest having some bond exposure in your investment portfolio. Combining the returns of both FGMNX and FNMIX could provide excellent bond exposure to your portfolio while keeping risk to reasonable levels. It would be a simple strategy to deposit equal amounts into each bond fund. This could also provide consistent monthly dividends for those looking at fixed income investments. I will post an analysis of the combined performance later this week.

Trading Thought - Up and Down Trend Filter Differences

2012-02-12T14:46:00.000-06:00

I was thinking about trend filters today. It seems to be a common practice to identify the longer term trend and then trade in the direction of the trend. This is supposed to increase the performance of strategies. Normally, most trend filters are purely symmetric, using similar criteria to determine the long and short trend periods. For example, you can say when the price action is above the 200 day moving average the trend is up and when the price is below the 200 day moving average the trend is down. The criteria fro defining the trend are the same except reversed.

Up trends and downtrends have very different characteristics. Up trends are characterized by low volatility and price action that often slowly grinds higher. Tops generally take awhile to form. Down trends are characterized by high volatility and prices that quickly dive down. With up trends and down trends having different characteristics, would it be better to have different trend indicators to identify each one?

It seems like it would be better if I created an indicator that would only be used to identify up trends, then create a separate indicator that would only be used to identify down trends because they are two characteristically different periods. For example, you could use the price crossing above a 200 day moving average to identify an up trend, then you could use price crossing below a 50 day moving average to identify down trends. This philosophy is similar to a moving average fan or the Guppy MMA, except it only uses 2 moving averages instead of many moving averages. From the picture below, you can see that the addition of the 50 period simple moving average seems to improve performance compared to solely using the 200 period simple moving average because it locks in profits quicker than the slower moving average would have by itself. This may also be why many investors use the 50 and 200 day moving average crossover as a timing mechanism, although it seems it may be better to use the price crossing both instead of the averages crossing each other. Testing would be needed to confirm which is better because whipsaws can have a significant impact of performance.

Another alternative would be using the same indicator for both trends, but using a longer time period for up trends (weeks) and down trends (days). For example you could use a 20 period simple moving average on a weekly time frame to determine and up trend, and a 20 period simple moving average on a daily time frame to determine down trends. This would use a slower signal to identify the characteristically slower up trend and a faster signal to identify the characteristically faster down trend. There will be some overlap between the indicators, but this could just be used as a signal that there is an impending trend change.

There would be countless indicators to use. The basic question is if having two different indicators to define an up trend and a down trend is better than having one indicator for both. I think there would be some merit to an asymmetric approach to identifying trends, but it would depend on your trading system. If you trading system shows poor symmetric performance (longs and shorts don't yield the same result), then using an asymmetric filter may be worth investigating.

Breakout of the Day - NEP

2012-02-10T18:28:00.000-06:00

Stock = China Northeast Petroleum (NEP)
Industry group = Energy
Sub-industry group = Oil & Gas Drilling & Exploration
Price per share (<$20) = $2.63
Price percent change today (>4%) = 13.85%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 591,000
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 4.58
Dollar volume (>100,000) = 1.6 million
Latest float (<70 million) = 32.9 million
Percent shares owned by institution (<70%) = 23%
Breakouts in past 5 days = No

Breakout of the Day - ELON

2012-02-09T19:07:00.000-06:00

Stock = Echelon Corporation (ELON)
Industry group = Computer Hardware
Sub-industry group = Networking & Communications Dev
Price per share (<$20) = $6.15
Price percent change today (>4%) = 7.52%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 277,000
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 1.74
Dollar volume (>100,000) = 1.7 million
Latest float (<70 million) = 35.0 million
Percent shares owned by institution (<70%) = 41%
Breakouts in past 5 days = No

Trading Thoughts - Another Great Bond Fund

2012-02-09T06:04:00.002-06:00

Last time I profiled FGMNX because it was a great bond fund with consistent/linear returns over the past 18 years. FGMNX is great for its robustness and US domestic exposure, but what if you want something with a little more punch to increase your returns?

FNMIX IS A GREAT FUND FOR FOREIGN EXPOSURE AND GOOD RETURNS.

Here is the description from Google Finance - "The investment seeks high current income; capital appreciation is a secondary objective. The fund normally invests at least 80% of assets in securities of issuers in emerging markets (countries that have an emerging stock market as defined by MSCI, countries or markets with low- to middle-income economies as classified by the World Bank, and other countries or markets with similar emerging characteristics) and other investments that are tied economically to emerging markets. It normally invests in debt securities of issuers in emerging markets. The fund potentially invests in other types of securities. It is non-diversified." In addition, the FNMIX has a 4 star Morningstar rating over the past 10 years, has an expense ratio of 0.89%, and assets totaling $4.6 billion.

FNMIX gives you the increased returns of foreign (emerging market) exposure with less volatility than a stock equivalent. Let's take a peek at the numbers and the past performance. FNMIX has an average annual return of 9.5% over the past 18 years. It pays a monthly dividend and the max drawdown over the past 18 years was -43%. The equity curve is fairly linear with a few sizeable drawdowns during market retracements. Below is a chart of the equity curve for FNMIX compared to the equity curve of SPY, a surrogate for the performance of the S&P500. Both curves are dividend adjusted.

This bond fund has done a good job of providing consistent returns comparable with the market, yet with less risk as indicated by the smaller drawdowns. I would say that FNMIX is best used as a way to diversify your portfolio with foreign exposure with the added benefit of adding the cushion of a bond to hedge against some of the stock volatility you can experience during bear markets. It is a good alternative to other foreign investments for the risk-adverse. Below is a chart of the equity curve drawdowns for FNMIX and SPY.

Let's see what you can expect from the fund's historical performance. The one year rolling returns have averaged a return of 13.4%. What this tells me is that had I chose to invest in FNMIX anytime in the past 18 years and held it for one year, I would have averaged about 13.4% returns on that one year investment. Also, 84% of the 4250 rolling one year returns were above 0%, so the odds are good that you will make money on your investment over the course of one year. Below is a chart that shows the one year rolling returns for FNMIX (green) with the average of all these returns in blue.

The rolling one year max drawdowns shows that there have been three substantial (<-20%) drawdowns. The average rolling max drawdown was -4.9%. This tells me I can expect a drawdown of at least -4.9% when I hold this investment for an entire year. Also, 90% of the rolling one year max drawdowns were -15.2% or better, which is much better than the SPY (90% are -22.1% or better). Below is a chart that shows the one year rolling max drawdowns for FGMNX (red) with the average of all these drawdowns in blue.

Now you may be asking why I am focusing on bonds. Bonds are a good way to capture market alpha without all the volatility and noise associated with stocks. The SPY has had a total return of about 288% over the past 18 years because it has been range-bound for most of that time. If you were an exceptional market timer, you could have made much more during this period. For those who like to keep things simple, bonds offer a great way to capture that performance. FNMIX has a total return of 519% over the past 18 years with smaller comparative drawdowns. You would have made almost 10% a year with a buy-and-hold strategy using this bond, which is difficult to imagine for most investments in the current era of market uncertainty.

Breakout of the Day - WIBC

2012-02-08T17:42:00.000-06:00

Stock = Wilshire Bancorp Inc (WIBC)
Industry group = Banking
Sub-industry group = Regional - Midwest Banks
Price per share (<$20) = $4.04
Price percent change today (>4%) = 6.60%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 1.5 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 4.98
Dollar volume (>100,000) = 6.2 million
Latest float (<70 million) = 14.7 million
Percent shares owned by institution (<70%) = 67%
Breakouts in past 5 days = Yes

Indicators - Moving Average Fan Metric - Update

2012-02-08T06:10:00.003-06:00

I went ahead and programmed the MA fan metric mentioned in the previous post here. It may serve as a way to determine the longer-term trend. The timing is not exact, but it does seem to pick up the major trends most of the time. There is some lag which becomes apparent when the price action exhibits shorter cycles.

After I posted my thoughts on the original indicator, I realized why the idea seemed so familiar. The method is very similar to your typical MACD except it is applied to more than two moving averages. All the metric would need is a signal line to make it complete. The slope of a signal line could be used to determine the trend instead of the metric line.

You can notice from the picture above that there are many small oscillations in the indicator. This is primarily due to the shortest time frame moving average. If you remove the contribution of the shortest period moving average, it will smooth out the signal a little more. It may also be possible to reconstruct a composite moving average from the resulting metric signal by creating a cumulative indicator that sums up the the metric values.

Breakout of the Day - WNC

2012-02-07T17:26:00.000-06:00

Stock = Wabash National Corp (WNC)
Industry group = Automotive
Sub-industry group = Trucks & Other Vehicles
Price per share (<$20) = $10.45
Price percent change today (>4%) = 12.73%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 5.3 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 5.00
Dollar volume (>100,000) = 55.2 million
Latest float (<70 million) = 67.6 million
Percent shares owned by institution (<70%) = N/A
Breakouts in past 5 days = No

Indicators - Moving Average Fan Market Behavior Metric

2012-02-07T06:05:00.009-06:00

I was watching another webinar by Andy Carlsen today called "The Application of Two Indicators" which can be found at TraderKingdom.com. In the webinar, he discusses how he uses a moving average fan composed of 7 simple moving averages. He uses the moving average (MA) fan to determine if the market is trending up or down.

I was thinking to myself that there must be a way of to summarize the current state of the MA fan into a simple metric that can be used to determine if the market is trending up, trending down, or is range-bound. When the market is trending either up or down, the MA fan is spread out and each moving average is ordered sequentially from shortest period to longest period in the direction of the trend. When the market is range-bound, the moving averages do not have a uniform direction and they are crossing over one another. The picture below shows how the various MAs are aligned when the price is trending up or down.

The metric needs to summarize each of these states and clearly distinguish between them. I was thinking that comparing the difference between the indicators could provide a good summary metric. You can sum the values of the difference between each MA pair in order of of the period length, for example (MA1-MA2) + (MA2-MA3) + (MA3-MA4) +... up to the last moving average. If you are in a strongly up trending market, the metric would have a large positive value. For a strongly down trending market, the metric would have a large negative value. For a range-bound market, the moving averages would be crossing over one another so that sum of the MA pair differences would be positive and some would be negative resulting in a sum with a value closer to zero.

I personal prefer normalized indicators because the state of the indicator can easily be compared across market regimes and instruments. This would be useful to determine which trading instrument would be the best candidate for a trend trade or mean reversion trade. You can normalize the MA fan metric by dividing the sum of differences by the closing price of the current bar or perhaps the value of a middle period MA (for example if you have 7 MAs in your fan, use the value of the MA4). The normalized MA fan metric will oscillate around zero and have a typical max and min value. You can then determine positive and negative thresholds around zero to differentiate between the range-bound zone and the up/down trending zones.

I will spend a little time investigating this further. Once I have an indicator that demonstrates what I am referring to in this post, I will create an update post.

Breakout of the Day - DSX

2012-02-06T17:13:00.000-06:00

Stock = Diana Shipping Inc (DSX)
Industry group = Trasnportation
Sub-industry group = Shipping
Price per share (<$20) = $8.95
Price percent change today (>4%) = 7.96%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 1.6 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 3.41
Dollar volume (>100,000) = 14.3 million
Latest float (<70 million) = 65.7 million
Percent shares owned by institution (<70%) = 45%
Breakouts in past 5 days = No

Trading Thoughts - The Best Bond Fund in the World

2012-02-06T06:02:00.002-06:00

Well that title may be a bit subjective. It seems like the world is always battling some kind of crisis which can add a considerable amount of volatility to the returns of the stock market. Trying to find a safer investment with a consistent history of returns can often be difficult, especially when most trading products are correlated with the overall market performance.

THIS IS WHY FGMNX IS THE GREATEST BOND FUND IN THE WORLD (right now)

Here is the Google Finance description of FGMNX - "The investment seeks a high level of current income. The fund normally invests at least 80% of assets in Ginnie Maes and repurchase agreements for Ginnie Maes. It invests in other U.S. government securities and instruments related to U.S. government securities and in U.S. government securities issued by entities that are chartered or sponsored by Congress but whose securities are neither issued nor guaranteed by the U.S. Treasury. The fund allocates assets across different market sectors and maturities and seeks to have similar overall interest rate risk to the Barclays Capital® GNMA Index. " In addition, the FGMNX has a 5 star Morningstar rating over the past 10 years, has an expense ratio of 0.45%, and assets totaling $9.8 billion.

Let's take a peek at the numbers and the past performance. FGMNX has an average annual return of 3.5% over the past 18 years. It helps that is pays a monthly dividend which helps insulate it from very large drawdowns. The max drawdown over the past 18 years was 6.43%. The equity curve is quite linear and the returns are uncorrelated with the market. Below is a chart of the equity curve for FGMNX compared to the equity curve of SPY, a surrogate for the performance of the S&P500. Both curves are dividend adjusted.

The point of this bond fund is not to outperform the S&P500. FGMNX is best utilized as as safe house during bear market drawdowns in the markets. FGMNX also serves as a good investment to act as a savings vehicle. At the time of this post, most savings accounts are returning less than 1% a year. FGMNX has consistently returned higher than this with little risk. I personally invest all of my short-term savings in FGMNX. Below is a chart of the equity curve drawdowns for FGMNX and SPY.

Let's dig a little deeper into the performance to get a better idea of what you can expect from the fund. I like to look at the one year rolling returns to get a sense of what to expect. The average rolling return was 6.3%. What this tells me is that had I chose to invest in FGMNX anytime in the past 18 years and held it for one year, I would have averaged about 6.3% returns on that one year investment. Also, 98% of the 4250 rolling one year returns were above 0%, so the odds are good that you will make money on your investment over the course of one year. Below is a chart that shows the one year rolling returns for FGMNX (green) with the average of all these returns in blue.

In order to understand the risk associated with FGMNX, I like to study the rolling one year max drawdowns. The average rolling max drawdown was -0.5%. This tells me I can expect a drawdown of at least 0.5% when I hold this investment for an entire year. Also, 90% of the rolling one year max drawdowns were -1.5% or better, so that is limited risk. Below is a chart that shows the one year rolling max drawdowns for FGMNX (red) with the average of all these drawdowns in blue.

It is always important to remember that things can change in the future. Regardless, this fund has done an exceptional job of providing consistent returns through some rough times, including the financial crisis of 2008-2009. I will continue to us it for my short-term savings and as a safe-haven during bear markets.

You Want an Equity Curve, I'll Give You an Equity Curve...

2012-02-05T13:29:00.001-06:00

I have been working on a strategy for the past couple of weeks. It seems to have a very promising edge. The strategy is simple and only uses a few trading instruments. The instruments are liquid and the strategy is very scalable. The strategy is always invested in the markets and requires very little upkeep and monitoring (perhaps once a week). Below is the equity curve for Strategy X over the past 4000 days (about 16 years).

You can tell from the equity curve that returns have been stable for many years and returns are very consistent. The strategy has returned an average annual return around 11% and a max drawdown around -15%. The average annual return for a buy-and-hold S&P500 strategy is 6% with a max drawdown of -55%. Strategy X easily beats a buy-and-hold strategy on the S&P500 both in terms of profit and risk. Below is a plot of the drawdowns for the Strategy X equity curve.

I would say that this strategy seems to be a consistent performer with very low risk compared to many other strategies. Here is the best part, I will be revealing all the aspects of this strategy in a post in the very near future. I will tell you what instruments are being used and how you determine when to enter and exit positions. It will become another trading plan to add to my portfolio of systems. I hope that the strategy will be able to help you in your investing.

Breakout of the Day - MGIC

2012-02-03T17:55:00.001-06:00

Stock = Magic Software Enteprs (MGIC)
Industry group = Computer Software and Services
Sub-industry group = Application Software
Price per share (<$20) = $6.84
Price percent change today (>4%) = 10.14%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 1.2 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 6.68
Dollar volume (>100,000) = 8.1 million
Latest float (<70 million) = 17.6 million
Percent shares owned by institution (<70%) = 5%
Breakouts in past 5 days = No

Trading Thoughts - What a Failed Trade Signals

2012-02-03T06:07:00.011-06:00

I was watching a webinar by Andy Carlsen called "Tight Stop Trading for Gold, Crude Oil, and E-Mini Russell" on TraderKingdom.com. In the webinar, he discussed his day trading and showed his charts. He mentioned that sometimes his trade entries result in a failure, but this failure often leads to a failure continuation trade. This was a very interesting concept that I never really considered before.

Most of the time we will trade our systems, make our entries, then exit our positions. Sometimes this results in a profit, and sometimes it results in a loss. After this process is complete, we start over again and look for another entry. The failure continuation trade is interesting because it uses the failure of the original signal as a signal itself to reverse the position. In the webinar, the original signal would quickly fail for a small loss, but the position would be reversed and often lead to a winning trade. Rarely was there a failure of the original signal followed by a failure of the failure continuation trade.

This is just an interesting twist to add to a system and something extra to evaluate. I have read countless times that it is important to be a nimble trader and not get married to a position. The failure continuation trade can help solve this issue. When the original position is complete, can you squeeze out more profit by reversing direction? Of course this would not be applicable to symmetric systems that are always in the market, long or short. Perhaps you have a system that is not profitable, but then you can evaluate a failure continuation trade to couple with the system to potentially turn it into a profitable system.

I guess it is important to remember that a trade is not over until it's over...

Breakout of the Day - ZOLT

2012-02-02T17:33:00.000-06:00

Stock = Zoltek Companies Inc (ZOLT)
Industry group = Manufacturing
Sub-industry group = Industrial Electrical Equipment
Price per share (<$20) = $9.47
Price percent change today (>4%) = 7.13%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 7.9 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 2.68
Dollar volume (>100,000) = 75.1 million
Latest float (<70 million) = 27.5 million
Percent shares owned by institution (<70%) = 60%
Breakouts in past 5 days = No

Trading Thoughts - Auto-tuning Tick Charts to Match Renko

2012-02-02T06:18:00.003-06:00

Like I have said before in prior posts, I am a fan of renko charts because they simplify the price action and act somewhat like a price filter. Unfortunately, they can be terrible for entries and exits because the price can pass through a wide range before the next bar is formed. I had a thought that it would be nice to be able to use a tick chart that was sized in such a way that it would match a corresponding renko chart. Below is a picture of a renko chart with a range of 2.

You can use the average near-term volume to determine a good tick chart size that will be representative of the renko 2 chart. In this case, I used a 20 period simple moving average. The picture above shows that the average volume is around 160. It seems that a tick size about 50% of the renko average volume produces a plot that is similar in appearance. Below is a picture of a chart with a tick size of 80, which is about 50% of the average volume from the above chart.

A comparison of the two charts shows that they are quite similar. The advantage of using the tick chart, is that we can use indicators from the renko chart to interpret signals on the tick chart. It is often easy to read indicators based on renko charts because the price action is much cleaner. Obviously, you would want to create a program that would auto-tune your chart to display the correct tick price action. An indicator could be created to represent the price action (OHLC) in the correct tick format. It is important to note that you need to be careful to make sure that there is enough volume. You don't want to be trading a chart with an average volume of 5 ticks because it could create a lot of problems. I would suggest putting a minimum requirement that the number of ticks cannot go below, for example 30.

Breakout of the Day - SONC

2012-02-01T20:58:00.000-06:00

Stock = Sonic Corp (SONC)
Industry group = Leisure
Sub-industry group = Restaurants
Price per share (<$20) = $7.13
Price percent change today (>4%) = 4.09%
Strong breakout candle = Yes
Large gap from previous day's close = No
Recent price consolidation = Yes
Volume (>100,000) = 1.2 million
Today's volume greater than yesterday = Yes
Volume to SMA50 volume ratio (>1.5) = 2.61
Dollar volume (>100,000) = 8.4 million
Latest float (<70 million) = 48.4 million
Percent shares owned by institution (<70%) = N/A
Breakouts in past 5 days = No

Update - Indicator and Strategy Evaluation

2012-02-01T06:01:00.007-06:00

I just finished reading "Systems Trading for Spread Betting: An End-To-End Guide for Developing Spread Betting Systems" by Gary Ford and I wanted to take this opportunity to update my methodology for evaluating trading systems. The book was an easy read with plenty of illustrations of how to use NinjaTrader. Overall, I would say it was a good introduction to system evaluation, but more research is necessary to further develop my methodology.

The system evaluation methodology is broken up into three sections that include system setup, optimization, and evaluation. Below is the list of steps that should be taken when evaluating the potential and robustness of a trading strategy:

System Setup:

Select a basket of at least five different contracts that have a low correlation to use as trading instruments. Each instrument should be very liquid, have a small spread, and have enough volatility to generate a profit regularly. It would be best if the contracts were from different sectors. Any basic strategy or indicator should work on this basket of products. Correlation testing will have to be done using Excel and can be performed on end of day data, even though we will be day trading.
Obtain the tick level historical data for each contract going back to 2007. This will insure that we are covering all major market behaviors (range bound, bull market, and bear market).
Determine the average volume for each contract over the past few months on a 10 minute time frame. Identify the times when the volume is at least 30 contracts a minute. Use this information to determine the trading times for each contract. Periodically re-evaluate the volume analysis.
Determine your trading time frame by deciding how often you want to receive trading signals each day. If you want signals once a day, try starting with an hourly time frame. If you want signals once an hour, try starting with a 5 minute time frame. If you want signals once every 10 minutes, try starting with a tick chart. This will just be a starting point for the analysis of your strategy.
Determine your basic entry methodology. Make sure that entries occur during times when the volume of the contract meets your trading requirements. Consider avoiding major economic announcements and entering right before the market closes.
Determine your basic exit methodology. Will you be exiting the trade at the end of the day just before the market closes? Make sure that the exits occur during times when the volume of the contract meets your trading requirements. Consider exiting just before major economic announcements.
Add a basic filter to help reduce the number of bad entry signals and whipsaws.
Use the NinjaTrader Strategy Wizard to create the basic strategy. Create input parameters for the different aspects of the strategy that you would like to optimize such as indicator period, stop loss size, profit target size, etc. For a fully symmetrical system (always in the market long or short), do not plot your exit orders on the chart.
Use the NinjaTrader Strategy Analyzer to backtest the data on a long duration time span (>250 trades). This time span is used extensively during research and optimization phases of strategy development. Pay close attention to the total net profit, percentage profitable, profit factor, Sharpe Ratio, average maximum excursion, and maximum drawdown. Use the chart tab to evaluate if the trade is entering and exiting orders correctly. Use the cumulative profit graph to evaluate the equity curve. Use the drawdown graph to evaluate the severity and duration of strategy drawdowns. Use the daily net profit graph to determine the consistency of daily returns. Use the distribution graph to evaluate the the profitability of the strategy by time of day or day of the week. Use the trades tab to export all the trade data for analysis in Excel.

System Optimization:

Use the NinjaTrader Strategy Analyzer to optimize the strategy over the long duration backtest period. Optimization metrics should include maximum profit factor (preferred), maximum win/loss ratio, maximum average profit, minimum drawdown, and maximum net profit.
Optimize strategy inputs until the parameter results are in the middle of the optimization range specified for each input. Perform an optimization of the strategy inputs for each instrument. Calculate the mean, median, and mode of each optimized input parameter for all instruments reducing the input parameter combinations down to a set of three. Once again, backtest the three sets (mean, median, mode) of input parameters on the entire basket of instruments to determine which set is best.
Repeat previous optimization procedure for many different time frames including ticks, minutes, and hours.
Perform a walk forward optimization beginning with the oldest data in the long duration backtest period and moving forward up to the beginning of the out of sample backtest period.

System Evaluation:

Use the NinjaTrader Strategy Analyzer to backtest the data on specific market condition time frames such as range bound, bull, or bear markets. Use the date ranges in the Strategy Analyzer to specify important periods.
Test the strategy using the simulated dynamic data feed to evaluate its performance on range bound markets, up trends, and downtrends.
Use the NinjaTrader Strategy Analyzer to backtest the data on the out of sample period. This time span is used to validate if the strategy performs consistently over the backtest periods. The out of sample backtest is performed on the most recent historical data.
Export trade backtest results for all instruments to Excel and perform analysis of equity curve to determine position sizing (% risk per trade), spread/slippage cushion, initial capital account size, and money management. Compare equity curve analysis results to the same equity curve analysis results for a buy-and-hold strategy on SPY (S&P500).
Monte Carlo analysis (more research required)
Bootstrap analysis (more research required)
Use the NinjaTrader Market Replay to backtest the strategy on a dynamic data feed to help evaluate entries and exits.
Simulate the strategy on a real-time live data feed using a demo account to understand if a strategy is tradeable, trade signals are generated correctly, and if slippage/commissions seem reasonable. Once you are consistently profitable for four weeks in a row with 4 out of 5 days showing a profit, and only hitting your max daily loss once a week, then you can begin thinking about trading the system live with real equity.
Stochastic process control theory analysis to determine when to stop using the strategy (more research required)
Trade system live with real money and monitor performance.

So I was able to add a lot more detail to the system evaluation procedure, but there is still more analysis that needs to be completed. Specifically, I have ordered some more books on walk-forward, Monte Carlo, and bootstrap analyses. The methodology will continue to constantly evolve, but I have a good foundation here to begin testing systems. It will take a lot of work/time, but this will ensure that I am confident in the final product and that I am doing everything I can to manage my risk.

Trading Thoughts - When Bad Things Happen

2012-01-31T21:32:00.002-06:00

I have done a lot of research on trading that has included all sorts of topics including indicators, analysis, risk management, psychology, etc. Something I have rarely seen addressed though are the actual technical problems involved with trading full-time from home. Things may be different if you work at an established company because if something does go wrong, there are usually measures in place to fix things quickly or prevent bad things from happening.

When I say bad things, I am referring to the technical aspects of trading not involved with the strategy itself. I am referring to a plan of action if something breaks or the power goes out. Below is a list of bad things that could happen:

Computer hard drive crashes (no cpu for days = no money made in the market)
Monitors fail
Mouse breaks
Virus attacks your computer and freezes the cpu
Trading software strategy is out of sync with actual account positions
Microsoft Windows update restarts your computer without your knowledge, shutting down your automated trading system
Power to your home goes out
Cable internet connection goes down
DSL internet connection goes down
Home burns down or is flooded (off-site backup of strategies)
Brokerage server connection goes down
Insane market behavior and flash crashes
Futures market reaches limit move
Brokerage company unexpectedly closes or goes bankrupt (ex. MF Global)

I am sure there or many more problems that can occur. At some point, I need to develop emergency action plans to prevent or account for these scenarios. I can't imagine how terrible it would be if some of these things occurred and I was not prepared. Are you prepared?

Trading Thoughts - Value Entries and Improved Performance

2012-01-31T06:07:00.002-06:00

I was watching a webinar the other day by Andy Carlen over at TraderKingdom.com called "Tight Stop Trading for Gold, Crude Oil, and E-Mini Russell". He made a point that had a impact on me and my view of entries. He briefly discussed the issue of value entries. The idea is simple, but the effect can have an incredible impact on your trading results and system.

A value entry is an entry at a better price than the initial price when your system signals you to enter. It seems like many systems traders use only one contract to enter and exit. If the system has a positive expectancy, value entries provide a method for improving your system metrics in two ways: reducing your risk on the position and increasing your profit on your position. Now you may not always be able to enter at a better price than the initial entry price because sometimes the price takes off and never looks back.

Let's look at a quick example. Let's say you have a system with a winning percentage of 50%, an average win of 10 ticks, an average loss of 5 ticks, and an expectancy of 2.5 ticks. The system normally only enters and exit with one contract. Let's say you decide to add value entries. Through testing you find out that 25% of the time you are able to enter with a second contract at a value entry with a price 1 tick better than the initial entry. Now assuming you still make the same exits, your average win for the value entry is 11 ticks, your average loss is 4 ticks, and your expectancy for the value entry position is 3.5 ticks. The value entry will increase the size of your average winner and decrease the size of your average loser. This is a powerful concept because it adds up over time.

Now this sure seems similar to averaging down, which many professionals will argue is a poor practice. I would say there is one subtle, yet important difference between averaging down and value entries. Averaging down is a result of an emotional urge to avoid losers in a futile attempt to justify the correctness of your position, while value entries are a validated/tested money management method to improve your strategy performance. Value entries are planned while averaging down is more of an impromptu reaction. The difference is all in the plan, remember that.

Trading Thoughts - Time to Trade

2012-01-30T06:40:00.000-06:00

When is the best time to trade futures? Futures trade nearly 24 hours a day for most of the week. As someone who works full time, it is tempting to believe that I could try to trade futures live either before the work day begins or after it is over. The question is one of liquidity. I have not yet examined the around-the-clock volumes of all the futures contracts. In fact, I am not sure what kind of volume is required for a one-contract trader to experience reasonable spreads. Would it be good to use a criteria of 15 contracts a minute, 10 contracts for a range 4 chart, or trade using a 30 tick chart?

I am not really sure how to answer that question and what setting would be optimal to reduce slippage and establish minimum volume requirements for good liquidity. I have read in some forums that trading most contract between 7am (eastern) to 4pm (eastern) provides enough liquidity, and this seems to be clear when viewing the charts during those hours. Although, there appears to be an uptick in contract volume beginning around 2am (eastern) which probably corresponds to the European markets opening. I do not know how to gauge if there is enough volume during the early morning hours to justify trading. Additionally, I think it would be better to avoid scalping small trades during the off-peak hours, and look to trade larger ranges.

Besides regular, live trading experience, how do you determine if there is enough liquidity present to support your money management system?

Indicators - Market Breadth MA Crossover Count %

2012-01-26T07:12:00.001-06:00

I was thinking about market breadth yesterday and had some ideas about how to measure. There are many different ways to measure market breadth of stock participation in a given market move. I have seen countless cases of people using moving average cross overs to gauge the strength of weakness of the market, i.e. 50 day average crossing the 200 day average. But is there possibly a better way to measure the underlying breadth?

I was reading "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing" by Michael Carr and he tested several measures of relative strength on many Fidelity Select sector funds. He found that a normalized moving average crossover on a weekly time frame worked well for measuring the relative strength of the funds. I setup a spreadsheet that uses the 8 week and 15 week simple moving crossover on 40 Fidelity Select sector funds and then ranks them. I don't really prefer to trade this way because of the inherent lag induced by the simple moving averages. You can often end up exiting positions during significant retracements.

Instead of using the relative strength to determine which funds were behaving the "best", I was thinking I could use it to determine market participation and whether there was strength behind the move. I setup a column in my spreadsheet to determine the percentage of the 40 funds that had an 8 week simple moving average above their 15 week simple moving average. When the reading was near 100%, I knew that almost all sectors were participating in the up trend. When the reading was near 0%, I knew all sectors were participating in the down trend. Of course you can optimize the moving average lengths to improve the indicator, but the overall goal is to understand the market breadth. Usually, as an up trend continues there is less and less participation until finally the strength collapses and a down trend initiates. This indicator can sometimes tell you when this occurs.

Obviously, this is just an idea right now and more research is need to see if it would be useful. I think one of the best ways to use it would be to determine when to enter longs and when to enter shorts. If the indicator is greater than some percentage, you could look for long entries. The opposite could work for short entries. Combining this indicator with a short term oscillator may yield an interesting strategy for swing trading the markets and entering on a pull back. This type of market breadth indicator may also help you avoid those times when the market is range bound if the percentages are near 50%.

Another useful way to use the indicator is to apply classical sector analysis theory. You can use the measure to see if most of the up-trending sectors are defensive (utilities, healthcare, defense) or offensive (technology, materials, consumer discretionary). Also, if we are beginning a new bull market uptrend, you could see which sectors are doing well to determine if there is new leadership and good sector rotation. In the Carr book, he develops a strategy to always be long the market by pick the best few sectors, which can result in large drawdowns during times like the 2008 financial crisis where everything is going down. You could use this indicator to determine when to exit all longs and be entirely in cash, or perhaps entering a bearish fund to capitalize on the downturn. I am sure there are plenty of other ways to use this indicator, but I am sure you are starting to get the idea how this market breadth indicator could be useful.

One final thought, I am not sure if the individual sector moving average cross over would be much different from the composite behavior of a moving average crossover on an index. I believe there would certainly be a difference if you were to setup the same moving average cross over count on the individual component stocks of the Russell 2000 index and compared it to a moving average cross over on the index itself. This idea could also be applied to any trend indicator too, not just a moving average cross over.

Indicators - Ehlers Dominant Cycle

2012-01-24T19:42:00.000-06:00

If you haven't had a chance yet, you need to read "Cybernetic Analysis for Stocks and Futures: Cutting-Edge DSP Technology to Improve Your Trading" by John Ehlers. It is an incredible read, especially for someone like me with an engineering background. He clearly lays out the development of some novel indicators and also includes the easy language code.

One of the indicators he developed was the dominant cycle indicator. The dominant cycle indicator measures the period length of the dominant frequency cycle. The values general range from 10 to 40 periods and works on any time frame. There is some inherent lag in the calculation, which I believe is about 8 bars. Regardless, it is the fastest (shortest lag) calculation of the dominant cycle. Below is a screen shot of the indicator.

As I mentioned before, the indicator does cycle quite a bit from 10 to 40 periods. The only issue is the indicator is backward-looking. So when the cycle period is large (around 40), a trend has already occurred and it may be too late to capitalize on it. There are some very effective ways to use the indicator though. A mean reversion type trade is a possibility. Actually, it would be more of a breakout system. You would plan to enter a trade at the beginning of a trend when the dominant cycle is low (around 10). Of course you would need some other entry signals to confirm the initiation of the trend.

Using the dominant cycle to adapt common indicators is one of the more novel uses presented in the book. Imagine using the RSI. Instead of having a fixed period length, you could use the dominant cycle to make the period length adaptable. The RSI would then use a smaller period when the cycle is smaller, or use a larger period when the cycle is larger. You must be careful of the lag though because you could be out of phase with the data if the period is small enough. The possibilities are endless though and this indicator makes for a good launch pad for adaptable indicators.

I have some interesting ideas on how to use this indicator to create a better moving average and stop loss system. I will do some research on the topic and present the results when they are ready.

Trading Thoughts - Progress?

2012-01-24T06:48:00.000-06:00

I seem to spend a great deal of time watching the markets. I enjoy looking for patterns and coming up with new indicators to code. Even though this is an enjoyable and sometimes beneficial experience, I know i am not making the best use of my time. I have a tendency to play around with the code and briefly inspect the results of the modifications as compared to the recent price data over the past couple of days. This is an improper way to analyze the effectiveness of a new indicator or trading idea.

For instance, I probably spent about 2 hours last night "playing around" with some indicators I have been working on. The end result of my efforts is nothing. How can I measure progress if i have no measurable results for my research. In the academic world, I would proceed with my research to the point where I could accept or reject my hypothesis, often times performing statistical analyses. For some reason, I am not using the same methods to evaluate my trading ideas. Therefore, I am not getting the most out of my time. This is very frustrating. It is even more frustrating because I keep doing it each day.

I think the best way to put a stop to this is to conceptually design a strategy with a couple basic indicators, perhaps 3-5 indicators. Then I should practice day trading it or backtesting it (if possible) to see if there is any edge. If there seems to be an edge, then I need to evaluate each component of the the strategy. For example, if I am using a trend filter, I need to determine if the likelihood of the the price data showing gains when the filter indicates and up trend and vice versa for downtrends. If I know that information, I have a starting point for making modifications to the filter. Once completed, I then need to move on to the other aspects of the strategy. This task seems incredibly time consuming if I cannot backtest my strategy. I am hoping to clear this issue up in the near future so I can get back on track.

Indicators - Renko Charts

2012-01-23T21:50:00.000-06:00

I have been researching ways to filter price data according to trend for my day trading strategy. I have considered using multiple time frame analysis to create a composite filter, but I wanted to start off with something a little more simple.

I really like the appearance of Renko charts. For those who do not know, Renko charts act like a price filter by only plotting a bar when the price action has made a move of a specified number of ticks. For example, if you set the Renko range to 2 ticks, a bar will only print if the price moves up two ticks from the high of the last bar or down two ticks from the low of the last bar. The result is a plot that looks like a series of bricks. This helps to filter out a lot of price noise. If you get sideways action that does not penetrate the range boundaries, no new bar will print. This helps to preserve the underlying trend and seems to be more favorable for trend indicators because of the clean trending action. It also seems to be much easier to identify small retracements in the trend that could be good entry opportunities. I will be looking into this in the future.

I have experimented with some indicators using Renko charts and the results show some promise. I am thinking of using a higher magnitude Renko chart to determine the trend. Perhaps a setting between 6-10 ticks depending on the recent market volatility. In fact, it would probably be better to automate the adjustment of the brick size based on the recent volatility.

One note, be careful when backtesting with Renko charts. Backtest results can often be inaccurate because much of the price data is not preserved in the data bars. This is especially true on reversals and your results tend to come out more favorable than they would if you were testing with live data. Also, since Renko charts are only concerned with price and not time, be sure to check volume levels carefully. Low volume data will appear to be great trading opportunities because the price can get pushed over large ranges on low volume.

Trading Thoughts - Trading vs. Planning

2012-01-23T06:14:00.031-06:00

I was speaking to my fiance yesterday and she asked me how my trading was going. I told her that I was pretty productive this weekend and I made a lot of progress towards getting organized and developing my trading plans. She responded by saying that it seems I spend a majority of my time planning instead of trading. This comment really made me think. Should traders spend more of their time trading or planning?

Now I want to make it clear that when I say planning, I am not referring to a trading plan. A trading plan is critical and you should not be trading live without one. When I say planning, I mean scheduling out tasks and procedures such as what you are going to do for the day, how you are going to backtest an idea, what books you are going to read, etc. For instance, I spent time this past weekend revising my daily trading schedule. I needed to update it in order to make sure I was getting the most out of each day. I also want to create a weekly schedule because there are so many trading related activities that I cannot fit all of them in everyday. So I need to put time to creating a schedule to ensure that each week I am accomplishing all my objectives and covering all the areas of my trading activities. This is what I am referring to when I say planning. This task would be so much easier if I had a boss or coach devoted to scheduling my time in order to maximize my performance. Since there is no such person, the responsibility is solely mine.

Trading vs planning is a difficult argument because there seems to be a balance between the two. If you look at the extremes, neither option is good. You would never want to spend all your time planning without trading because you can become lost in the search for the holy grail as well as become somewhat disconnected from the live, psychological action of the market. On the flip side, it would be a terrible idea (and costly) to spend all your time trading without a plan because your actions would most likely be dominated by emotions and plus you would have no way of evaluating your performance against a specified benchmark or plan. Therefore there must be a balance between the two.

This topic is probably less difficult for those lucky individuals who are trading full time. Unfortunately for me, I have a full-time job in engineering which takes up most of my week. That leaves me with only the morning, evenings, and weekends to work on my trading. There is little room for error because my free time is at a minimum.

Personally, I lean towards mechanical system trading as opposed to discretionary trading. I believe that a majority of my time is well spent researching and testing methods to apply to the live market. At the same time, most of my ideas come from either trying to trade the market are watching the live market throughout the day. I do believe in performance evaluation, so i think it is critical to have some guidelines. I don't think you can strictly evaluate performance by looking at your PnL statement for the day because there are many other factors that determine if you traded well. I also believe in having standard procedures for researching topics, so time must be spent on these procedures. Once they are in place, it makes researching a more efficient process and ultimately save you time. One final note, I believe a plan is critical because it lays out a path to success. In trading, one day I feel like i am gonna be a millionaire, the next day I feel like I am back at square one. With a plan in place, I can feel a since of accomplishment regardless of if the outcome is profitable or not. I believe that goes a long way to preventing burn out and hopelessness.

While planning is necessary, it is important to remember what you are planning for and that is why trading (whether sim or live) is important. It would be like training for a race that you never run, it would be very easy to lose sight of your goal. This is why it is necessary to also get as much screen time as possible. It helps you familiarize yourself with your trading products. It will also provide countless ideas for trading indicators and systems, which provides more ammo for your planning.

I guess what it all boils down to is loving the process. Whether it is trading or planning, as long as you love what your are doing the rest doesn't really matter much. When it becomes a chore or a burden, then something needs to change. There should be something besides money that drives you to pursue a path to successful trading.

Trading Thoughts - Indicator and Strategy Evaluation

2012-01-22T15:18:00.004-06:00

In an attempt to become more organized and more efficient, I have realized I need to determine a procedure for evaluating trading indicators and strategies. The procedure should be a simple, repeatable, and robust process with clear milestones that determine whether further testing is warranted.

Unfortunately, there seem to be a countless number of ways to evaluate a trading system. Thankfully, there is a whole niche of books devoted to trading system development and evaluation. I have made a list of the books and will begin reading them this year with the goal of refining my personal system evaluation procedures and development processes. I recently purchased "Systems Trading for Spread Betting: An End-To-End Guide for Developing Spread Betting Systems" by Gary Ford. This seems like a good starter book because it walks through the fundamental steps of creating and evaluating a trading system. Currently, I am not interested in spread betting, but I am always looking to learn something new. The real bonus is that the author uses NinjaTrader for the system development and evaluation, which should significantly improve my platform skills.

I will eventually develop an entire post/plan for my evaluation procedures and add it to the side bar, but for now this is more of a kick-off post to highlight the various areas of system evaluation. From what I have seen, below is a list of topics that my system evaluation procedure should address:

Time frame analysis (ticks, minutes, hours, days, etc.)
Day trading time analysis (what hours during the trading session)
Contributions of each aspect of the indicator/strategy
Entries and Exits
Filters for volume and volatility
Backtesting
Risk management and position sizing
Parameter optimization
Walk Forward optimization
Monte Carlo simulation
Bootstrap analysis
Stochastic process control theory analysis
Simulated strategy trading
Live trading

This is just an initial list of topics to be investigated. Hopefully, once I have read a few books on the subject I will have the basic steps of my procedure in place and I can begin evaluating systems on this website. My initial goal would be to evaluate at least one indicator/strategy a week. The primary goal would be to familiarize myself with each procedural component to better understand its strengths and weaknesses. Once that is accomplished, I can then focus on determining the true merits of a sample trading system.

Daily Schedule - January 2012

2012-01-22T14:16:00.005-06:00

Daily structure is critical to keep you focused on your immediate and long-term goals. Just like every trader should construct a detailed trading plan, traders should also construct a daily plan that makes the best use of their time and helps direct their energy and efforts. Below is my current daily schedule that will be updated as necessary:

6:00am - Wake up
6:00-6:15am - Check futures, setup market replay for the morning session
6:15-6:30am - Read trading blogs
6:30-7:00am - Blog post morning thoughts
7:00-7:30am - Shower, dress, eat breakfast
7:30-7:45am - Check important news items
7:45-8:30am - Commute to work
8:30am - Begin work for the day and follow SPY and IWM activity
10:00am - End market replay recording of morning session
12:00-1:00pm - Lunch, read trading books, blog post intraday thoughts
3:30pm - Update market breadth indicators
4:30-5:15pm - Commute home
5:15-5:45pm - Document trading strategy results, post Market Breadth Report
5:45-7:00pm - Evening workout
7:00-8:00pm - Shower, dress, eat dinner
8:00-10:00pm - Sim trade the morning session with market replay, research new indicators, research new trading strategies, read trading books, blog post evening thoughts
10:15-10:45pm - Go to sleep

Throughout the day, I monitor the behavior of the market using FreeStockCharts.com. I follow the intraday performance of IWM and SPY, noting volume and technical patterns. I have set up a watchlist to track the intraday performance of several markets including DIA, EFA, EUR/USD, GLD, IWM, OIL, QQQQ, SPY, TLT, VIX--X. I monitor each of these for daily percent change, volume buzz, and their relationship to their 5, 10, 20, and 50 day moving average. I will also monitor the number of stocks up or down 4% on the day as a gauge of market strength or weakness.

During lunch, I review any significant news items. I also use my lunch time to read through any interesting trading blog posts and archive them if I believe the post can help me in the future.

In the evening, I create the Market Breadth Report to summarize the behavior of each industry and help me determine the overall health of the market. I review and archive trading blog posts, then post a list of my daily trading thoughts on this blog. I use the rest of the evening to research trading ideas or read trading books.

Trading Plan - 401k Investments

2012-01-22T13:30:00.005-06:00

NOTE: THIS IS A PRELIMINARY DRAFT OF A TRADING PLAN THAT NEEDS TO BE FINALIZED WITH HISTORICAL RESEARCH. DO NOT USE THIS FOR TRADING OR INVESTING.

Below is my written trading plan describing the aspects of my 401k investment strategy such as market breadth, entry/exit criteria, and risk management. I am continually researching improved methods for the system, therefore this is a fluid document that will be updated as needed. All times are central time zone.

Objective:
To invest in two different mutual funds, a bond index fund and a 2x leverage stock index fund. The portfolio should remain invested 100% of the time, with the allocation to the bond and stock fund changing based on market behavior. The portfolio allocation should be rebalanced on a weekly basis, but each fund should be held for a target of 30 days before changing the position to avoid short-term trading fees. The goal of the portfolio is to produce an average annual return >15% with max annual drawdowns remaining <15%.

Timeline of Trading Tasks:

Each evening all market indicators will be updated and tracked.
Each weekend the market behavior will be evaluated and the portfolio allocation will be determined.
The fund orders will be placed each Monday morning if changes to portfolio allocation are required.

Market Breadth:

Calculate market breadth indicator after the market close each evening.
There will be three measures of market breadth: stocks up/down 25% in the past 65 days, stocks creating new highs/lows in the past 5 days, stocks creating new highs/lows in the past 52 weeks, number of stocks with SMA10 and SMA20 crossover, and a comparison of SMA 10 and SMA 20 for the IWM.
Other measures of market breadth may be evaluated in the future and replace one of the measures listed above, but the system should rely upon at least 4 different measures of market breadth.
Daily or weekly charts may be used to determine the state of the indicator - the time frame will be determined by historical research.
All stocks used in market breadth calculations have an average daily volume greater than 100,000 shares and closing price greater than $1.00.

Portfolio Allocation Criteria:

Portfolio allocation will be based on the readings of the market breadth indicators.
The market will be split up into 7 different behavior zones: very bullish, bullish, slightly bullish, neutral, slightly bearish, bearish, very bearish
Very Bullish Allocation =0% bonds and 200% stocks (all 4 indicators bullish)
Bullish Allocation = 25% bonds and 150% stocks (3 of 4 indicators bullish)
Slightly Bullish Allocation = 60% bonds and 80% stocks (to be determined)
Neutral Allocation = 80% bonds and 40% stocks (2 of 4 indicators bullish/bearish)
Slightly Bearish Allocation = 85% bonds and 30% stocks (to be determined)
Bearish Allocation = 95% bonds and 10% stocks (3 of 4 indicators bearish)
Very Bearish Allocation = 100% bonds and 0% stocks (all 4 indicators bearish)

Risk Management:

The portfolio allocations have been sized to create a max drawdown of 15% over the past 10 years of historical data.
Future drawdowns may exceed the historically tested drawdown of 15%, but the portfolio should be 100% allocated to bonds in this instance. So the portfolio should exhibit a drawdown much smaller than the overall market.
Possible hedging strategies should be evaluated in the future to maintain a worst case drawdown of 15%.

Getting Organized

2012-01-21T13:04:00.000-06:00

While it is only the beginning of 2012, I already seem a little lost. I have not been pleased with my progress so far this year. Now I could come up with many excuses as to why I have not accomplished as much as I would like (wedding planning, marathon training, etc.), but really there are no valid excuses. I have been watching the market daily, learning the various aspects of NinjaTrader, programming some basic indicators, and researching/backtesting various trading ideas. It seems like everyday I come up with new trading ideas for indicators or strategies, then i get lost on focusing on evaluating previous strategies. I have been committing effort to trading almost everyday, but I still feel like I have not made any progress.

I have thought about this for awhile now and I attribute the feeling to not having a clearly defined plan. I need to get organize and lay out a clearly structured plan for the year. I have the major points and timeline sketched out, but it is the intermediate steps to achieve each milestone that I need to determine.

In addition to a plan, I have not actually been trading the past three weeks, I have only been researching. This has made me feel like I have not made any progress because there is no documented trading results to evaluate. Even simulated or paper trading, whether the results are positive or negative, makes me feel productive because I have the ability to clearly evaluate my performance.

So this all needs to change. Below is a list of items I need to accomplish to get myself back on track:

Develop a weekly trading schedule that outlines when I will paper trade, research trading ideas, program new indicators and strategies, make blog posts. This will be a detailed schedule and will be added as a blog post in the side bar. At the same time I need to update my daily trading schedule to reflect my current trading activities
Learn to use market replay to record the 7-10am market action, then practice trading it each night using the trading simulator to simulate real time performance.
Begin documenting all trading ideas so I can have an archive which I can reference for researching.
Develop a step-by-step system for evaluating trading ideas and strategies.
Develop a simple strategy for investing in my 401k.
Revise and update my market breadth monitor on a weekly basis.
Post at least one blog post everyday to track progress. The post does not have to be extensive, but the important part is contributing daily to keep my accountable for my activities.

NinjaTrader Platform Notes

2012-01-04T18:58:00.001-06:00

I have decided to use NinjaTrader as my preferred trading platform. For many years, I solely subscribed to Worden products which were excellent for quickly scanning the market and for basic indicator programming. I still use freestockcharts.com to follow the intraday market action while I am at work. Unfortunately, my demands for a more robust platform have outgrown the capabilities of the Worden software. After extensive research, I decided to focus on using NinjaTrader.

While I will still be trading stocks and ETFs in my retirement accounts, I have decided to focus on futures for my short-term trading. NinjaTrader coupled with Zen-Fire provides an excellent foundation for trading futures. I have found that NinjaTrader is a robust software that includes several valuable tools and a simple programming interface (C# and .NET). I am still getting up to speed with their indicator and strategy development methods, but things look very promising so far. I am also hoping to flesh out my trading game plan in a little more detail. Specifically, I want to include more steps for moving from trading theory to real-time practical application.

I have begun programming my first indicators and strategies and will be posting results and ideas on this blog. I will also be simplifying and updating my market breadth monitor in the coming weeks to make it more applicable to trading the Russell 2000 index via IWM, which is my preferred investing vehicle.

Future items of interest will include:

How to record your intraday trading for the purposes of review and improvement
Steps to evaluate trading strategy performance
Strategies for trading IWM
What to do with a savings account - the best bond fund in the universe
Improved market breadth metrics
Evaluation of various trading indicators
Evaluation of NinjaTrader software

Welcome 2012 - The Year of Change

2012-01-03T19:27:00.001-06:00

I cant believe it has been over a month since my last post. I have taken some time to reflect on my trading and I have decided that changes will need to be made to make 2012 my most successful year yet. I have lofty goals for the year:

Reach my fundraising goal and finish the Fight for Air Presidential Tower Stair Climb race.
Finish 5 half marathons = 3 Chicago, 1 Richmond, 1 Columbus
Get married
Get a new dog
Leave job and trade full time

The last one is going to be the trickiest. Parts of my trading plan have been coming together over the past month. I have determined my trading time frame, vehicle, style, and platform. I will be day trading (scalping) the mini Russell 2000 futures contract (TF) using the NinjaTrader platform. I have been paper trading over the past six weeks, and I believe I have an edge. There is still plenty of research that needs to be done before going live. Below is my schedule for achieving my goal of trading full time:

January - program and automate strategy
February/March - track strategy performance and research position sizing and money management
April/May - begin trading live in the mornings before work (4am to 8am)
June - wedding and honeymoon
July - trade live in the mornings before work (4am to 8am)
Post July - request 3 month leave of absence from work to trade full time

Currently, I am hording as much cash as I can to build up my equity. I also will not request a leave of absence from work until I have been consistently profitable. I need to average $100 a day to cover my expenses (rent, food, utilities, etc.). It should be a challenging and rewarding year. I am looking forward to it!

Bring it on 2012!

Market Report - November 21

2011-11-21T17:42:00.002-06:00

The Market Report is updated daily and summarizes the short (1 week), intermediate (1 month), and long-term (6 months) market behavior. The 6-month relative strength for each industry, top 20 sub-industries, and bottom 20 sub-industries is calculated to help gauge the long term behavior of the market. The 1-month change in relative strength for each industry, top 20 sub-industries, and bottom 20 sub-industries is calculated to gauge the intermediate behavior of the market. The top 10 instrustries with the largest percent of stocks making new 52-week highs helps identify weak industries that may be starting new up trends, or to gauge the continuing strength of current up trends. The bottom 10 instrustries with the largest percent of stocks making new 52-week lows helps identify strong industries that may be starting new down trends, or to gauge the continuing weakness of current down trends. The dollar volume analysis shows the ten largest stocks (>$100 million DV) that are making daily moves larger than 4% up or down. This helps to determine if institutions are buying or selling stocks, which can effect market direction in the short term.

This daily routine keeps me connected to the behavior of the market, and I do it for my own uses as a personal exercise. The calculations are strongly influenced by Pradeep Bonde's market analysis at StockBee and William O'Neil's analysis at Investor's Business Daily. I highly recommend you check out both sites.

Market Report - November 18

2011-11-19T12:01:00.002-06:00

Market Report - November 16

2011-11-16T17:52:00.002-06:00

Market Report - November 15

2011-11-15T17:33:00.000-06:00

Market Report - November 10

2011-11-10T17:28:00.002-06:00

Market Report - November 8

2011-11-08T17:35:00.000-06:00

Market Report - November 7

2011-11-07T20:01:00.002-06:00

Market Report - November 3

2011-11-03T18:50:00.000-05:00

Market Report - November 2

2011-11-02T18:26:00.000-05:00

Market Report - November 1

2011-11-01T17:24:00.000-05:00

Market Report - October 31

2011-10-31T17:50:00.000-05:00

Market Report - October 27

2011-10-27T19:02:00.000-05:00

Market Report - October 26

2011-10-26T17:59:00.002-05:00

Market Report - October 25

2011-10-25T18:25:00.000-05:00

Market Report - October 13

2011-10-13T19:18:00.000-05:00

Market Report - October 12

2011-10-12T17:35:00.002-05:00

Market Report - October 10

2011-10-10T21:02:00.000-05:00

Market Report - October 5

2011-10-05T21:28:00.002-05:00

Market Report - October 4

2011-10-04T19:18:00.002-05:00

Market Report - October 3

2011-10-03T19:56:00.002-05:00

Market Report - September 30

2011-10-02T15:26:00.000-05:00

Market Report - September 29

2011-09-29T17:47:00.002-05:00

Market Report - September 28

2011-09-28T17:36:00.002-05:00

Market Report - September 27

2011-09-27T19:03:00.002-05:00

Market Report - September 24

2011-09-24T12:50:00.002-05:00

Market Report - September 22

2011-09-22T20:58:00.000-05:00

Market Report - September 21

2011-09-21T20:16:00.002-05:00

Market Report - September 20

2011-09-20T17:37:00.002-05:00

Market Report - September 19

2011-09-19T20:51:00.002-05:00

Market Report - September 16

2011-09-18T13:12:00.000-05:00

Market Report - September 15

2011-09-15T17:48:00.002-05:00

Market Report - September 14

2011-09-14T20:49:00.000-05:00

Day Trading Notes

2011-09-13T21:57:00.002-05:00

I have begun day trading the IWM ETF with long only positions. As a novice trader, my initial focus is developing good methods for day trading. I will frequently chronicle notes on my market observations and performance to track my progress.

Today was a positive day with several good trading opportunities. It is much easier to trade with the trend. The size of my winners and losers is about the same for both positive and negative days, but my winning percentage doubles from about 25% to 50% when I go long on positive days. Today was my best day so far based on total return ($0.52) with a winning percentage of 56% and a win-to-loss ratio around 1.61.
I think I finally found a good way to enter orders with the Fidelity Active Trader Pro software. I began using one triggers the other (OTO) orders to place a buy limit order near support, then when it gets filled it triggers a sell trailing stop limit order. I size the trailing stop to be a little smaller than the ATR(10).
I like adjusting the risk of my trailing stop based on the ATR(10) and the direction of the trend. If the trend is up, I will use a slightly larger stop because there is larger probability that the trend will continue up before reversing against me. If the trend is down and I am trying to time a reversal, I will use a smaller stop to account for the lower probability that a breakout will succeed.
I used to be opposed to trailing stop orders, but they are good for a few reasons. First, if I place a buy order near support and get a good fill, the odds are in favor of the price moving up. If this happens, the trailing stop will help ensure that if the price then reverses, I will have a very small loss. Second, the trailing stop order can track the actual order flow faster than I can. It is even faster than the chart price action prints. It is also even faster than the Level2 data feed. So if the price spikes momentarily up several ticks and then retreats, then position will exit before I would have been able to register it visually. Third, the point-and-click order entry method is very slow and the trailing stop ensures that I get a pretty good fill quicker than if I waited to place a limit order. Finally, it gives me peace of mind that as soon as my buy order is filled, my stop order is automatically in place. This helps manage my positions while I am working and helps reduce my risk while I am dealing with the daily distractions associated with my job.
I began making a summary sheet of all my trades that tracks what was traded, how many shares were traded, entry price, exit price, time of exit, day of exit, and whether the market was positive or negative for the day. I then analyzed my trades based on time of day. My performance is the worst on the opening drive from 9:30 to 11am because of my slow order entry technique. My performance is best from 12-2pm, which happens to frequently overlap my lunch hour, allowing me to focus all of my attention on the markets. My performance drops off again from 2-4pm.
For now, I will continue trying to trade all day. It is obvious from my analysis, that I will have to address my trading methods to account for the different market environments throughout the day. I am continuing to focus more on cutting my losses, but eventually I will put more emphasis on improving the size of my winners and my winning percentage.
I still need a good way to analyze market breadth intraday.

Daily Trading Summary (09/07/11):

Number of trades (round trips) = 18 (10W, 7L)

Trade Size = 1 share

Average Win (Winning %) = $0.092 (56%)

Average Loss (Losing %) = -$0.057 (39%)

Win-to-Loss Ratio = 1.61

Average Return = $0.029

Total Return = $0.52

Market Report - September 13

2011-09-13T21:36:00.000-05:00

Market Report - September 12

2011-09-12T19:34:00.002-05:00

Market Report - September 9

2011-09-11T14:55:00.002-05:00

Market Report - September 8

2011-09-08T17:42:00.000-05:00

Day Trading Notes

2011-09-07T17:37:00.000-05:00

I have begun day trading the IWM ETF. As a novice trader, my initial focus is developing good methods for day trading. I will frequently chronicle notes on my market observations and performance to track my progress.

Today was another good day of trading. The market gapped up big on the open and trended higher for the rest of the day. I was still able to keep my losses small and I scored 2 sizable wins (0.16 and 0.33), riding the trend for most of the move.
I think my entries are improving. It seems that is helping reduce my risk on each of my positions. I normally try to limit my risk to one ATR(10) on the one minute charts. My target profit is normally 2+ ATR(10). It seems that this has been effective the past two days because my win-to-loss ratio has been respectable.
I still got stopped out of one of my positions just before it ran up for a 0.30 move. My stop was 0.01 from the lowest print on the shake out. It would have been nice to catch that move. I am still working on my entries to help reduce the odds of being shaken out.
I still find it easier and more comfortable to buy into support and sell into resistance instead of buying a breakout. It seems I get shaken out of my breakout entries far too often. I need to develop better breakout trading skills because there is not always an excellent entry point at the bottom most support level.
I played around with the filters in Fidelity's Active Trade Pro software to try and see if I could find a good market breadth indicator, but the filters were not useful. They may be useful for finding other trading candidates, but they are basic filters and there is no customization. Yet another downside of ATP.
I did miss a couple of moves today. I should just spend a week and enter every time my entry criteria trigger to get a good sense of the win percentage, which would help with my risk management by allowing my to determine an appropriate win-to-loss ratio.
I felt a little better reading the tape today. On my biggest win there was some huge buying. The price had settled into support for about 5 minutes and I noticed that there were two exchanges with bids over 10000 shares. I was able to get filled on a limit order 0.01 from the low, targeting the price of the large bids. The price began moving upward and the buyers persisted on each small dip. I would keep my stop loss just below the large bid price, riding the trend until the sellers put up some huge offers and the buying dwindled. I was really pleased with my tape reading analysis on this trade. I need to target my buy limit orders coming into support, with large bid orders.

Daily Trading Summary (09/07/11):

Number of trades (round trips) = 7 (3W, 4L)

Trade Size = 1 share

Average Win (Winning %) = $0.167 (43%)

Average Loss (Losing %) = -$0.067 (57%)

Win-to-Loss Ratio = 2.47

Average Return = $0.033

Total Return = $0.23

Market Report - September 7

2011-09-07T17:16:00.002-05:00

Day Trading Notes

2011-09-06T21:01:00.001-05:00

The past couple of days the market has been in a strong downtrend, making it very difficult to trade from the long side. Today there was some good trading on the long side as the market seemed to find a nice range with some good swings.
I need a way to determine if I should be trading long or sitting on the sidelines. In other words, I need an indicator to tell me when to bet big or small. I am thinking of using multiple time frames to determine my short term bias. For now, I will use a 10 day chart with 1 hour bars. Using my my momentum oscillator on this time frame may help me improve my trade results. When momentum is positive on this time frame, it normally stays positive for at least a day or so. These positive momentum periods increases the chances that a breakout will follow through.
USE THE MOMENTUM FROM DIFFERENT TIME FRAMES TO ALIGN TRADING BIAS AND IMPROVE WIN %.
I really need to find a way to incorporate market breadth into my day trading. I use market breadth in my swing trading and I feel like I am trading blind when I am day trading without it. Unfortunately, Fidelity Active Trader Pro does not provide many options. They do have the TRIN and advancers vs/ decliners, but I was really hoping for the TRIX or something more customizable. I will have to find a solution to this problem.
FIND AN INDICATOR TO MEASURE INTRADAY MARKET BREADTH.
During the down days I have been working on my order entries/exits in order to trim my losses. Things are progressing nicely as my average loss seems to be decreasing from around 0.11 to 0.07. This should help improve my performance and risk-reward ratios.
I need to find a easily accessible list of news events for the week. I was caught off guard the other day when the ISM number came out better than expected. The market had traded in a tight range for about 10 minutes. The news came out and IWM immediately popped up about 1.00, trading over 1.5 million shares a minute for several minutes. I had no idea what was going on, but I am glad I was not short at the time.
FIND A LIST OF MAJOR NEWS EVENTS COMING OUT DURING THE WEEK.
I am considering changing time frames to make trading a little easier with the distractions at work. A 2, 3, or 5 minutes time frame may be better for my situation. For now, I am going to continue to trade the 1 minute bars.

Daily Trading Summary (09/06/11):

Number of trades (round trips) = 6 (2W, 4L)

Trade Size = 1 share

Average Win (Winning %) = $0.205 (33%)

Average Loss (Losing %) = -$0.068 (67%)
Win-to-Loss Ratio = 3.01

Average Return = $0.023

Total Return = $0.14

Market Report - September 6

2011-09-06T20:06:00.000-05:00

Market Report - September 2

2011-09-05T17:38:00.000-05:00

Market Report - September 1

2011-09-01T17:20:00.005-05:00

Reading the Tape

2011-08-31T21:55:00.000-05:00

I have read in many places that learning to read the tape is a very valuable skill when it comes to day trading and can significantly improve performance. That being said, there are very few good sources of information that provide sound training in order to develop tape reading skills. I will begin a series of posts exploring tape reading. As a novice trader, reading the tape is still a mystery to me, but through continuous research and study I am hoping to develop such a valuable skill. The following post is just my interpretation of what I saw in the tape during trading

The price action from 8/30/2011 had some good examples of how reading the tape could prove useful in timing exits and entries. IWM had experienced a short run up from 71.90 and started bumping up against resistance at 71.10. It continued to bump up against 72.10 for about 10 minutes (as shown in the figure below). Will IWM break out to the upside or breakdown? All charts are 1 min bars.

Normally, the market depth shows exchange orders with sizes <3000 shares. Up to this point, the bid and ask volumes had been fairly balanced with prints around 2000-3000 shares. The price made a run up to 72.13 when sellers came out in force. The picture below shows that the exchanges were showing shares of 12100, 16940, and 22600 on the ask. These volumes are well above the usually 3000 shares. Also, notice how the ask volume is overwhelming the bid volume. The ask depth at 72.13 is much deeper than the bid depth at 72.12, 72.11, and 72.10. This is a huge warning sign that 72.13 area is important and a sell off could occur soon if buyers don't come out in force immediately.

The price dipped from 72.13 down to 72.10 when the buyers stepped in. The price was pushed back up to 72.16 when the sellers came out in force again. You can see once again on the high share volumes and great depth on the ask.

The price drops from 72.16 to 72.14 and the ask volume increases even more signaling that sellers are in control.

The price quickly begins to drop from 72.14 to 72.05 when the buyers step in and try to rally. The bid volumes increase to about 10000 shares on a few exchanges and the bid depth is much deeper compared to ask depth. If sellers do not show up immediately, I would expect the price to increase.

The price begins to slip to 72.02 from the 72.05 level despite the high bid volume and depth which indicates sellers are still showing up in force to burn through the bids. You can see that the bid depth is still good, but the volumes are decreasing and the price is still slipping indicating sellers are still in control.

The buyers are unable to sustain the bid volumes and the sellers come out in full force overwhelming the buyers, as indicated by the huge volumes on the ask and the poor volume and depth on the bid. The price should continue to drop from these levels and power through the SMA50(red).

The sellers maintain their control with large ask volumes and depth, pushing the price through the lower level at 71.95 in a breakout to the downside.

Finally buyers show up again around 71.87. The buyers were able to show sustained strength as show in the bid volumes and depth, stopping the price from falling further below these levels.

I am sure there are many different interpretations of the tape and this is probably an over simplified case. It is a good illustration of how reading the tape can tip you off to the markets short term behavior, helping to improve order entry and exit points. While the behavior of the tape in this post seems simple, it is much different in real time. In real time, the bid and ask volumes are bouncing back and forth jockeying for control. You have to pay close attention to the large volumes that post in the level 2 data stream, and the values are continuously changing. With practice it should become easier.

Day Trading Notes

2011-08-31T19:38:00.000-05:00

Today was not a very good day for me in terms of trading. I felt like I could not do anything right today. The market was making some moves up and down, but the moves were really choppy and I got ripped up all day long. Breakouts to the upside rarely seemed to follow through. Levels were difficult to play because the price would consolidate for a few bars, then shoot up all of the sudden during one bar to the upper half of my range. I could not enter/exit fast enough to take advantage of these momentary spikes.
There seemed to be a lot of selling pressure today. Unfortunately, I only trade long right now. The easy money was in the shorts with nice long, clean trends. Most of the day I wanted to start shorting, especially when my early longs were not working.
I created a summary of all my trades so far with performance metrics broken down by the hour of the day. I trade best during the middle of the day. My winning percentages during this time is around 52% and my win to loss ratio is 2.27. This may be due to the fact I can follow the market more closely during lunch with very few distractions or it could be due to the lower volatility. Things seem to move a little slower during the middle of the day, so it is easier for me to analyze what is happening.
I don't seem to trade well on the open or the close when there is a lot of volatility. My winning percentages during these times is around 25% and my win to loss ratio is 1.11, that is pretty bad. This is primarily due to the order entry methods on the trading platform. I will need to be more selective when choosing my entries.
I started getting frustrated today. My first 4 trades were losers. I started getting stupid and entered a position at 73.75 when my indicators said it was a bad time to enter. Then I was really stupid and averaged down at 73.71 on the same position with no indication of increased buying. DUMB! As soon as I entered that second position, the market ripped down and I loss -0.19 and -0.15 on the positions for a total loss of -0.34. They were my largest losses of the day.
I recognized during the day that I was getting frustrated and my trading style was not working well, but I continued to try to trade. If anything I need more experience in all types of markets so my actions were more for education than anything.
Although today was by far my worst day, I did get good practice at cutting my losses short. Besides the two poor trades mentioned above, the rest of my losses were less than -0.09, with an average loss of -0.06 (not including the two stupid trades from above). I have to be pleased with that because I know if I can keep my losses around this level during a good day, it will lead to a very profitable run.
I need to develop some rules to stop me from trading if things aren't working. Something like an intraday loss limit or setting a limit on how much money I can give back. Perhaps if there are 3 bad trades in a row, I should shut things down. Right now I am still trying to learn, so I will continue to refine my skills. I will need to consider such rules in the future, especially when I begin increasing my size.
There was a long uptrend in the last hour of trading which I tried to 4 times, but 3 of them were losers. The trend was very choppy with an ATR10 around 0.11, which isn't bad if the trend is moving up quickly. This trend was grinding up slowly, in a choppy manner with some ugly candles. My indicators said there was buying strength for almost the entire trend. If I had had some more patience, my positions could have been more profitable. I kept trying to enter when the price broke up to a new level, but the breakouts were not clean. I should have entered on pull backs to the EMA7 and rode the EMA7 all the way up for about a 0.70 gain.
WHEN BREAKOUTS ARE FAILING, ENTER ON PULLBACKS TO THE EMA INSTEAD OF BREAKOUTS TO NEW TRADING RANGES.
I need to make a summary of all my trading rules for entry and exits. I should add it to the sidebar of the blog for easy access and editing.

Daily Trading Summary (08/31/11):

Number of trades (round trips) = 24 (7W, 16L)

Trade Size = 1 share

Average Win (Winning %) = $0.07 (29%)

Average Loss (Losing %) = -$0.07 (67%)

Average Return = -$0.027

Total Return = -$0.65

Market Report - August 31

2011-08-31T19:00:00.002-05:00

Market Report - August 30

2011-08-30T17:28:00.000-05:00

Day Trading Notes

2011-08-30T17:26:00.000-05:00

Today I felt like I made a lot of progress when it came to letting my winners run during an uptrend. I had thought about my entry and exit criteria and made some improvements which turned out to be profitable.
The 7 period EMA on 1 minute charts seems to be a good indication of the short-term trend.
I was down early today as my first three trades were losers. Then I began to find my groove and out of my next 11 trades only one was a loser (-$0.07). I was able to capture most of a strong up move during this sequence with the three consecutive trades of $0.40, $0.17, and $0.02. I was able to exit near the top of the trend. I did miss some portion of the middle of the trend, but I can improve my entries next time. I closed out the day with two losing trades of -$0.02 and -$0.10.
My last loss of the day was a very bad entry. The price shot up and I was afraid it would get away from me so I entered hastily instead of waiting for a better opportunity. My indicators even told me that upside momentum was at an extreme. I need to focus more on timing my entries at better prices. As soon as I entered, the price dropped $0.10 and I exited during the uptrend. Later the price ended up trading higher than my original entry, with several opportunities to enter at good prices.
Today was a new personal best in terms of total return.
I felt like I was able to understand the tape a little better today. I was able to make some timely entries and exits based on the tape. It seems that IWM normally posts depth of 1000 shares or less, but there were several instances today when the buying and selling came on strong and exchanges were posting orders of 10000-20000 shares. I was also able to spot could support and resistance points based on when the large order came into the tape. I will try to create some posts summarizing what I saw in the tape, which should provide some good learning experience.
I use a ten period average true range to give me some idea of what I am risking. I know I have to be very careful when the ATR is about $0.20 and make sure my entry points are good. When the ATR is below $0.10, I usually look to scalp trades for a target profit of $0.05-$0.10 because the price is usually range bound and moving slowly. Fills are easier at my target prices with lower ATR.
A vast majority of my trades were entered with limit orders. I am feeling more comfortable with my system of order entry/exit. I begin with 4 preset orders: buy limit, buy market, sell market, and sell limit. Once I have entered with a buy limit order, I then change the buy market to a sell market. This will be my emergency exit order. I also change the sell market to a sell limit, which becomes my target loss order. My final sell limit order becomes my target profit order. I adjust the limits on the profit/loss targets as the price moves. This systems seems to work well and usually gives me some good fills.
There were a few times today that I would place a buy limit order and the market would come down just above my entry price, then take off. I spent the one whole uptrend chasing the price with my limit orders, which were never hit. Sometimes you just need to get into the trade and sacrifice that penny, instead of sacrificing a $0.20 move.
I would still like to improve my average win to average loss ratio. It seems to be hovering around 1.4. given that my winning percentage is often around 50%, that doesn't give me much room for error.

Daily Trading Summary (08/30/11):

Number of trades (round trips) = 16 (8W, 6L)

Trade Size = 1 share

Average Win (Winning %) = $0.11 (50%)

Average Loss (Losing %) = -$0.08 (38%)

Average Return = $0.026

Total Return = $0.41

Index Forecast - August 28

2011-08-29T18:10:00.001-05:00

Ponzos Time Machine is updated each week by the ETF Prophet blog. The updated analysis replaces the old analysis each week, and the blog does not maintain a past archive of the analysis results.

Each week I post the index forecast from the PREVIOUS WEEK as a way of archiving the results over time. The analysis also provides a good guideline for trading over the coming weeks based on historical performance.

You can check out all the great commentary and the current time machine analysis at ETF Prophet by clicking on the link in my blog roll. It is an excellent site worth following.

Market Report - August 29

2011-08-29T18:07:00.000-05:00

Day Trading Notes

2011-08-29T18:05:00.000-05:00

Today was a very interesting day. Although the market was up significantly, I was unable to capitalize on the move because I need to...
LEARN HOW TO TRADE BREAKOUTS!
Today should have been easy money because the market just continued upward in long long trends with very small pull backs, and that was my problem.
Today began with a strong opening drive to the upside, followed by a sizable sideways consolidation, followed by another strong breakout and surge to the upside. I had difficulties trading the breakout and opening drive. I feel uncomfortable jumping into a MOMO price movement because I cannot adequately define my risk:reward like I can on a range play with identifiable levels.
I need to practice identifying secondary and tertiary entry points in a trend move. I often forgo entering a trend unless I have got in at the bottom. I am hoping that a video review of the days action will help improve my ability to enter a trend in multiple places.
I also need to improve my order entry speed/type. I feel uncomfortable entering a breakout position because if the position reverses quickly, I have to enter another order quickly. I practiced entering some contingency and OTO orders to help with this problem. The issue will require more thought.
I think the best way to play a breakout may be to setup a buy limit order before the breakout. In addition I should setup a contingency or OTO order to sell at my stop loss and target profit. The target profit part is the trickiest with the breakout. I could place a trailing stop limit sell order to follow the breakout, but the trail size is an issue. I also could place a stop loss limit order after the breakout has moved a certain distance. If the breakout continues to move, I can cancel and replace the order with a higher stop loss limit sell order.
I am thinking of playing the opening drive with a preset market buy order in addition to a preset stop loss limit sell order. If the market opens up, I can place my buy order and then set the stop loss limit based on my fill. Just a thought...
It would be nice to find a day trading mentor that could teach me the nuances of reading the tape and different strategies.

Daily Trading Summary (08/29/11):

Number of trades (round trips) = 3 (0W, 3L)

Trade Size = 1 share

Average Win (Winning %) = N/A (0%)

Average Loss (Losing %) = -$0.02 (100%)

Average Return = -$0.023

Total Return = -$0.07

Market Report - August 26

2011-08-28T17:24:00.002-05:00

Day Trading Notes

2011-08-27T13:55:00.000-05:00

Today flet better trading. It was an up day with long tradeable trends, but I was nto able to capitalize on the trends as much as I wanted to. My entries and exits are getting better and I feel more comfortable executing limit orders.
I started the day with two losing trades trying to go long in the initial downtrend. I had some signals that an uptrend may be starting, but the attempts failed. I should probably avoid trying to call the bottom on a strong opening drive to the downside. I was pleased with my ability to continue trading and rally from being down early to being positive.
I try to limit my losses to $0.10 per trade, but Fidelity's Active Trader Pro platform has been giving my some problems. It is hard to enter orders quickly unless they are prepared well before entry and exit. The platform also froze for a few seconds during one of my trades so that I could not exit correctly. I took a large hit of -$0.21 because of it. I need to find a better way to enter my stop loss entries.
LET YOUR WINNERS RUN!
There were a few great long trends to the upside today of more than $0.40. I was able to get great entries at the beginning of the trends, but i would always exit well before I had signs that the trend was exhausted. I normally determine levels for a trading range of $0.10-$0.20. I set a limit order to exit at the upper range. Several times today the trend was powerful enough to plow through my upper limit and continue going for >$0.30. I need to capture this move! I noticed that these trends tend to stay above the 7 period EMA, but that could be coincidental.
I need to learn to read the tape. I recorded my entire day of trading using the SMRecorder software. It worked beautifully! I am looking forward to reviewing my trades and turning points in the price to see if I can identify what happen in the tape during reversals and trends. I will begin posting some videos on the blog was I make some progress. there seems to be very little information on the web about reading the tape. I am hoping this will be a valuable resource for me as well as others.
The volatility in IWM was greatest for the first few hours. The volatility reduced signifcantly the rest of the day until the close. I need to try to capitalize on the early volatility with as many winners as possible. It would be difficult to dig myself out of a hole once the morning volatility wanes.
My average trade length is about 2 minutes. This is more likely a function of balancing my day trading while I am at work dealing with meetings, coworkers, phone calls, etc. I still need to learn to hold my trades longer to capture more upside. Perhaps I should try using a trailing stop in combination with a stop loss limit order.

Daily Trading Summary (08/26/11):

Number of trades (round trips) = 15 (8W, 7L)

Trade Size = 1 share

Average Win (Winning %) = $0.12 (53%)

Average Loss (Losing %) = -$0.10 (47%)

Average Return = $0.015

Total Return = $0.22

Day Trading Notes

2011-08-25T19:04:00.001-05:00

I experimented with placing trades using market orders. The fills were much faster, but the prices were not as good as with limit orders. I have missed several trades trying to use limit orders. I may try to get a feel for trading by using market orders, then improve my trading by working on placing limit orders instead.
Because the trading platform uses point-and-click execution, I need to have several orders ready to execute in succession. For instance, I should have my initial buy order, my stop loss sell order, and my target sell order ready to execute before I execute my buy order. It may also prove valuable to have one extra sell order ready to go just in case.
ALWAYS TRADE WITH SHORT-TERM MOMENTUM!
Since I am only placing long trades, I need to avoid trade to fade down trends. A sideways consolidation or uptrend needs to be established before I enter my long trades. There were three separate trading periods today: the morning was a down trend, midday was an uptrend, and the close was a downtrend. Almost all of my trades in the morning and into the close were losers because I was trying to call the bottom of the downtrend, while almost all of my midday trades were winners because I was trading with the short-term momentum.
I need to come up with a clearly defined list of factors that will help my define when an uptrend is starting or ending. Once i have that list I need to review the price action from the day to get used to spotting the signs.
It is important to identify levels and trade those levels. In an uptrend, I should try get long near the lower level and ride it to the upper level.
LEARN HOW TO READ THE TAPE TO IMPROVE TRADE PERFORMANCE!
I will begin using SMRecorder to capture video of my screen during the trading day. This way I can monitor and review the action in the tape and how that translates into price action on the chart. Optimal settings seem to by 8 frames per second with a compression ratio of 60%. This should allow me to record the entire days action with 3Gb. With this video, I will be able to review the market action in the evening and on weekends to improve my tape reading skills.
Look into trying to scalp the opening drive.
I still need to play around with the trading platform layout to improve the my order entry/exit skills.

Daily Trading Summary (08/25/11):

Number of trades (round trips) = 11 (4W, 7L)

Trade Size = 1 share

Average Win (Winning %) = $0.14 (36%)

Average Loss (Losing %) = -$0.11 (64%)

Average Return = -$0.020

Total Return = -$0.225

Market Report - August 25

2011-08-25T18:18:00.000-05:00

Day Trading Notes

2011-08-24T18:37:00.001-05:00

I trade the IWM commission-free, but I can only trade it from the long side. The commission-free trades are huge because they allow me to focus on making good trades (with small trade sizes) without worrying about eroding my account with fees.
Order execution is critical. I am familiarizing myself with the new trading platform. Unfortunately, there are no hot keys for placing trade orders. I have to use the point-and-click method. I need to determine the best way to place my orders. I am using limit orders. I work full-time, so I will not always be able to actively manage my position once it is initiated. I am currently evaluating multi-contingent, OCO, and OTO orders.
I am limiting myself to one open position at a time in only IWM until I gain more experience.
I need a way of defining if IWM is in a short-term down trend and I should take profits quickly, or if is is in a short-term up trend and I should let my profits run. I will summarize my trade performance to determine the size of my winners/losers and my expectancy.
It is easy for me to exit trades at my stop points.
It is difficult for me to enter trades. I find that I am missing fills on my limit orders by a few cents. Once I miss my target entry, I tend not to try and re-enter. This is especially bad if it is followed by a long trend. I need to practice entering a trade quickly and exiting quickly if it moves against me because I can't afford to miss those moves.
My goal is to break even each day while I am learning. As my skills develop, I would like to be able to exceed the daily movement in IWM on a per share basis. Example, today I made $0.15 per share while IWM closed the day up $1.01. I would like to have exceeded $1.01 per share.

Daily Trading Summary (08/24/11):
Number of trades (round trips) = 6 (3W, 3L)
Trade Size = 1 share
Average Win (Winning %) = $0.15 (50%)
Average Loss (Losing %) = -$0.10 (50%)
Average Return = $0.025
Total Return = $0.15

Market Report - August 24

2011-08-24T18:10:00.002-05:00

Market Report - August 22

2011-08-22T20:32:00.002-05:00