1) Bottoming process – At market lows, we tend to see an elevation of volume and volatility and a high level of market correlation, as stocks are dumped across the board. Selling pressure far exceeds buying pressure and sentiment becomes quite bearish. At important market bottoms, we see price lows that are not confirmed by market breadth, as strong stocks begin to diverge from the pack and attract buying interest. At those bottoms, we also find a rise in buying pressure and a reduction of selling pressure, as fresh market lows fail to attract new selling interest.
2) Market rise – With the drying up of selling, low prices attract buying from longer timeframe participants as well as shorter-term opportunistic ones. The market rises on strong buying pressure and low selling pressure, and the rise generates sufficient thrust to generate a good degree of upside momentum. Volatility and correlation remain relatively high during the initial lift off from the lows and breadth is strong. Dips are bought and the rise is sustained.
3) Topping process – The market hits a momentum peak, often identifiable by a peak in the number of shares registering fresh highs. Selling from this peak generally exceeds the level of selling seen during the market rise, but ultimately attracts buyers. Weak stocks begin to diverge from the pack and fresh price highs typically occur with breadth divergences and lower levels of correlation. New buying lacks the thrust of the earlier move from the lows and volatility wanes. By the time we hit a price peak for the cycle, divergences are clear, volatility is low, both buying pressure and selling pressure are low, and sentiment remains bullish.
4) Market decline – Fresh selling creates a pickup in correlation and volatility, as short-term support levels are violated and selling pressure exceeds buying pressure. Breadth turns negative and the bulk of stocks now move lower.
Archives of “January 9, 2019” day
rssCastles Made Of Sand
Jimi Hendrix was an extraordinary guitarist, but most people focused just on his guitar playing abilities, not realizing his lyrics were often quite poetic. In one song, he sings “Castles made of sand, fall in the sea, eventually.” This is a great phrase to think about while trading.
There are two good lessons for traders in this simple song lyric. First, just as you should not trade based on a faulty idea, you should not use sand as a building material. Second, you need a solid trading plan as your foundation – without it, you’ll slip into the sea, where 90% of traders reside. Let’s look a bit more at both ideas.
First, you need to trade with a sound concept. This means you can throw all those hot tips out the window, and ignore the talking heads on television. What you need to do is have an idea or strategy that has been properly researched and tested. Then, you need the emotional power to trade the proven idea as is, without fail. Obviously, there are a lot to these two steps, but if you ignore them your trading house might as well be built of sand.
Second, a trading plan is essential to have a solid foundation, BEFORE you enter the markets with real money. What is involved in a trading plan? A good trading plan is written just like a business plan, since if you don’t treat trading as a business, you are destined to fail. So, all the sections that make up a good business plan (Mission, Products, Operation, Strategies, Disaster Plan, Financials, etc) should be in your trading plan. The more time you spend on this plan, the stronger your foundation will Be. (more…)
If Trading is War, Is All Fair?
An article in today’s New York Times focuses on high-frequency traders and the efforts that they are making to avoid regulations that may limit their growing power in the markets.
According to the article, “Critics say traders with access to the fastest machines win at the expense of ordinary investors by seizing on the best deals and turning fast profits before other traders.”
Many attribute last May’s “Flash Crash” to high-frequency trading, although according the article, “Regulators did not blame high-frequency traders for causing the sell-off.”
High-frequency trading firms defend that the technology they utilize to build their business is part of “stock-exchange modernization” and helping to create “a level playing field.”
How do you feel about high-frequency trading? Has its rise affected your own trading? How have you had to change the way you trade to remain competitive?
As one of the comments on the article suggested, would it be foolish to think an average trader can beat an automatic trading professional?
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“Trading consists of three parts: personal psychology, money management and system development. We also agreed that trading psychology contributes about 60% to success and position sizing contributes another 30%, which leaves about 10% for system development. Furthermore, most traders ignore the first two areas and don’t really have a trading system. That’s why 90% of them fail.”
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