Facts of Life

The above picture is, of course, Norman Rockwell's Facts of Life. Here are a few of them that you ought to be aware of based on Thursday's exciting trading activity.

NYSE Closing Summary
Trade Date 8/16/2007
Number of Issues..... 3,591
Advance-Decline Ratio.... 0.6
NYSE Trades ....8,908,020
NYSE Volume....2,989,836,240
NYSE Dollar Volume ....115,188,118,914

Retail Buy Trades ....152,848
Retail Sell Trades ....204,524
Total Retail Trades ....357,372
Retail Buy Volume....53,008,213
Retail Sell Volume.... 76,575,492
Total Retail Volume....129,583,705

Program Trading
Index Arbitrage Program Trades ....576,924
Non-Index Arbitrage Program Trades ....6,231,010
Total Program Trades....6,807,934
Index Arbitrage Program Volume ....111,238,364
Non-Index Arbitrage Program Volume ....1,534,370,009
Total Program Volume....1,645,608,373

NYSE Broker Volume Top 5
Nasdaq Execution Services.... 794,915,984...... 19.70%
Goldman Sachs Group....339,484,455....... 8.40%
Merrill Lynch....269,748,370....... 6.70%
UBS....213,478,481....... 5.30%
Morgan Stanley & Co....205,736,575....... 5.10%
Lehman Brothers Inc....195,926,832...... 4.90%

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Program trading accounted for 55% of total NYSE volume.

Retail trading accounted for 4% of total NYSE volume.

Program trading accounted for 76% of NYSE trades.

Retail trading accounted for 4% of NYSE trades.

These are typical readings, although retail trading is normally 5-6%. If you want to track the NYSE data on a regular basis, go to the NYSE site. Lots of free data and some pricey real time databases for the pros to help them develop program trading algorithms to challenge your skills. (Also see August 10th post).

NASDAQ order flow

This is part 4 of the series on order flow begun on Sept. 1st and covers data available on the Nasdaq. The NAZ is an 100% electronic marketplace, which gives it a decidedly different character than the NYSE. The NAZ is driven by bid/offer spreads provided by market makers, which the NAZ does track and which numbered about 892 on a daily basis for August. But the reality is that with the anonymous electronic market, anyone can be a market maker, just submit a bid/offer.
While the NAZ does not segregate retail and program trading, it does identify "block trades", which it defines as trades over 10,000 shares. August averaged 8,783 daily block trades, which accounted for only 0.15% of all trades but 15% of total volume. Being home to most of the high beta stocks, the NAZ is the favored venue for day traders, so maybe the piddling NYSE retail numbers just mask the real action on the NAZ. But wait a second, looking back to our NYSE data we see an August daily average of 5.8M trades as compared to the NAZ's 6.0M trades. We also see NYSE average daily volume at 1.86B and Naz at 1.88B. Given the magnitude of the numbers in question, the correlation between them is rather surprising.
Discounting the block trades, we see that the remaining 99.85% of the trades account for 85% of the volume and yield an average of 265 shares/trade, a number that is midway between the NYSE retail and program trading trade share average. These numbers strongly suggest that program trading and algorithmic trickle filters are accounting for the bulk of trading volume but the nature of the electronic marketplace creates a veil that is difficult to penetrate.
As was the case with yesterday's study of WM on the NYSE, as I look at EBAY on the NAZ this morning I note 3.9M shares traded during the first 90 minutes and as I watch the L2 time and sales go streaming buy, the vast majority of the trades are 100 shares, a few 200s, a few 400s and an occasional 1000 share order, or about 14,700 orders = 163 trades/minute. The WM study produced 12,500 orders and 140 trades/minute and this further supports the contention that orders are being algorithmically partitioned and queued.
How awareness of these trickle filters can benefit the average trader will be the subject of upcoming research. My next series of studies will focus on NYSE volume tells and will begin in October.
Anyone wishing to further investigate NYSE or Nasdaq data can refer to the links on the right side of this blog under "Data and Charting links". Then click either "NYSE Data" or "Nasdaq internals". NYSE gives you 14 days of info free, Nasdaq gives you 5. I tried to collect AMEX data also since this is the domain of the large volume sector SPDRs like XLE, XLF, XLB, XLU, etc, but AMEX charges $30/day for a peek at their numbers so I will have to defer.
As I mentioned in Part 1, I'll be glad to forward my study as a consolidated Excel spreadsheet to anyone who wants to massage it further.

NYSE and the Retail Trader

This begins a 4 part series on NYSE and NASDAQ market participation and is a follow-up of my August 17th post on the Facts of Life.. I began this study to better understand how orders flow, who controls the markets and how they do it, since I'm always looking for a trading edge. As the NYSE evolves from the specialist mode to a hybrid mode to an electronic market like the Nasdaq, the dynamics of order flow and how it is controlled have also evolved. My goal is simply to look at the statistics provided by the NYSE and Nasdaq and to determine if, in fact, some patterns and probabilities can be detected.

I welcome your thoughts and comments on these posts as I do not claim to be a savant (or even very smart as Mr. Market keeps reminding me) and 2 heads are always better than one when looking at a data field. The data is presented as digital photos for ease of presentation. If anyone wants the Excel files to play with, e-mail me at bzbtrader@aol.com and I'll be glad to forward them.

The statistic that stands out for me is the size of retail trades. This represents the volume of trades through retail brokers such as Schwab, Fidelity, TradeStation, Interactive Brokers, ETrade, AmeriTrade, etc. There's an awful lot of money being spent by these brokers trying to attract a client base as evidenced by my weekly mail and phone calls from at least 3 of those mentioned above. Assuming each client makes 1.5 trades per day equals roughly 123,000 traders on an average August day. That's not a lot. Neither is the volume of retail trades. The consistency of the average trade size is also interesting since I had expected that traders would scale up on positive days and scale down on negative days. In fact, the tendency appears to be the opposite. This sheet reflects only NYSE data, an arena I much prefer to the Nasdaq (Qs are the exception), although many traders I know would rather eat ground glass than trade the Big Board. If there's any simple lesson to be learned from this first glance at the data, it's that going with the flow is an absolute must and that to follow or get out of the way are the only safe courses of action.

For several years I was able to generate a respectable and consistent ROI when I found that it was possible for a retail trader to actually move NYSE stocks, in the low volume (less than 75,000 daily volume) issues which tend to be illiquid with huge spreads and thin or no options . But this endeavor requires at least $200K in risk capital and a special set of trading skills and risk management rules. My current risk comfort level prevents me from following this path again as I encountered more than a few moments of dread and terror along the way.

Monday Series: Part 2 - The Game

"Trading is a bit like flying an airplane. Most of the time it's not very interesting, but every once in a while it's horrifying." That's a quote from Curtis Faith, who was 19 when he was selected to be one of the legendary Turtles in 1983. The most successful of the Turtles, he racked up profits of over $ 30 million in the next four years and then basically retired from trading. His new book....THE WAY OF THE TURTLE....is a great read and an extensive interview with him can also be found in the June 2007 Active Trader Magazine. One of the points he makes is that the Turtle system (which is not very complicated and has been discussed, reviewed and modified by many) would not fare very well today because of changed market dynamics. This is an issue worth exploring because, personally speaking, I like to lmit those "horrifying" times to the absolute minimum........

Traders operate in a dynamic, probabilistic and opportunistic environment characterised by uncertainty and risk. Market movements are driven by government financial policies, unpredictable news, intentional mis-information, chat-room hype, program trading, earnings reports, business fundamentals and the rampant trader emotions of fear, greed and hope that can dramatically impact price and volume action in both stocks and options. The markets are a zero sum game and utterly impersonal. Other traders have no regrets about taking your money and eating your liver for lunch, presumably with some fava beans and a nice Chianti. The marketplace that provides these trading opportunities, however, has some dynamic characteristics that retail traders would do well to consider. Electronic program trading accounted for 10% of the daily NYSE volume in 1988. In 2005 that number rose above 50% and now rides at the 70% level. The volume of retail trading on the NYSE is less than 5%, often dropping to the 3% level of total NYSE daily volume. In addition, 15 years ago 40% of NYSE outstanding shares traded hands each year, while that percentage had more than doubled to 94% in 2004 and now stands at a frothy 98%. The churn rate continue to rise, which reflects a growing willingness of both the institutions and the retail sector to practice market timing, dumping losers and seeking new winners. The buy and hold philosophy that predominated for many years has steadily eroded as higher investment returns are sought. Facilitated by the rapid development of the electronic marketplace over the past few years, market liquidity has vastly increased, trading spreads and transaction costs have dramatically decreased, and easy access to instant market news, sophisticated technical analysis algorithms and inexpensive programmable system testing and backtesting software have all served to enhance market dynamics. It should also come as no surprise to learn that some of the most successful traders are also skilled poker players (such as Bob Bright) who are consistent winners. Trader Monthly magazine is read by many institutional and commerical traders and one of the regular columns is "The Card Shark", wrtten by a 1o time world series of poker champion, and which is devoted to tactical poker. More than a few professional trading firms require traders to be rigorously educated in not only the legal and mechanical aspects of trading, but also in the application of mathematical modeling and game theory. They do so because market activity ultimately revolves around the psychological components of fear, greed, ignorance and hope and game theory can provide an extremely valuable tool for understanding, evaluating and defining trading probabilities in that emotionally dynamic market environment. A good working knowledge of game theory is a basic component of consistently successful traders because it can improve the probability or odds of winning trades and therefore provide an edge. Skilled poker players develop the ability to read “tells” of other game participants. These are the facial expressions, hand movements, body language and vocal signals which other players in the game may unconsciously exhibit in response to the cards they are dealt and are holding. The ability to read “tells” can provide a significant edge, and in a similar fashion, traders must learn to recognize “tells” when trading …the idiosyncratic behavior that each stock or option exhibits when subjected to various market conditions and forces. “Tells” are typically the actions of program trading, market makers, NYSE specialists, or other large traders that are revealed in the dynamics of the bid-ask spread, price-volume vagaries and unusual activity in options volatility and pricing. Although there is no simple roadmap for detecting these “tells”, those traders that do invest the time to study and understand such behavior will be rewarded with knowledge of significant edges that can be effectively utilized to increase the probability of success for multiple trades. Among the sites that seek to quantify these tell signals http://www.markettells.com/ is worth a look. This is a fee site, but a free trial is available. I will highlight a few other such sites during the week. Next Monday: Dealing with Uncertainty

NYSE and the Ficaps

This is part 3 of the series on NYSE order flow started on Sept. 1st. This post looks at the residual of retail and program trading, which I have termed FICAP (funds, institutions, commercials and prop shops). This is the deep jungle where the 800 lb gorillas roam and includes the likes of GS, MER, LEH, C, and the usual suspects with deep pockets seeking alpha. In August this group accounted for 16% of NYSE trades but 38% of the volume. The average trade size was only 809, which suggests this group is also masking true order flow volume by trickling 100 share orders into the pipeline, but they are having a harder time doing it perhaps because of the sheer volume of trades that need to be executed and the fact that many of the trades are executed de facto rather than run through the electronic algorithmic trickle filter. It's understood that the bulk of the program trading discussed yesterday is also executed by this group, so the numbers may be somewhat misleading, but the focus of this study was to understand order flow dynamics, not necessarily the character of those submitting the orders.
NYSE case study - WM - just looking at a few stats we find 888.41M shares outstanding with 92% held by institutions with average daily trading volume in July 8M shares and 14M in August. So we are seeing 1-1.5% of total shares traded each day for the past 2 months. In August WM averaged 44,000 trades per day or about 113/minute. These numbers are averages and the 60M chart shows that the volume is typically skewed towards the open and close so a more realistic trade frequency is in the range of 250 trades/minute for the first and last hours. As I watch my L2 time and sales data for WM stream by this morning the vast majority of the trades are 100 lots, a few 200 and an occasional 1000. In the first 90 minutes WM has already traded 4M shares = approx. 12,500 trades = 140 trades/minute. As Dr. Brett points out, it would be very helpful to have this information available as a data stream in order to gauge market momentum. This can be accomplished by dumping your data feed into an excel spreadsheet (if available on your platform), and then massaging the data a bit to produce a dynamic force indicator. This is not a trivial effort and is possible with only a limited number of data providers. This is a work in progress and I'll report on any new developments.
Prop shops - the impact of proprietary trading shops is often overlooked, but it should not be underestimated. These are typically hypertraders who are scalping pennies out the market on sheer volume. In order to accomplish these ends trades must be executed as blocks. The large cap NYSE stocks are a regular stomping ground of this group and the effects can be substantial. A few months ago I met a very accomplished trader who worked with a little known 1000 trader Chinese prop shop with $1B capitalization and a very active participation in US equities. These traders are the top financial and mathematics college graduates and are carefully selected and trained (and culled when they don't perform). Do you think these guys can nudge the markets a little bit when they set their minds to it?

NYSE order flow stats

Yes, this is data from last September. . . the NYSE use to provide these stats gratis for 2 weeks, but have since revised their policy and now charge between $1500 and $5000/month for a peek under the sheets. Anyone out there with an NYSE access account care to share updated stats, send 'em along.

The reason I posted this is that I got a few emails questioning my 80% program trading and 3 % retail trading comments yesterday. Since the frequency and volume of program trading have shown a pattern of increasing over the past 10 years I'd be surprised if this year's numbers aren't even higher.

This data is a rehash of a series of studies I ran last year (starting Sept, 1 2007) exploring the effects of order flow masking algorithms, iceberg orders, and backchannel order executions. Interestingly enough, retail orders typically print de facto, whereas pro traders' orders are shown in increments of 100, 200 and 400 shares. Watching level 2 time and sales stream by, those 1000 share prints are probably retail orders, not the big dogs, so it's important to keep track of the total volume per bar rather that the T&S when trying to assess momentum.

A New Approach

It's easy to be pissed off and frustrated by the HFT manipulation of the markets that has become commonplace. Unless you've been trained as a jet fighter pilot like some of my trading buddies your reflexes just can't keep up with the intraday big bar trend reversals that have become the new paradigm for daytraders.

There's still the standard benchmarks for traders like the pivots that continue to provide valuable intraday reference points and, perhaps interestingly, I've noticed that the pivots appear to have become even more reliable as stop and reverse or stop and rest points than they have before. This may have to do with the nature of some of the preset risk management controls embedded in many of these HFT programs, because once the pivots are violated the volume surge typically accelerates substantially.

Now, you know me . . I'm always looking for a better mousetrap, or in this case an easier mousetrap.

I've been following the recent developments of my trading brother in arms the Clueless Q Trader, who shares my underlying fascination with the Qs as a trading vehicle. Clueless has now migrated a goodly portion of his daytrading over to the SSO and, as I pondered and examined this development, it's simple brilliance struck me.

I've often said that if I could just trade the NYAD, life would be a breeze. Of course the NYAD is just an indicator reflecting the relative NYSE advancers versus decliners. BUT, the SPY is a perfect mimic of the NYAD . . you'll never see any significant divergence between the SPY and the NYAD. Using the SSO just doubles the beta. . voila!!.

Thus my new trading platform setup as shown above to capture those SSO moves. This is the Schwab SSPro platform and includes just 4 charts . . SSO/VIX, VIX/NYAD, NYAD/VIX and TICK. In between the charts are 3 dynamic scrollers that display the new highs and lows count of the day for the NYSE, the indices and the Nasdaq. Below the scrollers are 2 watch lists. . one of the major indices, the other of the volatility indices plus a few wild cards. The Watchlists have an interesting Schwab feature that let's me turn on the real time tick for each item, so I can see at a glance whether the major or vol indices are in alignment.

I've been using this setup for just a few days, but am extremely impressed with it's reliability and ability to discern the market turns. The charts above are shown on 2 minute bars, but the whole display is fractal and can be set to 1, 2, 5, 10, 30, 65 minute or daily bars.

One thing you might notice is the clarity of the VIX chart relative to the SSO chart. The dynamic ATR of the VIX 2 minute bars is surprisingly low relative to the SSO and this is the reason that I juxtapose the 2 setups side by side. While momentum might not be immediately clear on the SSO chart it's crystal clear on the VIX chart.

This is a work in progress and no substitute for a co-located server at the exchanges and a million dollar software program but as a discretionary trading tool it's the best thing I've found to date.

NYSE and Program Trading

This is part 2 of a series of posts started Sept. 1st on order flow dynamics. This post covers program trading (PT) .. that portion of trades accomplished through automatic executions driven by set buy/sell algorithms. Also see http://www.programtrading.com/ for more info.
A couple things strike me about this data:
Volume of trades - PT accounted for fully 80% of the NYSE trades during August. That's a lot. One thing to keep in mind is that there is no single trading algorithm used to trigger trades, but rather thousands of them, based on a variety of parameters including support/resistance, time of time, technical indicator signals, arbitrage with the futures, pair trades, etc. And most of these algorithms are dynamic and scalable, ie., triggers at 6:30am don't resemble triggers at 7:00am. What PT takes out of the equation is the foible of human emotion trying to second guess or finesse a trade. Nothing personal, just good risk management. And the reason there are so many PTs is simple mathematics . . . if you want to buy 250,000 shares of WM and do it at 100-200 shares per trade so as not to show your intent, it's going to take about 1600 trades.
Size of average trade - this is interesting because it is only 2/3 the size of the average retail trade. Where are all those 1000, 10,000 and 50,000 share orders? It's hard to tell and program trading is designed specifically to make it that way. There's a very successful local company (San Clemente,CA) that markets and manages software called "The Executioner". The clients are those trading more than 1M shares a day (you get a price break if you trade more than 10M). The software is designed to take a 1M share order and break it down into 100 and 200 share orders and trickle them into the pipeline at the most advantageous time. There is similar software available from a number of vendors designed to accomplish the same ends, although you don't read about it Active Trader or Technical Analysis of Stocks and Commodities. The net effect is little disruption to the price . . which benefits both big buyers, who don't care to show their hand and pump the price, and big sellers, who don't want to show their hand and drive the price down. Front running orders has become a lot more complex lately unless you've got a Sun8000 computer and some very sophisticated (and pricey) software. So, as you sit in front of your trading screen, watching level 2 quotes flow by displaying an apparently endless stream of 100 share orders, you're really watching a flood of program trades interlaced with a trickle of few others.
Implications - I routinely use the TICK, NYAD, VIX and volume to gauge short term momentum and trend strength because I assume the specialists and market makers (MM) can't manipulate these numbers. This is a popular view among many bloggers and traders. Trying to determine market strength by looking at L1 or L2 data is not practical, since MM aren't obligated to show their true order size - the same option I have available to me as a retail trader. So I'm always looking for a clue, an edge, an indicator, a tell that the MM can't finagle and that will provide me an undistorted peek at the true character of the market. I rely heavily on the MACD of the TICK and NYAD to guide my day trading (along with pivot targets), and while it is hard to fudge the NYAD I am now rethinking the effectiveness of the TICK indicator based on this current research. Dr. Brett's hybrid TICK/volume indicator looks like it still has legs, and I will explore this issue further in coming posts.

Qs Pairs Basket - Part 2

Despite the JJT and PTM diversions this week, I'm still working on the Qs pairs basket and have expanded the preliminary Qs matrix as shown above. I had fully intended to conclude the Qs pairs study this week, but sometimes you've just got to go where the research takes you if you want to uncover the nuggets.
Next week I'll run the complete Qs pairs basket analyses and define several metrics for determining what's hot and what's not on the basis of a daily update.
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Going forward into November I've got two new projects that have consumed much of my time time recently and will no doubt consume much more going forward:
# 1. A series of studies I'm calling GEconomics, including systems and pair trading approaches.
Since I actually trade GE more frequently than the Qs and hold bigger positions, it seems wise to devote some investigative efforts to assure maximum risk management controls are in place. Being a stock, GE is a little more problematic to trade than the average index ETF, but initial forays have been encouraging. Because of it's consistently high daily volume (almost always in the NYSE top 10) and it's relatively high daily ATR , GE offers some unique trading opportunities and I'll endeavor to profile a few of them.
# 2. Another series of studies involving VIX and VXX pairs. The preliminary research on this front is stunning to say the least and really devolves into a variation of my VIX Advantage studies a while back. The difference here is that by creating a VIX/xxx pair and using the reversals of the VIX z-scores to trigger trades we goose our single sided Ticker A performance considerably.
For those that haven't been following my pairs-related posts for the past month this may sound like a lot of mumbo jumbo. Sorry, but that's where I'm headed.
Reread earlier September pairs posts to catch up and/or get a 3 day trial subscription to the Rewind matrix and pairs trader with no obligation to try out the possibilities for yourself.

Checking Close Imbalances

One of the nice features of the Schwab SSPro platform is the dynamic news window that automatically reports the daily NYSE order imbalances at 15:40 and then again at 15:50. Traders who've looked at these numbers probably also know that a few prop shops (like Bright Bros) make a good portion of their daily bread by trading these imbalances in the name of providing liquidity. Most of these imbalances are effectively untradeable by the average retail trader due to the small margins, but occasionally the skew is sooo large that it behoves a quick scalp.
Such was the case with Thursday's BAC imbalance. At 15:40 the BAC imbalance was 16.5 M and 10 minutes later that number had only been shaved by 600K shares. The implication was clearly bullish at both the 15:40 initial report and the subsequent 15:50 update. This setup is as close to a free lunch as it gets but you have to deploy significant capital to make it pay off. Entering BAC at 15:40 and exiting at the close would have yielded .14 . . not a lot, but very low risk.
VIXEN traders should have caught the clear VIX cross at 13:45 ($ 16.15) and ridden BAC to the close for a more productive .39 gain.
Note those closing volume bars. BAC actually traded 17.7M shares in the last 2 minutes.
Also note the continually upslope mid panel SMAs and the price position on the double 8s channel . . all very bullish.

Following the NYAD

Yesterday's S2 - R2 swing in the Qs was picture perfect and exceptional for the range. I've previously mentioned benefits of monitoring the NYAD (NYSE advance/decline) in conjunction with the major indices, and the value of the NYAD can be demonstrated above. The 3 Finger study displayed the relative alignment of index behavior and I typically rely on the NYAD not only to confirm trade signals, but, perhaps more importantly, to keep me out of premature exits . . . which I am prone to execute as I scoot away from risk. The trick, of course, is to determine what's a pullback and what's a reversal. Although many scalpers prefer to just exit on 1 minute bar ADX reversals and then re-enter when (and if) the 3 or 5 minute bar trend rekindles, I'm more inclined to just follow the 5 minute bars, avoid the whipsaws, and exit of the alignment of the parabolics trigger, an RSI crossover and a NYAD reversal.
I've also found it's helpful to watch the action of the 8 and 16 MAs on the NYAD and frequently use the crosses for mid-day entries or exits. While the NYAD will seldom have the width of range of the indices and the slope of the NYAD is typically only a fraction of the indices, this is an important tell for what's really going on with market dynamics. Best monitored with a good vertical aspect in order to detect the signals.

The Elephant and the Irish Setter

One e-mail I received recently asked me to clarify the reasoning behind the NYAD / GE divergence studies I have posted for the past several weeks.
The best example I can offer is by comparing an elephant to an Irish Setter. The NYAD, like the elephant, cuts a wide swath with considerable momentum and it's trail is easy to follow. While elephants do go rogue occasionally, that is not typical behavior. At the same time I'm reminded of a friend's Irish Setter, a delightful dog, that was a complete airhead, seemed to have the ability to run in several directions at once and seldom responded to voice commands in any meaningful way. Off leash, the dog would disappear for hours at a time, only returning for chow time or inclement weather. Think of the NYAD as home for our divergent Irish Setter stocks.
To date, I have only mentioned GE in conjunction with the NYAD. However, if you set up the 2 minute chart template as I have shown on multiple posts and then examine NYSE stocks like HD, MCD, WMT and VZ you'll quickly see very similar trading possibilities.
And if you really like excitement, load a few NAZ stocks like PCAR and EXPD against the NYAD.
Within an hour of fiddling with the template you'll have a stable of NYAD divergent trading candidates that will keep even the most hyper daytrader busy for a looooong time.
Some readers have commented that my trading style seems boring because I only focus on one or two ETFs at a time and just trade them up and down.
My response is . . . that's what works for me. I get up 15 minutes pre market open and often shut down well before the final bell. If I didn't spend a few hours a day blogging and testing ideas I'd have a lot more time to play golf and still have the same amount of money in my pocket.
I don't spend any time running scans, sorts or RS studies. I seldom read my live news feeds and consider most fundamental analyses generally flawed and after the fact.
And my expectations are pretty dull too. I just try to generate a steady income stream from day to day. I'm content to make .40 - .60 on a couple thousand shares a day with minimal exposure. I seldom have a tremendous day, but I never have a horrendous day. That's just my style of risk management and liking to sleep at night. I've tried lots of different trading styles in the last 23 years, and this suits me just fine. Each trader needs to find their own risk comfort level and their own trading style, whether it be discretionary, systematic, algorithmic, technical, fundamental or (most likely) some hybrid.
Hope these posts provide some ideas to help you find yours.

SCHF/EEM Revisited

I've previously posted on possible free commission trading opportunities provided by the SCHF. Here's a swing trading approach using 130 minute bars. With 390 minutes in the equities' trading day, this little bar system breaks the day down into 3 increments and provides a quick snapshot of how price is trending from open to close. I'm still applying my standard stable of indicators and I've highlighted the ATR indicator in the lower chart pane as a reference for a point I'll make later on in the post.

The lessons to be learned here: if you're going to trade the low volume SCHF and take advantage of the free commission deal, then best to pay close attention to the much bigger EEM (regardless of the time frame). While SCHF may lead or lag the EEM for short spurts, mean reversion to the EEM trendline will inevitably occur and using a simple SCHF chart with an EEM overlay can keep you from being on the wrong side of the trade. I also rigorously adhere to my previously discussed 8sma high/8sma low channel to define my risk tolerance.

The other metric I track is the dynamic ATR8. If you knew that one of the largest US prop shops, trading a couple hundred million shares a day, routinely used a conditional 1/3 ATR10 as one of their stops for NYSE daytrades, would that effect how you set your stops? I try and front run that tsunami by using a 25% ATR8 stop as a component in my stop basket. The parabolics, the 3,7,12 smas slope, and the 8/8 channel round out the rest of the basket and when any 3 of them fire, being out is never in question.

Pullbacks and Reversals

This is part of my continuing study of GE and NYAD divergences that may serve as high probability tells for intraday scalps of GE. Although my initial tests of GE and QQQQ divergences still offer trading opportunities, my research over the past 2 weeks has led me to conclude the $NYAD is a much more reliable GE counterpart. This is probably due to the fact that the Qs reflect the average momentum of 100 Nasdaq stocks, while the NYAD reflects momentum of the entire 6400 issues in the NYSE, therefore making the NYAD a lot harder for market makers to game than the Qs.
What was interesting about today's action was the 11:00 slope reversal in th NYAD, while GE continued to climb, then falter, then climb again to noon when it began a 4 hour descent, punctuated by several pullbacks to the downsloping GE trend line.
One indicator that is helpful capturing these short term pullbacks is the parabolic SAR, which I typically set up with a minimum step of .05 and a maximum step of .2. Most platforms provide the parabolics, although the default settings may be a little different. The white arrows on the chart above designate the parabolic triggers for today's GE overhead pullbacks. Used as either a confirming or leading signal, the parabolics can help keep you on the right side of a trade.

Wednesday Qs wrap

After an initial follow through of yesterday's strength, the Qs went into a holding pattern for most of the afternoon session before a modest late-day selloff. Although the Qs did manage a R1 break, it was short lived and that failure signalled the weakness to come. The 5 minute 20 SMA line typically provides a great tell for the turns and the last couple days have been good examples. The 5 minute 20 SMA also worked well on the NYAD and would have kept you short (or at least not long) into the close. The upslope ADX on the NYAD starting at 15:00 was another confirmation for the shorts that the Qs were going to be weak into the close.

But wait, you say. . .the NYAD reflects the NYSE. My response is, that's true, but the positive correlation between the NYAD and Qs behavior is uncanny, and if you spend a little time watching the NYAD in sync time frames with the Qs, you'll see what I mean.

Dr. Brett talked about dropping a 10SMA on the TICK to determine short term trend. I echo the idea along with watching the NYAD, although I prefer a 2 minute bar look since the length of my typical trade is seldom over 120 minutes. Using a MACD histogram or single line MA component of the MACD (5,20,3) or (3,10,16) in a study pane will also yield good turn signals once you become familiar with the pattern.

Tactically, I was hoping for a little more upside in the Qs and the other indices for a couple days to really build up the overbought momentum. Today's action instead demonstrated that "sell the rally" is still the prevailing mantra. The XLF's looked particularly weak going into the afternoon session, so any new longs should be viewed cautiously.

NYAD Proxy Gadget

I've added another new gadget to the right side of the blog. This time it's a real time proxy for the NYAD, the NYSE advance decline line that I use to confirm 100% of my trades.
I've mentioned before that I could probably daytrade quite successfully using just the NYAD and the pivots but I like the conformations offered by the MAs and the parabolics to take the edge off.
Just as a real time feed for the VIX is unavailable in FreeStockCharts, it's the same story for the NYAD. I've managed to solve the VIX problem recently by using the VXX, but the NYAD proxy required quite a bit more work. I've placed it between the Qs and GE VIXEN feeds on the blog so you can watch the NYAD dynamics on all 3 charts simultaneously.
The violet line is a composite of 6 different indicators and I regard the coding as proprietary, just because its development required so much time.
I've added a little momentum shadow behind the violet line to show relative strength and topped off the indicator with 7 (yellow) and 14 (blue) period linear regression lines that clearly indicate the direction of the short term trend.
Many thanks to Worden Brothers for making this product available. 3 years ago this level of technical refinement, user programming options and a real time feed would have cost you at least $60 per month.
Also thanks to readers for feedback on the GE VIXEN Trader, which seems to have generated a fan club of it's own.
I failed to mention a reliable entry/exit setup in the initial post so I'll quickly describe it here as shown by the green and red vertical arrows below.
Although I use the GE/VXX cross as an initial entry I'll add to the position when green arrow conditions present. On the other hand, when in the position, I'll exit when red arrow conditions present.
The red, green and yellow lines in the lower technical panel represent a 3 (green) and 7 (red) Moving average, while the yellow line is a FSC smoothed detrended price oscillator (DPO) that has been individually "tuned" for the Qs and GE charts shown here.
As with the NYAD gadget, I've also added a LR7 (white line) to the yellow line DPO to clearly display short term momentum.

Monday VIXology

Here's a little variation of the VXX Dashboard that I've been fooling with that involves pairing the VXX with a basket of currencies. While the model doesn't produce those 90% + linearity returns seen in some of the other PDQs the P&L is certainty impressive given that this model reflects only the last 6 months and that these are currencies.
Of particular note is the green status of the P&L status for each and every one of the pairs. I'll be tracking this little nugget in the background for the near term as the returns so far have been very impressive.

We did get a mean reversion move last week as the Qs worked off oversold levels and the VIX settled back to the LR30 upper channel band. With most of the volatility surprises prompted by earnings reports now in the past the technicals are strongly suggesting a continuation of last week's bump.

And, just to put things in perspective I've included a comparison of the VIX and VXX below. Peaks and valleys coincide but notice the LR30 down slope of the VXX indicative of a net decline of volatility in the VXX relative to the VIX.

Finally, a little side note here on the NYAD proxy gadget added to the blog on Friday. I neglected to mention that I set the gadget to display at 2x the amplitude of the NYAD in order to provide clearer indications of impending trend changes. There are two smoothing algorithms on top of the underlying detrend indicator and a doubling of the initial raw signal value to accomplish this goal. Keep in mind this chart does not necessarily reflect prices, but rather the momentum of the NYSE. With this template in place I can now create a NYAD-like signal for virtually any index and I'll add one for the Qs and the IWM in the future, just to test their forecasting value.

Yesterday's action can only be characterized as a pop and really big drop day.

Here's a daily chart of the NYSE advance decline line. A diffent way to look at market volatility but the histogram and MACD signals give a close indication of the turns.

One thing I look for after a day like yesterday is what stocks held up well. NWS/A was unique in this category.

Reading the market

This an update of a previous screen posting of my Schwab StreetSmart Pro platform setup and may help you understand what I'm looking at to guide my intraday trades.
Front and center top to bottom:
The TICK, shown here on 2 minute bars, although I toggle to 1 minute bars for the open.
I overlay the pivots on the TICK and also use an 8 & 16 MA to gauge sentiment changes.
The three vertical columns under the TICK are a nice little feature of the platform that provide a tick by tick rolling scroll of new intraday high and low counts. I use this feature 3 times . . one each for the NAZ, NYSE and the indices. so I catch the full flavor of the market trend in real time. When the market's weak, all the scrollers will be running all red and rolling fast. When the markets are about to reverse up, the scrollers will roll very slowly and will be punctuated with periodic green tells of buying. In flat markets the scrollers will be a hodgepodge of red and green and typically scroll by slowly. Coupled with the NYAD chart, these 3 scrollers are invaluable in keeping me on the right side of momentum, even as the market makers are trying to head fake me in another direction.
Below the 3 scrollers, I watch charts of the NYAD and the IWM in 2 minute bars.
Both charts are overlaid with the pivots, 8/16 MAs and the 3/14/3 signal line, which is the moving average component of the MACD.
To the sides, I have 2 charts of the day, typically the Qs and XLF or XLE or IWM if I'm looking for a closer look at the technicals and fibs than the lower middle chart provides. Each chart displays the fibs, parabolics, pivots and 8/16 MAs as well as my technical suite of RSI, %D and StochRSI. Each chart has its own trading window to help old guys like me from getting confused when placing orders and I can instantly toggle from stocks to option string to level 2 options.
I have another SSPro screen that I watch with similar features, but that screen also includes, news, messages, account details, multiple watch lists and a programmable stock scanner, but the trading screen shown is really the core workhorse of the program for me.

Occam's Razor

Over the course of the past few weeks as the Basket of Systems components have been introduced I've received a number of emails from skeptics claiming that the systems can have little practical value as they are so simple in concept and coding.
I beg to differ.
There's an ancient approach to reasoning called Occam's Razor, which suggests that, all things being equal, the simplest approach to solving a problem . . . typically the one requiring the fewest steps . . . is the best one. Having run the gamut of trading very complex to very simple systems over the past 20 years, I'm definitely in the camp of the later.
If you've got some time on your hands, watching 2 minute bars and waiting for the daily RSI to reach oversold levels, you might want to amuse yourself at the following link:
http://en.wikipedia.org/wiki/Occam%27s_razor
About 10 years ago INTC was the poster child for technical signal alignment, and every TradeStation system you could think of using INTC made money. 2 higher high daily closes on increasing volume = BUY. Hold till you got a 2 bar reversal, then exit. It was like printing money. But those easy money days are gone. Order flow masking, algorithmic program trading, backdoor order flow conduits like Pipeline, Executioner and a slew of other "smart execution" programs have all made trading a lot riskier.
Last night I spent a few hours with Don Bright and some of his traders just talking about trading and looking at some of the ways they trade. Now I've known Don for about 8 years, have visited their Las Vegas office and have the highest regard for their integrity and savvy. They've been traders for 40 years and have run Bright Trading as a prop shop since 92. They currently have about 500 traders, local and remote, and that's a lot. On a average day Open, they're queued with between 30 and 50 million shares of orders. WOW. . .that's a lot. Their approach is focused on NYSE stocks, simple, basically threefold and they like to be flat at the end of the day:
1. Mean reversion to projected fair value from envelop variations at the open (set a high and low limit and trade against it with Opening Only orders).
2. MOC (market on close imbalances), using orders which trade with the imbalance momentum.
3. Pairs trades of various types
Of course, they've got very sophisticated software that executes all three type of trades on an auto trade basis, but many of their traders still opt for manual execution of pairs trades.
Now, this is not an endorsement or solicitation for Bright, I'm just sharing a conversation that you didn't get to hear, and I think there's more than a few nuggets of wisdom there.
Don's number one caution for traders. . ."Don't overcomplicate".
In the comments a few days ago Muhammad suggested using a 1/3ATR(10) stop for intraday trades. I don't know if he picked that up from Bright, but it's one of their favorites and you might want to test it with your own fantasy trading.
One interesting vignette (to me) was a report from a trader who typically trades pairs, 2000 share lots, with average 7 trades/day. He has a buddy, trading the same pairs, 200 share lots, with an average of 15 trades/day. The buddy's account equity is slightly higher.
Although their performance records only extend back 4 months, the argument favoring smaller trade size to manage risk/reward certainly looks promising. Bright Traders pull nickels, dimes and occasionally, quarters, out of the market on each trade: just a little reality check for those who think that a successful trade has to be measured in 50 cent increments.
For any potential prop shop traders, the link to Bright is noted above. They've got a 3 day "get to know Bright Trading" program and a 2 week boot camp if you want to get serious. Fees are VERY reasonable. Since their traders have professional status, there are tax implications and you need to get a series 7 license (think about 100 hours of prep), which they will facilitate, as much as possible.