Incorporate the Tick Index Inside Your Short Term Strategies

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Market Breadth Indicators Can Be The Key To Profitable Trading

For example, if the number of stocks on an uptick is 1,000 and the number of stocks on a downtick is 500, the NYSE Tick Index will be +500. These figures are constantly changing, but anything above zero is bullish and below zero is considered bearish.

I can tell you from personal experience that when used correctly the $TICK indicator adds tremendous value to intraday stock strategies. To gain real benefit from the $TICK indicator, you must only pay attention to the readings when they are at extreme levels. These are levels are positive 1000 or higher and negative 1000 or lower. Anything below positive 1000 or above negative 1000 is not considered in my opinion anything that will cause a shift in the movement in the markets, especially with the level of volume coming into the market these days.

High Tick readings occur mostly when large mutual funds initiate buy programs and sell programs, as I explained briefly a bit ago, these are computer generated orders to purchase or sell thousands of shares of different stocks simultaneously.

Buy and Sell programs can occur several times during the day when markets are being driven by strong fundamental data and volatility is high and sometimes hardly ever when the stock market is calm during quiet periods or during the holiday season. But when the Tick moves to the 1000 level repeatedly throughout the day, you can be assured that large mutual funds are either accumulating or selling share repeatedly throughout the day.

For entries I use the $Tick index as contrary stock swing trading indicator, this means that when you see a reading below -1000 there is a high likelihood that computerized selling is taking place; so when you see extreme levels, there is a high likelihood that the market is becoming oversold and that selling may be slowing down or coming to an end in the very near term.

Similarly, if you see a TICK reading above 1000, there is a high likelihood that large institutional buying is taking place and the stock market is going to stop climbing and possibly begin correcting in the very near future.

The way I incorporate the $Tick indicator into swing trading strategies very simple and very effective. If I’m about to initiate a long position and I see the Tick reading is -1000 or lower, I will simply wait for the sell program to end before initiating my long position.

If during the 90 second window period before I place my order in the morning, the Tick is reading is below -1000 I will just wait beyond the 90 second time period before entering. Once the Tick reading moves back up above -1000, I will enter regardless if I have to wait several minutes prior to entry. I find that waiting beyond the 90 second time period for the sell program to end decreases my risk on the trade substantially.

Similarly, if I want to enter a short position and the Tick reading is above 1000, I would wait beyond the first 90 second to enter the stock short position in the morning. I find that most buy programs end within a few minutes and waiting generally improves my fill price in most cases.

 

ATR and Volume Analysis On Stocks

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ATR Measure Market Moves

The indicator I use is the ATR indicator and many traders know this is one of my favorite indicators for measuring volatility and trading range. The ATR stands for Average True Range and it simply calculates the trading range over the days that you specify in the indicator. I won’t go into the history of this day trading indicator or the exact mechanics of the calculations, but I can tell you that it’s one of the best indicators because it’s derived from actual market data and is used by many professionals stock day traders to measure market volatility similarly to what we are doing here.

The standard settings for the ATR indicator is 14 days and for the purpose of measuring volatility, I prefer to change that period to 10 days. This gives me a shorter period to look at and at the same time gives me a more accurate indication of volatility because there’s less time to average.

Just about every technical analysis software program has the ATR indicator build in. The only thing you will need to do is change the look back period from 14 days to 10 days.

You can see in this example how the volatility is right around the $2.00 range when we apply the ATR indicator. Keep in mind that picking stocks is not a science and you are looking for an approximate volatility of $2.00. So if the stock or ETF you are analyzing has a 10 day ATR of $2.20 or an ATR of $1.90, these numbers are certainly in the $2.00 range and are acceptable; it doesn’t have to be $2.00 exactly.

This is another good example of an ETF that has a 10 day ATR right around the $2.00 level. I find that performing two week volatility analysis gives me enough data for purposes of estimating day trading strategies and volatility volatility for short term trading and day trading purposes.

The next step is to perform volume analysis to see which stocks and ETF’s we have to eliminate due to low volume. My rule when it comes to volume is very simple and works the great majority of time. I base my volume requirements on my holding period. In other words, the longer I hold the position the less volume I require and the less time I hold my position the more volume I require.

 

The Moving Average and Following Trends

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You can see in this example how the volatility is right around the $2.00 range when we apply the ATR indicator. Keep in mind that picking stocks is not a science and you are looking for an approximate volatility of $2.00. So if the stock or ETF for swing trading you are analyzing has a 10 day ATR of $2.20 or an ATR of $1.90, these numbers are certainly in the $2.00 range and are acceptable; it doesn’t have to be $2.00 exactly.

In this example you can see a good strong uptrend, its well above the 90 day moving average and moves steadily up. This is the type of stock you want to focus on when selecting picks for the next trading day.

Here you can see how the stock swing trading strategies moves steadily down without too much deviation from the main trend. It’s trading below the 90 day moving average and has a downtrend well below 25 degrees.

This is another good example of an ETF that has a 10 day ATR right around the $2.00 level. I find that performing two week volatility analysis gives me enough data for purposes of estimating volatility for short term trading and day trading purposes.

I simply want to make sure that if I’m taking long trades, the overall market is above the 50 day simple moving average and if I’m taking trades to the downside,

And if I’m going to take trade to the downside, I want to make sure the SP 500 index is trading below the 50 day simple moving average.

The most important factor to pay attention to on the long side after the open is whether the stock’s price violated the 90 day moving average. If during the first 90 seconds of the day the stock trades at or below the 90 day simple moving average, the set up invalidated and no trade is taken that day.

Conversely, if you are waiting for a short set up, make sure that during the first minute and a half, the stock doesn’t jump up and touch or trade at or above the 90 day simple moving average. Always monitor the daily bars and the 90 day moving average so you don’t have to guess or wonder if the stocks priced rallied high enough to touch the moving average during the first 90 seconds of the stock trading day when you’re in a rush to place your order.

 

Conditions to Market Entry and Avoidance

stock chart

When To Enter and When To Exit

Since we are using the 50 day simple moving average of the SP 500 to dictate overall market direction, the issue of taking long trades on some futures and commodities and short trades simultaneously becomes a moot point. If the SP is trading above the 50 day moving average we only take trades to the long side and if the SP is trading below the 50 day moving average we only take trades to the short side. This rule completely eliminates any chance of initiating positions both to the short and long side of the market simultaneously.

The next and final discretionary element we have to consider is when we should avoid trading completely and when we should avoid trading specific market sectors and individual stocks. Because as a trader we have to understand that not taking a position is taking a position, this is an important rule I learned many years ago when I first started trading and it’s something I recommend you remember and follow as well.

The first and probably the most obvious time frame that you should completely avoid any trading is during the winter holiday, that starts around the 2nd week of December and end the first week of the New Year. Many traders come back the first week of the year but I always wait till the second week before initiating full sized positions. The second time of year I typically avoid trading, especially day trading is August.

This is the time of year when most financial futures trading funds and most financial companies are on holidays and you are not going to see too much follow through in the market due to very light volume. Therefore I find it best to completely stay out of the market the entire month of August and sometimes even the first week of September and wait till the kids are back in school and everyone is back to work.

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Losing Period Dangerous For Traders

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Lean When To Hold Positions and When To Fold Trading Positions

The first time frame I highly recommend and my futures broker does as well that you stay out of the commodities market is during major federal announcements. Every week there are several different government reports and some of them will have an impact on market volatility. For the most part, these reports are released weekly and will not have a significant enough of an impact on market volatility to impact your position significantly. Furthermore, many of these reports come out prior to the beginning of the day session, so there’s no impact on existing position.

However, there are times of the year when the Federal Chairman has live discussions, during market hours about interest rate changes. These reports have a very strong impact and influence on the economy and the stock market as a whole. Therefore, when you hear about a scheduled report by the Fed Chairman during market hours in regards to interest rates, I highly recommend staying out of the commodities trading market during that time period; the volatility swings can be enormous. For a detailed schedule of weekly market news, I highly recommend you bookmark Bloomberg.com.

249. Before I wrap up this tutorial, the final topic I want to discuss is trading psychology, especially because the stress of day trading and making decisions in real time is the most intense type of trading stress. It’s one thing making decisions when markets are closed or positions are held for several weeks at a time, but when markets are moving and decisions have to be made under real time market pressure, the stress can take a toll on even the most seasoned and experienced trader.

250. Working with a predefined trading strategy that has a set of rules is one of the best ways to combat this type of stress. Regardless, the best strategies and the best traders go through losing periods. It’s just part of the game and there’s very little anyone can do about it.

251. Unfortunately, the losing period is a very dangerous time for a commodity trader, because the trader begins to doubt the effectiveness of his strategy, begins feeling negativity, and eventually starts to deviate from the rules of the strategy or even worse completely abandon the strategy.

 

Trading Success For Short Term Traders

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The Best Advice Traders Can Get

The last and final time period I recommend you stay out of the market is when there are unforeseeable events taking place. These things don’t happen very often but things like threat of war between countries, terrorist attacks, acts of God such as large scale earthquakes or hurricanes, just about anything that occurs with rare frequency can cause the stock market to behave differently than normal, these are the specific time periods you want to avoid.

So when something truly rare happens in the world that can potentially impact the futures market or a major market sector, I would recommend either staying out of the market that day or liquidating your position if the event occurs during market hours.

Lastly, there are times when news and information impacts only a specific stock sectors. When this happens, it’s best to avoid trading stocks or ETF’s that make up that sector or are closely related to that sector. Sectors that have impact on other sectors such as oil stocks and airline companies or semiconductor stocks and computer manufacturers can have correlation as high as 70 percent so be careful to avoid sectors related to those affected by news.

The primary time to avoid particular futures or commodities sectors is during news and announcement season. This is a time when companies are releasing information that explains why they are doing well or not. This is the primary time when companies’ news can impact other companies in the same sector as well as related industries and sectors.

For example, if a major computer manufacturer reports bad earnings and claims that sales are slowing down in a particular part of the world, the companies that supply the chips and other parts for that computer will also decline in value that day as a result of the news. Another very typical example is interest rate stocks, which have a very strong impact on both the real estate sector as well as the bank sector.