SmartDayTrader
Tips on Trading
There is no holy grail in
trading. Period. Each day is unique with numerous twists and turns, expected
and unexpected events and expected and unexpected market responses to those
events.
In addition there are
times when money is more or less available, conviction is present or lacking,
interest rates are high or low, market participants are present or absent.
If you understand this,
you begin to understand why “trading systems” don’t work. You understand why
computerized “black box” systems don’t work. There is no way to incorporate
nuance, although there are those who claim to and those who are working on it.
I wish them well.
For those of us who
understand that trading is as much of an art as a science, we look to our palette
of trading tools, study the “light”, dip in and go. Here are some tips that
will be helpful. You must keep a trading diary. Update these indicators AT
LEAST every 30 minutes during the day.
The pivots we use at
SmartDayTrader are guideposts only. These represent mathematical areas that
have a higher probability of being significant during the trading day. They are
not written in stone. Used in conjunction with our other tools, we can be
prepared as the market reaches these levels. The significance of each level
will be different on different days.
We closely follow the
trading flow during the day. This can best be seen by watching the TRIN (or
ARMS index), the TICK (or net advance/decline issues on the NYSE), the TIKI (or
net advance/decline issues on the DOW) and the BREADTH (or advancing versus
declining issues). I find these the most useful. In addition we keep an eye on
the VIX and the put call ratios.
The “art” is important to
keep in mind as there is no single reading on any of these indicators which
will ring a bell to trade. Taken together, they will more likely put you on the
right side of a trade.
The TRIN measures the
volume of trading. Typically, readings over 1.00 are indicative of more
selling, readings below indicate more buying. In more sedate or normal trading
environments, the TRIN will hover near 1.00. Its use comes in when you follow
the direction of the TRIN during the day. If, in our Nightly Report, we are
expecting an up day, and the market opens lower, we can look to the TRIN. If it
does not suggest extreme selling as we approach our buying pivot, and/or the
TRIN is improving, we are more likely to take the trade. Likewise, if we are
expecting a down day, but the market moves up strongly and the TRIN is going
lower, we are less inclined to take our short position. You must keep track of
the TRIN every 30 minutes in your trading diary. The TRIN can also be helpful
when it reaches extremes. If the market panics open, up or down, and the TRIN
reaches rarified levels, such as plus 3 or more or .40 or lower, be on the lookout for either a full fledged breakout or meltdown, or the surprise reversal. More often you will get the surprise reversal. When it does turn into the melt up or melt down, it’s less common and more intense. The DIRECTION of the TRIN from these extremes
is what will give you the clues you need.
The TICK and, to a lesser
degree, the TIKI, are helpful to trade AGAINST. Extreme readings often
represent short lived moves by institutions, hedge funds, etc. Often you will
see the market move right into one of our pivots and stop there, with TICK
readings near 1000 (plus or minus). If we are expecting to sell, and the market
moves into a pivot on 1000 or so tick and stops, this is our sign to get short. These trades work best when we are expecting
them from our Nightly Report work. They also work best in trading markets and
tend to work less well in a strong trending market. They work best when they
occur in isolated “blasts” and not in continuous waves. They work best during
“institutional hours”, that is
The BREADTH is at the
heart of my longer term strategy as, for me, it is simplicity itself. If stocks
are going up and breadth is strong, who am I to fight that? Intraday, it is still useful, but is not my
primary intraday indicator. If we move higher early on and hit important
levels, the breadth should be strong, too, near 2:1 positive. If not, something
is not right and we look for a place, with other reasons, to get short. If we
move ABOVE important levels on strong breadth, but the breadth begins to
diminish, that would also be a sign. Once again, the direction of the breadth
is as important as the absolute numbers.
I watch the Put Call
Ratios during the day, most days. If we are in a trading range the PCR is less
useful. If we’ve been in a trending market and are beginning to wonder if the
trend is intact or in danger of slowing or changing, the PCR is more useful.
Often, the PCR will ultimately reflect the trend to such a degree that it
becomes prudent to begin trading in the opposite direction. If the market has
been trending higher, although most market participants were expecting it not
to, the PCR will be high, reflecting that pessimism. If the PCR begins to drop
as the market moves higher, this suggests that the pessimists are giving up. At
some point, there’s no one left to convert to the bull camp and the market
stops going up. Sadly, once again, there are no absolute numbers, just
direction and also numbers relative to recent numbers. For instance if the PCR
was high near X-level in the market and the market moves away from that level,
we want to know what the PCR is the next time the market reaches that level. Extreme
readings are very helpful. If the market makes a dramatic sell off early and
the PCR races ahead to much greater than 1.00, with other evidence that would
alert us to the possibility of a significant snap back. Likewise a rally with
the PCR near or below .50 would be due for a correction.
I find the VIX least
useful intraday, but it can be another directional, especially if we are really
trying to read the sentiment of the market. Strong moves are helpful as is the
direction of the VIX movement during the day, relative to the price action. In 2003 the CBOE changed the VIX. It used to represent the SP 100 (or OEX) but now represents the SP 500 (SPX). The "new" indicator is the VXO which takes the place of the old VIX and now represents the OEX 100. Remember. watch the direction during the day. For information see www.cboe.com
Finally, we look at the
relative price of the various indices for confirmation or divergence. A strong
market will have movement in all indicators. A suspicious move will be apparent
if there is only movement in one index. One stock in the DOW, for example, can
push that index far, and give an initial impression that the “market” is heading
that way. A glance over to the SPX and
Composite, however, may show those two flat or off in the other direction.
This should help clarify
some critical trading points. In the next update to this article I will add
some “real life” examples.
Trade Smart!