GREY1's APPROACH TO TRADING US STOCKS
There are many many ways to win the stock market . I will set a foundation for all levels of traders during the course of this thread.
Generally speaking there are two different approaches to intra day trading of US stocks
1) TOP DOWN APPROACH
2) BOTTOM UPAPPROACH
A top down approach is used by professionals.
A top down approach is when a trader starts with analysis of market direction first and thenmoves on to do the stock analysis .
A top down analysts there fore does not move to do any analysis what so ever on the stock unless he has done a full analysis on the market direction .
A top down analysts wants to know where market is heading ( UP, DOWN , SIDEWAY ) during the time frame that he is trading before any analysis done on the direction of the stock . A top down approach is a must for scalper to postio traders of many weeks
There fore if you ever decided to go long or short any stock you must have a definite view on where market going before taking a position . DONOT START WITH STOCK FIRST . DONOT SAY WELL APPL IS STRONG SO I AM GOING TO GO LONG . MOST TIP SHEETS YOU GET IGNORE MARKET DIRECTION AND THEY ONLY GO BY STOCKS VAL UATION DERIVED FROM FUNDAMENTALS.
Now, I want to take this issue slightly further,
The TOP DOWN approach can be expanded into
1) MARKET DIRECTION
2) SECTOR DIRECTION
3) STOCK DIRECTION
This technique is used amongst many technical or fundamentalist ( institutions/Hedge funds).
Now that we know what TOP DOWN is we introduce a strategy ..
STRATEGY 1
IF MARKET IS LONG AND SECTOR X is OUT PERFORMING THE MARKET THEN LONG STOCKS THAT OUT PERFORMING THEIR SECTOR
( REVERSE OBVIOUSLY FOR SHORT MARKET AND UNDER PERFROMING SECTORS AND STOCKS)
2) BOTTOM UP APPROACH
This is opposite of TOP DOWN and often the newbies play this game. When i say newbie i donot mean those who ae new to stock market i mean those who still have a lot to learn to make money from the market.
I will also discuss high frequency strategies in due course which reduces the need for market direction by slicing the time frame and increasing the exposure.
PS:_- There are software available that performs a TOP DOWN Approach automatically and in real time ( AIQ , OMIN TRADER )
The first strategy was a sector strategy . Some traders prefer not to look into sectors and just watch market and stock .
Lets say Trader’s analysis results in a LONG view for the market ( remember we are using TOP DOWN approach,, so if you feel you aren’t sure about the market direction then you don’t move to second phase which is stock direction )
Stock direction
There are some basic rules for stock direction .
These are the rules
1) Stocks that have gapped up the most and stayed in positive territory are LONG candidates ( reverse for SHORT )
2) Stocks that stay positive when market oscillates into negative before moving back to positive are LONG candidates . ( reverse for short )
STRATEGY 2
If MARKET is LONG THEN GO LONG rules 1 and 2
Remember I have still have not told you about the entry techniques . I am just telling you that you have more chance of winning if you are trading in the direction of the market and stock . ( even if you throw a dart at your entry price as long as you are trading according to above rules you have more chance of eventually moving into profit.
Trend what is it ?
Trend does not exist unless it has already exhausted .. this is what some traders say ? well this is correct to a degree but it is not the whole story
Now from here on wards you have to concentrate to what I tell you because this is the whole concept of trend trading .
If you ever asked me hey grey has the trend for stock X exhausted I would say to you .. WHAT TIME FRAME ARE WE TALIKING ABOUT .. In another word trend might be exhausted in 5 minute time frame but not in hourly or weekly time frame.
So this means even though a trend might look that has been exhausted, it might still continue to trend into higher time frame .
SO in another word a trend is born in lower time frame and dies ( often refers as PULL BACK ) and then it trends again to extend into a higher time frame . ( NEW BIRTH OF TREND STANDING ON THE TOP OF PREVIOUS TREND).
Now
If you are trading a 5 min chart and you see a LONG signal from your indicators you MUST GO BACK TO LOWER TIME FRAME to see if the stock has been trending in previous younger time frames and exhausted and if yes . then you can go long on the 5 min bar which at this stage has no TREND HISTORY. TREND ALWAYS STARTS IN LOWER TIME FRAMES and do you know why ? Because smart money has more information in his disposal which eventually leaks to the market to start a baby trend
Risk management
This subject is for those who trade for living and their capital is their business . it is for those who are serious traders and count on long term wins.
If you wanted to become a pro trader and live off of other market players for years to come you have to know about the following
1) How much should I risk for each trade
2) How much , when and How to scale in and out during the trade
This subject is often referred to risk management .
There are many academic definitions for risk . some people argue one cannot not ever measure risk . I kina agree but it does not help a trader lol
A trader needs to know the un known . This is the bottom line. Hence we approximate out maths and our reasoning to gives us a projection of risk control .
A traders is at risk because of volatility . If the market is closed then you are not risking any thing because by definition market is closed lol if you trade during consolidation then you are less exposed to risk than open due to volatility . so is volatility the root of all evil ?
Is volatility dangerous ? I will answer this question if you can answer me the next question ? ARE LION DANGEROUS ? well lion is not a dangerous animal if you know how to handle them .. Lion Tamers do that in circus. Are Shark dangerous,, well again not really if you are in a metal cage ? so the point is if you know about volatility nothing is dangerous .
VOLATILY MEANS RISK and RISK MEANS POSTION SIZING CONTROL .
Hence to tame VOLATILITY YOU NEED TO BE ABLE TO CONTROL YOUR POSITION SIZING BEFORE YOU OPENING A POSiTiON AND DURING THE TRADE
Now
I am going to leave you with a quiz…
IS SPENDING £1 on the LOTTO a risky adventure ? or not
Please write this down
IF ( AMOUNT BET ) > PROBABILITY OF WIN * AMOUNT OF WIN THEN THE TRADE IS RISKY .
a) Probably of win comes from your strategy
b) Amount of win comes from the Possible reward ( donot expect 7$ run from a low volatile stocks ,, such as AMZN for example.... i will expand on that in due course )
Position sizing will come from your capital ( see example below ) how ever we need to have MPD band to tell us how to move from one stock to another . Therefore we use MPD bands as a means of measuring the risk element in STOCK SELECTION than position sizing .
Example
stock 1 reward 20c exposure needed 3000
stock 2 reward 80 c exposure needed 750
stock 2 seems to be a better candidate but , are we going to take 750 as our next trade ? Then read the next part..
POSITION SIZING
lets say your capital is $100 000
lets say we use 1% rule ( I will discuss the study of ruin in detail in future )
so stop loss would be $100 000 * 1 /100 = $1000
so we have $1000 in our hand to go shopping . Every stock has a price tag defined by their volatility
Stock A ATR 30 C i can afford to buy 3333 of this stock ( $1000 divided by 30 c)
Stock B ATR 50 C i can afford to buy 2000 of this stock
stock C ATR 120 C I can afford to buy 833 of this stock
next we look at the possible reward from MPD
Stock A MPD possibe reward 10 C
Stock B MPD possible reward 30 C
Stock C MPD possible reward 80c
remember we were down $600. ( Previous two consecutive loing trades scenario.)
in above example stock C seems to be the correct stock ( 833 * 80= $644 which would recover my $600 loss plus $44 profit ) .. Hence we use MPD band as a confirmation for correct choice of stock
I think i have answered your question now.
Just one more explanation ... if you adjust your postion sizing according to ATR ( volatility ) then there is absoloutly no difference if a stock is HOT ( dangerous to play ) or cold . because you are taming the stock by reducing its postion size accoriding to its volatilty . There for for those who have read this thread and fully understood it it is safe to play any stock as long as you fully implement the simple and elementary position sizing technique i discussed
All above can be programmed into Trade station and you don't have to be bothered with any calculation intra day once you have coded it.. You must become as mechanical as possible.
MPD bands are calculated as follow
upper MPD = VWAP +( high -Low ) /2
lower MPD = VWAP - ( high - Low /2)
When VWAP trading we only pair trade stocks that are touching their upper and lower bands. This way we eliminate the market direction which is the root of all evils lol
Under no circumstances a trader should take a directional trade using the vwap strategy .
These are the rules of engagement in a VWAP trade..
Market is strong with DOW open + 50..
1) We don’t pair trade when market is strong .. We only take a directional trade
2) We only go long ..
3) We go long when price approaches Lower band
4) We fine tune with MACCI ( MACCI is slowed down version of CCI and eliminates much noise those with TS please PM me for the code ).. MACCI is a secondary tool
5) Further fine tuning with L2.. Make sure there is not a series of bidders sitting much further than your entry
6) Deduct the lower VWAP price from the VWAP and make sure there is enough meat in the trade.. For example if the VWAP is 30 $ and lower VWAP is only 29.80 then your max gain will be 20C.. is this what you want ? .. Make sure your possible reward ( the max gain ) is much greater than your risk ( stop loss). No point to get only 20C from a trade if you only trading 100 shares..
Reverse above for short position .. Short ONLY from the upper band VWAP when market is – 50 .
Market is oscillating 50 > DOW > -50
You can take both directional and pair trade positions.
1) Short a stock with price near its upper VWAPO and simultaneously long another stock with the price near the lower band .. This should result in a market neutral position ..
2) If you can not find two good candidates then directional trade.. Since the market is oscillating you can go both short or long on the day .
3) Follow rule 4 above
4) Follow rule 5 above
5) Follow rule 6 above
If you pair trading always put your short trade first.
Stick to these rules and for get about predicting the market direction .. Don not bring any other rules of trading you know from the past into this strategy.. Once you totally know and understand the strategy then test drive it for 3 days.. and post your results on this thread.. All trades . GOOD . BAD , UGLY
Exit :-- We exit when price hits the VWAP
No there is not any contradiction . I have how ever made an adjustment in choice of stocks. I no longer use the trending stocks for VWAP strategy and only use those stocks that oscillates . I have mentioned that in my previous posts too .
We back tested the directional trades on the bank I used to work with 6 years of historical and the conclusion was to use VWAP bands for pair trading ONLY or just choose stocks that oscillates than trend
------
How would one know if a stock is oscillating ?
That is simple.
1) stock oscillate when market oscillates and that is when the market goes through consolidation and again that is defined by volume shirinkage . Try any stock of your choice 2 hours after the market has opened. Lack of volume sends the stocks into oscillatory motion even the trending ones..
2) stocks that are not either OB or OS on a daily chart oscillate much more often than OB/OS stocks .
3) Oscillatory stock show equal path of resistance to market movements.
Path of least resistence is a concept in TA which refers to stocks that exhibit least tendency to move against market direction . ( I am not refeing to high beta stocks here ) .
Stocks with equal path of resistance shadow the the market movements mindlessly .
Let me know if u want me to expand on decomposition techniques of financial time series to isolate the non stationary elements within the dat set.
Let me know if i have answered your questions buddy .
STOCK CHOICE
There are many stocks available for trading but only few percentage of them are suitable for active day trading
These are the minimum requirements for choice of stock
1) MINIMUM INTRA DAY VOLUME 2.5 Million
2) Low spread Preferably 1 C . Up to few cents is still OK
3) Stock with Minimum ATR of $1
You can use the link below to short list the candidates
You only need 10 stocks ( updated ever two weeks ) to trade the market. That is all. It does not have to be from NAS market as I trade NYSE market myself with no problem what so ever . Stocks like RIG,VLO,SLB,EOG, OXY, X are liquid enough for fast execution.
The 10 stocks is your core stocks , you must be having as many as possible stocks in your radar for pair trading as 10 is simply not enough. The core stocks are those stocks that you are familiar with them . They are like your babies. you know their characteristics.
No correlation analysis is needed in VWAP pair trading ...
I have 10 core stocks and around 50 other stocks for MPD trading , due to hard ware restrictions only.
STRATEGY 3
This is a high probable strategy and I invite traders of all level to use it in real time and post their result in here. ( all results good bad and ugly ) . You can also quote me if you felt the result was poor.
IF MACCI of DOW > 120 ( 1 min time frame ) and MACCI OF DOW > 120 ( 3 min time frame ) and MACCI of DOW ( 5 min time frame ) then short weakest stocks. ( reverse for long
(Weakest stocks are defined by those which have gap down most @ open in your list .
( MACCI is defined by moving average of CCI )
Of course i use more adaptive version of MACCI but a simple MA of CCI would be just as good .
Those of you have TS can code this easily and you got yourself a solid strategy to use for years to come .
CCI Setting
You just smooth the CCI which has a 20 bar as default with a 6MA . As simple as that . ( the correct way of both smoothing function and the bar back settings comes from cycle analysis which is beyond the scope at this time. It is more adaptive to cycle top and bottom .
For the time being
CCI 20 ( default ) smmoted over 6MA
( PaulF’s Question )
My apologies for digressing here slightly but I would like to be clear on how the VWAP is calculated.
My understanding is its the:
(Sum of n number of bars Close times Volume) Divided By (Sum of n number of bars Volume)
which in AmiBroker AFL language would read:
VWAP = Sum((Close * Volume), NumOfBars) / Sum (Volume, NumOfBars);
If I'm calculating correctly then my only question is what value should NumOfBars be set to?
Exhaustion
Trader 333’s comment
The Exhaustion is the Macci in multiple timeframes. The problem here is that Radarscreen (which is the only real current option for this) cannot take multiple timeframe indicators and so you have to use a Global variable but this is not easy and even if you successfully code the indicator the amount of PC resource it uses is huge and this is without other factors that are also needed.
Grey 1 :
Exhuastion engine is your best friend in identifying when a particular trend has been exhausted . We use three MACCI in three time frames for exhaustion signal . Once the trend exhausted the trade is closed . you can have daily m weekly and monthly if you are a position trader , I use 1 ,3 and 5 min MACCI for hit and run trading .
In my earlier posts i did mention that the best way in stock trading is a TOP DOWN APPROACH . In another word you start with market analysis and then move to the stock which no one did . This is one of the areas that a trader should strengthen himself. If he does not know where market is heading he MUST NOT even considering to do any kind of analysis on the stock . Why do you think the fundamentalists fail to perform ? is that because they cannot not asses what stock is cheap or not ? NO simply because their analysis over the market direction lets them down .
The fact that SLB failed to perform higher and higher was simply because market took the stock down beyond stock's inherent strength .
Now lets go to exhaustion .
The most important concepts in TA are
1) EXHAUSTION
2) CONFIRMATION
Exhaustion
Exhaustion is the art of identifying when a certain trend has come to the end. The market was technically exhausted which as a result corrected itself dragging individual stocks down with it .
The Exhaustion engine which i have mentioned few times will help traders to know
1) IF MARKET TREND IS EXHAUSTED
2) IF STOCK TREND IS EXHAUSTED
and if both 1) and 2) are not exhausted then IT IS SAFE TO GO LONG ( LONG IN SLB TRADE for example) other wise WAIT for correction .( the engine will give you an excellent insight in how long you have to wait for correction before taking a position )
I have out lined the exhaustion engine design which keeps traders out of BAD trade which in turn will help them to last longer in the market.