Archive | March, 2011

Buyers, Sellers vs. Bulls, Bears

31 Mar

You’ll notice the term buyers and sellers used in lieu of bulls and bears when talking about market moves. This is the correct way to relate to an up or down move in the market because we really have no idea whether it’s bulls or bears moving the market.

Allow me to explain…

  • John is bullish on the market, you could call him a bull, but he puts on a short position in the ES futures to hedge his long stock positions. At the end of the day John decides to cover his short position in the ES therefore he must BUY back the amount of contracts he shorted.
  • Sue is bullish on the market and get’s long ES futures at the open. At the end of the day she wants to exit her position and decides to sell. Sue SELLS her ES position to John who BUYS from Sue. John is a buyer, Sue is a seller, both have a bullish outlook on the market, but used the same vehicle in two different ways.

This is just one example, but the notion of buyers and sellers versus bullish and bearish bias in the markets can bee seen on many different levels and should be taken in account when looking at time and sales data. A green buy print on time and sales could be a bull putting on a new position long, or  a bear covering and buying back their short position.

The Hammer Candlestick

29 Mar

SPY Daily 3-28-11

The hammer candlestick is a very common and reliable pattern for the reason that it has a defined failure levels. Those levels would be below the tail and about the high and these can signal a strong move to new highs or lows.

In the recent rally we have seen in the S&P500 we broke above the down trendline. What usually happens from here is a retest of this trendline, old resistance now acts as new support. We are anticipating a pullback to this trendline before a continued rally.

One thing to keep your eye out for is a hammer candlestick on the daily chart. Intraday this can look like a giant V and really cause some voilent moves intraday. Knowing where we are on the daily chart we are able to prepare and keep in the back of our minds that the hammer candlestick could be coming this week on the daily.

You can find more information on the hammer candlestick and other charting patterns in our price pattern articles and in the book Japanese Candlestick Charting Techniques by Steve Nison.

The Doji Candlestick

28 Mar

The doji is a candlestick formation that can be seen on any time frame, but the larger the time frame which forms the doji, the greater the significance. This candlestick pattern represents an even balance between buyers and sellers at the close of the doji candle.

The Doji Itself

There are really two important factors to look at with the doji candlestick formation, the first being the doji itself. Whether or not the candle closes just slightly positive, slightly negative, or exactly where it opened doesn’t really matter, what matters is where it closes in relation to the “stick” or the tail of the candlestick.

doji japanese candlestick

If we have a doji that looks like a + sign then we have a market that is perfectly balanced during that time frame. If however we have a doji that forms at the top the candlestick with a long tail below, this is telling us that we had a significant amount of sellers, but the buyers were able to overtake the sellers and bring price back up to where it opened. This process would be reversed for a candlestick with a doji at the bottom with a long tail above.

The Doji in Context

The second important factor to look at is where the doji candlestick forms in relation to the surrounding candlesticks. In Steve Nison’s book, Japanese Candlestick Charting Techniques, he goes over all the different candlestick chart patterns in context and what they mean, but the main takeaway is think about it from the angle of human emotion. If we are trending up and we form a doji with a long tail above, this is signalling that buyers pushed the security higher early on, but sellers managed to push the security back to the opening price at the close of the time frame.

doji candlestick

The most significant thing to realize when you see a doji candle is that it is a consolidation of prices that could lead to a reversal. I stay clear of  trading when I see multiple doji candles in a row and if a doji forms at the top or bottom of a trend, I look for a break of the candlesticks high or low as a possible reversal in the trend.

EminiMind – Futures Trading for a Living

26 Mar

For those who are specifically interested in trading futures for a living I’ve put together a blog over at EminiMind.com

How to Evaluate Your Trades

24 Mar

One great way to track your trade performance and determine which setups are working and which are not is to evaluate your trades at the end of each day and week. This is the breakdown I use and is derived from John Carter’s book Mastering the Trade.

5 – Target reached
4 – Out for win (due to technical factor that signaled me to exit)
3 – Break even
2 – 1 target hit
0 – Full stop out
I – Indicates impulse trade

Scoring

  • Add up daily score and divide by # of trades for average
  • Separate trades by setup and take overall average
  • Score trade setups with below criteria.

Grading

Grade trade on how well you follow setup; take an average at the end of each day, week and month and look for trends. Ask yourself these questions…

Did I… Jump in too soon? Jump in too late? Chase? Get out too soon?

All of the above are impulse trades and should be avoided at all costs. Illuminate your impulse trades and the profits will follow.

When NOT to Trade

22 Mar

Waiting patiently on the sidelines is one thing you hear some of the world’s greatest trader’s talk about in the book Stock Market Wizards. These are the times I’ve found best NOT to trade.

  • When breadth is at parody, 1:1
  • When the a/d line is at parody, inside |400|
  • When the tick is at parody, inside |400|

Identifying Market Trends

14 Mar

When doing market trends analysis you are looking to identify not only the direction the market is moving, but whether or not it is moving in any direction at all. These are some things we look for when identifying the market trends.

Questions to ask when Identifying the Trend

  • Are we in a trend or counter trend on the monthly, weekly, and daily timeframes?
  • Are we in a trend day or choppy day on the 15-min?
  • Is volume on the 15-min chart constant or advancing/declining?
  • What is volume for the first 30-minutes of trading?
  • Are we within value?
  • Are we within the last 3 days high and lows?

Trend Day Characteristics and Setups

In a trend day the market will trade to a pivot, consolidates and move higher.

Wait for a break of a pivot level and trade in the direction of the trend break at a retest and 50% level.

Trends tend to reverse after 3 days.

After 6 or 7 days in a trend they tend to lose steam.

Choppy Day Characteristics and Setups

In a choppy day the market will move to a pivot and reverse.

Fade pivot levels at 50% levels once the market approaches them.

Days to Avoid Gap Plays

11 Mar

Avoid gap plays on the following days.

1.       Options expiry Fridays. It’s OK to play gap up situation.

2.       Rollover Thursday and the day after.

3.       First trading day of the new month.

4.       Day after Fed day.

5.       If after a narrow range day, the next day’s gap is larger than the previous day’s range.

6.       Gaps where the opening prices are outside the previous day’s session high or low.