Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
First of all, I want to tell you guys. I don't day trade that often. There are times where I might open a position and close it again during the same session. But most of money is invested in swing and position trades. I am still learning about day trading futures, watch webinars at this forum and spend time at some other places online to acquire more knowledge about market profile, etc. I used to work for a hedge fund, I was a wealth manager before that and moved to the States three years ago. When I got my MBA in 2007, I couldn't find a job so I invested more time in trading and opened my own businesses. I am very busy with my projects so there is not much time for day trading and since my swing/ position trading approach is making me money, I guess there is no urgency for me to make the jump.
My trading is very relaxed, decisions are made well in advance and I know exactly what I am going to do. When I don't have to be anywhere early in the morning (I live in San Francisco, CA), I am on the sim day trading the ES, but that's just playing around and testing my knowledge of market profile. So what I want to lay out in this thread is how to look at the market in the bigger picture. I won't go into how I swing or position trade here, that might come later. If you trade stocks, ETFs, futures you need to understand the market and know what is going on. I am not claiming to be a pro, I am just a student of the market myself and by trial and error, I have figured things out that work for me. I am sure there are better ways, if you want you can share them here. I will try to write everything as quick as possible, but I know this is going to be a bit longer, so I will give you bits and pieces here and there. If you have questions, I will try to answer them as quick as possible. If it takes a bit longer, please understand I am running three businesses.
How do I enter a picture file guys? I want to have a chart in the text not just as an attachment. When I hit insert image, it asks me for a url? do I have to upload this to a server first?
Ja, u have to upload the images somewhere, u can use, on the bottom of the page, the futures.io (formerly BMT) service bmcharts.com - share your trades, then past the code ' Link directly to photo thumbnail' in insert image.
Like I said with this thread I want to lay out a basic approach how to view the market.
Before making a trade, you need to know what direction the market is likely to go and then play it accordingly. Never fight the market. She is way too strong. She will swallow you and wipe you out, if you do not give her the right respect. She does not care about you, nor your account. She will take it all, your money, your pants and your pride, leave nothing behind except your broken ego. If you have no money, you cannot trade. Just like a warrior can't win fights without his weapon. So don't be stupid and trade without really knowing what direction the market is most likely heading. This is a suicide mission. Trust me I have done it for years.
As a trader, you are not predicting or forecasting the future. Let that job be done by analysts, who get tons of money for bunch of B.S., excuse my language. Using technical analysis will guide you and give you an understanding what is happening right now and help you to be on the right side. It increases your probabilities in your trades.
You have to understand that trading is a probability game, and just like a casino or insurance company, that deal with probabilities, you need to know how to improve your odds. For example, if you apply for a health insurance, you have to answer a ton of questions to the insurance company, starting from your age, gender, a numerous questions about your health, some might send you to a physical exam, and so on (at least that how it works in Germany). So why is the insurace company doing all that you might ask. Well they are using all your information, crunching a ton of numbers, using stastics, and figuring out your particular risk probability, the premium you have to pay according to your risk to the insurance company, which would be their reward, and many more things that are not that important to us. But they just don't do that for you, they do it for many more. They are not worried about a single client, they are interested in the all insured clients collectively, their risk pool. Everybody pays the monthly premium, some get sick a lot and some don't. For the ones that get sick alot the insurance company has to pay more hospital visits, doctor visits and medication. Now if the mathematicians in the insurance company got their probability calculations straight and the insurance company asks the right questions, like us as traders would analyzing the market. Then the insurance company ends up making money, hence winning the probability game, they play.
Understand this as a trader, we are dealing with the same issues, we are dealing with probabilities, and you have to ask and answer the right questions before you take that risk, otherwise you will never end up with making more money. You will lose some trades, which is equivalent to some of our insurance clients that get sick alot, but when you analyze the market, your stock, your investment vehicle appropriately you are improving the odds of having better trades that will make more money than your losses that you have to keep small.
In the past, I have done a lot of trading by analyzing just a stock. I really never new what the market was likely going to do. Are we going to have a pullback, a major correction, or even a bear market. I always found great candidates, but my timing was sometimes wrong. It didn't matter what strategy I used. You will always find candidates from a universe of 10,000+ stocks, that will fit the profile that should be the perfect long or short candidate. But when the market goes the opposite direction, the strategy will most likely fail. A cup with handle pattern will break out and falter in the next days, a swing trading candidate will trigger your buy; only to suck you in and turn around against, leaving you with a loss. Three out of four stocks will go with the market. Remember the stock market is actually a market full of stocks, it is not something separate. So if the market goes up or down, the majority of stocks are doing that action and all of the stocks are forming the stock market.
So let's get to the meat and see how one can take a look at the market. The following steps are for me and you. For me because, I gotta put something down on paper, so it is more binding and official. I will also attach a file once all this is done that describes just the steps and have an excel sheet as well, so we can really work with it.
The essential steps in analyzing the market is to evaluate:
Market Trend
Market Condition
Market Sentiment
Market Price and Volume Action
Your strategy according to the market environment
When analyzing the first 4 points it helps us which actions we are going to take in step 5. If for example the market is bullish and we evaluate that currently the market condition is oversold, we look for long entries. On the other hand if the market condition is overbought and we have certain bearish signals, I would suggest to become very careful and tighten my stops or you end up giving to much paper profits away.
1. Determining the trend of the market
As a trader, I look at four time frames when I analyze the trend. I take a look at:
long-term trend (months to years)
intermediate-term trend (weeks to months)
short-term trend (days to weeks)
intraday trend ( I use 45 min)
Now it is important to know upfront what time frames you are trading. If you are trading in the short-term time frame as a swing trader, you need to know what's going on intermediate-term trend is up, down, or just chopping around. If the intermediate-term trend is long, you can only be long or in cash on the short-term time frame. However, you need to analyze before what's happening in your time frame as well. If the short-term time frame is long as well, now you can go ahead and take long position according your trading strategies. To sum it up, when you trade, assure yourself to be on the same side as the higher time frame and use the shorter time frame you are trading in for opening a position.
I use on a monthly S&P 500 chart a 6-EMA, 10-EMA, and 20-EMA. The 20-EMA has provided great support and resistance in the past. The 6- and 10-EMA are used to identify the long-term trend. If the shorter Moving Average is above the longer, 6-EMA > 10-EMA, trend is bullish. If the short Moving Average is below, 6-EMA < 10-EMA, trend is bearish. Defining the long term trend with cross-overs of the 6-EMA and 10-EMA has worked well in the past and if you have mutual funds, 401K, or German private Altersvorsorge in mutual funds, it is a good tool to decide when to be in stocks or not. In my retirement plan I cannot short the market, but I can switch my already acquired shares and monthly payments into money-market funds (aquivalent to being in cash) or into mutual funds that invest into bonds and gold. It is no secret that bear market usually start at interest rate highs. Switching your money into assets that profit from interest rate drops or parking your money in cash, so your account for your retirement doesn't shrink to where you started off, is a better way than just letting your hard earned money sit in stocks and you watch the market take it all away. So use this approach not just as a trader, if you are a long-term investor then take a look at this once a month.
In 1998 the market sliced through both 6 and 10 EMA, while there was no cross-over of the EMAs. Whenever this happens, you should assume the market to be neutral. The 20 EMA has been a great support and resistance on a monthly chart for the S&P 500, so keep an eye on it as well, because it can give you a feel what direction the market is likely to go.
For long term trend analysis I would also take a look at the weekly chart. On the weekly chart I would suggest either to use 13/34 EMA or 17/43-EMA. Both of them work great, the rules of identifying the trend are the same on any time frame. As you can see in the chart below, the 13/34 EMA has worked great in identifying the long-term trend.
As you can see on the monthly and weekly chart, the long term trend was identified accurately. As a mutual fund investor you would have done a lot better to time the market in this manner just by following the cross-overs and switching your money from stocks to cash related mutual funds. For my retirement plan I follow the weekly crossovers to get earlier signals than the monthly. I hope this helps. I will continue with some other time. Until then keep educating yourself about the markets, there are a lot of resources.
Panda Trader
PS: On the last chart the 89 MA acted as good support and resistance line.
Again, we have a monthly chart and also our 6 and 10 EMAs added. Additionally, we see RSI(14) and a Slow Stochastic (14,3) on the chart. Anytime when RSI and Slow are above 50, we have a bull market. If it is below 50, we have a bear market. This too would have worked wonderfully in identifying the long-term trend.
For the weekly chart we have to modify the settings just a little bit. I use for RSI 14 period smoothed with a 10 MA and for my Stochastic 60 for Period K and 3 for Period D. That's it, this will signal you if you are in a bearish or bullish environment. Looking at the chart one can see extremely well with our price EMAs, RSI, and Stochastic if the market is bullish or bearish. According to that you have to adjust your trading approach.
Ok, now we are able to determine, if we have a bullish environment or bearish in the long term picture. Again, all we are doing is to determine the trend of the market by using Moving Averages. "We don't trade cross-overs!" This method gives us only a sentiment of the market, it tells us in what kind of environment we are going to do business, nothing more and nothing less.
Intermediate-Term Trend:
Here we are going to use 20 EMA and 50 EMA and the rules are the same.
I used to look at the 20 EMA and 50 EMA and determine intermediate-term trends in this fashion. The market trend turned bearish at its last occurrence on 05/18/2010 using these Moving Averages. However, there are better ways and with Ninjatrader the sky is the limit, even though I still look at EMAs as well, it takes only a few seconds to look at the chart.
Coming back to the new technique I use, it's a 15 Hull Moving Average (HMA) and a 45 Variable Moving Average (VMA) which I saw Big Mike posting on his blog for day trading the CL I believe. The Hull MA uses weighted moving averages and dampens the smoothing effect by using the square root of the period instead of the period itself. Therefore, the HMA is able to change more quickly to recent price action and gets rid of the lag. The VMA is an exponential moving average. It has the ability to automatically adjust the smoothing percentage based on volatility. So the more volatile the data is, that we are looking at, the more sensitive the smoothing. If price action is less volatile, in case of trending markets, the less sensitive the smoothing constant in the VMA formula. So instead of using the 20 and 50 EMA, I look at 15 HMA and 45 VMA like Big Mike does to determine the intermediate-term trend. I use the DoubleMAPaint indicator which can downloaded from Big Mike's forum.
We this method we had the uptrend turn into a downtrend on the intermediate-term level on 5/4/2010. Since then the market is in a downtrend. The DoubleMA line worked also great as a support and resistance line in the past. Using HMA and VMA will give us better signals in my opinion than using EMAs. Nonetheless, this is just giving us a feel in what type of market we are, so EMAs are fine if you don't want to use Ninjatrader.
Alright, that's enough for now. I will be back again. Remember to trade in direction with the higher time frame. So, if you use 45 or 60 min chart, then you should be looking at a daily and know its trend using the above described method.
