Ztrader

Ztrader – Moving Average (3)

 

As market always says the price and turnover shall confirm each other, there are many indicators taking consideration of the turnover rather than just look at the price alone.

 

Richard Arms had proposed a moving average calculation, called Volume Adjusted Moving Average. The idea is, on a high turnover trading day, the price on that day is more significant than the price on a low turnover day.

 

Let’s look at this chart. On early Feb, there was a 58M shares -8% at closing selling down day. This selling was significant. Although the stock price rebounds a bit in the coming few days, the turnover was small. The real selling was coming after that. On April 9, there was a 17% gap up with 71M shares. This is the beginning of a strong rising trend.

 

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If use two SMA lines, 10 days and 20 days:

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Since SMA only consider the price but not the volume, it would not tell the significant of early Feb selling day. In the above chart there are total 6 crossings of the fast and slow SMA lines. Note that there are two crossings in Feb. The April 9 event is recognized by these SMA lines on time.

 

In the following chart, two VAMA is used:

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Since the early Feb sell off is significant, VAMA is able to recognize it and both trend lines were not affected by the fake rebound in Feb. There are total 4 crossings in the above chart. The April 9 event is recognized by these VAMA lines on time.

 

In this particular example, VAMA seems works better, more accurate, and yet produce fewer fake signals.

 

To reduce fake signals, how about using a slower SMA line ? If 10 day with 30 day SMA line is used, fewer signals are generated with bigger time lags.

 

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Another stock , the SMA lines did a good catch this time.

 

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VAMA lines seems do a bad job:

 

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However, if you look at the green line above, while the stock price kept going up, the trading volume was going down (indicate by the red line). Price and Volume not confirming each other, the VAMA lines thus do not follow the stock price. It gave a very early alert already. By observing the gaps between the stock price and trend line, the price volume divergence is clearly identified.

 

In conclusion, the VAMA lines in these two cases are very useful. Valuable information shall be easily obtained from it, because it is in the stock price domain and at the same time embedded with volume information.

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Ztrader

Ztrader – Trading Decisions

How do you decide to trade ? Give some examples:

 

Fundamentals

F1 – US bond yield going up, bet on # 0945

F2 – Coal price keep dropping, bet on electricity sector

F3 – Q3 result announced, out of expectations

 

Event

E1 – placement, market overreacted

E2 – IPO

E3 – Insider keep buying (selling)

E4 – special events (special dividend, change of ownership, injection of assets, …)

 

Other people’s advices, rumors

R1 – Financial actors, ibanks, newspaper, paid services, friends, famous blogger, sing good

R2 – insider information

 

Market situations

M1- market panic, 80% stocks oversold

M2- market too hot, too many 52 weeks new high stocks

 

Relative valuations

V1 – Corresponding sector is strong in US, HK is behind

V2 – stocks in a particular sector very behind

V3 – sector is relative behind compared with other sectors

 

TA

T1 – your indicators give a signal
T2 – a stock making new high / new low

 

Or, you would mix the above, say:

F2 + T1, you know the electricity sector shall be good on lower coal price, but you want to wait for the best time to enter.

 

M1 + T1, you know oversold situation can last long, you want to avoid risk of early entry.

 

V2 + T1, you don’t know the reason why that stock is so behind, you don’t want to be trapped. A famous example is # 0246, which is very behind before gameover.

 

F3 + T1, you know the result looks good, but you want to confirm the market reaction first.

 

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So is the above common trading decisions you want to make everyday ? Part of Ztrader is built to support the above decision processes. I don’t want to press 10 keys to find out which stock in a sector is behind. I don’t want to go to HKEX to search if an insider is selling or buying a stock recently, I want it display on screen immediately. I don’t want to check how Home Depot performed daily when I own 669, I want it display immediately. Part of Ztrader is just to integrate available data together to help making a trading decision.

Other than data integration, how do you know if a particular TA indicator is a good indicator for your trade decision ? What is the historical performance ? Can you tell if trade on a particulr oversold signal can give you how much return on average ?

 

Another part of Ztrader is trading system. To build a sound trading system, one may have to go through a design, testing, performance evaluation, risk evaluation, and implementation cycle. Trading system is a much bigger topic, will share more later, if it can be shared.

 

Ztrader

Ztrader – Moving Average (2)

 

While Moving Average is a very good tool, it suffers when market situation changes. If the price is changed rapidly with a lot of noises, the MA may generate wrong trading signals.

Many adaptive methods had been created, it tried to vary the length of the moving average to better cope with the market situation. Kaufman’s moving average, KAMA, is based on the concept that a noisy market requires a slower trend than one with less noise.

Look at this stock with 10day SMA:

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20 day SMA:

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30 day SMA:

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50 day SMA

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KAMA:

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KAMA seems able to follow the trend closely but less affected by the minor noises. It seems as smooth as a 50 day SMA at the same time follow the major price trend more timely.

It needs more verification on actual trading performance. It looks better than it performs, from my observations.

Ztrader

Ztrader – price information overlay

 

 

Ztrader is now capable of adding other stocks or user defined data on top of a chart, for example, # 2333’s corresponding A shares and average monthly sales information:

 

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# 1818 , with Gold price, on relative scale:

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Note that some information has to be plotted with relative scale or same scale.

 

# 0669 with Home Depot

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Most important, the information is stored separately for each stock, no need to re-enter next time visit the stock again.

Ztrader

Ztrader – Moving Average (1)

 

 

The Guppy Multiple Moving Average (GMMA), using two groups of EMA lines to help visually identify the trend and trading opportunities:

 

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The green lines are groups of shorter period EMA lines, and the red lines are groups of longer period EMA lines. When the stock is on a clear uptrend (or downtrend), these lines will be aligned in order and go in parallel. When the trend changes or the stock price consolidates, these lines will be merged or crossed.

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It looks nice. However, GMMA itself does not give extra information more than a group of EMA lines. It is also not useful for setting up automatic trading rules. It is only a nice visual tool to help making trading decisions. e.g. jump on a strong stock when the GMMA lines merged at price consolidation, ride on a stock when GMMA lines aligned and goes parallel.

Ztrader

Ztrader – Market Breath Indicators (1)

 

 

Oct 14, 2013

Market Breath indicators attempt to guess the direction of the overall market by analyzing the number of stocks advancing relative to the number declining.

 

Arms Index, called also TRIN, the Trader’s Index, created by Richard Arms, measures the market breath by:

TRIN = (Advancing Stocks / Declining Stocks) / (Advancing Volume / Declining Volume)

 

When it is below 1.0, the market is considered as bullish. When it is above 1.0, the market is bearish.

 

Here, the plot of TRIN since 2011:

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Arms Index against HSI one day change, from 2007 to Oct 14, 2013:

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It shows some extreme cases, where TRIN values can shoot up to abnormally high during very bearish market.

 

If zoom into the “regular” and normal range:

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The center of the chart is about at (0.0, 1.0), which indicate when HSI index is no change, TRIN shall be around 1.0. The relative empty areas in upper right and lower left in the chart, indicates the effectiveness of the indicator is confirmed.

 

Here is the distribution of TRIN between 0 to 3.0 :

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The chart shows a more than neutral view. The median value is 0.85, indicates in general the market is on a slightly bullish side.

 

Here is the one day HSI change distribution:

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The chart shows a very neutral view. The median value is 0.056%, indicates in general the market is on average very neutral.

 

If there is a relationship between TRIN and HSI, I would say the neutral point of TRIN value is 0.85 instead of 1.0.

 

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Then how about MUPI distribution ?

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The median value is 0.175%. In fact I think TRIN is more correlated to MUPI.

 

How about TRIN vs MUPI one day change:

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Still not easy to read.

 

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Prediction Power of TRIN

 

How about using today’s TRIN to predict next day’s market direction ?

 

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Seems no useful relationship.

 

If only consider TRIN value < 0.6 (a bullish day), plot against the next day performance:

HSI gain is about 0.028%, almost zero prediction value.

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If uses MUPI:

 

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Average gain is 0.18%, median 0.27%, better than HSI.

 

In conclusion, Arms Index is more related to MUPI than HSI. It makes sense. A bullish day indicates the next day shall be a bit bullish also. It has no one day prediction power with one day Arms Index on HSI.

 

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While it seems the prediction power of TRIN for next day’s trading is not much, Arms suggested a moving average of TRIN can be used to pick bottoms and tops for the market. Here a 21 days moving average is used and oversold level set to 1.5:

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The peaks seems shifted a bit. MUPI version is better :

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Except on 2007, the recent lows of the market is quite accurately captured. One can enter the market after the moving average leaves the red zone.

 

It seems more difficult to predict market tops using this indicator.

In conclusion, it is an effective tool to help locate the market bottom for MUPI rather than HSI.

Ztrader

Ztrader – Price Distribution Indicators (1)

 

 

To determine the support and resistance area, one method I like to use is to collect the statistics of the price distribution and display it visually on a chart.

 

For example. # 0135 this year, before it collapse next day:

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One can draw a support line a about $15.4. Is this support strong enough ?

 

Turn on the Volume by Price indicator, the trading volume of the corresponding price level is accumulated and displayed as an overlay on the chart. Longer the bar, means bigger the trading volume at that price level. Green bar is the volume that closing wih a upward price, pink bar is the volume that closing with a downward price :

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One can clearly see the region 15.66-15.95 , is dominated by the pink bar, which indicates an resistance more that a support, more than that, the lastest closing is below that region.

 

The support region from $13 to $15.6 is very weak, observed from the short Volume/Price line.

 

Extend the chart backward to 2012, the major support seems at $13.5.

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In the case, it is better to escape rather than bet for a rebound. Follow that day, It collapsed and tried to rebound later:

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Later it fall through the major support at 13.5:

 

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Re-examine the major support at $13.5, There was a placement in 2012. If exclude that placement, support at $13.5 is not that major:

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In fact the 857 corruption event was disclosed in late Aug. It seems a lot of related party already knew the investigation much earlier. The stock price stabilized after the event disclosed. If play this stock based on limited FA resources, it is a real disaster.

BTW, I am not challenging FA by TA. It is just the imbalance of information makes a pure “FA” analysis failed. Stock market is never a fair game.

Ztrader

Ztrader – Multiple timeframes trading

 

Usually we have our own set of favorable indicators that we use from time to time. However, sometimes we would like to apply different indicator sets to examine the stock in different way. It is troublesome to do this indicator configurations from time to time.

 

The Triple Screen Trading System http://www.investopedia.com/articles/trading/03/040903.asp , suggest that we shall view a stock in multiple timeframes, and apply different set of indicators on each timeframe to make a proper trading decision. I believe the Triple Screen Trading System makes a lot of sense. Reading short, intermediate and long term chart shall be a step one for stock analysis (although I did not do so in the past). To make such multiple timeframes view and comparison, it is quite time consuming.

 

Ztrader charting system is re-designed for fast switching between indicator sets and also display multiple timeframes at one click:

 

# 0980 hoping for a new trend started:

 

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# 0700, it is not a good idea to short this stock while 3 trends are moving in the same direction:

 

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# 1177 , may indicate a buy opportunity at the recent corruption event:

 

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Ztrader

Ztrader – Box indicator

Oct 7, 2013

 

In various trading patterns, I think the Box pattern is the most simple to understand and yet most powerful.

 

In this example, this stock’s ATR reducing gradually and at the up break point comes with a huge volume. Certainly the best example we can find this year.

 

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Although it looks like it is easy to capture the box break out, actually it is not. Look at # 777 recently:

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On Aug 19, the volume increase with a fake up break, and the closing restored to the previous box range. Later on, the momentum pick up and ATRN goes upward, a real up break occurred. The technical difficulty on the implementation side is the fake up break or down break which may affect your assumptions of the definition of a box. You may get confused at the fake up break and down break points. Entering or leaving at wrong and fake break point is common.

 

In Apr this year, # 0777 had demonstrated a box down break. But this stock is strong, it recoved with a high volume and get back to the previous box trading range after a few weeks:

 

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Sometime Boxes formation indicates the stock is entering a different trading range:

 

 

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So it can combine with other indicators to confirm the trend. For example, after Sep 16, box up break with a high turnover, , # 0980 is traded on a new range. Aug 28 is confirmed as an inverted head and shoulder, CMF and momentum is healthy, today high turnover up break (the green dotted line is the PV resistance line extended from the last peak):

 

 

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Ztrader

Ztrader – Volatility (1)

 

Volatility means trading opportunities. One of the famous indicator is Actual True Range, which is easy to construct and understand, for example, # 0777, consolidated for a while and up break the box to make a good advance:

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The above chart showing two ATR. The ATRN is a normalized ATR with the SMA of the closing price. Because ATR is an absolution term, it means that you can’t compare one with another. For example, HSI ATR is usually a few hundred points; ATR of # 0777 is $0.5 to $1. ATRN can be used for comparison and for other trading algorithm’s building block.

 

Here is another example of box up break, where ATR shoot up shapely:

 

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Among the various chart pattern, box breakout is one of the most powerful. ATR can be used as a building block to construct such indicators.

 

 

A collapsing example:

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The ex-dividend effects on ATR indicator is none, if aastock’s old method is used. However, if you construct a normalized ATR, the effect is large in special cases, like 2088 this year:

 

Here is the old method:

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The new method before and after the big dividend payout: Note that the normalized ATRN is not affected in the new method.

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There are quite a few trading system based on volatility. Definitely ATR is a useful building block for those systems.

 

Volatility mean opportunities and risks at the same time. Another use of ATR is to control the bet sizes for future / options trading. Some recommend to use ATR for setting cut loss price points in options trades. It is also useful to measure the overall volatility of a portfolio. Will talk about it in portfolio management later.