I have found this articles that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content of their site, and I advise you to take a look.

Every trading system has its components of determination.  Simply put, it is the components of information that a trading system makes it decisions.  There are two basic classes of components, technical and fundamental data.  Both can provide strong information toward trading decisions.  There are a couple of hundred different technical indicators and a fair size group of fundamental indicators, and I have found no single indicator that provides an adequate trading system.  Adequate, of course, is all in the eyes of the person assessing its effectiveness.

It is possible to form combinations of the various indicators to derive trading signals, but in many cases it just makes the water muddy not giving clear signals.  The components of determination are not important if a given trading system is low risk and high in successful trades.  Many system boast high gains, but their percent of winning trades hovers around 50%.  As the components used become better, the pieces start to come together to allow a trading system with low risk, high gain, and high percent of winning trades.  It may not be evident as to what components of determination are used in a trading system, but the system’s performance should be obvious in the information that describes it such as gain potential, loss potential, and risk.  Beware, if this sort of information is not available to describe the system’s performance.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

It doesn’t take a trading system to measure the market strength, but it might be beneficial if the trading system used this measurement in its decision-making.  Market strength can be many things, but you like to have something that doesn’t represent a big time lag.  Many people use various moving averages to represent market strength.  There are also various technical indicators that can give some relevance to market strength.  The most desired strength indication would be an accurate predictive technical indicator.  That, of course, is quite hard to produce.  As was stated in a previous section, most trading systems work well in only one type of the three types of market.  Therefore, if a trading system has a short time-lag market strength indication, it could be more adaptive and work better across the three types of markets.

Market strength could be view as the upward or downward strength of the market.  Maybe it is the upward or downward trend of the market.  Maybe it is the economic strength and investor confidence.  Maybe it is all of the above.  The real answer is any strength indication that reduces the trader’s risk.  Therefore, once again, a predictive strength indication that is reasonably accurate would indeed reduce the trader’s risk.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

Measuring risk is a complicated business at best.  Everybody has a variety or different methods of measuring risk.  You can read all the books and articles, and be left with confusion as to what is a good method of doing this.  It is not know what the right answer is, but some of the ways of assessing risk need to be addressed.  Drawdown is used in some of the methods to develop a risk to reward type of measurement.  This is a fairly good measurement of the trading system’s performance, but this ratio probably shouldn’t be a linear relationship.  Another method used is to determine the volatility.  Volatility is really a measure of a security’s past performance, but how well a trading system deals with this volatility can be a good measurement of risk.  A measurement of the trading system performance in gains compared to various market indexes can give yield some risk assessment if a gain loss ratio is derived, but just because a system beats the market does not make it a good system.  A large amount of portfolio management systems and fund performances are compared to the S&P 500 Index performance.  Just because you loose less then the index does not make everything all right.  The goal is to make money, not loose less then something else.

Some combination of the first two methods, drawdown verses gain and the volatility / performance, could be combined to yield a risk that is meaningful to the user of a trading system.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

It would seem that measuring losses would be taken care of by measuring gains.  If a negative gain is present, it would indicate a loss.  This is true, but there are other ways of looking at losses that can pertain to a trading system’s performance.  One method might be to measure the drawdown.  A drawdown is measured from the time a retrenchment begins to when a new high is reached.  This method is used because a valley can’t be measured until a new high occurs.  Once the new high is reached, the percentage change from the old high to the smallest trough is recorded.  Trading systems have the tendency to allow more drawdown as the gains become greater.  As the drawdown is minimized, it has a tendency to reduce the gains as well.  This is all fine and well, except the trader never knows where his entry is in the scheme of things.  He does not want to take a 20% loss shortly after entering a position.  If he had already made 90%, then maybe it wouldn’t be viewed as being so bad.

Trading systems can be set to trade the cycles or trade the trends.  Trading the trend usually has a larger amount of drawdown leniency, thus allowing more give back on the market cycles.  Cycle trading can be very efficient, but in many cases a trader could have made more by buying and holding.  The proper way to interpret or use a trading system is to reduce the risk.  You may have made more gains by doing something else, but the trader should reduce the risk to an acceptable level for the desired trading style.  It is always a good thing to manage the losses.  Many people make good gains and end up giving back way too much.  The goal should be to keep most of what you gain.

A good trading system will act in the capacity of minimizing the amount you give back to the market while leaving you good gains on the upside.  Measuring gains and measuring losses have to work in tandem along with other factors to determine a good trading system.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

Measuring gains seems like a very straightforward proposition, and it is.  The real question is, how well, or how much gain should I have achieved.  That question gets a little more complicated.  Gains are reasonably associated with risk.  You hear about the cases where a person makes some extraordinary gain, and he is prancing quite high.  Did he just hit a lucky chance, or did he perform in an extraordinary fashion?  The market indicators usually give indication as how the various securities performed.  Not all stocks follow the market, but most do.  Therefore, measuring gains might be in reference to the market indicators, measuring gains might be in reference to other securities, measuring gains might be in reference to some other trader’s gains, or measuring gains might just be in reference to positive or negative.

All the aforementioned measuring methods hold some merit, but we must strive to find something that yields a reasonable answer.  This section does not deal with loss management or risk, just gain.  There are probably two methods of measurement that gives credence to a trading system’s gain performance:  the percent gain of the system verses the buy and hold percent gain over the same security over the same period of time, and the percent gain of the system on a security verses the buy and hold percent gain of various market indicators.

There are two parts to making a system work well for a trader.  The first is a system that performs well, and the second is applying the system to the proper securities.  This article will be in reference to taking long positions verses short position.  If a system is assessed against enough securities that represent a composition of going up, going sideways, and going down, you can then determine its effectiveness.  Be careful, most systems are situational and only work well in one of the three types of markets.  If a system can give you positive gains, or non-negative gains, and out perform the market indexes, it has established a merit that few can achieve.  There is some unfairness in this overall method, but if this is found, it represents an effective system.  The unfairness lies in the situation where the market is going up and a measured security is going down.  In that case it may be very difficult for a securities system gain to outperform the market.  Some judgment may have to be exercised.

To find the best system, a person would have to perform the above for each system and do a comparison.  What a wonderful journey for those who enjoy that sort of work.  But for those who don’t enjoy the analysis of data at this level, the above method should prove effective in assessing a trading system performance.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

 

A trading system is a method in which a number of signals are generated to help the trader make decisions.  Some of the possible signals that could be generated from a trading system are a setup for a buy signal, a buy signal, a hold signal, a setup for a sell, and a sell signal.  If the system also deals with going Short on a position, then the signals would be generated inversely.  More will be talked about going Short in future topics, but the concentration in this article will be going Long in a position to eliminate any confusion.

 

The purpose of any trading system is to make positive gains in monetary worth.  There are many systems in existence that strive to achieve different goals, but all are predicated on making money.  A system can be optimized for maximum gains, optimized for minimum loss (draw-down), optimized for a balance between these two goals, optimized for short term positions, optimized for long term positions, or etc.  The goals of various trading systems can be as far reaching as one’s imagination.

 

There are many books and information available to describe trading systems and how they are tested.  The most common way of testing a system is to analyze its performance over historical data.  This is a good method, but it should be kept in mind to test over various market conditions to understand it effectiveness across the various conditions.  Many systems work well in certain conditions and not in others.  Often one needs to use different systems for the different types of markets that are present.  The problem with this is that it is usually difficult to determine if the market conditions are changing until it has already changed.

 

Many systems generate a variety of metrics to allow the trader to assess the systems effectiveness and the market conditions.  Generating these metrics are as difficult as generating the system itself.  History has shown that many bad systems have been generated over the years, and the good ones are normally only effective for certain market conditions.  Risk is always a concern for the trader.  He wants to minimize his/her risk while capitalizing on opportunities to make positive gains.  A metric to give an assessment of risk is, there again, just as hard to generate as the system itself.

 

The perfect system would be a living algorithm that adapts and accurately predicts the market and the position (stock) movement to maximize gains and minimize risk.  It has been said that you cannot predict the market, and in general that is true if you consider all cases.  The real fact is that you cannot predict a market that has gone out of normal trading conditions.  A market is in normal trading conditions over 95% of the time, and therefore it is to some degree predictable during that time.  Events that cause an anomaly are such as unforeseen changes in the economic situation, world wide or local catastrophes, large companies doing improper things that come to light that have a perceived impact to the market, trading/investor radical change of confidence in the market, and many others.  But after a market adjustment, it goes back to normal trading.  This doesn’t mean it will go back to where it was before the adjustment, it simply means that it goes back to a normal pattern.  This pattern can be, and normally is, different from the pattern that existed before the adjustment.  In terms of normal market changes, they are reasonably predictable or readable.

 

The term “indicator” is used quite often to describe various market conditions.  There are fundamental indicators, economic indicators, and technical indicators.  In all of the market downturns and crashes in the U.S. markets in its history, the indicators have told the story that the market is doing this.  The problem is that most traders/investors ignore the signals and loose a lot of money.  A good trading system is suppose to help you maximize your gains, minimize your loses, and take the emotion out of the decision process.

 

Well, the Market is in shambles, and we investors are in the process of wondering what to do.  That is the question of the day.  If you are still in positions, should you stay or take the losses and get out?  If you are out, is it time to buy?  Stocks are cheap only when they are done going down.  A few months ago, a colleague told me to buy financials because they were at the bottom and a good buy.  I didn’t buy, and he bought a bunch.  Well, needless to say, he bought much trouble.  So, what is the answer?  I don’t have the answer, but the market has busted below the last support level, and there isn’t another one in sight.  The truth of the matter is that the traditional technical analysis does not hold in times like these.  The market will return to normalcy, but when that will happen is not to be answered presently.  There is too much emotion and fear leading the way.

The leaders of the financial institution across the globe have created an event of greed and stupidity that now has to run it course.  The bailouts across the world will surely do something to help the situation, but I will not address that with my opinion in this write-up.  We have greed running rampant in politics, corporations, positions of power, and we, the individual investors.  Maybe it is time to bring things back to a reasonable level of doing what is best for all, not the supreme selfish prevalent attitude.

If you perform your technical analysis with honesty, it will tell you when the market has returned to the sanity level worth trading.  We will not be able to catch the absolute bottom, but we will see after the fact that the bottom has been formed.  Keep in mind that most of the time after a bottom, it will go back down to test that bottom to see if it holds.  The market is definitely below the moving averages.  If you looking for long positions, it might be prudent to see a crossing to the positive side.  If you are reading various oscillators, good luck, I don’t think they will be very useful at this time.  The dive in price has distorted our indicators so badly that market normalcy will have to prevail before we can read the ‘tea leaves’.  I realize I haven’t been much help, but maybe I have helped in the fact that reading the signals are not going to be very clear in the near term.

This posting and Stockanalysistalk.com provides information using market trend analysis for technical analysis of stock data for market investment, stack market trading, portfolio management, and investment position for financial growth.

Let us continue the talk about trend analysis. There are various ways of trying to determine the trend of the market. This can be done by using moving averages, various indicators, various filtering techniques, an algorithm technique, and with the market cycle tops and bottoms technique. All these methods have a market time lag associated with the results, but they can still be quite effective. I have recently read a book by John F. Ehlers called “Cybernetic Analysis for Stock and Futures”. This has some very interesting information, but when I tried to use this data to develop a trading system, the results fell along the lines of my typical trading system results. I am looking for the system that gives me a trading advantage in the market. One manual analysis technique that has served me quite well is the Tops and Bottoms technique.

Tops and bottoms analysis of the market is reasonably simple, but it has a few little quirks associated with it that you must understand. I will attempt to explain this technique. The market or stock behavior is comprised of some small cycles in about 8 days in duration, 4 days up and 4 days down. If this cycle really held, you could simply find the bottom, buy, and sell in 4 days and make a lot of money. It isn’t quite that simple, but if you investigate the data (it is more prevalent in an index like the S&P 500) you will be able to see the cycles. In general, you will be able to identify the top of the cycle and the bottom of the cycle. The tops and bottoms technique is a method of comparing a top with the previous top, and a bottom with the previous bottom. If the top is greater than the last previous top, you have what is called a rising top. If it is the same price, it is sideways. And if it is lower, it is falling. The same goes for the bottoms. If you are in a BULL or rising market, the tops and bottoms will be rising, and of course if they are falling you are in a BEAR or falling market. As these rising or falling amounts change, the strength of the trend is changing. If you study the tops and bottoms relationships you can get a good indication of market strength and trend. You can use the early indication as the top is not rising well for a BULL market as an exit criteria or the bottom is not falling well for a BEAR market. Or you can wait until the results of the next cycle, but of course that will give you some decision lag. You can use a combination of the top and bottom to cut that lag in half. It by itself is not a complete trading system philosophy, but rather a effective trend analysis technique.

Let me talk a little bit further about the market cycles. There are times that the cycle is hidden, but it does not mean it is not there. If in the count, the market is suppose to go down and it doesn’t. That is an indication that the market is very strong and the down portion went up. If you continue the count, in many cases it will go up more when it is in the up portion of the cycle. The 4 day count appears to change in phase, and therefore once a top or bottom is formed, that is where you start the count. If a top or bottom does not form, then the count has to be derived from the previous top or bottom. If you draw a line to connect all the tops and another line to connect all the bottoms, you will see a divergence and convergence of these lines. I will save that discussion for another day, but there is some real meaningful information in this relationship. It gives indication of the stocks volatility, and real volatile stocks have more prevalent cycles making them more tradable using this technique. Additionally, you can use the signals from an index to trade a stock if they are in sync with each other. Many times the trading signals are clearer from the index. This is a good technique for determining trend and strength, but be careful and study the effects if you use it as a trading system.

This isn’t a plug for the CaprockAnalytics.com site, but some of this information and technique is used in their analysis. I have been in contact with these folks, and they have shared and taught me quite a lot in some of the things that are useful in stock analysis. Of course, they are probably not telling me all of their secrets. The perfect trend analysis would be predictive in nature, and they seem to have that ability in their analysis.

This posting and stockanalysistalk.com provides information using market trend analysis for technical analysis of stock data for market investment, stock market trading, portfolio management, and investment position for financial growth.

Let’s talk about moving averages in this posting.  Good technical analysis of the market is like free money because it provides good trading signals that take the emotion out of the trading decisions.  Moving averages are a key part of the technical analysis.  The “big players” talk about the 200-day moving average as being key.  This helps to determine a Bull or Bear market.  If the stock price is above the 200-day MA it is a Bull market, and if the stock price is below this MA it is a Bear Market.

Trading signals generated usually need to be different based on a Bull or Bear market, so the moving average helps to determine the market type.  The only problem is that this indication has quite a lag time, so the trader needs to be patient.  The good news is that there are enough securities to choose from that you can keep you portfolio active most of the time.

Other players look at the 50-day moving average in determining the same Bull/Bear signal.  Its time lag is smaller and it gives a good indication of the market type as well.  The problem to watch out for is when the stock price is oscillating back and forth across the line.  This condition causes a non-described market or possibly a sideways market.  The trading signals still work, but I prefer to break the market into three types, Bull, Bear, and Sideways to help define the trading signals.

Why does the moving average work?  Well, to a greater degree it is a self-fulfilling prophecy.  If enough traders use them, and if enough money is moved based on them, then they will work by default.  Much of the technical analysis is based on that very premise.  Other parts of technical analysis have more foundation.  My favorite saying for describing why the market did what it did is that “It did what it was suppose to do”.

Trends can be used to help pick securities that offer good probabilities of positive gains.  The slope of the line gives some indication of the stock’s momentum.  Also, if you look at the convergence or divergence of the 50-day and 200-day lines, they can act as a heads-up for a changing market.  Check out some of the so-called “Picks Of The Day” and see how they stack up with the moving averages.

I found a site called caprockanalytics.com that provides a free market trend analysis.  I went and checked this out and was somewhat amazed.  I am not sure how they do this, but it looks really advanced.  One part looks like a moving average trend line without the time lag, and another parts looks like a prediction line.  They have some really powerful stuff. 

This posting at stockanalysistalk.com provides information using oscillators for technical analysis of stock data for market investment, stock market trading, portfolio management, and investment positioning for financial growth.

Wow, this is a large topic. There are quite a few different oscillators, and they fall into three different categories. There has been much written that describes the basic uses and signals from oscillators. I believe in a lot of it, and they can be used to make trading decisions. In fact, I use them all the time, but probably not in sense that an avid believer would. I think you should do a web search on MACD, STOCHASTIC, RSI, etc. and read the wonderful information that exists. It is really interesting, and it is all good data. There are various packages available that let you develop a trading system, and if you take the various oscillators and try to develop a trading system around one or several together that the results are still lacking something. If you read the oscillator different for different types of markets (bull, bear, sideways), the results get better. But now you have the problem of determining what type of market you are in. There are some interesting things you can do that will make this easier. I haven’t stumbled across this technique described anywhere, but I am sure somebody has written a book or article about this method. Once you have read up on the various oscillators and understand how the one you like works.  You can do some interesting maneuvers to find good rewards. I like the Stochastic Slow oscillator, and it is easy to find in most web charting tools. Take the Stochastic with some data, an index like the S&P 500 is a good place to start, and analyze it over the last couple of years. Now look at the same data over a longer period with a time frame (compression) of 1 week and then 1 month. If you could overlay all of these charts with a common time base (x axis), you would see that the amount of movement of the data varies as these three oscillators go in and out of phase with each other. This really doesn’t turn into an indication of magnitude as much as it describes the strength of direction. Of course you can do quarterly and yearly, if you have enough history data, but the overall affect starts to loose clarity as you dilute this too far. I do NOT base my trading system strictly on the oscillators, but they surely contribute. Knowing when positions are over or under bought at various time compressions tells a big story.

Let me share a belief. In general, I believe the market is reasonably predictable. You can’t predict anomalies, but you can predict a normally traded market. This is not an easy task, but I believe some people have found the methods to do this at various degrees. If the market falls out of prediction, then a anomaly has happened, which is a very small amount of the time. Will we probably not be able to take the information from out various discussions and predict the market, but we will be able to make better informed trades.

The market movement is comprised of up and down movements that vary in frequency, phase, and magnitude. Therefore, the oscillators help put these cycles into perspective. If you can time the cycle, then you have most of the battle won. The cycles and oscillators won’t get you a perfect trading system, but by putting different time compressions together with the oscillation periods you can do pretty well. An example of how this might work is: if the monthly and weekly compressions are on there way up but not over bought yet, then the daily down cycles should be small and the daily up cycles should be larger. This describes a Bullish market and you may decide to ride through the cycles. As these compressions get out of phase you get different types of movement in data and can handle them accordingly. Go ahead and study these affects, and I’ll come back to this subject sometime in the future embellish it further.

There is an article at stockcharts.com, “Introduction to Technical Indicators and Oscillators” that has a lot of good information on Indicators and Oscillators. http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_tech#centered_oscillators

This might be a good place to get some useful information. I performed web searches on the various types of oscillators and found much information.Â