Market change confirmed!

An interesting observation.


On June 8th, I posted a blog that I thought we might be at a market turning point.  This past Friday, June 15th, Investor's Business Daily (Investors.com) announced we had in fact turned.

When I'm daytrading (as opposed to my longer term investments), sometimes I'm long (buying first, then selling later, with the expectation that the market is going up), and sometimes I'm short (selling first, then buying later, with the expectation that the market is going down). At any given point on any given day, I will be long or short. I will typically be long and short at some point during the same day.

My day-trading futures strategy makes money, until it doesn't. 

Recently, after consistently generating profits, it started consistently generated losses. 

Which begs the question: how can something be consistently making money, then consistently losing money, with no change to the strategy, unless something is different about the market? I became convinced that there was something different about how the market was trading that was causing my to move from success to failure.

I pulled my daytrading logs, and did a little research from trades over the past year. 

I found that I go through this same change when the market is making a change from one direction to another. If I was successful while it was going up, then when it hovered prior to switching to going down, during this transition I experienced failures. Likewise, if I was successful while it was going down, then when it hovered prior to switching to going up, during that transition I experienced failures.

This was a very big surprise to me - not only that a strategy could suddenly switch like this, but it was also capable of prediction. In other words, the fact that my trading strategy moved from success to failure meant that the market was going to change direction. Once it moved from failure to success, then the new direction had been shown.

From my logs, I had been successful at trading until the end of July 2011, when the market bottomed, then I wasn't again until October, when the market moved out of a sideways correction to an uptrend. I started experiencing failures again at the end of November, when the market turned, and started being successful again at the end of December, when the market turned. I started experiencing failures again in April, then success again in May, followed by problems at the first of June, followed by successes again last week. 

On June 8th, 10 days ago, I noted on my blog that, based on the shift of my trading strategy from success to failure, the market was at a turning point, changing from 'downtrend' to 'uptrend'. The market had been in a downtrend since the first part of April, 2012.

This past Friday, as noted by Investor's Business Daily (Investors.com), the market has changed from 'Market in Correction' to 'Market in Confirmed Uptrend'.

So, in other words, my trading strategy's shift from loss to profit, led me to predict on June 8th, that the market had changed direction from downtrend to uptrend, and on Friday, June 15th, the Investor's Business Daily announced this change in market direction.

So - here's what I've learned:
1 - my strategy is successful when the market is moving in a direction, up or down.
2 - my strategy fails when the market is in a transition, moving sideways.
3 - my strategy predicts the turn from a direction to moving sideways.
4 - my strategy predicts the turn from moving sideways to a direction.
5 - I need to employ a different strategy while the market is moving sideways, and abandon my original trading strategy, when the market is in a transition. 

This has been pretty fascinating to me!

A Market Turn?

A couple of weeks back I posted an entry in this blog that I was declaring success in my daytrading of the E-mini S&P 500 futures.

And then suddenly, the style that was giving so much success, quit being successful.

So I pulled my trading logs, and reviewed the last year, and noted something that I feel is important for me: I start losing at market turns.  In other words, during an uptrend, and during a downtrend, I consistently make money.  But at the point where the market is turning, I consistently lose money.

One way to look at this, is I have a tool that says the market is turning!


And, assuming this insight is correct, then it is saying we are having a market turn right now, starting with Monday June 4 2012. That day was the last day, that I made money all day long, on every trade.  Every day since then, Tue - Fri, I lost.  And it was the first loosing week in a month.


It doesn't say for how long it will be heading up, just that it is turning!

UPDATE: Investors.com (Investor's Business Daily), on Friday June 15th, said the market changed to an uptrend.  Here's my new post on this.

APPLE (AAPL) - This is what a Flash Crash looks like

Today, at 10:57, Apple (symbol AAPL) had a whopper of a drop, with some systems (CNBC) showing a 9% drop, while my service (Think or Swim) is showing it dropping 1.3% from 598 to 590 .  This was not a high volume dump of the stock - instead, it was a regular volume trade.

Some media reports, (CNBC for instance http://www.cnbc.com/id/46835129) are calling this a Flash Crash, and saying: Apple Flash Crash: Stock Halted After Trade Causes 9% Plunge.

My chart (see picture), which is showing data from "Think or Swim", shows a drop from 598 to 590, which is 8/598, or 1.3%.  So, I don't know which report is correct, since the math appears to be different between the two systems..  Of course, the system I use for stock trading, Think Or Swim, may not have captured the whole move.

Also, I don't see any evidence that the stock has halted trading - have a look at the picture yourself - it's still moving around as I post this.

Anyway, here's the picture!

Stock Market - interpreting volume

I watch $UPVOL - $DWNVOL (NYSE, up-volume is trading volume for shares increasing in price, while down-volume is trading volume for shares decreasing in price.  $UPVOL minus $DWNVOL is the difference in trading volume.  On market-down days, the difference will be negative, while on market-up days, the difference will be positive).  I have watched it for a long time, but today I gained more insight.

What I realized:

• Constant slope means:
• - No rate of change, no acceleration, constant speed.
• - The rate of things changing is staying the same.
• The size of a bar
• - shows the amount of accelaration
• - or rate of change
• - continued acceleration down, changing slope down, shows panic
• Downward direction means:
• - The difference in the volume of stocks,  upVol vs dwnVol, is more down vol.
• A change in the direction (e.g., slope up instead of down) of the slope
• - shows a change in the sentiment

Banjo Daytrading - Trading ES with TICKs

To understand this post, you'll need to know something about Market Profile.  If you aren't familiar with it, then google it - too much required to put here for this entry on trading the TICKS (that's the NYSE TICKS).  I also monitor the change in NYSE volume, and the change in the relative advancing vs declining changes for those stocks.

I have been daytrading the E-mini S&P 500 futures for a while.  Their symbol (concurrent) is ES.  The smallest increment in the ES is a tick (not the same thing as the NYSE TICK), which is 0.25.  A point is 1.00, so it is 4 ticks.

You can buy or sell-short as many contracts as you want, as long as your account balance will support it!  Each tick is $12.50 per contract.  So for 1 contract, 1 tick is $12.50, and 1 point (4 ticks) is $50.00.  If you were swinging for the fences and have multiple years of a proven successful record at trading the ES, then as a professional, you might trade as much as 200 contracts!  At that level, 200 x $12.50 means a single tick would be $2,500, and a single point (4 ticks) would be $2,500 x 4 would be $10,000!


Today I had a total net of -3.5 points.  I started trading around 1:45 pm.

So, while you don't know what I actually made or lost today, since the minimum number of contracts is 1, and 1 tick is $12.50 for 1 contract, and 1 point is $50 (4 ticks), and I lost 3.5 points, then you know I lost at least $175 today.  If I traded 3 contracts, then I lost $525.  And that pro trading 200?  He would have lost $35,000!

As mentioned above, it is my goal to watch the TICKs, along with the changes in the Volume and changes in the Advance/Decline value, as well as the actual ES value.  I like to draw trendlines on the TICKs so I can see the trend in the TICKs, as well as drawing trendlines on the ES.  I keep a loose eye on the simple moving averages (sma) for the 20, 50, and 200 period I have the chart set to.  I like to have a 1 min, 5 min, 15 min and 30 min chart open, all at the same time.  I'm aware of, having previously looked at the daily chart, but I don't keep it open.

Prior to the open, I examine the SPY as a proxy on a weekly basis.  This helps me to see longer term trends that I'm operating under and being influenced by.  I find it much easier, for instance, to observe overall direction, and in particular, the change in SPY volume on a weekly time frame.  I note any new trends or trend continuations, closeness to big SMAs like the 200 dma, 50 dma for turning points that may be induced onto today's environment.  I next look at the daily SPY, for the same reason as looking at the weekly, in particular trying to observe any change in sentiment as indicated by volume, while also noting yesterday's high, low, close, and various MarketProfile values (explained in more detail below).  I then look at a rather broad spectrum of overnight futures to get a flavor of what the world thought was going on overnight, as reflected in the futures, as it will carry over into today for a while until new news comes along to change the world's collective opinion:

• Markets: ES (S&P 500), TF (Russell 2000), YM (Dow industrials), NQ (NASDAQ)
• Commodities: (GC (gold), CL (oil), HG (copper), LBS (lumber), ZW ( wheat)
• Foreign Exchange(FX): DX (US dollar), 6E (Euro), 6J (Japan)
• Treasuries: ZT (2 year), ZN (10 year), ZB (30 year)

Monitoring and trading the ES
On the 30 minute chart, I like to place a price line for the following elements: the VAH (see MarketProfile), VAL, VPOC, R1, S1, and yesterday's high, low and close.  I'll put yesterday's open on the graph if it's not embedded in the middle of everything.

I monitor every candle on the 1 min, 5 min, and 15 min charts.  I try to evaluate their meaning.  I do the same for the TICKs, and I keep an  eye on the VOL change and the ADV/DCN change.

My Loose Rules for me to trade (these are evolving, and as you can see, my results were negative today, but then, I didn't follow my rules too well today...):

Start the day, get a view of the influences in effect:

• What does the weekly SPY look like?  What big support/resistance, SMAs, and volume are going to influence today?
•  What does the daily SPY look like?  Same questions as above.
• What do the market futures look like?
• What do the commodities futures look like?
• What do the FX futures look like?

I Only want to go long if:

• Near the bottom of a VAL, S1 (or S2,...).
• TICKs are above neutral, generally above 500, and have been above neutral for a while (or swing positive hard, like to 1000 or more).
• If more confirmation is needed, I like to wait for the ES to have been hitting resistance for a while, now breaking through.
• There's been some range to today's trading since open.  I do terrible when the range is suppressed.
• I like to have a range of at least 4 points, from bottom to top, assuming I can get in somewhere near the bottom of the range.
• I like to have a range on the VAH-VAL to be at least 4 points too, and try to get in near the VAL.
• I don't want the VPOC too near to my opening the position, as the ES will frequently stall here for long periods of time.  So, I would prefer that there be at least 2 points, and preferably 3 points or more to the VPOC from my entry point.
• I don't want the VOL and ADV/DCN to be going against me in my direction.  If I'm going long, I don't want them falling.

Only go short if:

• Opposite of the above.

Banjo on Hedging Stock

Hedging - what's the point


A Simple Definition of Selling Short
I want to talk a minute about hedging.  But before I can do that, I need to be able for you to understand the concept of selling short.

When selling stock short, it means I borrow stock then sell it (it's all automated - I don't say "Hey, I want to borrow some stock"; instead I just sell it and the borrowing happens for me).  So, when I borrow stock (from my broker) and then sell it, I have sold stock short.  At this point, I still owe the original owner (my broker) the stock that I borrowed.  So I have to buy stock and give it to my broker.  Once I have returned stock to my broker, my short stock position no longer exists.

Sometimes people find this confusing.  They wonder, "how can I sell something I don't have"?  Well, I can't.  But if I borrow something, I can sell that borrowed item, with the understanding that I will need to return that borrowed item to the original owner at some point in the future.  Making it simple, it's the same as buying something then selling it, which you already understand by living life.  We are selling something then buying it, but it's the same, from a profit standpoint, as buying something and then selling it.

Selling Short
One thing to note - in these examples, I'm going to assume that the stock I'm long (NFLX), and the stock I'm short (SPY - actually, it's an ETF, but we're going to ignore that for this example), travel in lock step.  If I have $1,000 worth of NFLX, and it goes up $500, then the $1,000 worth of SPY will also go up $500.  This is an example only; it  may not be true in the real world, but is used to illustrate the point.  Another thing - for this example, I'm going to ignore the cost of selling short.  Those costs will be the cost of borrowing, and the cost of any dividends I may need to pay on the shares I borrowed - the real owner of the shares I borrowed are going to expect to be able to receive their dividends!

If I own $1,000 worth of Netflix (NFLX) stock, and it goes down so that I own $500 worth of NFLX, then I have lost $500 value from NFLX stock.  That should be clear.


If I sell $1,000 worth of S&P 500 (SPY) short, and it goes down so that I now owe $500 for the SPY, then I have made $500 value from   SPY stock.  If that confuses you, accept, without worrying about the 'how' that it means: I buy something, then I sell it - I'm buying it at $500, and I'm selling it at $1,000 for a profit of $500.  In reality, I borrowed $1,000 worth of SPY, which I sold for $1,000.  Then later, after the price of SPY dropped, I bought SPY back for $500, and returned those shares to the original owner I borrowed it from, keeping the $500 difference.  It should be clear that I made $500 on this transaction.  I sold it for $1,000, I paid $500 for it, so I made $500.  This is the same as - I bought it for $500, I sold it for $1,000, so I made $500.  It's the same, except the time sequence it occurred is inverted.


Hedging
My definition of a hedge is something that will provide value in the opposite direction of another investment.  So, if I own stock (aka long the stock), and I want to hedge that stock, then I could sell another stock short (also known as being short the stock) if it tended to move with the stock I'm long.

Assuming I'm careful about selecting the stock I bought and it's relationship to the stock I'm using for a hedge (the stock I'm short), (in other words, they move closely together - when one investment goes down $500, the other investment will go up $500), then as the market moves up and down, the two stocks (one the long stock, the other the short stock) will move in opposite directions, with the net change being $0.


What's the point in a hedge?
What's the point in being in a hedge?   While I'm in a balanced hedge, long one stock and short another, then (assuming they move in lockstep):

• I won't make any money on my short, nor lose any money on my long, when the market goes down.  
• I won't make any money, nor lose any money, when the market doesn't change (doesn't go up or down) on neither my long nor my short.
• I won't make any money on my long, nor lose any money on my short, when the market goes up.

It's as though my account is frozen; the market and my stock bounce around, up, down, and sideways, but my account balance doesn't  change much.  It may not track in lockstep, so it may vary a little, but it won't be big if I've been careful about selecting the primary investment and the hedge.

If the primary investment and the hedge are balanced, moving in lockstep then:

• When the market goes up, my long will make money, while my short will lose the same amount; my net is $0.
• When the market goes down, my long will lose money, while my short will make the same amount; my net is $0.
• When the market goes sideways, my long doesn't make nor lose money, and my short doesn't make nor lose money; my net is $0.

My account balance doesn't really change.

So, what's the point?  I mean, why would I want to basically lock or freeze my account balances?

I've been asking myself this for quite a while.  I understood the concept of a hedge, but since nothing is changing, I never really could find the answer, in any of my searches, as to why would I want to my account into a situation where it doesn't change value?  Why wouldn't I just get out of the market, since when I'm out of the market my account balance doesn't change either.  So, to me, a hedge was the same as being out of the market.  And, to a certain point, that's true.  And if being fully hedged (that's one consideration - being fully hedge vs. being partially hedged) means my account balance doesn't move, then it's true that it's the same as not being in the market.

Or is it?  As it turns out, while my account balance doesn't change, some other things may change.  For instance, I could continue to collect dividends on my long positions, if they pay dividends.  And those dividends would certainly affect my account balance, in a positive manner!

So, what are some things that might change?  That might give some insight as to why I might want to employ a hedge.

Some things that might change when in a hedge

My basis

Assuming I bought $1,000 worth of NFLX stock (I'm not concerned with the price per share here in order to keep this example simple).  My basis in the NFLX stock is -$1,000 (we can ignore how many shares this is).  Suffice it to say: I am long $1,000 worth of NFLX.  I have a '-' sign in front of the $1,000 because I payed cash when I bought it, so I reflect the spending of $1,000 with the '-'.

If I hedge by selling $1,000 worth of SPY, then my basis in SPY is +$1,000.  I am short $1,000 worth of SPY.  I have a '+' sign in front of that $1,000 because I received cash when I sold it, so I reflect the receipt of $1,000 with the '+'.

If the market moves down, and NFLX and SPY move lock-step together, with (in this example) NFLX will losing -$500.  Meanwhile, the short SPY position will make +$500 profit.

Position Change (I start with $1,000 worth of NFLX, and -$1,000 worth of SPY):

NFLX: -$500  (it dropped in value by $500).

SPY: +$500 (it went up in value by $500).

net: $0 (-$500 +$500 => $0)

If I close the hedge (by buying back SPY for -$500) at this point, I receive $500 from that hedge transaction on SPY.  I sold SPY short for +$1,000, and I bought it back for -$500, so the profit is +$500.  This is the same as saying I bought it for -$500 and I sold it for +$1,000, so the profit is +$500, with the only difference being the time sequence of events - the events themselves didn't change.

So, while I lost -$500 on the NFLX, and I made +$500 on the short SPY, so the net gain or loss is $0.  No change there.  But one thing did change: my basis in NFLX changed from $1,000 to $500, from a practical standpoint..  I still own the same number of shares, but after closing the short position, they cost me only -$500, instead of the $1,000 they cost when I bought them originally.  So, while my account balance didn't change, my basis in the NFLX stock did change!

This, for me, is some additional insight I didn't have; I never thought about the fact I was changing the basis point of the long position.

So, another way to look at a hedge is to view it as a way to change a basis point in a stock.  It can work both ways, for you, and against you.  For instance, if the market had moved in the opposite direction, so that I made money in the long position, while losing money in the short (SPY), my account balance would not have changed, but my basis in the long stock (NFLX) would have gone up by $500.

So, account balance doesn't change, but stock basis changes, and it changes based upon the direction of the movement relative to the primary and hedge positions.  And, it only changes when you close the hedge.

So a full hedge can be viewed as freezing the account value, and changing the basis point until the hedge is removed.

When might I be interested in doing this?

Well, I might be interested in doing this if my goal is to hang onto stock for dividends; the account value isn't changing with the market's gyrations, but I am still receiving the dividends.  It appears this might be a way to freeze my account balance with the exception of the dividends I am going to receive.  

What else have I gained?

Well, since my account balance isn't changing, then I've removed a lot of risk, assuming the long position and the hedge position move in lock step.  Also, note that, if the stock I am using as a hedge has dividends that are payable during the time I have them borrowed, then I will pay the dividends out of my account, plus interest on the borrowed stock.  You didn't expect to get all of this for free, did you?  So maybe I should hedge with stocks that don't have dividend risk, or stocks that pay a lower dividend then the stock I am long.  That might be a good idea.

(Note that this section talks about hedging with options.  This is not something you would do unless you are an expert in trading options, and understand the obligations, risk, and pitfalls in trading options).  Another example might be where, instead of being long a stock, I am short an option.  Remember my definition above - the hedge is the opposite of the other position, the primary position I call it.  So if I decide to short a put on NFLX in order to capture time value, with a belief that NFLX is going to go up, which means I would be obligated to purchase the stock should the put expire in-the-money, then the opposite (the hedge) would be to be short calls; being short calls means I must provide the stock if the call expires in-the-money.  So, I could use the put and the call as hedges for each other.  Note a problem here though - you must understand fully the concept of deltas, gamma, and vega in order to understand the hedge, with the profit being theta.  

Some thoughts on using a hedge

I'm still looking, and thinking, about using hedges.  I know that I am only scratching the surface, but I'm having to do this on my own, as I don't have any mentors nor have I been able to find any information about the 'why' of hedging.  So, I'm sort of stumbling along on my own, trying to gain insight.  If you have additional insight, I would appreciate hearing from you!

Considerations

Anything that moves in an opposite direction from my primary investment can be a hedge.  It doesn't have to be stock.  Gold is frequently used as a hedge against inflation, which is a hedge using gold against the dollar. It's important to know how tight the correlation between the primary and hedge are.  You don't want to be long some investment (long real estate, long stock, long classic cars) and think you have a hedge (long gold, short stock, short bass boats) only to find out you don't have a hedge at all; I wouldn't think long classic cars and short bass boats would be good hedge; I would think they might have a tendency move in the same direction with each other, and if that's the case, when I'm losing money on the primary, I'm also losing money on the hedge!  That's a way to lose fast!

So understanding the correlation is important.

I always assumed that should inflation kick in, I would go long rental houses or beach property as a hedge against the purchasing power of the dollar.  That certainly worked in the 1970s, but currently it's not a hedge I would put on until the housing market turns upwards.  So that hedge isn't available to me right now.  But I do have some of my portfolio on GLD, an ETF (or is it ETC?).  It's bouncing around quite a bit, and sometimes it looks like a really great hedge, and other times it looks like I've made a mistake.

Pairs Trading

One popular concept I hear bantered around is 'pairs trading'.  This is an approach, primarily using stock, where you go long the stock that is the stronger in it's sector (or where you have some belief that this is a strong stock), and go short the weaker stock.  A popular example of this is long HomeDepot, and short Lowes.  I don't have an opinion on this, I've just seen it used as an example.  

Typically, HomeDepot and Lowes have different stock prices, and may move at different rates in the market; e.g., the market is up 2%, HomeDepot is up 5% and Lowes is up 3.5%.  I use software that allows me to get a gauge on the relationship between the two stocks, so I could invest -$1,000 in HomeDepot (going long HomeDepot), while selling +$1,000 of Lowes (going short Lowes).  If they move at different rates, then it might mean that I need to go long $1,000 worth of HomeDepot stock, while going short +$750 Lowes stock.  I'm not trying to say what to do, as that will change over time, I'm just saying you need to give this consideration before doing it.  Doing a google search for stock pairs trading will give you much more detailed information then I have presented here in this little example.

So, I'm still looking for more ways to use hedging to reduce risk while providing profits.

If you know additional approaches, leave me a comment!

  

Banjo's Trading - Adding New Hardware

My trading platform consisted of a gigabyte mother board, several large hard drives, two 23 inch Samsung monitors, and a video card with dvi and vga output.  I had 8 Gbytes of memory.  I had set the Java configuration to 1.28GBytes for the trading platform I use (TOS), but would still get system slowdowns when I had a lot of charts I was monitoring.  I found the app's system utilization to be typically around 600 meg, with 600 meg left over, but other times I would see I only had 100 meg or less remaining.

I found that I needed more screen realestate.

I debated on swapping out the graphics card for a 4 channel card, which would drive 4 screens, but I was a little concerned about the slowdown I was already experiencing, so wasn't sure this would work well.

I had an old Dell computer loaded with Ubuntu, but it was an older version of Ubuntu.  However, it had 3Gbytes of memory, dual core mcu, and a dual video card.

Since I already had all of the hardware, except for the monitor, which I was going to have to buy anyway regardless of which direction I went, I decided to give the Dell Ubuntu an OS upgrade and see how well it would work.

I bought a Samsung B2330HD monitor/tv for the display.  I can also connect a tv signal to it when I don't want to use it as a computer monitor, so I was good to go with the display.

I downloaded and installed Ubuntu 11.04.  It was easy to install and get running.  I downloaded and installed my trading platform, TOS.  Since TOS Is written in Java, it will run on any Linux system.  I had already confirmed that TOS would let me have multiple sessions up from the same IP address.  Since my system is proxied behind a router, all of the PCs on my home network appear to all have the same IP address to TOS, so I can run as many on as many different computers as I want.  This meant I could run, realtime, the TOS software on Ubuntu while it was also running on Windows.  Since it would be on multiple computers, I would have some redundancy in case of computer issues, as well as offloading some of the work so it would be split between 2 computers.   I already have a Verizon Wireless MiFi 2200, which gives me a redundant Internet connection via cell towers should my cable modem crash or a neighbor cut my cable with his shovel.....again.

Everything was up and running within an hour, with the monitor.  I placed the new monitor on the existing Windows system, as in the past I've been aware that Linux lags in device drivers.  It may have worked OK on the Ubuntu system, but it wasn't an issue to place this on the Windows system and move one of the older monitors (Samsung 23") over to the Ubuntu.  This worked without any issues.

This Dell Ubuntu system is slower overall than my Windows system, but then it is a couple of years older and only cost 1/3 as much!  

During the day, I place my more static charts onto the Dell Ubuntu system.  By this, I mean I have 10 - 12 charts that I don't change, so they are just running and showing the chart.  I have 6 futures that I set to 'Daily' chart, (/cl, /dx, /es, /gc, /si, /zt), and then the others are for stocks I currently own, for which I have these set to 15 minute intervals.

The Windows system, being the fastest, and most stable (have noted some screen color issues on the Ubuntu), so this side has news, cnbc video, trading, and multiple sector windows, as well as any charts I'm working with while analyzing and determining whether to make a trade.

I also have a small switch box, where I can select either "System 1 or System 2".  When in "System 1", the mouse, keyboard, audio are all connected to the Ubuntu system.  When in "System 2", these devices are connected to my Windows system.  Therefore, I only need a single keyboard, mouse, and set of audio speakers.

Now, on to getting my Ubuntu system recognized by the Windows Workgroup, so I can share files, music and movies.....

Banjo's Trading Insight - Volume

Market Volume

For too long I had a tendency to look only at the price a stock was trading at.  I would primarily look at daily charts, then switching down to 15 minute charts if I was going to day-trade this stock.  If my goal was to swing-trade, then I would stay with the dailies, except for the actual execution, where I would switch to a 5 minute chart after first reviewing the 15 minute chart.

During all of this, I might glance at the volume, but I never really took a deep look, or study, at it.  I believe now that my trading suffered as a consequence to this.  Since paying more attention to volume, my trading, as measured by my profits, has improved.

I believe that volume leads the price, at least in terms of importance.  If I can locate an unusual volume in a stock, then I want to know what the stock is doing - is it going up, or is it going down.  The increase in volume says that something important is going on.  Once I know something important is happening, then my next question is, what is going on?  This is answered by looking at the price; is it going up, is it going down, or is it trading very close to the same price.  All three of these can happen on a change in volume.

The first assumption, with respect to volume, is that it has to have increased, above its normal value (an average), for it to be important.  However, it is also important to recognize if a volume has significantly dropped below its normal value.  This should also be taken in context of the market volume (e.g., SPY) as a whole, with a good idea to take a look at the sector this stock belongs to and its volume.

Volume Increasing, price going up - under construction

Volume Increasing, price staying the same - under construction

Volume Increasing, price going down - under construction

Volume Decreasing, price going up - under construction

Volume Decreasing, price staying the same - under construction

Volume Decreasing, price going down - under construction

Volume Average, price going up - under construction

Volume Average, price staying the same - under construction

Volume Average, price going down - under construction

An Analogy - restaurant volume and trading insight
After watching some of Gordon Ramsey's "Kitchen Nightmares" shows on TV, we have started to avoid restaurants with low customer volume.  On Ramsey's shows, invariably those restaurants with low customer volume, are trying to hold over their food far past the dates when the food should have been discarded for safety reasons, let alone taste reasons!

So, while I was tending to ignore volume in my trading, I was paying increasing attention to volume at restaurants.

And this leads me to my analogy on trading and restaurants!

Assume I had only had access to the average price paid for a meal at a restaurant, but no information about the number of customers that bought meals that day.  Charting the average price of meals at that restaurant, assume my chart shows this daily meal price average to be $12.50.

On this new day, assume they only had one customer for the entire day, and he spent lavishly, paying $100 for lunch.   The average price of the meals for that day would be $100.  So, looking at my charts for the average daily sales price of meals, I would observe a huge spike in the price - from $12.50 to $100!  I would be very interested in stock for this restaurant!

However, by adding volume into the information I'm obtaining regarding the sales of meals at this restaurant, instead of being interested in buying the stock for this restaurant, I might have an entirely different opinion: I might conclude this restaurant was dying, as it only had a single customer for a whole day!

So volume adds a significant amount of relevant information to the information I use to consider whether to buy or sell-short a stock.

Volume allows me to have confidence in the price I'm observing.   Not enough volume, then my confidence in the price being accurate goes down.  Average volume, and my confidence in the price being accurate goes up.  A significant change in the volume, and I'm interested in knowing more.

Daily Volume
Sometimes, such as today (Monday, June 27, 2011), on a daily chart, I noted a huge volume spike in CHSI the previous trading day (Friday, June 24, 2011).  This looks odd - a huge volume spike yesterday, and no increase in volume today.  Investigating further, I switched to a 15 minute chart, and saw the truth.  On Friday, at the end of the day, there was an increase of 10 times normal volume for this time of day.  Meanwhile, the price range was within normal for the day.  So there is a disconnect between the price movement and the volume movement.  So, the volume, since it was a spike and not uniform across the day, leads me to discount the quality of this information - I don't think I can effectively use this increase in volume.  This, coupled with a non-linear response in the price, where it didn't also move considerably, again leads me to conclude there isn't much tradable information being presented, so I do nothing with this stock.

Today, this stock is continuing in its normal trend, which it started on Thursday, on average volume.

Banjo's Insight - My Trading

This will be a page where I update my experience and thoughts with respect to trading.  I primarily trade equities (stocks), but also occasionally trade futures (e.g., currencies, S&P, silver).

This will be a main page of collected information rather than a series of pages.

Insight Pages

• Volume
• Trading Hardware
• Explaining the market