Fat Tuesday

While some things change, most things stay the same. The sun came up this morning; Democrats and Republicans still hate each other; central bankers are still printing money with reckless abandon; Oprah Winfrey is still rich; the stock market made new highs on ridiculously low volume; and Greece was saved…again. The only thing that is different is the date on the calendar, which makes today Fat Tuesday.

What isn’t on the list above because it hasn’t happened yet (this time around) is the other part of the Greek bailout saga that never seems to change: as sure as Oprah will still be rich in a few days, yesterday’s Greek bailout will fall apart like a politician’s promise.

In the latest bank bailout via the Greek people, we learned that Puppet Papademos and Company agreed to more austerity for more cash - $172billion to be precise. In order to get this, private bondholders are being forced to accept higher losses without being paid on their insurance policies (CDSs), the ECB accepts no losses, the ECB retroactively changed all bond language so they wouldn’t lose money which radically changes all bond sales going forward, and Greece will be placed under a new wicked type of Financial Fascism by the EU that will make all decisions for the people of Greece.

There will be massive protests in the streets of Greece come Wednesday.

Here are a few comments about the latest bailout. I wonder which ones will be correct.

"It's an important result that removes immediate risks of contagion" - Italian Prime Minister Mario Monti.

"A nightmare scenario was avoided. It is maybe the most important (deal) in Greece's post-war history" - Greek Finance Minister Evangelos Venizelos.

"What's been done is a meaningful step forward” - Swedish Finance Minister Anders Borg.

"The austerity measures it will have to implement and increased monitoring by the troika amidst public outrage will make things harder and drive it deeper into recession. There is a risk of a euro zone exit later this year" - Jennifer McKeown, senior European economist at Capital Economics.

"This program is not something to cheer about” - Dutch Finance Minister Jan Kees de Jager

“The new Greek government could refuse to follow through on its commitment” - David Mackie, chief European economist at JPM

"So what? Things will only get worse!” – 31-yr old Athens taxi driver.

"Without the rebound and growth of the economy ... not even the immediate fiscal targets can be met, nor can the debt become sustainable in the long-term” – Greek Conservative leader Antonis Samaras

The final two comments above are true right now. In order to get the Eurocrats to agree to this banker bailout and keep their constituents from howling, the Eurocrats did what all slimy politicians do at the end of the negotiating line: fudge the numbers. Mr. Samaras’ comment above is exactly correct – Greece has no chance of growing out of this burden.

Isn’t it odd that EVERY U.S. president in memory – on both sides of the isle – have promised that he could cut the deficit in half by the end of his first term? How can they all make such a statement? It usually boils down to rosy growth predictions. None of them ever propose real cuts in the budget, just fantasy cuts; however, the way they look you right in the face and lie without batting an eyelash is in their always-rosy GDP growth projections.

And that’s exactly what the slimy EU politicians have done: made preposterous GDP growth predictions that everyone knows is a lie – but must accept to keep the can-kicking exercise going down the road.

As you can see on the chart above, Greece is in a depression. Yet on the chart we see the assumptions made by the EU politicians, who claim that Greece will magically halt this process this year and stage a staggering reversal of fortune. How this would happen, while the majority of the previous austerity demands have not even been implemented, is not explained by the Financial Fascists now ruling Greece. Even under the wild supposition above, Greece will only get to 159% of the required debt-to-GDP ratio and not the 120% needed for this to supposedly work.

In other news on this Fat Tuesday, the USSA posted its own new debt-to-GDP ratio…a record of course. It now stands at an official 101%. It will get worse with the coming 5 & 7-YR Note auctions over the next few days. But don’t worry; nothing bad ever happens to the USSA. Now if one were to consider the unfunded mandates made by our own home-grown slimy politicians, well, then the debt-to-GDP ratio would be somewhere around 730%. No worries, right?

Trade well and follow the trend, not the so-called “experts.”

Larry Levin

President & Founder of Trading Advantage

News Days

Yesterday I said “Wednesday’s data will be bigger than Tuesday’s data which are; GDP, Chicago PMI, Beige Book, and Ben Bernanke speaks to Congress. Moreover, we will get the results of the European LTRO – Act 2. Although some are saying the LTROs are not the QE equivalent of Ben Bernanke, it is. When the ECB repos junk for cash; what else is it than money printing a-la the US Fed.”

The GDP report was better than expected. The Chicago PMI was much better than expected and the Beige Book is always blasé. Even Europe’s LTRO cash-for-trash scam went off without a hitch; but Chairman Bernanke did not.

Although Chairman Bernanke gave his usual central banker double-speak, he gave no indication of QE3 and when asked about it by the Congressional goof-balls, he continued to make no overtures of QE3. Moreover, when asked about his brothers-in-crime, the ECB, he said “The ECB is well capitalized.”

The markets liked neither. The markets love the current ~$10TRILLION faux-stimulus it has gotten from the central planners and hates the idea of the punchbowl being taken from the party. The market wants the punch bowl to stay and wants it spiked again: “Bring on more *hiccup* vodka! Bring on the QE3 and LTRO3.”

When the drunken/methamphetamine addict (the US/global stock market) felt like it wasn’t getting another fix – it instantly suffered withdrawals. I think I saw it lose a tooth or two as well…nasty habit. Anyhow, the withdrawals led to a reversal lower that hasn’t been seen since, oh I don’t know, maybe since QE2 was withdrawn. After that, the drug pusher (read: Ben Bernanke) came right back onto the scene with Operation Twist.

Speaking of Operation Twist and the Fed, isn’t it quite a “coincidence” that Operation Twist by the US Fed is now ENDING exactly when LTRO2 of Europe is STARTING? Did you know that?

Yeah, that’s surely a coincidence…a fluke…a twist of fate…or a direct arrangement of the global central planning masters that rule over everything. You decide.

Trade well and follow the trend, not the so-called “experts.”


Best Trade To You,

Larry Levin
President & Founder - TradingAdvantage

Moral Hazard

Trading Tip: Trade with a Plan – Using a Stop Loss

In my opinion, every trade you consider should be laid out ahead of time with a roadmap. A complete map should have an “off ramp” or a place where it makes sense to enter the market. It should also have exits for your destination (profits) as well as off ramps for emergency exits. This part of your plan will likely include stop orders.

Stop orders placed to potentially close an open position are called stop loss orders

A stop order is a contingency order. It is triggered only comes into play at the price level specified in the order. In other words if the market never trades at that price, the order will never become active. The caveat to this is the fact that the market can sometimes gap through your price, at which point the order would be executed at the best possible price. This unfortunately has the tendency to open up the trade to the possibility of getting filled at a far worse price than the one specified in the stop order. So, in summary, a stop loss order specifies a price level at a point and beyond where your order will be triggered to a market order.

Stop loss orders are like big signals where you will pull out of trade

Based on how they function, stop orders have very specific placements. Buy stop orders are placed above the current market price. Sell stop orders are placed below the current market price.



*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
CHART COURTESY OF GECKO SOFTWARE.

They work when the market trades at or through the specified stop price level. Once the price is hit, it becomes a market order and is executed at the best price available. Here is an example of a stop loss for an open long position (one that was initiated by buying a contract):

Sell one December e-mini S&P futures contract at 1335.00 stop.

The mechanics of this trade would work in a straightforward way. It would have to be placed below the price level the market is trading at so for this example, assume the market is trading at 1338.00. Normally, I recommend placing a stop loss order 3 points or less from the current market price. So if a long market position was initiated at 1338.00, this stop was placed. If the market starts to trade lower and hits 1335.00, then the sell stop would be triggered and the order would be filled as a sell at the market.
If the market price gaps lower, say 1330.00, the stop loss would still be triggered and the order would be executed at the best possible price. That might mean any price at or below the 1330.00 point. You can see how the gap is something to be aware of.

The same concept applies to a buy stop order. Consider the same example as a buy stop.

Buy one December e-mini S&P futures at 1335.00 stop.
The order would have to be placed above current market price, so keeping with the idea of 3 points or less, assume the market is trading at 1332.00. If the market trades higher, against your open short position (a trade initiated by selling a contract), the order would be triggered once it touches or moves higher than 1335.00.

Traders can use a stop loss order and trail it behind an open position as the market moves in their favor

Stop loss orders don’t go away if the market is moving in your favor. You can trail them to keep them within 3 points or less of the price level the market is trading at. In this way, you can actually try to use your stop loss to protect unrealized profits on an open trade. As long as the position does not get closed by getting filled on your limit order (Secret #2), you could keep rolling or trailing the stop loss order. Additionally, if you close out your position in a way other than through your stop order, don't forget to cancel your stop.

In this way, stop loss orders remain a key component of any trading plan. They are like a safety net, and they can help you try to keep emotion out of your trade. Knowing when to cut your losses and exit a trade can help traders keep things in perspective. Too often people can fall into a trap of holding an open trade that is moving against them, hoping that the market will turn back in their favor. Making a roadmap and sticking to it can help you avoid this pitfall.

_______________
Larry Levin
President & Founder- Trading Advantage

To QE or Not to QE

Twilight Zone

Breaking News: Volatility

Breaking news: There has been a precipitous rise in both online poker activity and napping during early 2012, most notably between the hours of 8:30am and 3:15 pm CST.

From the financial floors to the computer screens, the trading universe has been bored, bewildered, and baffled by the lack of volatility. The markets have been on a slow upward grind with the intra-day trading ranges being historically small. For example, the majority of German & Bernanke-led explosion on Monday traded in a pathetic 4-point range until the late spike took hold. Tuesday was worse; it also had a ridiculously narrow intra-day range coupled with one of the lowest volume days in months if not years.

Is there any hope to break out of these depressing market conditions? It’s difficult to decipher considering the world isn’t really that much different from August-October 2011 when 30 point trading ranges were commonplace.

While the European Sovereign Debt crisis is no longer at code red, Portugal, Spain and Italy to name a few, have yet to emerge from the recession or lower their debt to GDP ratios and budget deficits. In a nutshell, they still have way too much debt (and growing) with too little economic growth (and shrinking) to really improve their situation.

Here at home the MF Global money still can’t be found, the “recovery” limps along with anemic job growth and a still-cratering housing market. Meanwhile, Benny & The Inkjets continue to print more money – or promise to print more money at the drop of a hat, just like lead singer Benny did Monday.

It’s ironic that this bull market is indicative of the more somnolent bear. Let’s hope volatility was hibernating this winter, and will soon join the spring bull or bear.

Trade well and follow the trend, not the so-called “experts.”

Best Trade to You,

Larry Levin
President & Founder - TradingAdvantage

Economic Fantasy Land

The market is back to the races in Q2 today with a whole lot of green on the board. Stocks, oil, gold, and commodities all finished higher today.

The reason: the news folks were touting the manufacturing numbers from February.

Yes, the ISM index of national factory activity rose to 53.4 in February, topping economist’s expectations of 53.0. Although it was only a .4 bonus, it was a full point above last month’s number.

The economic data released Monday was far from uniformly positive. Construction Spending data was not the +0.7% gain that was expected but a -1.1% decline. It was also far worse than last month’s release of -0.1%. It doesn’t seem to matter. Any and all economic data is viewed through a myopic lens that screens out any negative information and over-emphasizes the positive.

As we saw today, the market went straight up despite the aforementioned construction spending that suffered its biggest drop in seven months. In addition, we learned the euro zone's manufacturing sector contracted for an eighth straight month in March, with the downturn spreading to the core economies of Germany and France.

But none of this seemingly matters. With the central planners in charge, we’ve become conditioned to the good-news-only part of the proposition.

When you continue to operate in economic fantasy land with a Federal Reserve determined to keep the dollars coming, and interests rates low, there’s no reason to consider the bad news.

Trade well and follow the trend, not the so-called “experts.”

Best Trade to You,
____________
Larry Levin
President & Founder - TradingAdvantage

Trading Tip #20: Understanding Candlestick Patterns – Harami

I've already covered some of the better known patterns like doji (Tip #18) and engulfing (Tip#19) – now it's time to add harami to your candlestick chart pattern arsenal. Let's take a look at what this technical signal looks like, and what opportunities might be presenting themselves when you see it.

Harami patterns can be bearish or bullish

Harami, like engulfing patterns, are a two candlestick formation. They are actually often confused with engulfing patterns because they both involve candles where one real body is bigger than the other. The difference is that in harami, the preceding (or first) candle in the pattern is the longer one of the pair; it encompasses the whole body of the second candlestick.

If you see this two candlestick pattern, it could be a sign of a reversal

In a candlestick chart, bullish harami are formed when a long filled (or red) candlestick appears during an established downtrend and is followed by a smaller hollow (or green) candlestick. The reason this is a bullish signal is based on the idea that the first candle forms during a session with potentially high volume and bearish sentiment. The following day, there is a gap higher to open, a smaller trading range, and prices were supported above the previous day's close. This is seen as a potential indication that things are about to turn – a bullish reversal.


A bearish harami is made up of a long hollow (or green) candlestick occurring during an established uptrend which is then followed by a smaller filled (or red) candlestick. Similar principles apply to this signal as they did to the bullish version – the first day makes way for a smaller range led by a gap lower and selling pressure that kept prices from rising.


It is worth noting that some candlestick chartists suggest harami can include candlesticks of any color combination – filled + filled, filled + hollow, and hollow + hollow. The whole point for them is for a larger candlestick to be flanked by a smaller one. The reversal signal is just potentially stronger when the second candle is a different color. The two different candle sizes are just seen as an abrupt and sustained bit of trading contrary to the prevailing trend.

Harami are telling you that there has been a sudden trading shift

This candlestick pattern tends to crop up when there has been an apparent loss of trading momentum. The kanji definition of harami is embryo – I take this to mean that the second candlestick is just the early start of a new trading direction, contrary to the existing one. Like most candlestick patterns, it may be wise to look for confirmation of a reversal once you spot harami.

Best Trades to you,

Larry Levin
Founder & President- Trading Advantage

The Spanish Guitar

Secret Trading Tip #3 : A Little Lesson in Lingo

Bartender - Ben

It seems that the main “drink” on the menu for the market is the FOMC report which will be served during tomorrow afternoon’s cocktail hour, after they wrap-up their two day meeting.

All the drinks will of course be served with a garnish of Apple earnings, which came in far better than expected at $12.30 EPS after the market close that sent the stock higher in after-hours trading.

Prior to Apple’s announcement, none of today’s news was exceptionally good, but the market seemingly shrugged it all off.

It’s no surprise that the consumers aren’t really all that confident as the Conference Board’s gauge for consumers’ expectations declined to 81.1 in April, down from 82.5 in March.

Also, the Case-Shiller report was released showing that U.S. home prices dropped sharply in February to hit the worst level in almost a decade. And sales of newly built homes during March dropped 7.1%, largely because of a sizable upward revision to the government’s data on sales for February.

Bad numbers, scary numbers and of course revised numbers...... we might as well put the bevy of today’s financial data in a blender and serve it up over ice.

All eyes are on Benny and the Inkjets to see if they will once again be pouring a toxic cocktail of “liquidity.”

Trade well and follow the trend, not the so-called “experts.”

Best Trade to all,

Larry Levin

President & Founder - TradingAdvantage

Trading Tip #16: Buyers or Sellers

A question I often receive is, "How can there be more buyers or sellers at one price? Isn't there a buyer for every seller and a seller for every buyer?"
The answer is yes, but people are forgetting one important thing. There is a bid and an ask (or offer), and only one of them can be traded at a time.

A bid is an expression of willingness to buy at a price; an ask (or offer) is an expression to sell.

If the ES is trading at 1200.50, the bid is either 1200.25 or 1200.50. The answer depends on which way the market has just traded. Let's make it easy and simply say the ES is between 1200.25 & 1200.50, making the bid 1200.25. In order for the market to move from 1200.25 to 1200.50, someone must pay up to get filled.

You may not be in a hurry and attempt to wait to buy 1200.25, but that will usually only happen when the bid/ask drops to 1200.00 & 1200.25 and you are actually filled on the ask.

If you are trying to buy and really want to get filled, you must pay up at the offer or risk missing the trade. Conversely, if you really want to get filled on a sale, you must hit the bid, or reach down to get filled.

Sure, there is someone on the other side of the trade, but without you choosing to reach up and pay the offer the market stands still. Therefore when trades are executed at the offer it is said to be done by the buyers even though there are sellers at that price taking the other side.

Every buy will be filled on the offer and every sell will be filled on the bid, period.

Let's say we once more have a number of 1200.50 and we see that over time (sometimes just a few seconds) the fills were 100 x 1300. We can say that there were 1200 more buyers than sellers at 1200.50 because of how traders reacted to the bid/ask spread when it was at 1200.25 x 1200.50 and higher at 1200.50 x 1200.75 (called the spread.)
When the market was at the lower spread, 1300 buyers reached UP to pay the 1200.50 offer.

When the market was at the higher spread, 100 sellers reach DOWN to sell the 1200.50 bid.
When the spread traded around this price range there truly were more buyers than sellers at 1200.50.

Understanding bid and ask can open up other realms of technical analysis.

There are some traders who will look at the bid and ask order flows to try to get clues to potential movement in the market based on what buyers and sellers are doing. This is often referred to as reading order book flow or depth-of-market.

If you look at the number of orders for each bid and ask around the current market price you can see the probable number of transactions available at those levels. Reading this information is the key to certain kinds of volume based trading systems and other trading methods that follow the book order flow.

Best Trades to You,

Larry Levin
Founder & President - Trading Advantage

When Ben Bernanke was appointed as Chairman of the Federal Reserve seven years ago, the national debt was $7,932,709,661,723.50.  For those of you not interested in counting digits, that number is nearly a cool $8 trillion, but still a tough sum to wrap your brain around.  
 
After yesterday’s end of the month $70 billion Treasury debt auction settlement, total US debt is now a record $15.692 trillion dollars, nearly double what it was when Benny became the leader of the Inkjets back in 2005.
 
To make the seemingly unquantifiable somehow quantifiable - total US GDP is $15.6242 trillion, which is 101.5% of GDP.  That’s right; the national debt is now GREATER than the Gross Domestic Product.  US politicians, including the White House, Treasury, and the Federal Reserve have just crossed the Rubicon: the point of no return.
 
Unless the US economy heats up like a furnace, which would drive GDP higher than total debt, we have crossed the Rubicon indeed.  Speaking of the Rubicon we are reminded of Caesar and how the Roman Empire once ruled the world.  England, France and Spain were also global empires that were brought to end by DEBT.  To be sure, there was more
to it than debt but it cannot be denied that profligacy was a major factor in all their declines.
 
If you aren’t depressed enough, read on at Zero Hedge where the eponymous Tyler Durden writes about the implications of this unfathomable debt figure.  
 
http://www.zerohedge.com/news/total-us-debt-soars-1015-gdp

Trade well and follow the trend, not the so-called “experts.”

Larry Levin
President & Founder - TradingAdvantage

One of the biggest moments for the markets can come when there is a key news release or fresh fundamental data. Buyers and sellers seem to wrestle with the potential outcome, and in the case of larger announcements, volatility goes through the roof. The problem that I see some traders struggle with is knowing what news to look for, and how to trade it.

Finding news that you can actually use.

The thing that often comes up when you talk about announcements is that a lot of traders don’t understand the market reactions. A report will come out and it will appear as though it is good news, but the market will go down. The thing is that some people still try to trade on the news itself, when in reality they should be looking at what the market thinks the news will be. More than likely, those days when there was a “good” piece of data but the market went down, forecasts were calling for a better number.

The other explanation is that the report just might not have been as important to the market as it was to the observer trying to trade it. Reports and news events are lobbed into a general basket of analysis called fundamentals. Fundamental analysis focuses on the things that have the potential to impact the supply or the demand in a particular market, thus affecting the prices.

Reports that come out with some regularity, like initial unemployment claims, are unlikely to rock the S&P unless they are really, really shocking. Federal Reserve meetings, which are a rarer occurrence, tend to hold a bit more zest for traders. Monthly employment readings are also big. Producer Price Index (PPI) and Consumer Price Index (CPI) readings are key figures for inflation, which in times of economic troubles might get more attention than a decade or so ago.

Perhaps one of the best ways to weigh what kind of news is valuable to traders is to keep your eye on the stories daily.

Traders shouldn’t keep their head in the sand.

If you know what is happening in the market that week, that day, and that hour, it is better all around. You can line up the market’s movements with fundamental events. Of course, there will be big news that comes out of nowhere that can still catch you and the market off guard. However, there are plenty of economic report calendars, Federal Reserve meeting notices, and other lists that show you key data points. Most news outlets will also report results of a general survey of economists showing what the basic expectations might be. Knowing what the expectations are ahead of the report is just as important as the report itself. Good news can quickly become bad news if it falls short of what people were looking for.

A great example of this in recent news is the build-up ahead of the debt ceiling deal. In any other situation, finding a compromise or agreement would be considered a good thing and good news. The opposite was true in this case as investors and traders weighed the potential impact of continuing debt and a tarnish on the credit rating for the US. The highlighted area in the following chart shows the reaction leading up to and following the news:
 

Past Performance is not necessarily indicative of future results. Chart courtesy of Gecko Software.

Focus on the bigger picture, not just the headlines.

One of the best favors a trader can do for themselves is stay appraised of the bigger picture. There are plenty of places where you can get calendars online, and check for the stories that might impact the market. The longer you watch these fundamentals, the more likely you are to be able to distinguish which ones might bring higher volatility and potential trading opportunities. Avoid developing tunnel vision and focusing only on the things you think could be important. Watch for forecasts and estimates on reports – these are just as important as the actual news release and can be key in trying to gauge possible market direction. Good news and bad news are relative to expectations.

Best Trades to you,

__________
Larry Levin
Founder & President - Trading Advantage

Day trading is probably one of the most misunderstood labels in the industry. Some people might picture a random trader acting like a cowboy just buying and selling with pure abandon. Others might imagine a seasoned vet pouring over charts and analysis, looking for a chance to try to scoop up a few points here or there. Let’s set the record straight on what day trading does – and doesn’t – entail.

Day trading is definitely not for the faint of heart.
Day trading is possible because of the great amount of leverage there is in the markets. The ability to buy or sell contracts that represent exponentially greater values than what is held in deposit in a trading account can mean the chance for big gains or even bigger losses. That is why a lot of day trading is thought of as gambling or a Wild West show.

There are a lot of traders out there who exclusively day-trade.

The mechanics to day trading are straightforward. You are in a trade and out of it in the same trading session. There is no “holding” the position overnight or through to the next session, looking for more potential profits. That is position trading. Why open a trading position and close it in the same session? There are a bunch of reasons that someone might cite, but the most obvious is that there is a different kind of exposure between trading sessions.

For a day trader, there is an inherent risk that the market may gap up or down and against an open position when trading begins in a new session. Picture some of the overnight or over the weekend financial bombshells that could be dropped. A couple of good examples are those nights when Asian markets have tumbled on their fundamentals and North American markets open much, much lower the next day. This would be a gap to the downside that would be a big negative to an open long position.
Closing things out before the session ends is a way that some traders try to avoid that kind of exposure.

So how do day trades work?

Most markets are a constant flux between buy orders and sell orders, and it is unlikely that a highly liquid market (one that has many buyers and sellers, making it relatively fluid to open and close positions) would stay at a constant price through a whole session. Day traders look to buy low, sell high and scoop up a few points to their benefit.
Trades can be based on:
- Identifying and trying to follow a trend
- Looking for technical signals that suggest a coming reversal and try to play a breakout
- Playing market movement off identified support or resistance
- Quick in-and-out trading strategies like scalping, where the trader tries to identify arbitrage opportunities where there is a price imbalance
- Any personal system a trader might use to try to identify trade opportunities
The last one on this list is becoming more common as trading moves into the electronic world. Programs on computers look for specific algorithms and other identifiers that may signal price action that a day trader can use to try to gain an advantage.

The one thing that people need to remember is that this style of trading can also quickly accumulate fees and commissions for each round-turn on a trade. Since you are not approaching the market with a single buy-and-hold approach, you have to factor these extra costs into the 2-3 points you are trying to gain on every trade. Make sure that there is enough room to make the risk-to-reward ratio worthwhile.

Day trading is fast, and risky, and not for everyone.

The quick pull-the-trigger style trading that is synonymous with day trading is not for everyone. There are great disadvantages and heavy risks. I think the big trick is to find and stick to a trading plan. Having a pre-determined approach to the market – a place to get in and a place to get out for profit OR for loss – should help you keep your head on straight. Trading with a plan instead of raw emotions is what separates the cocky cowboy image most people might have from the actual serious day trading reality.

Best Trades to you,

__________
Larry Levin
Founder & President - Trading Advantage

Let's take another look at a more advanced technical tool - Bollinger Bands. These were developed by John Bollinger in the 1980s. In simple terms, they use a simple moving average and standard deviations to give a different perspective on potential highs and lows.

Bollinger Bands have a middle band and two outer bands.

The middle band shown on this indicator is a moving average, usually a simple moving average (see Tip #29 for more on those) although some traders do use the exponential moving averages. The standard deviation formulas for the outside bands might be calculated like this example:

* Middle Band = 20-day simple moving average (SMA)

* Upper Band = 20-day SMA + (20-day standard deviation of price x 2)

* Lower Band = 20-day SMA - (20-day standard deviation of price x 2)

The actual values used may depend on user preference. Use and interpretation may also vary.

This technical tool is a way some traders try to define and observe potential patterns. I don't claim to be an expert on these, but there are some common basics that analysts agree on. Volatility is the name of the game for the upper and lower band. Since they are based on standard deviations from the middle band they move closer to the middle when volatility contracts, and further out when volatility expands. Based on this level of volatility, the relationship between those lines and prices can be used to signal potential market conditions. Some analysts might see an overbought market where prices touch the upper band. Conversely, an oversold market might exist when prices are edging towards the lower band.
 

Past performance is not necessarily indicative of future results.
courtesy of Barchart.com

Other subtle patterns can be seen with Bollinger Bands on a chart.

The way the prices interact with the bands can lead to different kinds of patterns that technical analysts might interpret for trade designs. They have names like W-bottom or M-top or walking the bands. If you like playing with these statistical measures, you might enjoy reading more about them. Generally speaking, the visual cues regarding volatility are the main feature for this kind of chart overlay. They can also be used in conjunction with other analysis or observations as a way of complementing other signals or patterns. Play with Bollinger Bands and see how they might work with your trading tools to confirm or sharpen your market observations.

Best Trades to you,

Larry Levin
Founder & President - Trading Advantage

In the fallout from the 2008 global financial crisis, there have been moments that have been driven by pure fear. These are the moments when it can be hard to maintain your composure and trade your plan. Unfortunately, these big days are the times when you need that composure the most. Here is a quick lesson in why it is important to keep focused in a scary market and how to achieve that focus.

Market Basics

First let us understand some market basics. Markets exist to facilitate trade. From moment to moment the market offers traders the opportunity to profit from price movement. It's an environment where every trader has the freedom to create his own results, i.e. all the choices and the power to exercise those choices reside with the trader.

'Scary' implies fear, anxiety, or insecurity.

In his book, The Disciplined Trader, Mark Douglas addresses these issues in a no-nonsense, no holds barred way.

Let me give you an example of his views on this subject:

"It was only the lack of trust I had in myself to do what was needed to be done that I was really afraid of."

"The market is never wrong in what it does; it just is."

"The market cannot take anything away from you that you don't allow."
"In the trading environment the outcome of your decisions is immediate, and you are powerless to change anything except your mind. You have to learn to flow with the markets; you are either in harmony with them or you are not."
It becomes self evident that your trading success will be dependent on your ability to correctly perceive opportunity, to execute a trade arising from that perception and your ability to allow your profits to accumulate.

Are You Consumed by Fear?

Markets are inherently scary. If you are a trader consumed by fear, then the market will always be scary, and the only variable is how scary it is at any given time. When consumed by fear a trader is doomed to failure. Fear will twist your perceptions and blind you to the opportunities available. Fear will almost always drive us to make the wrong action, and it will without question make us totally incapable of accumulating profits that might be made. Even for disciplined and proven successful traders, the markets can be scary.

Objectively scary markets can be quantified by the Volatility index, the VIX - the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Levels below twenty are associated with market complacency and over thirty with increasing market anxiety. Extremes are often excellent contrarian indicators.

Trading should be considered a business, and your rules should reflect good business practices. These would include adequate capitalization. Conservation of capital is your primary job. If you are under-capitalized, you are half way to the losers stall before you even start.

Over-Trading & You

Do not over-trade. This too will drain your energy, your attention to detail, your perception of price changes and the efficiency of your trade execution. Over-trading will inevitably drain your capital from your account to the guy on the other side of your trades, who you can be sure does not have his/her perceptions blunted. If you have this as your guiding star, chances are you will eventually succeed in this business. Preserving capital is closely associated with risk management, and I will address this in the five things you can do when there is evidence of market anxiety.

5 Rules to Trade By

1) Stick to a Trading System that has proved itself over time to be profitable despite losing trades. No system is 100% correct. It only needs to be correct 50% of the time if profits are substantially greater than losses.

2) Never Anticipate Your System. Let your system fully play out so that its various criteria are fulfilled before entering your trade. When in doubt keep out or if already in a trade, get out!

3) Always Use Stops; NEVER trade without them. Make it your practice to enter your stop loss trade before you enter your trade.

4) Never Let a Winning Trade Become a Losing Trade; use a trailing stop once your trade is showing a profit. Once a trade is showing a two-point profit, consider bringing in your stop to the entry price. Should the market unexpectedly reverse, it would be a scratch trade. After that, trail your stop two points for every two points prices move in your favor.

5) Trade with the Trend. Do not attempt to pick tops and bottoms to trade against the trend. Following these principles and spending the time necessary to create the psychological stability necessary to succeed is the most difficult part of this profession. Your goal should be to have the self knowledge and confidence that you unquestionably believe in your trades. Identify with Mark Douglas' dictum, "markets can't do anything to any trader who completely trusts himself to act appropriately, in his best interests, under all market conditions."

Best Trades to you,

_________
Larry Levin
Founder & President - Trading Advantage