I wanted an indicator that provides a view of the strength of the market. In particular I wanted it to capture the spikes that occur prior to trend direction changes.
The basic idea is an RSI accept instead of capturing the relative size of up and down moves it is calculated on how strong the high (push up) and low (push down) are from open.
The other difference is two sets of horizontal lines set at 30, 40, 50, 60 and 70. The inner two at 40 and 60 provide a channel between which the indicator moves when range bound. When the Price is bullish it moves between 50 and 70 and when Bearish 30 and 50.
Overbought and oversold when it hits a line. If the range bound then that means 40 and 60. When trending choose either the 50 and 70 pair or 30 and 50 pair.
I have also added a 4 point EMA as a signal line.
It works pretty well for my purposes. It tracks oversold and overbought signals generated by the stochastic, but has additional information regarding trend strength.
UpTick=High-Open
DownTick=Open-Low
//N a 12 point EMA for data collection.
Av1=ExponentialAverage[N](UpTick)
Av2=ExponentialAverage[N](DownTick)
//M as 9 point EMA for smoothing
Strength=ExponentialAverage[M](100*Av1/(Av1+Av2))
return Strength as “Strength”,30 as “Lower”, 40 as “Lower Channel”,50 as “Mid”,60 as “Upper Channel”,70 as “Upper”
July 16 2010 | Trading and Uncategorized | No Comments »
The Equity Traders Day
Does this sound like you?
Your day starts at around 8:00 am. You are in front of the screen a couple of hours before market open catching up on the overnight moves in the US. You have a read of the Bloomberg news, you check out the DJIA, the London metals exchange, browse through a few of the chat forums just to see whether you have missed something in your view of the world. You have had a look through the list of announcements just to see if there has been a monster gold discovery somewhere that you really need to be on board with.
By market open at 10:00 am you are alert and ready to go. You wait half an hour for the morning chaos to settle and you are away for the day. The next 6 hours will be busy even if you don’t trade. Lots to look at, market scans to make, announcements to read.
The move to Futures and Forex
Ok so you have dabbled and figure you know how to read a chart. You have decided that “Penny Dreadfuls” are just that, unless you are either a geologist or have a really good knowledge of the resource industry. For sure the multibaggers come and go, but you never seem to be on them.
Bored with the little ones, you drop the speculative stocks and have a look at real stocks with real value and a real market. Much more liquidity, but to pull out a living it is going to tie up too much capital. You look at margin loans, discover CFD’s and somewhere along the line you discover Index Futures and Forex.
These seem to fit. You are using someone else’s money. With reasonable money management and stop losses you can control your risk exposure. So you open an account and get ready to trade.
So what happens, you are doing everything right. Up nice and early, you have your head around the market and hours go by and the index or currency does nothing. It wobbles around in a 10 pip range for hours. Lunch time comes and you are bored. By 4:00 you are mentally exhausted and haven’t placed a trade.
Next day same thing. In fact this goes on for weeks. In fact you are finding it hard to be alert even a couple of hours. Staring at the screen day after day with nothing happening is almost torture. How do professionals do it?
To make matters worse, when you look back the market seemed to put in a move overnight. What gives here, this is the Australian Index contract or the Australian dollar. Why did it move when the market was closed? The fates must be conspiring against you. The very moment you take your eyes off the screen the contract makes a 100 pip move.
So whats happening here?
Reality check. Lets have a look at what you are doing. You are a trader. You are the guy who goes down to the fruit market and buys a barrow load of fruit that you hope to sell at a profit later in the day. When you are trading Australian hours the whole world is in bed asleep. You are like the fruit seller trundling his barrow of wares out into the main street at midnight and packing off to bed at sunrise.
Those hours might suit you, but they don’t suit the market place.
The truth of the matter is that SPI200 is dominated by RIO and BHP as well as the banks and they trade in the US. The Big Australian index components are most likely to make a move during US hours and when they do the SPI200 moves.
Remember the SPI is a futures contract it trades where the market thinks the underlying index should be. At market open the SPI has already put in the overnight move suggested by Wall street.
So what to do? Trade overnight? From Australia that is a hard ask. To be alert at US open around midnight Australian time means getting out of bed at around 10:00 pm.
Well there is a better way. Forex, but for that you need to see a later post and you need to know what Pivot Points are.
April 26 2010 | Uncategorized | No Comments »
