My process is as follows:
Breadth of my trading universe. How many stocks are in my trading universe and is it contracting or expanding?
How are stocks behaving over my time frame? How many meet my average gain over this time frame?
How are my signals behaving over my time frame?
My trading universe is dynamic and based upon a simple calculation of momentum over a 3 and 6 month time frame. Being dynamic this will contract or expand depending upon the underlying market structure. There are currently 5700 stocks and ADRs in Telechart and of those only 357 meet my 3 month requirements and 161 my 6 month requirements. This is clearly a period of contraction and indicates that the market I trade on my time frame is not conducive. What would indicate to me that there is an improvement on my time frame would be seeing this universe expand to 10-20% or more.
 |
| Universe |
How many new highs are there over a 3 and 6 month period? Currently they are inverted. 1 month highs have moved above 1 month lows which is positive for my holding period of 5 to 10 days, however stocks that meet my momentum requirements are currently inverted with new lows eclipsing new highs.
 |
| New Highs-Lows |
In addition I have a scan based upon weekly price action. One of the benefits of dynamic scans that have consistent properties is they expand or contract based upon the underlying market structure. This particular scan is based upon a decrease in price volatility. For this week there are only 346 of 5700 stocks that meet the requirements which is on the lower side. Clearly there has been an increase in volatility which is reflected in the return numbers of this scan. Periods where I have traded better have lower volatility, so as volatility decreases this scan will reflect that and indicate the structure of the market is realigning to my strengths.
 |
| Weekly Watchlist |
 |
| Weekly Watchlist |
Moving from trading universe to trading signals, I asses how many stocks that met my entry trigger have had a follow through on day two and are higher by my time stop —day 5. As the numbers currently show, by day 5 only 48 of the stocks that flashed a signal ended higher than signal day. This indicates that even with a decent bounce in the general market as represented by the major indices, price from my signals on my time horizon is not well reflected.
 |
| Price/Time Horizon |
My weekly signal gives a wealth of information. From this universe I assess whether or not there are there stocks that meet my technical requirements to trade. How many there are and how they behave over my time horizon gives me information about current structure. Are they triggering? Are they reaching my exit signals or stopping out due to a loss or time stop? How are they behaving over the entire ten days? A time comparison of these metrics is a useful template for when the market is realigning or diverging.
 |
| Period of Alignment |
 |
| Period of Divergence |
During times when the underlying market structure is congruent there will be a number of candidates, they will trigger, and expectations will generally be met over time as targets are hit. When there is divergence the candidates decline and fail to trigger, or trigger and targets aren't hit but stops are.
Another piece of information from my trading results is what is my typical gain and how many stocks have met that over my holding period. If on average my exit is in the range of a 12% gain and my average dollar is $2, then knowing how many stocks are up 12% or $2 over my time frame is useful information that marries my expectation with what the market is offering. Conversely, knowing how many stocks retreat the value of expectation highlights periods where I may be out of alignment with market structure.
 |
| Leadership |
Through using one’s trading stats along with periods of peak profits as a template, the current market backdrop can be more clearly assessed. Risk reduces when the market structure aligns with one's trading metrics. Market analysis through the lens of one's metrics gives quantifiable information to filter the current structure and behavior that can be repeated. This is an inherent part of risk management, trading aggressively during conducive periods while tampering down during divergences, and a repeatable process helps ensure consistency.
Additionally, filtering the market through metrics assist in timing during corrective periods. Instead of falling into the trap of guessing a top, allow the contraction of one's trading universe and a divergence of expectations to be the awareness that structure may be changing. Instead of falling into the trap of picking the bottom, allow metrics to be the guide when stocks realign with expectations, one's universe increases, and behavior over one's time horizon improves.
No comments:
Post a Comment