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About a week ago, I showed a chart of AGP that was a potential swing setup- it was oversold and throwing off bottoming hammers. Yesterday we got the first “higher high” since that post, and it turned into a nice short-term trade entry:

With the bottom of Friday’s hammer as a stop, that’s about a 3R (300% of initial risk) gain in 2 days. In other words a thousand shares at $24,600 would be up about $1800, or over 7% total, in those 2 days.

A more aggressive way to play these is to set the entry bar’s bottom as the initial stop, then size your position accordingly. That would result in an entry of 24.60 with an initial stop of 24.30, or an “R” of 30 cents. Sizing using that method would have you up over 6R in the ensuing 2 days.

Do We Have a 2b Top On QQQQ?

Vic Sperandeo coined the term “2b Top” to describe a classic double-top, but where the second high momentarily spikes above the first one. Check out the Qs:

An aggressive short can be taken upon the failure back below the first high, whereas a more conservative trade would be to enter at the break of the near-term low between the two highs.

This method also allows for an initial stop at the second high. Personally I’d be inclined to set my stop a little below the second high, because if this pattern plays out, the second high should never be revisited during the trade.

Only made one trade today, then had to go to ICK! the full-time job and work until 10pm. Have to be back first thing in the morning, so this is going to be short and sweet.

In the one day a week I get to daytrade, I’ve evolved something of a system. StrategyDesk, with all its shortcomings, has made quite a difference in that system. This morning, I ran my old faithful Prophet.net scan for up-gappers with good volume. As usual, it returned about 15-20 stocks (actually, a little lower than normal). Since I’m using the free version, I didn’t get my list until around 0950 EST, which is fine as I don’t normally trade before then anyway.

Next, I made a custom symbol list from those results and loaded it in a realtime screener in StrategyDesk. It was very similar to the one I described a few posts back, and is solely designed to make my job easier. This one looks for a couple of simple things that I would previously have had to manually and constantly scan for (very labor-intensive):

• A series of lower lows where the last one closes within 1% of the 5ema

• A current bar that is threatening to break the previous bar’s high (I just have it look for “Last Price >50% of the prior bars range”)

The screener only kicked out a few stocks, exactly as it should have on a day like today. The list would only be from 0-4 stocks long at any given time… most of the time it was empty. I drank coffee, checked the Market Overview, read/wrote some email, played a little guitar.. then when a symbol would pop up, I’d look at the charts on multiple timeframes (both StrategyDesk and Quotetracker), and within about 10 seconds I’d be back to drinking and playing.

Finally it kicked out COO (The Cooper Companies) on the 1100 EST bar, and it was a beauty:

I simply entered when the 1100 bar broke the 1030 bar’s high of 46.60, set the low of the entry bar (46.30) as my initial stop, and let ‘er go. She went up nicely. I had to sell on the 1130 bar, because I had to go to (choke, puke) work and couldn’t practice my stop-trailing. However, I made a nice little gain in about 30-40 minutes, and as it turns out, I didn’t miss out on much until that big run at the close.

Ah, low-stress trading. I could get used to this.

StrategyDesk 1.1: Minor Improvements, Still No Documentation

As John noted in the comments to a previous post, AMTD released the 1.1 version of StrategyDesk over the weekend. The changes are very small, in most cases hardly noticeable, but they are definitely improvements, so we can at least “keep hope alive.”

Let me just say right here- if you develop software of any kind (or hardware, or pretzels for that matter), when you release a new, improved version, for the sake of Judas Priest TELL US WHAT THE FREAKING IMPROVEMENTS ARE!!!. Do you StrategyDesk developers (I’m assuming there’s more than one of you) have any idea how aggravating it is to have to SEARCH for the changes like we’re working that puzzler in the funny papers where the dog’s tail is longer in one picture?? Is it too much to ask for a little info-teaser, like “Hey, try the new SD 1.1; we’ve addressed many issues including 1)this and 2)this and 3)that.”

The changes I’ve noticed include 1) the Screener and Strategy Setup windows (basically the same) are “sectioned” more clearly, making it a little more obvious what’s optional and what’s not 2) the context menus have improved in many places, notably with the options to import/export watchlists from within the Screener, and to Export Data from both the Screener and Backtester. This one seems minor at first, but it makes a world of difference when you start with a long list, say the S&P, and run it through a preliminary “filter screen” to pare it down. Rather than having to TYPE the resulting symbols into a new symbol list, you can now quickly EXPORT them into the new, “lean and mean” watchlist, on which you then apply your more complex criteria.

One other notable item - TDAmeritrade has now added a special email and phone number so we can contact the “StrategyDesk Team” directly. I’m still holding back, but I’m wanting to call and yell, “How can I RTFM if you won’t write me a decent FM?”

Using StrategyDesk to Test the TradingMarkets R2 Method

This is where a tool like StrategyDesk comes into its own. As you may know, TradingMarkets.com sells a tool called the R3/R4 method which claims average annual returns of nearly 260%. Sounds fantastic. Not fantastic as in “wow! great!” but fantastic as in “ludicrous and unrealistic”. Well, I’m here to report that after testing their publicly-published R2 system, I’m inclined to believe them. Not that you’ll make 260% per year (past performance yada yada yada), but that their system, over the specified time period, did in fact achieve that return. What will it return now? I dunno. It costs $8000, which means I can’t buy it unless I feel pretty certain it can make me $8001 over what I can do on my own. Hey, maybe it can. If I ever find out, I’ll let you know.

The R2 system is extremely simple, which is also to say, good. The name comes from the fact that their research on Welles Wilder’s RSI apparently showed that the “normal” 14-bar period didn’t return what they considered significant results, but that a very short 2-bar RSI actually did. The trading method they set up was very straightforward. It’s based on the S&P 500 index (or the related ETF, the SPYders), and simply looks for three consecutive lower-RSI2 days, with the first one being below 65 and as long as the current price is above the 200-day simple moving average. That’s the “buy” signal. The “sell” signal is even simpler: it’s the close of the day where the RSI2 subsequently hits 75. And with a 2-bar RSI, that’s usually within a couple of days.

Setting it up in StrategyDesk: Easy-greasy. Here’s the buy formula:

And here’s that big bad sell formula:

At first I ran the backtest, then ran it via a chart (StrategyDesk has a very neat function where it tags all the “buys” and “sells” the strategy generates on a chart, so you can observe visually whether the signals seem valid… think chart vs. spreadsheet). The results were very disappointing- at first. There seem to be a million buy and sell signals, and none of them catches the big moves. Click the chart and have a look for yourself:

However, I then noticed that the strategy seemed to be doing exactly what they claimed: generating a ton of very- short- term trades where the vast majority of the “sells” were higher than their corresponding “buys”. (I’ve noted, as I’m sure you have, that the last signal generated was a “BUY” and it was prior to last Tuesday. Once it pops up and the RSI2 hits 75, this last trade may knock the stats down for many months back — an even better argument for the 1.00 initial stop I suggest below).

I’m a “need-to-know” kinda guy, so I naturally exported the results into Excel to do some more calcs on them.

One caveat- StrategyDesk data only go back to January of 2000. Why? Hell, I don’t know. I’ve learned by now not to ask that question regarding this software. So the results are for 1/1/00 thru 12/31/06, and you’ll note the first trade triggered was in 2003 if you download the spreadsheet. That’s because May of ‘03 was the first time the price was above the 200ma and we had the three declining-RSI2 days as required by the formula.

The results from Excel are pretty impressive, and do bear out TradingMarkets’ claim about the R2 strategy. Here they are:

• Total Trades Triggered: 35

• Winners: 28 (80%)

• Losers: 7 (20%)

• Average gain per winner: 1.15/share (+/- 0.53)

• Average loss per loser: 0.64/share (+/- 0.35)

• Expectancy: 0.80 (this is an extremely good expectancy, considering that a stop could be placed 1.00 below the entry without decreasing the system’s performance… for an excellent discussion of expectancy, see this great article by TraderMike)

If you want to look at the (short, boring) spreadsheet of these results, grab a copy here.

The Upshot: Would I recommend the R2 method for trading? Nope, although it apparently isn’t too shabby even in this basic form. I would definitely recommend this as an excellent starting point for experimentation. Add rules to go short. Vary the period. See what works with different stocks. I suspect this is what the TradingMarkets folks did with their “R3/R4″ system, and after this little experiment, I think I see why you’ve gotta pay to see that one!

In my last post, I discussed how I started Tuesday long QQQQ due to an OGRe (Opening Gap Reversal), then had to flip back to short as that reversal failed. A failure of a failure, if you will.

Today, we got another OGRe, but this one played by the book. Here’s the setup- the Qs (and everything else) had gapped waaay down on the open, freaking out the water cooler bunch. That in itself is often enough of a sign to position opposite the open, but let’s be prudent and watch for the big gap down to fail. Sure enough, on the 0955 EST bar, the Q’s reverse (break upward) into the gap, and we have our OGRe trade:

This one was a straightforward gap fade trade, and it never looked back…

Nice when Mr. Market gives us an easy one once in a while, eh?

[From 2/27/07]

Got a few things to talk about today. First, the morning action and how easy it is sometimes for good traders to get whipsawed out before a big move… and how we must Endeavor to Persevere, keep our chin up, and follow our plan.

(Or not- sometimes it is best to know when to say when, as I think W.C. Fields said– “If you fail, try again. Then quit- no use being a damned fool about it.”)

My first position this morning was long the Qs. That’s right, LONG.

My StrategyDesk screener was sitting there with Dell at the top of my “prospects” list early-on (after about 0945, the list had anywhere from 5 to about 20 stocks setting up at any one moment; I order the list by volume when it gets long, and work on the ones at the top). Dell was set up, but just wouldn’t break to the downside.

I generally keep a chart of the Qs open for reference, and noticed that as Dell was failing to break to the downside, the Qs had actually set up and broke out– for a long entry! My old friend the OGRe (Opening Gap Reversal):

At this point, I was comfortable that the Qs were heading to close the gap, and I might as well change my scanners over to start watching for other long setups. However, I got straightened out pretty quickly as things rolled over and headed south violently on the 1055 EST bar:

Typically, after gearing up for shorts, then going long on a reversal, when that long is then stopped out, it’s easy to say “Forget It!” out of frustration. However, it’s often on that stop of an entry taken on a reversal that the big moves take place with very few people on board, most on the sidelines from having been stopped out. And as we know, the market loves to make its big moves with as few people on board as possible.

I was stopped out of my long, and once again went back to watching for shorts, especially given the suddenness of the move at 1055. It was at this point that Dell broke short as well:

I did manage to get short here. I know there were many stocks which made bigger moves, and I did cover too soon (trailing stop too tight and thinking “it’s almost out of steam”… old and still-too-frequent errors). However, I read the play correctly, I positioned correctly, and I caught a chunk of the Big Move. No regrets.

On the 200-point gap- I’m still waiting to hear an even close- to- reasonable explanation from the talking heads. After all the bragging by the exchanges after the turn of the century how they had massively upgraded their systems and no volume known to man could bog them down… “the computer that calculates the average got logjammed” … um, nope, not buyin’ it. I’d find it much more believable to read that the multi- hundred- billion- dollar hedge funds (that cross most of the market’s volume via super-fast, super-powerful computer-generated trades) had unleashed a massive “sell program” which, in a matter of seconds, completely constipated the exchange. Supposedly no one can “lean on the market” with quite the weight of a Jesse Livermore in his day, but these guys can certainly walk bids and asks around a “bit”. Not manipulating, mind you. That would be wrong. Just the, ahem, unintended effects of lots of big trades.

And then there’s the arbitrage question: if the stocks which constitute the Dow were falling, and the “computer that calculates the average was logjammed” and got behind, how many billions of dollars were made in a matter of five minutes by computer programs buying those 30 stocks and simultaneously shorting the Diamonds or the Dow Futures as the spread between the combo of those 30 stocks and the index which is supposed to represent that combo got farther and farther apart, only to snap back together in one near-instantaneous 200-point leap?

On the latest CNBC “competition”- what do you do when you’ve got everything to gain and nothing to lose? You go for broke, of course. That’s why these marketing shams never reveal anything about actual trading.

How to win something like this? It’s not SKILL! Get a bunch of people together. Get a list of very volatile, low-priced stocks. Have each person pile his or her entire “fake money” stash into one or two of those stocks. Chances are very good that someone will “make” a boatload, and hey, there’s no downside. This is putting Fooled By Randomness to work. You could even agree that if someone out of the group wins, you all go on a cruise or something. I’m sure that’s how many, many people are “playing” this thing. It’s just a game, after all. They would never do that crap with REAL money.

This is also why contests like this end up crowning some clown as a “brilliant investor,” when all they’re actually doing is crowning the one who got lucky. In life, sometimes it’s hard to tell the difference. Many of our major institutions are run by lucky idiots. Fooled By Randomness, again. Read it.

Favorite Talking Head Quote of the Day- some “expert” was being asked what he thought about the prospects for China as an overseas investment, what with the falling of their stock market and all.

His response? “Stock prices falling is just an equity market phenomenon. We believe China’s economy will continue to be strong and therefore China itself will continue to be a good place to invest even if their stock market falls.” Or something to that effect. My only thought was, “And how, Mr. Fancy Pants, do you propose that people invest in China, if not via their equity market??”

That’s “all I got” for the moment. I had a long day at work, and I’m hurting, exhausted, and a little hung over from the moving adventure last night.

Cheers, ya’ll.

• Supper Tonight: Wendy's Single Combo plus a Frosty for dessert. Tonight, I deserve it.

One of the greatest things about blogging is how much we learn from each other. I think our trading evolves much faster that way than working in a vacuum. For instance, in the comments of my previous post Gabriel enlightened me to the fact that StrategyDesk (hereafter SD) does indeed have a formula for monthly average volume. So my life suddenly became much easier due to some simple generosity.

Let’s get into the meat of this thing a little. Here’s a better-annotated shot of my intraday SD monitor screen with the three windows I keep open. Click for a larger version:

In particular please notice the “Sym” (symbol) and “Inv” (intervals) buttons on the charts. If the Inv buttons are the same color, every time you click a ticker in your screener list, both charts will switch to the SAME time interval. So, make sure the Sym buttons are the same color (so all windows will change to the same ticker when you click it), but that the Inv buttons are different colors, else you’ll get frustrated pretty quickly as your “minute charts” keep changing to “daily” or vice-versa.

To enter a screening formula, highlight the Screener window, then click “Screener” in the toolbar of the MAIN Window. Yes, poor programming. The screener toolbar should be in the screener window. Instead, the MAIN toolbar changes based on which window you last highlighted. Perhaps in a later version…

Under “Screener” in the toolbar, click Add Screener or Edit Screener. This will bring up the Screener Settings window, which is where we do all the “under-the-hood” work. Here’s a screenshot with an important warning:

As of v1.0, SD doesn’t support different directories (”folders”) for groups of formulas- they’re all under the Formula Library list, which can get unwieldy really quickly as you save all your tweaks. For now, I’d suggest you begin each of your custom formulas with a particular letter or symbol so they’ll all stay grouped together within that long list. For example, I start all of mine with a number sign “#“, so the title looks like “# 15-minute Dummy Spot Test“. That way, when I drop down the Select a Formula list, all of my custom ones are grouped together.

Time for that formula! As I’ve said before, your rules have to be extremely specific to be useful. What we’re going to do here is write a formula which will give us, in real-time:

Pretty specific! But that’s what we need if this is going to be really useful. We’re wanting to use this tool to narrow the field the way we previously had to with our eyes, and free our eyes up to pay more attention to the prime suspects as they appear.

Let’s walk through the construction of this formula:

• First, price and volume. The formula for stocks with a prior closing price above 20 is Bar[Close,D,1]>20. The “D” is for “daily bars” and the “1″ tells SD to look at the bar “1″ day before the current day.

  The formula for volume (thanks, Gabriel!) is (Bar[Volume,M,1]/20)>200000. This takes the previous month’s volume and divides it by 20 (trading days in a month), and we’re wanting stocks for which the result is higher than 200k.

  2/25/07 Warning: I’ve been toying with this formula more tonight, and there’s some problem with this volume statement. The lack of documentation by Ameritrade makes this a trial-and-error arrangement, so I haven’t isolated the problem yet. I will post the update/solution once I work it out or someone emails it to me; until then, consider eliminating this statement from your formula and pre-screening your stock list for volume.

  2/26 - formula has been edited and should work reasonably well; please see next post for more details.

• Next, our gap. The formula for a gap simply divides today’s open by yesterday’s close, and, for a 1% gap, looks for a result greater than 1.01. It goes like this: Bar[Open,D] /Bar[Close,D,1]>=1.01

• Now for our 30-minute bar formulas. The high of the current 30min bar would be written Bar[High,30] and the low of the previous bar would be written Bar[Low,30,1] (remember, the “1″ tells SD that we’re talking about “1″ bar prior).

  For our formula, we want the previous 30min bar (bar “1″) to have a lower HIGH than its previous bar (bar “2″), so we would write the formula as follows: Bar[High,30,1] < Bar[High,30,2].

• The formula for a 5-period exponential moving average of 30min bars based on the closing price of each bar is this: ExpMovingAverage[EMA,Close,5,0,30]. I know having to write “ExpMovingAverage” and then having to write “EMA” is redundant. Poor programming again. They should hire someone who actually uses the program as a consultant. Or maybe my 7th grader- she’d catch that one easily.

  Since we want our previous 30-minute bar to have a low which is within 1% of the 5ema, we’d write that part of the formula like this: Bar[Low,30,1] < (ExpMovingAverage[EMA,Close,5,0,30] * 1.01)

• Finally, now that we have a pullback and a price which has come within spitting distance of the 5ema, we want SD to only notify us once the current price reaches more than halfway up the previous bar.. in other words, when it may be approaching a breakout. No need to waste our cerebral processor cycles otherwise– we’ve got better things to do.

  Our formula to say “Last price higher than 50% in the previous bar’s range” requires us to take the high of the previous bar minus its low, divide by 2 (thereby giving us “half” of the hi-lo range), then adding that number back to the low for our cutoff price.

  The way we write that part of the formula is: Last > Bar[Low,30,1]+((Bar[High,30,1]-Bar[Low,30,1])/2).

Ok, bored yet? Let’s put it all together so we can move along to more entertaining subjects. Here’s the completed formula, with each part (hopefully) explained above:

Well, all the formula yakking is great, but what does this accomplish? For your viewing pleasure, here’s a chart from Wednesday which shows the kind of setup we’re trying to catch with this scan:

Well, that’s that. It’s just a basic start, but maybe it’ll give you some ideas. Feel free to copy the above and edit it as you see fit to make yourself a scanner. I’d also encourage anyone who comes up with a useful scan to share the formula in the comments so we can collectively speed up our learning curve.

Cheers, and best of luck!

I’m going to focus tonight on what I feel is the most important ability of StrategyDesk: its real-time scanning capability.

First, you’ve got to have a very clear idea what you want to do. You never realize how “flexible” all your trading rules are until you try to put them in writing, or even better, program them. You’ll often find that your “rules” have so many “exceptions” that they aren’t really rules at all. More like suggestions, if that, and your constant bending of them causes you great agony in the end.

I’ll write more about this in a separate article, but in scanning for potential daytrades what we’re trying to do is simultaneously narrow the field and improve the quality of candidates with each “rule” or criteria we add. For instance, the first “cut” many daytraders make is with gaps. Not all stocks that make a big run start with a gap, and not all gaps result in big runs (in fact, if you read my ramblings I’m sure you know one of my favorite plays is on an Opening Gap Reversal), but requiring a gap can drastically reduce your workload and improve your odds- you might be looking at a list of 100 stocks of which 20 are likely to be strong winners, as opposed to 5000 stocks of which 50 are. Yes, you cut out some winners, but you improve the quality of the remaining field by an exponential amount.

Ideally, we’d continue to add this requirement and that filter, and end up with a list of 5 stocks with 4 very likely winners. That’s a little pie- in- the- sky (at a certain point additional criteria do more harm than good), but you see what I’m getting at. We can’t mourn for every winner we may have excluded; that’s not what’s important. What we want is a small, strong set of candidates, and then we use our chart-reading, executions, stops and money management to spank those puppies.

Ok, so we’ve fired up StrategyDesk and arranged our layout. I close everything except three windows:

(not clickable, just for show)

• Window 1 is my intraday chart, ranging from 3min to 30min bars. I do not use this chart to make trades! It’s too clunky. I have Medved Quotetracker (another freebie) running on the other monitors for that.

• Window 2 is a daily chart, about 30-40 bars long. I cannot overemphasize the importance of knowing exactly where a stock is on its daily chart when you’re trying to daytrade it. Daily bar support/resistance levels play a large role in intraday thrusts and reversals, and without them you’re driving blind.

• Window 3 is my Screener window, which shows the real-time results of whichever scan I have running at the moment.

Let’s Build That Screener!

For this example, I’m going to use a setup that most of you have seen or traded already: the famous 30-minute pullback to the 5ema. Sounds pretty simple, no? Au Contraire! Read on…

I like stocks over $20, and I like stocks with reliable volume. You may not agree, and you may make millions on lower-priced, thinly-traded stocks. More power to you. But they give me gas. So the first thing I want to do is reduce my universe of candidates to stocks over $20 with a 30-day average daily volume of over 200,000 shares. So far, I have found no way to screen for average volume with StrategyDesk, other than to take today’s volume, today minus one, today minus two, etc for the past month, then add them up and divide by 30. Yeah, you gotta be kiddin’ me.

Also, StrategyDesk won’t scan “the stock market” as it is. You must choose a list of stocks on which the Screener operates. Here is where I saw an opportunity. But more about that in a minute.

SD (I’m tired of typing the name out) comes with only a handful of default symbol lists: The NDX, the S&P 500, the OEX, the S&P Midcap 400, the Dow, and the Nasdaq Financial 100. That’s right- the Nasdaq composite is not included! However, this is relatively straightforward to remedy:

• Go to the Nasdaq Market Site. Locate the option to download the Composite list to a spreadsheet.

• In the spreadsheet, delete all the rows and columns except for the ticker symbols. Now drag over them (guess you could do this without the deleting, but it’s clearer this way) and Copy & Paste them into Notepad.

• Once you have that long list (over 3000 stocks!) running down the left side of your Notepad window, do a Save As- and here’s the tricky part: save the file in your TD AMERITRADE\StrategyDesk\Symbols\Stock Indexes directory, and save it with the extension “.sym“. It’s still just a text file, but this way the Screener will recognize it as a symbol list.

Voila, you now have the Comp at your disposal. Now that we’ve walked through how to do it, you can collect any variety of symbol lists you like, and as for the Comp, you can see I’ve been there and done that, so feel free to grab the .sym file from me.

The opportunity I saw with this crazy symbol-list stuff was that I could include my volume screens via a pre-screened symbol list. I fired up a different program (Advanced Analyzer, yes, another freebie) and set up a screen for all the stocks over $20 and with average volume over 200k. I exported the results of that screen (about 1000 stocks) using the method described above. If you want to grab that one too, here it is. And now, only 85 lines of html later, we’re ready to start writing formulas.

My apologies, but it’s late, I’ve installed a new stereo in my car today, wired HyperLites onto my motorcycle, grilled for the girls, watched a movie with them, and gotta get up at 0530 to go to work. Will do my best to finish this article tomorrow night.

I’m thinking of Tom T. Hall singing an old song that went something like faster horses, older whiskey, younger women and more money…

The fact has not been lost on me that I’ve recently been stopped out of two excellent swing trades by mere pennies, and if I ever want to get on board for a longer move than my typical 2-5 days, I’m gonna have to make some changes. So, one of my resolutions for 2007 is going to be to switch from swing trading off of charts like this:

And relax it a bit to trading off of charts like this:

This will necessitate my waiting patiently for days or weeks after I spot topping or bottoming action and not jumping in on the first break and setting a tight stop, as much as that pains me. I may need some rehab.

The good part of this change is that my swing trading should become positively laid back. I can go about the business of fatherhood, work, etc and not have to worry what the stock is doing at that particular hour, or even on that particular day.

No definitive resolutions on the daytrading yet. But there are gonna be some.

• Accomplished Today: Installed dual 12" subs in the trunk. Finally the bass sounds like it should on Dark Side of the Moon.