The Trader's Mind

By: Stock Barometer | Sat, Apr 21, 2007
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Bi-Weekly Stock Barometer No. 156
4/21/2007 5:21:07 PM

Overcoming your weakness is the key to improving your trading. And many of those weaknesses exist in the trader's mind.

Welcome to the biweekly stock barometer. This article comes out every 2 weeks and gives our big picture view of the market. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so too can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

Each weekend, I try to focus in on one topic that I believe can help improve your trading or awareness. We all make mistakes and we all continuously need to learn and I've never met a successful trader who thought they knew it all.

In fact, it is just when you think you know it all, that you'll suffer your biggest losses. That's over confidence.

Is that your weakness? Do you find yourself taking bigger risks after having a successful run, only to see those hard earned gains disappear rather quickly?

Or do you just have bad habits, like changing your trading plan while you are in a trade? Do you widen your stop if the trade doesn't go your way? That is probably the worst mistake you can make. Actually, trading without some sort of stop parameter is the worst mistake you can make because if you're wrong, it creates a financial deficit that you will not be able to recover from.

You can also give up some good gains if you try and extend normal gains for above normal gains. You could end up losing all your profits trying for a few extra dollars.

There are so many rules to trading that it is sometimes difficult to figure out what you should and shouldn't know and do. But instead of killing yourself trying to learn every new approach, just focus on your own trading and your own state of mind. There is a reason why some traders are successful and some are not. I'm not going to pretend like I know the answer for each individual, but I can give you advice on how to fix your woes.

You've all heard the saying that a chain is only as strong as its weakest link. So let's apply that to your trading. You may have only one thing wrong with your trading that affects every other aspect of your trading. For example, poor entry points can result in your stops having to be too tight and thus getting stopped out all the time.

If you can continuously focus on and fix the weakest link in your trading, then you can greatly improve your performance or at least figure out if there's another weakest link in your trading.

To me, a trade has 4 simple components; Stock selection, entry price, stop placement and exit price. Each component should be given careful scrutiny. Asking a trader friend or getting some sort of trading coach can help you figure this out. It is easy for an outsider to look at and evaluate your trades because they do not have the bias that you had going into the trade.

So what is your weakest link? Figuring it out just may be the solution to your trading woes.

Now for the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment; you can gain reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VXO CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday will be day 11 in our up cycle.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3, 2/17, 3/10, 3/24, 4/21, 5/6. We publish these dates up to 2 months in advance.

This weekend holds our current key reversal date. We've been seeing a lot of bullishness in the Qs lately, so we'll see what the market holds in store for us Monday and Tuesday. With May 6th coming quickly, and a gap up reversal in the Qs, the likelihood of a move lower into 5/6 increases.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28.2005 Potential reversal dates based on 'other' cycle work were 12/27/04, 1/25/05, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows). Note we recently changed bottom and top to read buy and sell.

 

4/05

BUY (7 days)

 

3/27

SELL (13 Days)

 

3/08

BUY (34 Days)

 

1/18

1/18 SELL (4 Days)

 

1/11

BUY (17 Days)

 

12/22

SELL (6 Days)

 

12/14

BUY (0 days)

 

11/24

SELL (0 days)

 

11/14

EXIT/CLOSE/CASH (9 days)

 

11/01

SELL (18 days)

 

10/26

BUY (18 days)

 

10/2

SELL (4 days)

 

9/26

BUY (14 days)

 

9/6

SELL (15 days)

 

8/15

BUY (4 days)

 

8/9

SELL (12 days)

 

7/24

BUY (10 days)

 

7/10

SELL (29 days)

 

5/26

BUY (33 days)

 

4/10

SELL (8 days)

 

3/29

BUY (6 days)

 

3/21

SELL (5 days)

 

3/14

BUY (10 days)

 

2/28

SELL (8 days)

 

2/15

BUY (23 days)

 

1/12

SELL (6 days)

 

1/04

BUY (31 days)

 

11/29

SELL (28 days)

 

(historical reversal dates and performance figures are published at the bottom of the home page and updated annually)

The following work is based on my price based spread/momentum indicators for the USD$, XAU, GLD and TLT. They are tuned to deliver signals in line with the Stock Barometer. Combined with up/down indicators and you have a powerful tool for pinpointing market reversals.

Gold (GLD:AMEX & INDEX:XAU.X)

I monitor Gold in the form of GLD and the XAU as well as the US Dollar Index as a general guide to the overall health of the US Economy and the markets, as well as to assist us in the entry of positions in our Gold Stock Service.

Bonds (Amex:TLT)

I include bonds in our studies and use Lehman's 20 year ETF, as the direction of bonds can have an inverse impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

Summary & Outlook

We remain in Buy Mode as the Qs continue to push and push at the door of the February highs. We actually saw action on Friday that broke the previous high, but the bulls weren't able to sustain their momentum so the Qs settled back in slightly below the highs.

However, given the high level of complacency as evidenced by the put/call ratio, we are likely seeing a top of hope. With everyone bullish, everyone's pretty much bought into the advance. When an advance runs out of liquidity, it's doomed to fail. And that's what we'll be looking for early next week.

Again, if you're new to the biweekly stock barometer, welcome. This article comes out every 2 weeks and gives a big picture view of the market and our recent activities. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so to can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

Have a great rest of the weekend.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,

 


 

Stock Barometer

Author: Stock Barometer

www.stockbarometer.com

Stock Barometer is completely independent. We have never and will not ever accept compensation from any company whose stock we recommend.

Our goal is to make you money. We offer you the tools and information to do so and leave it to you, the individual investor, to apply them in the best way possible.

Important Disclosure: Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Investment Research Group and all individuals affiliated with Investment Research Group assume no responsibilities for your trading and investment results.

Investment Research Group (IRG), as a publisher of a financial newsletter of general and regular circulation, cannot tender individual investment advice. Only a registered broker or investment adviser may advise you individually on the suitability and performance of your portfolio or specific investments.

In making any investment decision, you will rely solely on your own review and examination of the fact and records relating to such investments. Past performance of our recommendations is not an indication of future performance. The publisher shall have no liability of whatever nature in respect of any claims, damages, loss, or expense arising out of or in connection with the reliance by you on the contents of our Web site, any promotion, published material, alert, or update.

For a complete understanding of the risks associated with trading, see our Risk Disclosure.

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