How to Spot Winning Trades with Market Club

May 19, 2008: 10:33 AM CST

Market Club, known for their ‘trade triangle technology,’ is becoming more popular and widely known, and I wanted to share a couple of screen shots and a recent message and video by Adam Hewison.

First, I wanted to show the “Welcome Screen” which contains direct links to your portfolio, ’smart scan,’ Trade School (Education), Blog, and Data Central.  The screen also provides news updates and recent internal blog posts for members.

Second, I wanted to share a screenshot of Adam analyzing a stock and the technical signals that are available at a glance for a stock that takes into account short-term and longer term momentum and trend.  It makes scanning extremely easy and allows you to view chart details of a stock quickly to determine if further analysis is needed:

Finally, Adam released a video entitled “How to Spot Winning Trades with Market Club” where he walks you through the process of how to use the service, scan the database of stocks, futures, and FOREX pairs (depending on your preference), and how to evaluate the results of the scan and how the ‘trade triangle technology’ works to help you increase your probabilities of finding a potential winning trade.

From Adam:

“I am often asked how I find winning trades in the market. I can easily answer that question in one word: MarketClub. Just like the thousands of other MarketClub members, I use our “Trade Triangle” technology every day to spot stocks, futures, precious metals and foreign exchange markets that are ready to move.

In this new video, I’m going to show you exactly how to find potential winning trades using our “Trade Triangle” technology.

This short video will get to the point quickly. That’s what I most like about MarketClub, it’s fast, and our “Trade Triangle” technology is definitely a winner with investors. The website shows me quickly and easily what markets are ready to move with only a few clicks of a mouse.

“How to Spot Winning Trades with Market Club”

Take the time, watch the video, and if you have any questions you can call us or find more information and videos at MarketClub.com. Enjoy the above video and give us your feedback when you have a chance.”

I find the service useful for scanning capabilities that generate fresh ideas, and also to confirm the analysis I do.  As a disclosure, I have become a commissioned affiliate of Market Club. The indicators are applicable for monthly, weekly, and daily charts, which allows you to craft the larger picture for the potential movement in a stock or a market.

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Five Steps to Backtesting Successfully

May 18, 2008: 11:41 AM CST

We know that backtesting our ideas and strategies in the markets can lead to improvements in trading results – some would consider the process essential – but where do we start and what progression must we take?

I’ve been testing out different ideas and strategies over the last few weeks and have eliminated some ideas I thought might work (but didn’t) and have opened my awareness to ideas I thought were impractical (but worked).

Here’s a quick list of steps to backtest a strategy or trading idea.

1. Clarify the Concept in your Mind
2. Define Rules for the Concept into a Programming Language
3. Run backtests with different parameters across different markets
4. Visually inspect buy and sell signals for logic and clarity (fact-check)
5. Evaluate the System and Continue to Backtest

1. Clarify the Concept

There are different types of systems, including volatility breakout, trend following, mean reversion and you need to know what you’re testing and why. Are you looking to see what happens when a Stochastic gets ‘oversold’ and you buy? Are you looking to buy when two moving averages cross? If so, what does that say about the larger picture of your strategy? Clarify what you want to examine in your mind before you examine it so that it can direct your thinking.

2. Formally Set Rules (program them)

At this stage, you may need assistance, but most software applications already have ‘canned’ strategies or indicators you can use. This step can also be as easy as “insert strategy” when it’s already pre-defined or downloaded from a website. Otherwise, you need to familiarize yourself with the respective language and formalize entry and exit signals.

3. Test Your Strategy Across different Markets

Also, test it across different time intervals and data. For intraday data, it’s best to test 2 years or more; for daily data, expect to test at least 5 or more years, and for weekly data, test over 10 years or more. Also, try to incorporate some sort of defined bull market, bear market, or sideways (consolidation market). Note and compare results in each condition.

4. Inspect the Buy and Sell Signals

Sometimes, a system may look great on ‘paper’ but when you look at the buy and sell signals, there’s something odd that leaps off the page at you. For example, what if your system got you short a few days before the 1987 crash? One signal could show a massive profit which was due to chance which skews that data. Also, make sure your signals are being executed where you expect. If you want to test out a 20 period Bollinger Band, make sure you use that indicator on the chart and see where signals were executed. I had trouble with a Point and Figure strategy I tested and noticed the signals were being executed at unexpected places.

5. Evaluate and Continue

You define what’s most important to you – be it % Win Rate (which is not as important); $ Net Profit; Maximum Drawdown; Annualized % Return; Number of Trades, etc. Only you can define what’s important. Net Profit may not be the best single statistic, even though it may seem logical to maximize this. Look deeper in your data and continue testing until you have a clearer understanding of how your system works and whether the program is capturing what you expect to see.

Don’t expect one test to end all for you. Backtesting is a continual process in which you must guard against over-optimization and strive for robustness at the expense of grandiose profits. I’ll keep sharing some of my experiences with you as I continue to backtest different ideas and strategies.

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A Look Under the Market Hood

May 17, 2008: 10:17 AM CST

The market has been strong since its March 2008 lows, but let’s take a peek under the hood at the Market’s Internals to see if there’s underlying strength or weakness.

First, the the recent NYSE Advance/Decline Line:

The important fact to note about this chart is that the line made a new high for 2008 and rose steadily in line with the market from the March lows.  This could be a sign of strength in the market

Now the weekly AD Line:

The Weekly AD Line broke out of a downward trend line and again made new highs for 2008.

Notice how the AD Line led the market top, in that the high on this chart was formed in June 2007 yet the Market peaked near October, when the AD Line was clearly beneath that earlier peak.  Now we are seeing a break of the down trend (lower lows and lower highs) which could be an early sign of strength.

StockCharts says the Advance/Decline Line is “One of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal.”

In the weekly “New High – New Low” Index ($NYHL), we see only a minimal recovery, as few stocks have been able to surmount the losses they took earlier this year.  While the line has turned positive, it has done so only slightly.  Many stocks including the US Market Indexes fell over 20% from the October peak and it will take strong strength and sustained buying to stage a broad-based recovery to advance this line significantly.

Notice also that this indicator peaked in July 2007 and by the time the actual market peaked in October, the indicator clearly was showing weakness at that time with fewer stocks making new highs.

Looking under the hood, we see some strength, but keep in mind that the indexes appear to be at critical resistance levels via their ‘line in the sand’ average (200 day moving average).  I would like to see the indexes clearly break that level before getting super bullish, but if I had to make a bet, I would say the price would experience a short-term reversal at these levels and test some lower prices – that’s a common expectation.

Should price defy expectations, it could knock a lot of traders off balance and higher prices could result as the market defied the odds yet again and caused more and more shorts to cover their positions.

Check out Dr. Steenbarger’s Wednesday post entitled “Gauging Market Strength after a Move to New Highs” for further information on recent market internals.

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Indexes Confused – Trapped

May 16, 2008: 8:25 PM CST

Today marked a day of relative indecision for the US Stock Market.  The Dow & S&P are trapped just beneath their 200 day moving average, and formed a strange doji pattern at this level, while the VIX reached new lows for the year.

Let’s look at these developments:

S&P 500:

The NASDAQ actually closed higher than its 200 day average, while these two indexes found resistance there.  Dojis (where the close and the open are almost identical) are signals of ‘indecision’ and can precede short-term reversals in price.

The only issue is that there is seemingly strong support beneath price via the rising 20 and 50 day moving averages on both indexes.  Volatility has been contracting and price swings have narrowed.

Also, one could say ‘fear’ is leaving the market due to the VIX (Volatility Index) making new lows for 2008:

One could imagine the complacency at these levels as hedge positions are unwound.  Also, the market has risen quite steadily since early March, and traders may be lulled into a potentially false sense of security.  Let’s see if the bears can have their say, since the bulls (buyers) have been rather victorious for the last few weeks.

As always, check out the Market Club for additional resources and ideas.

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New Apple Store Unveiled

May 16, 2008: 10:17 AM CST

Apple’s new store in Boston, MA was opened to the public Thursday evening and I must say I was amazed at the beauty and aesthetic appeal of the storefront.  I wanted to share a couple of pictures:

Apple Boston Store

(Courtesy Apple Insider)

(Courtesy Apple.com)

They’re building a new Apple store in my hometown of Huntsville, AL which should be ready by the end of Summer – I must say I can’t wait.

In the Boston store, the first floor is dedicated to Mac computers; the second floor is dedicated to iPods and iPhones; and the third floor is used for service and workshops.  An impressive glass spiral staircase connects the three floors.

With such beautiful and appealing stores as these, is it any wonder their stock has been on such an impressive run lately?

Price has almost traveled $100 from the February lows.  The actual appreciation is closer to $75, but price is still on a strong and pervasive uptrend.

Currently, price seems to be pausing and slowing its rapid ascent, as the acceleration of prices slows gently.  Investors have described AAPL as “a new breed of stock” which may be the case, but remember that unexpected events can happen so it’s best not to place all your investment eggs in one basket, no matter how wonderful the company or stock seems.

Nevertheless, Apple has continued to reward its investors and customers with great elegance.

(Thanks to Jarred M. who showed me the pictures for the new store)

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