Archive for May, 2009

Fade the Losers: It Begins

May 28, 2009

NOTE: I’m in process of finishing some commissioned work, as well as figuring out Ninjascript. This is an article draft I have been working on for a while, but I’m going to publish part of it now. Thanks for bearing with me during this time!

In my years of market watching, I’ve come to believe that markets are more reactive in general, not proactive. It’s not traders that proactively initiate positions that move markets, it’s traders that are reactively exiting positions that move markets. This opens up a whole new way to think about price action.

Let me qualify those statements with my personal definitions of a proactive trader vs. a reactive trader:

Proactive Trader–Has a plan or a strategy that outlines the conditions under which trading may occur; trades will not occur outside of these conditions. Waits for a piece of information, be it a price level, fundamental factor, news item, indicator or sentiment, and makes a valuation judgement based on that info; either the stock is too cheap or too expensive compared to where price should be in the future. Whether the timeframe is 10 seconds or 10 years is irrelevant–the fact is that the setup has occurred and the plan says the time is now. The trader goes to the market and trades, either entering or exiting a position. The key is that the trade is entered or exited according to an active mindset–they wilfully, intentionally CHOSE to act. I believe that proactive traders are profitable, winning traders, on average.

Reactive Trader–Has no set plan. Goes to the market looking to put on a trade, any trade, and right now. Is forced to react to price, usually by emotions and impulses, or sometimes external factors like a margin call. Jumps into a trade due to fear of missing out, usually late in the move after they see “how much money they could have made”. Does not have a pre-determined profit target, and therefore will hang on to a trade out of greed until an adverse price movement forces them out, often at a loss. Reactive traders get lucky sometimes, but they are losing traders on average.

It is true that the proactive trader is reacting to information in a way, but the proactive trader only reacts when market information matches the plans and setups that were previously defined. It is not his reactivity that defines the strategy nor the conditions under which the trade is taken though. I hope this point is clear. So the first step here is to operate from a proactive position and never from a reactive one if you want to succeed. Thankfully, human nature is what it is, and there will always be plenty of reactionary traders to transfer money into your accounts.

The markets are made up of traders. You are not trading businesses or commodities or securities as much as you are trading other traders, especially over shorter timeframes like daytrading. I believe that the majority of traders are net losers on average. Because of this, there is substantial edge in taking the other side of a loser’s trade! The money flows from weak hands to strong hands, and from reacting traders to proactive traders. I should know; I’ve been the other side plenty of times. Now I want to study the losers so I can fade them. This includes studying my past mistakes as well as observing price action in general.

So what do losers do? Losers will exit into adverse extremes, puking out their position at a point of max pain. Stops are often placed just beyond the most recent price extremes and round numbers, and savvy traders know this and position for it. Losers will enter late, after they see a big move. Losers like to enter on pauses, where the trade “lets them in”. Low volume, low speed (hint: it’s low and slow for a reason). Losers are constantly out of phase with the market waves. Losers try to pick absolute tops and bottoms, hoping to catch ALL of a move. Losers ignore market context, be it volatility, volume, support / resistance or whatever else. To a loser, “Today is a good day to trade”, all day, every day. There are a lot more, but you can see where this is going. All of these kinds of things are responsible for moving market prices! I submit that it’s the losers that actually move the market, not the winners. The winners actually dampen market movements! This is especially true intraday. An example or two should help:

Suppose a stock is trading near the highs of the day. Any trader who is short is losing. Any new short positions taken here will also become losers should prices move to a new high. Stops are placed on the other side of the day’s high by losers attempting to pick the top. There is a huge invisible sign there flashing “I am prepared to buy at these prices! Come and sell to me high!” Who is going to lift the offer here and pay up for the stock? Here’s a few people:

1. A trader / market maker with inventory purchased at a lower price who sees an opportunity to sell at higher prices. He may buy a small chunk at the market to then spin around and offer in size to the losing, stopped out traders. His catalyst buy may nudge the markets over the edge, but it’s the stops and panic of the losing shorts that applies buying pressure to the upmove. The winning trader is actually a net seller here, and is applying selling pressure that is opposed to the upmove!

2. The second person who will pay up is the reactive new long, mad that he missed the move up so far, and ready to chase a new high. He enters at a price which is usually adverse to his hoped-for trade direction, and if he is a weak hand, is about to become a loser after the shorts get done losing. On a sharp pullback, they will dump their long position, basically bailing at adverse prices because they are forced to by their stop or by their pain from the loss.

3. Longs from a higher order timeframe that are buying a breakout. A position trader from the daily or weekly timeframe is not a weak hand, and therefore will not typically be shaken out. But they also do not buy in size at a sinlge spot, so they won’t push prices much intraday.

4. Losing shorts that want to get out NOW, either by stop or by puking out their position.

You can see from these examples that losers react to price, usually adverse price movements, while winners are proactively looking for their price.

To Be Continued…

CCI Divergence Indicator for Think or Swim

May 21, 2009

This indicator has been updated!  See the new post here.

I got commissioned to write more divergence indicators, and the customer was generous enough to allow me to share it with the rest of the donors. I say donors because it builds on my donor-only fully variable swing points indicator, so I’m not releasing it freely as a sponsored indicator. If you are a past (or future 🙂 ) donor, you can get it from the “Released Thinkscript Studies” page, called “”. I like this “donor share” idea and will keep doing it as those who commission custom work are willing to share. If you don’t care to donate or you just want to do-it-yourself, it’s not complicated to write your own if you already have a swing points logic built, like I outlined previously. I’ll walk through the additional steps below.

Following on the heels of my Swing Points and MACD Divergence indicators, here’s two more indicators that look for divergences between the CCI and price, and divergences between Price and CCI. There’s one upper study and one lower study.

Every time we get a lower swing low in price, the CCI is checked to see if it also prints a lower value. Similar for highs; higher high without higher CCI is a divergence. Here is a picture of the indicator at work. On the upper frame, the ProCCIDivergence is plotted as a red dot for bearish divergence, and a green dot for bullish divergence. On the lower frame, the opposite divergence is checked. If the CCI has a a lower swing low, the price lows are checked to see if they also print a lower value. Similar for highs; higher CCI swing high without higher price high is a divergence. The colors on the lower plot look backwards, but remember–the lower indicator is plotting a bullish divergence for the value of CCI, NOT the value of price. And as CCI rises, price generally declines.


To make the top study, just follow the MACD divergence tutorial, but in the recursive divergence functions, change the references from MACD to CCI in this way:

input l=14; #This is the CCI input length
rec blCCI = if swinglow then reference CCI(length=l).CCI else blCCI[1];
rec brCCI = if swinghigh then reference CCI(length=l).CCI else brCCI[1];

And there you go. If you also want the lower study, you change it up a bit. The swing point checks are reversed in that you check CCI values for swing highs and lows, and then you define your bullish and bearish divergence recursive functions above to get the value of price if you are at a CCI swing high or CCI swing low, like this:

input l=14; #This is the CCI input length
def CCI=reference CCI(length=l).CCI;
Def swinghigh = if CCI > CCI[1] and CCI > CCI[2] and CCI > CCI[-1] and CCI > CCI[-2] then 1 else 0;
Def swinglow = if CCI < CCI[1] and CCI < CCI[2] and CCI < CCI[-1] and CCI < CCI[-2] then 1 else 0;
rec blPRICE = if swinglow then low else blPRICE[1];
rec brPRICE = if swinghigh then high else brPRICE[1];

Then plot what you want, and go from there! Personally, I think the lower study is less useful than the upper, but you may feel differently.

That’s it! If you are making your own, leave a comment if you have any questions. If you just want to grab mine, donate away:

Some Work In Progress: Pivot Points Using “VWAP” Instead Of “Close”

May 20, 2009

One thing I have sporadically messed around with is this: What if you made a new Pivot Points calculation, but instead of using yesterday’s High, Low and Close, you used yesterday’s High, Low, and End-of-Day VWAP? Wouldn’t that give you a more “value” based pivot point calculation?

I leave this as an exercise for the reader, as I kind of lost interest with my ADD self and didn’t want to write an article. But since it might be interesting to someone, here it is as a “beta”.

My initial looks said it made the pivot levels wider in general, which I’m not sure is what we would want. In any event, the code is freely available in my “Work in Progress” page under the name “NewPivotVWAPSTUDY.ts”. Mess around with it and feel free to comment on any ideas or observations you may have!

Draft Trade Plan

May 19, 2009

This is a draft of my trading plan. It’s not complete and is more of an outline than a finished document, but it gives you an idea of my thinking to this point. One trade setup is detailed–buying/selling the pivot point. If price does not come within my parameters, I’ll sit on my hands at this time. I would add other setups to the mix after being able to show a profit with this one. This trading strategy is designed to be used during range-bound market days, and the parameters below define the structure that I will operate in. Future setups will be intended to address other market environments.

NOTE: Trade plan may only be changed outside of market hours! Trade plan will be followed when markets are open, or no trade.

Vital Plan Elements

1. What Trading Vehicles:

2. Position Timeframes:
-Intraday only. No overnight holds.
-Chart period: trades will be taken on a 5 min chart for ES and NQ.

3. Long Setup Description and Parameters:
-Above daily pivot level=long only
-No countertrend trades
-Entry setup: Long at pivot point plus 1 tick if volatility based trailing stop is long-biased and lies below the pivot.

4. Short Setup Description and Parameters
-Below daily pivot level=short only
-No countertrend trades
-Entry setup: Short at pivot point minus 1 tick if volatility based trailing stop is short-biased and lies above the pivot.

5. Stop Loss Parameters
-Use either fixed stop of 5 NQ or 2 ES points
-Or use the volatility based trailing stop
-Whichever is closer to market price.

6. Profit Target/Partial Exit Parameters
-Partial exit at TICK fade extreme (full exit if only 1 contract in position). Tick fade extreme is a bar where the TICK got beyond a threshold value of +/- 1000.
-Target is next pivot level (eg R1, S1)

7. Position Sizing Parameters–initial size, increase/decrease base size, add size parameters
-Base size: 1 contract
-Base size increase/decrease: when account crosses contract margin levels
-Add trade size: None currently. No adding to positions.

8. Overall Risk Parameters
-Two losses in a row = quit for day
-Down 2R for the day = quit for day

9. Valid trade entry days/times
-No entries between 12:00-1:00 ET (11:00-12:00 CT)
-No entries after 3:30 ET (2:30 CT)
-Flat before Fed/other big news announcements

There it is, a line in the sand. It’s imperfect and not optimal, but it’s something, which is better than the trading plan vapor-ware I have had up to now. Feel free to make suggestions or criticize it. If I can’t think of a good reason for why I wrote something, I probably wouldn’t want it in there anyway.


May 18, 2009

I have discovered the Holy Grail. This is big. If you donate $1,000,000 I will send it to you.

What the hell, I’ll give it away! I have had a change of heart. In lieu of donations, please send flowers to the freedom lovers at

plot HOLYEFFINGGRAIL = close[-1];

Plot that on your charts. IT. ALWAYS. SHOWS. THE. CLOSE. OF. THE. NEXT. BAR. IN. THE. FUTURE.

Isn’t that worth $1,000,000? I would think so. Also, if you donate to my blog, all of your dreams will come true. True story.

We now return you to your regularly scheduled “Pro-scam-us” blog, already in progress…