Walk-Forward Evaluation

Every system trader wants to see a healthy set of historically backtested results that will engender a sense of confidence before they begin to consider trading a given system with real money. But the truly savvy system trader will also want to see an extensive amount of forward-tested results from the same system using previously unseen data. A trading system that passes muster in both back- and forward-test mode (also known as “in sample” and “out of sample” [OOS] modes, respectively) has a far more promising future in the real world of trading than one that simply looks good when backtested over historical data. Every serious system trader should demand that both sets of test data be made available to them before they fork over their hard-earned money for any system, no matter who the developer is.

In Figure 1 you see the forward-tested results for an emini stock index futures trading system that I developed last year. I originally tested it on six months of historical data and after fine-tuning it, I decided to run it in forward-test mode for the long haul to see if the underlying market concept of the system was truly valid.

To do so, at the close of each trading session (0930 to 1600 Eastern time, Monday through Friday) I manually entered the trades into Adaptrade’s Market System Analyzer (MSA) using the commission, slippage, contract size, and starting balance you see on the chart in Figure 1. It was been a long and grueling test, but after 229 trades in OOS mode, it appears that the system has proved itself, and despite having endured some lengthy periods of drawdown and sideways choppiness, it has gone on to make new equity highs in recent trading action.

Now, before you decide that this is the trading system that will do the job for you, ask yourself a few difficult questions with as much honesty as you can muster — because you’re only fooling yourself if you aren’t honest with yourself:

1. If you had begun trading this system on February 24, 2011 (the day after the highest value in the equity curve [$19,370] was reached — prior to the new high of June 1, 2011, that is), could you have stayed with the system through the ensuing 18.7% drawdown (one that endured for 57 trades) that lasted until May 5, 2011? The dollar amount of the drawdown was $3,630. Would you still be hot to trade a system after it’s had a long streak of any kind?
2. Source www.traders.com

Six Tips To Successful Daytrading

It’s a classic catch-22 in a recessionary job market: People looking to enter a new profession find they cannot get in without at least some relevant experience, yet they have little chance of gaining any experience because employers are eliminating or outsourcing entry-level positions. One notable exception to this is daytrading, which is the practice of buying and selling a stock within the same day. Anyone with a few thousand dollars in seed money can set up a short-term trading account and compete for profits alongside huge investment firms and seasoned, multimillionaire traders. The only credential you need is a positive account balance to make tomorrow’s first trade.

Daytrading is also inherently adversarial: The strong make a profit by taking money from the weak. Inexperienced traders can (and do) lose thousands of dollars in a matter of minutes as the stock market soars and dives. For every beginning daytrader who goes on to achieve long-term profitability, about nine others fail.

Although there are no shortcuts or sure-fire formulas for successful daytrading, some of the most common pitfalls can be avoided by following six basic tips designed to help traders develop more consistent and professional practices.

1. Prepare your mind
What you believe about yourself is the most powerful predictor of what you can achieve in daytrading. A world-class athlete does not wait until he wins that first Olympic medal to start thinking and training like a champion. Likewise, great traders start to envision themselves as being successful before they ever make their first profitable trade of the day.

When he or she loses money, a successful trader can mentally contradict that fact by picturing him- or herself achieving the next good trade. Great traders don’t allow the situation — their last losing trade — to create or reinforce a negative belief. Instead of saying, “I always get stopped out on my trades,” try rephrasing that statement in past tense: “I had a problem with setting my stops today, but I’ll do better tomorrow.”

Another technique for developing a success mindset is to think about breaking your own “Olympic record” with every trade. If your highest profit on any one trade has been 10 points, resolve to keep trading until you earn 12 points. Picture yourself reaching that goal.

More than any technical trading setup, a success-driven mindset helps traders stave off the fear that can leave them stuck in a bad trade or afraid to hold onto a good one.

 Source http://www.traders.com

Reversing MACD by Johnny Dough

Moving average convergence/divergence (MACD) created by Gerald Appel is probably one of the more popular momentum oscillators in use today. It is calculated using two exponential moving averages (EMAs) of different lengths and is the value of the shorter (fast) period MACD less the value of the longer (slow) period EMA. MACD fluctuates above and below the zero value where the moving averages cross.

In Giorgos Siligardos’ article “Reverse Engineering RSI,” he showed that the reverse-engineered relative strength index (RSI) can help determine the following time period’s closing price using the value of the oscillator. And in the article “RSI Bands,” François Bertrand showed overlaying RSI overbought/oversold levels on the price chart.

I will show the calculation of the price value of a specific MACD level and the calculation of the price value that will cause the MACD to change direction. These values in relation to price can then be shown by overlaying them on the price chart.

Volatility Views

Volatility Review: Metals and gold vol. Euro vol review: Don talks about the recommendations he had made to sell the Euro VolContracts a week ago Thursday, and where they settled thispast Friday - a product rich in volatility. S&P, Nasdaq, and commodity vol review. Plus, Mark Sebastian's volatility review.

Volatility Viewpoint: A quick primer on mean, median, standard deviation, skewness, and kurtosis of distributions. Plus, explaining negative market skewness, leptokurtic behavior of stock prices, etc. As always, we keep it easy to understand and non-intimidating.

Mailbag: Captain Options asks, "Given the explosion of popularity in weekly options, I'm curious if Mark & Don think there is room for short-term realized volatility products. Would a weekly realized vol product even make sense at this point given the short time frame of the product? Can you generate a worthwhile calculation of volatility in such a short time frame?"

Crystal Ball: S&P, Nasdaq, and commodity Vol outlook. Euro VolContracts outlook. What's coming up at VolX and Option Pit?

Volume Price Confirmation Iindicator (VPCI)

The article by Buff Dormeier in this issue, "Between Price And Volume," presents the volume price confirmation indicator (VPCI), which is an interesting indicator that combines price and volume action to produce reliable signals.
The coding for AmiBroker is straightforward and is shown here. Comments inside the code make it self-explanatory. The formula can be used as an indicator as well as a simple trading system. To use it, enter the code in Formula Editor and choose Tools: Apply Indicator and/or Tools: Backtest menu. 

6 Proven Methods For Selling Stocks by Joseph Nguyen

Choosing a time to sell a stock can be a very difficult task. It is especially difficult because, for most traders, it is hard to separate their emotions from their trades. The two human emotions that generally affect most traders with regards to selling a stock are greed and fear of regret. The ability to manage these emotions is key to becoming a successful trader.

TUTORIAL: Investor's Guide To Behavioral Finance

Rising Profits
For example, many investors don't sell when a stock has risen 10 to 20% because they don't want to miss out on more returns if the stock shoots to the moon. This is due to their greed and the hope that the stock they picked will be a big winner. On the flip side, if the stock fell by 10 to 20%, a good majority of investors still won't sell because of their fear of regret. If they sell and the stock proceeds to rebound significantly, they'll be kicking themselves and regretting their actions.

So when should you sell your stock? This is a fundamental question that investors constantly struggle with. You need to separate out the emotion from your trading decisions. Fortunately, there are some commonly used methods that can help an investor make the process as mechanical as possible. In this article, I will look at six general strategies to help decide when to sell your stock.

Valuation-Level Sell
The first selling category we'll look at is called the valuation-level sell. In the valuation level sell strategy, the investor will sell a stock once it hits a certain valuation target or range. Numerous valuation metrics can be used as the basis, but some common ones that are used are the price-to-earnings (P/E) ratio, price-to-book (P/B), and price-to-sales (P/S). This approach is popular among value investors who buy stocks that are undervalued. It can be a good signal to sell when a stock becomes overvalued based on certain valuation metrics.

As an illustration of this method, suppose an investor holds stock in Wal-Mart that they bought when the P/E ratio was around 13 times earnings. The trader looks at the historical valuation of Wal-Mart stock and sees that the five-year average P/E is 15.5. From this, the trader could decide upon a valuation sell target of 15.5 time earnings as a fixed sell signal. So the trader has used a reasonable hypothesis to take the emotion out of his decision making. (For more on the P/E, see Profit With The Power Of Price-To-Earnings.)

Opportunity Cost Sell
The next one we'll look at is called the opportunity cost sell. In this method, the investor owns a portfolio of stocks and would sell a stock when a better opportunity presents itself. This requires a constant monitoring, research and analysis on both your own portfolio and potential new stock additions. Once a better potential investment has been identified, the investor would reduce or eliminate a position in a current holding that isn't expected to do as well as the new stock on a risk-adjusted return basis.

Deteriorating Fundamentals Sell
The deteriorating fundamental sell rule will trigger a stock sale if certain fundamentals in the company's financial statements fall below a certain level. This sell strategy is slightly similar to the opportunity cost in the sense that a stock sold using the previous strategy has likely deteriorated in some way. When basing a sell decision on deteriorating fundamentals, many traders will focus mainly on the balance sheet statement with emphasis on liquidity andcoverage ratios. (Learn more about the balance sheet in Breaking Down The Balance Sheet.)

For example, suppose an investor owns the stock of a utilities company that pays a relatively high and consistent dividend. The investor is holding the stock mainly because of its relative safety and dividend yield. Furthermore, when the investor bought the stock, its debt-to-equity ratio was around 1.0 and its current ratio was around 1.4.

In this situation, a trading rule could be established so that the investor would sell the stock if the debt/equity ratio rose over 1.50, or if the current ratio ever fell below 1.0. If the company's fundamentals deteriorated to those levels – thus threatening the dividend and the safety - this strategy would signal the investor to sell the stock.

TUTORIAL: Investor's Guide To Brokers And Online Trading

Down-from-Cost and Up-from-Cost Sell
The down-from cost sell strategy is another rule-based method that triggers a sell based on the amount, in percent, that you're willing to lose. For example, when an investor purchases a stock he may decide that if the stock falls 10% from where he bought it at, he would sell the stock.

Similar to the down-from cost strategy, the up-from cost strategy will trigger a stock sale if the stock rises a certain percentage. Both the down-from-cost and up-from-cost methods are essentially a stop-loss measure that will either protect the investor's principal or lock in a specific amount of profit. The key to this approach is selecting an appropriate percentage that triggers the sell by taking into account the stock's historical volatility and the amount you would be willing to lose.

Target Price Sell
If you don't like using percentages, the target price sell method uses a specific stock value to trigger a sell. This is one of the most widely used ways by which investors sell a stock, as seen by the popularity of the stop-loss orders with traders and investors. Common target prices used by investors are typically ones based on valuation model outputs such as thediscounted cash flow model. Many traders will base target price sells on arbitrary round numbers or support and resistance levels, but these are less sound than other fundamental based methods.

Bottom Line
Learning to accept a loss on your investment is one of the hardest things to do in investing. Oftentimes, what makes investors successful is not just their ability to choose winning stocks, but also their ability to sell stocks at the right time. These common methods can help investors decide when to sell a stock. (For additional reading, check out To Sell Or Not To Sell.)

by Joseph Nguyen (Contact Author | Biography)

Joseph Nguyen is an Research Analyst and contributing author at Investopedia. He graduated from the University of Alberta with a Bachelor of Commerce degree and specializes in financial analysis and research. Prior to joining Investopedia, he worked at a securities brokerage firm.

Source @ http://www.investopedia.com

Sebi stops Vaswani Industries listing

Capital markets regulator Sebi has withheld the listing of sponge iron maker Vaswani Industries' Rs 490 million initial public offer (IPO) offer after it received complaints regarding irregularities in subscriptions, it said late on Wednesday.

Based on the data from the exchanges and registrars on the subscriptions or withdrawals in the issue, which closed on May 3, and preliminary inquiries,
SEBI has advised the stock exchanges to withhold the listing of securities until further instructions.
Inquiries are in progress. Based on the findings, appropriate action would be taken, it added.
The company had sold 10 million shares at a price band of 45-49 rupees each and the issue was subscribed more than four times.
Source- http://www.financialexpress.com/news/sebi-stops-vaswani-industries-listing/793044/

McGinley Dynamic-The Most Reliable Indicator You've Never Heard Of by Brian Twome

John R.McGinley is a Certified Market Technician, former editor of the Market Technicians Assn. Journal of Technical Analysis and inventor of the McGinley Dynamic. Working within the context of moving averages throughout the 1990s, McGinley sought to invent a responsive indicator that would automatically be more responsive to the raw data than simple or exponential moving averages.

SMA Vs. EMA
Simple moving averages (SMA) smooth out price action by calculating past closing prices and dividing by the number of periods. To calculate a 10-day simple moving average, add the closing prices of the last 10 days and divide by 10. The smoother the moving average, the slower it reacts to prices. A 50-day moving average moves slower than a 10-day moving average. A 10- and 20-day moving average can at times experience a volatility of prices that can make it harder to interpret price action. False signals may occur during these periods, creating losses because prices may get too far ahead of the market.

An exponential moving average (EMA) responds to prices much more quickly than a simple moving average. This is because the EMA gives more weight to the latest data rather than the older data. It's a good indicator for the short term and a great method to catch short term trends which is why traders use both simple and exponential moving averages simultaneously for entry and exits. Nevertheless it too can leave the data behind.

The Problem with Moving Averages
In his research of moving averages which went much further than the basic examples already shown, McGinley found moving averages had many problems. The first problem was they were inappropriately applied. Moving averages in different periods operate with varying degrees in different markets. For example, how can one know when to use a 10-day to a 20- to a 50-day moving average in a fast or slow market. In order to solve the problem of choosing the length of the moving average that applies to the current market, the McGinley Dynamic automatically adjusts itself to the speed of the market.

McGinley believes moving averages should only be used as a smoothing mechanism rather than a trading system or signal generator. It is a monitor of trend. But a 10-day simple moving average is off by five days or half its length. Chances are good that the big move in prices already occurred by the fifth day of a 10-day simple moving average. In addition, a 10-day moving average should properly be plotted five days before the present datum.

Further, McGinley found moving averages failed to follow prices since large separations frequently exist between prices and moving average lines. McGinley sought to eliminate these problems by inventing an indicator that would hug prices more closely, avoid price separation and whipsaws and would follow prices automatically in fast or slow markets.

McGinley Dynamic
This he did with the invention of the McGinley Dynamic. The formula is:

MD = MD_-1 + (Index – MD_-1) / (N * (Index / MD_-1 ) ⁴)

The McGinley Dynamic looks like a moving average line yet it is a smoothing mechanism for prices that turns out to track far better than any moving average. It minimizes price separation, price whipsaws and hugs prices much more closely. And it does this automatically as this is a factor of the formula. Because of the calculation, the Dynamic Line speeds up in down markets as it follows prices yet moves more slowly in up markets. One wants to be quick to sell in a down market, yet ride an up market as long as possible. The constant N determines how closely the Dynamic tracks the index or stock. If one is emulating a 20-day moving average, for instance, use an N value half that of the moving average or in this case 10.

It greatly avoids whipsaws because the Dynamic Line automatically follows prices in any market fast or slow, it's like a steering mechanism that stays aligned to prices when markets speed up or slows down. It can be relied upon for trading decisions yet McGinley invented the Dynamic in 1997 as a market tool rather than as a trading indicator.

Conclusion
Whether it is called a tool or indicator, the McGinley Dynamic is quite a fascinating instrument invented by a market technician that has followed and studied markets and indicators for nearly 40 years.

Context Is Everything by Gil Morales and Chris Kacher

You do not have to be a Chartered Market Technician to understand how market context can influence the price behavior of stocks. No stock is an island, and how a stock behaves is often a function of the market at large, which in turn is a function of underlying conditions — the context within which any particular market environment is developing.

In the simplest of terms, we know that in a bull market, most stocks go up, and in a bear market, most stocks go down, so this basic idea that market context can provide meaningful clues when studying stock charts is already something we are familiar with when we speak of bull and bear market environments.

It’s the context
While the use of stock charts can be very complex, often the exercise of comparing the price behavior of a stock to a chart of the market as represented by, for example, a major market index such as the Nasdaq Composite Index or the Standard & Poor’s 500 can help you understand a stock’s potential strength. You are also able to better understand why certain price movements are evident in a stock’s overall price chart. When it comes to understanding the price/volume behavior of stocks, context is everything.

A CUP WITH A JAGGED HANDLE. The  Nifty-Spot came down in a series of three very sharp waves. As the Nifty was approaching a top in Jan 2011 at point 1, SCHW was attempting to emerge from a sideways consolidation on brisk volume. Note the powerful countertrend move in SCHW when the Nifty-Spot bottoms at point 4. This could be the deciding factor in purchasing shares of SCHW.

Putting A Stop To It by David Garrard

Investors and traders alike devote a considerable amount of time focusing on what investments to make and what tools to use to make these investments. Novices often spend very little time planning the exit strategy. This is the key difference between seasoned traders and novices. In fact, a greater focus on the exit and less on the entry might make the real difference in your overall trading effectiveness.

Why use stops?
When a loss is posted, we always measure it relative to our original holdings. A similar measure is calculated when a profit is posted. It is important to understand the asymmetry built into a loss/win cycle. Figure 1 shows that if you post a loss of 10%, it will take a percentage gain of 11.1% to recover. Okay, you can live with that as a recovery target. So what happens if you post a loss of 30%? It requires a recovery of 43% above your present net holdings to get back to your original account value. What happens if you lose 80% of your holdings? Well, that will require a 400% price move to recover your losses — not much chance of that in today’s markets. The lesson here is to cut your losses early. That is where the proficient use of stop alerts comes in.

Consistently deploying stops can be painful, but it will allow you to know the maximum limit of your loss in advance, moving you away from later stage fear–based decision-making that can occur when a trade goes against you. It’s already been decided in your trading plan; you exit with a controlled loss.

FIGURE 1: RECOVERY FROM A DRAWDOWN. A loss of 10% will take a percentage gain of 11.1% to recover. A loss of 30% requires a recovery of 43%. A loss of 80% of your holdings requires a 400% price move to recover your losses.

Investment Candles by Thomas N. Bulkowski

Investment-grade candlesticks work as reversal or continuation patterns at least two-thirds of the time (66%), and they are plentiful. By “plentiful,” I mean that I sorted a list of 103 candlestick patterns by how often they appeared in the Standard & Poor’s 500 from August 1996 to August 2006. I split the list and discarded the rare ones. That left just 13 candle types, which I describe here.

Configuration and definition
Before I discuss the performers, let’s review the configuration. Figure 1 shows two candlesticks, one black and the other white. The price bar’s high is at the top of the candle, and the low is at the bottom. Between those two extremes are the opening and closing prices, the order of which determines the candle body’s shade. The thin bars at either end are the shadows or wicks, with a body sandwiched in between. A candle need not have a shadow, and the body can be a flat line as in a four-price doji. In those situations, all four prices are the same.

VOLUME ZONE OSCILLATOR

“In The Volume Zone,” authors Walid Khalil and David Steckler present a new volume zone oscillator that can be easily implemented using AmiBroker Formula Language. A ready-to-use formula for the indicator can be found below.

To use the code, enter the formula in the Afl Editor, then press “Insert indicator.” To modify the averaging period of the volume zone oscillator, right-click on the chart and select “Parameters” from the context menu.

A sample chart is shown in Below Nifty-Spot Chart.

Hines Ratio

A modified put/call ratio that refines traditional option ratio analysis by including the open interest figures in the equation and can be defined as (Total put volume/Total put open interest) divided by (Total call volume/Total call open interest)

Adaptive Filter

Smoothing and/or forecasting prices with continuously updated weighting of past prices. 

ADA

Block-structured programming language developed under the guidance of the U.S. Department of Defense to provide a medium for writing real-time, concurrent applications, for facilitating program verification. 

Accumulation

An addition to a trader's original market position. The first of three distinct phases in a major trend in which investors are buying. 

ABC

Elliott wave terminology for a three-wave countertrend price movement. Wave A is the first price wave against the trend of the market. Wave B is a corrective wave to Wave A. Wave C is the final price move to complete the countertrend price move. Elliott wave followers study A and C waves for price ratios based on numbers from the Fibonacci series. 

Abandoned Baby Pattern

A rare candlestick pattern in which an upside gap doji star (where the shadows do not touch) is followed by a downside gap black candlestick where the shadows also do not touch; considered a major top reversal signal. 

A Priori

Known ahead of time

Free Cash Flow of the Firm-Why It matters to Investors ?

Free Cash Flow presents a more accurate picture of the financial health of a Company .It allows the company to pursue opportunities that ultimately enhance shareholder value, such as develop new products, acquire firms and pay-off debt. Companies with high free cash flows provide stable returns and tend to out-perform during uncertain times. They are also likely to pay rich dividends to the Shareholders.

If a Firm is increasing its cash flow steadily every year, it usually indicates that it is running its operations efficiently by reducing cost or expanding its market share.

 TEN Indian Companies (NSE Listed) with highest Free Cash Flow-

1.ONGC 2.COAL INDIA 3.INFOSYS 4.NMDC 5.HINDUSTAN ZINC 6.SAIL 7.WIPRO 8.HUL 9.TATA STEEL 10.TCS