For me personally, I use market breadth to measure trend…. and in my own dreamy world, I call it (trend) as sentiment or condition…. 🙂
There are basically 6 components of market breadth, Advance, Decline, New High, New Low, Up Volume and Down Volume.
One of the best source of learning breadth data for me, is Greg Morris, and the McClellans (not the whiskey) or from Investopedia. The McClellans created the MSI, or the McClellan Summation Index and the Oscillator. You can try google Greg Morris Breadth Data and McClellan etc to find from the large resource avaliable out there.
I collate the breadth data and come up with a simple indicator to measure trend, or sentiment, or condition. So in a way, this indicator is for me a leading “lagging” indicator, not the oscillating type of indicator.
(MA, ADX, OBV etc are lagging indicators…good for measuring certain form of trends….MACD Histogram, RSI, Stochstics are Oscillators….good for triggering entries etc….Do note that you should try to ignore oversold signals during uptrends on the oscillators)
Here below, you can see that my breadth indicator (in blue) helps me see when there is a trend forming when it is ticking up and ends when it is moving down. You can see that there were 5-6 windows of opportunity to go long in 2012…of course with 1-2 whipsaws smacked in too. This is the main drawback of trend trading.
I know I am pretty vague here (intentionally), on the formation and the basis of this personalised indicator. We have a chinese saying that your teacher only teaches you 70% (hey, I heard singapore pools gives you 70% as winnings and keep 30%…hahaha…dunno true or not man).
There are many ways to analyse market breadth data or charts. Some use it like a oscillating indicator, with oversold and overbought signals, much like RSI or Stochastics. Some try to lookout for divergences with current market price movements, much like RSI, Stochastics and perhaps MACD-Hist. Some use certain levels as trigger points, much like..erm..maybe ADX etc…
When you read adverts on “Secrets Revealed” on trading, and this and that…c’mon…if the trader is indeed so successful on his/her trading system, why bother to teach and lose his supposedly real trading edge? We cant be all so naive right? It’s either an exaggerated claim, or the trick does not work anymore…and the only way left to make money….is to teach….heheheh.
So now this forms a basis for me entries into the market. You will also see that this is a market level analysis, and does not look into any specific stock…but this does not worry me a bit. When the market condition is positive, most counters in the market will follow and trend up, like wise when going down.
“I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. ….
The way to make money is to make it. The way to make big money is to be right at exactly the right time…..
Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.” Jesse Livermore
So if you now also realise, again, there is no need to trade all the time. Wait for a trend to establish, then hop in. Very low risk and safe. Of course your broker or my boss will not be happy at all to hear this…. :p
If you are a addicted punter active trader and keeps your trading records (Do you keep a record of your trades? No? You should! Keep learning what made you money and what made you lose money!) go review your trades in 2012. Im very sure you will find most of your trades are more profitable during uptrends than compared to those down trends. Do a comparison to the STI’s chart and the blue line indicator above for 2012….
Im very sure many are making money trading in and out since Dec12 till now….and many will be too overconfident thinking they are market geniuses….and when the time comes to stay cash…most will continue to trade thinking that their skills or luck is still on….
When we trade with the trend, we are trying to be in the market at the safest time….thus, reducing the risk of losing….hey…guess what….timing your entry properly is also a form of risk control! Step 1 – 3 all are risk controls! Damn! Risk management again! I bet you have never viewed entries timing as a form of risk management huh?!
“There is time to go long, time to go short and time to go fishing.”Jesse Livermore (1877–1940)
Source: Quoted in Come Into My Trading Room (Alexander Elder, 2002)
“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.” Jesse Livermore
That’s for now. Next is the right price.