Stock Contest Signup

IMPORTANT: If you already have a Wall Street Survivor account, you need to sign up for a new one! After your name please put _cpcontest so that I know you have a new account.

Trading begins on Monday. Prizes are explained here. As mentioned before, the more people, the better the prizes.

Sign up by clicking here. (put _cpcontest after your name!--for those of you who didn't read the first part of this post...)

If you have any questions, leave them in the comment section.

Good luck!

Reader Email: Backtesting Software

I figure that posting the email conversations I have with readers may help other traders out there. I know that websites and blogs don't always answer all the questions you may have. While I don't have a fraction of all the answers to each question out there, I'll do my best to give whatever of my experience I think may help. Feel free to send emails or post comments. Grab my contact info here.

(Note: If I post something you send that you'd rather not have posted, let me know, and I'll remove it. Also, if you'd rather not have a question posted, give me the heads up in the email itself.)


Flip

Hi,

My name is Flip, I'm going to compete with you in the trading competition
you're setting up.

I'm interested in backtesting some strategies in both (single) equities and
in index futures. Do you recommend any good (and cheap) software for this.
I got some of my data from Bloomberg and used Matlab to program, but the
major problem I have is:

- programming is matlab is not the quickest way to get things done!
- if I want to make a backtest on the S&P 500 stocks I have to take into
account all the changes made to the index over time (thus avoiding
survivorship bias). I have tried doing this using Bloomberg but it is
extremely time consuming to fetch the companies that went bankrupt or
merged...

Looking forward for the competition!

Regards

Flip

Reply:

Hey Flip,

I've used Ninja Trader (http://ninjatrader.com) to do backtesting.
It's free to use for backtesting historical information (it costs
money if you want to use a strategy in the open market). From what I
remember it will actually download whatever historical information you
ask it to from Yahoo Financial (daily historical information only).

I know Dogwood uses Stock Fetcher
(http://www.stockfetcher.com/ui2/index.php) for some of his
backtesting. For free they let you test out some of the features. For
a reasonable price they give you access to many more features. I know
he's also started testing out Wealth-Lab
(http://www.wealth-lab.com/Home/Default.aspx) and I think there's a
way to get a free demo. Otherwise I think the software costs quite a
bit.

Good luck to you in the contest! =D

-CP

PS:

I have also used MetaTrader 4 and your standard programming languages (C++ and Python mostly) to do backtesting. I wouldn't recommend those to the beginner because of the extra effort and programming required, but they are also an option.

Charts -- Double Tops, RSI, Multiple Time Frames

Many, many people will advise against the use of the one-minute chart. And there are plenty of good reasons for such advice, the main being that the one-minute chart has tremendous amounts of noise, is choppy, and encourages overtrading. I agree with all of those points. I would never recommend trading solely from the one-minute chart unless you can mentally compress it into a five or fifteen minute chart (yes, you'll receive an edge from this madness). If you think of every five or fifteen candles on the one minute as a single candlestick, then you can obtain the same level of perspective (which provides stability and less noise) while still being able to see how those candles on the five and fifteen minutes were formed. On this chart it is much easier to see the descending support on the one minute than the five or fifteen (I took the screenshot two weeks or so ago and do not have the five or fifteen). I nearly always give the benefit of the doubt to the larger trend, but sometimes it is nice to see what the underlying trend is in order to supplement your knowledge of the five, fifteen, or longer trends.

This next chart is full of all sorts of patterns, as well as a sample of a hedging strategy (I wrote a little about this several posts ago). The main patterns are the double tops that form at least twice. One thing to look for when determining tops or double tops is the RSI. While the RSI can theoretically stay above the 70 point for an extended period of time, on the longer timeframes it typically reverts to the mean (50) fairly fast. Shorting near the peaks, or after the RSI fails to make a new high can be profitable or at least a nice compliment to an already solid system.

The more I have been playing with RSI the more I appreciate it. For more information of the empirical nature, check out The Dogwood Report and Woodshedder and more specifically Dogwood's post Wealth-Lab Developer 5.1 Experiment" and Woodshedder's post "Depressed Relative Strength: Bulls Have the Edge".

Why the DOW is a Poor Measure of the Stock Market

There are some amazing free trading and investing resources on the internet. If you haven't read John Mauldin you're missing out on fairly frequent insights into the economy. I Mauldin's writings emailed to me whenever he posts something new.

Upside Trader has a weekly newsletter that is not posted on his blog. I've read it the last few weeks and have enjoyed it. He tends to analyze the overall market, putting forth his opinions on what signals and info to look for in the coming week.

This last weekend Upside Trader mentioned one of Mauldin's recent posts. He highlights something that I found curious last week--something that I was going to point out today after reading Mauldin's "Here Comes Tarp 3 and 4". Last week I was surprised when I oversaw CNBC. The ticker for the DOW and the S&P500 was showing something peculiar. The DOW was up ~.5% and the S&P500 was down ~.5%, or something similar. At the time I didn't understand what would cause the divergence; I thought both of the indices monitored similar influences in the stock market. I was wrong.

While the S&P500 is market cap weighted, the DOW is weighted based on the amount a single share costs. When I first heard that, it sort of flew over my head. But what it implies is definitely worth the effort it takes to understand. Here's an example: despite MSFT's larger market cap ($156 billion), IBM (market cap of $123 billion) has a greater influence on the DOW's price. This is because market cap has no influence on the price of the DOW. It is based on share price. MSFT's shares go for 17.63, significantly less than IBM's 91.60.

This really starts to make things look weird when you consider the price of some of the financials on the DOW. They are all very low (e.g. C is 3.33 and JPM is 24.50). Mauldin says all the financials and all of the automakers on the DOW could go to 0, yes zero, and it would have less affect on the price of the DOW than if IBM, all alone, were to go to zero. He adds GE as a financial.

Mauldin goes on to say that there is a tacit rule that anything that falls below $10 is replaced by something else. However, the uproar that replacing C with something else, would be tremendous. Can you imagine the effect it would have on the DOWs price to replace a failing bank with something with a little more perk?

If you want to read his full article, check it out here.

I've heard a lot about why the DOW doesn't matter. Hopefully you now understand that the S&P500 is a better barometer of the stock market (assuming you didn't already grasp that 500 companies would be a better sample than 30).

I'm beginning to wonder how the media may manipulate this divergence to boost the general public's stock market sentiment towards something more positive. Something to look out for, especially considering many, many people use the DOW and not the S&P500 as a measurement of the stock market's health.

Stock Contest Update

I wrote a lot below, hope that didn't deter you from joining the contest. Here is the jist of it:

- The contest is free.
- The more people, the better the prizes (see below for the list of prizes).
- We'll be using Wall Street Survivor's group contest thingy.
- I'm thinking Feburary 2nd will be a good day to start. I'll post registration info on that day.

Here's who has signed up so far:

• Rob
  
• fiandola
  
• Charlie G (sorry if I misinterpreted your comment)
  
• Flip
  
• Chuck
  

Including me, that's 6 people, meaning we'll definitely have a contest for the book and if we get four more people we'll have some money prizes.

If you'd like to compete (and I think there's a good distribution of the prize money) then please leave a message below. Any ideas are welcomed.

PS: Many thanks to Trader-X. Not only does he publish a kick ass blog, but he's sent quite a bit of traffic. If we do make the 10 people, remember to thank him for the traffic. I'd also like to thank Rob for, not only his promotion of the contest (which is much appreciated), but for being the first to sign up.

Thank you.

Stock Trading Contest!

A few days ago I received an email from Wall Street Suvivor. They are offering group sign-ups that allow traders and investors to compete in contests. The cool thing is WSS will pay the group to sign up. The group gets $50 if it has 10 members, $100 if it has 25, and $200 if it has 50.

Now, I don't want the money. Instead, it is going to be part of this contest. The more people who sign up, the bigger the prizes. I haven't decided exactly what the prizes are going to be yet, and would appreciate some input. While I won't be competing for the prizes, I will be competing--more on that below. Also, if you would like to participate, please leave a message in the comments. We need at least 10 people in order to take advantage of the $50 offer. If there are fewer than 10 people, and it still makes sense to have a contest, I'll put up a copy of Liar's Poker for the winner.

Here are some prize ideas:

Less than 10 people:

1st place - Liar's Poker
Anyone who beats me - Linkage, plus a review of your site posted to my main page. (I'm trying to think of something equivalent for those who do not have blogs)

If we have 10-24 people:

1st place - $20
2nd place - $10
3rd and 4th place - $5
Anyone who beats me - Your choice of either an entry into a randomized 'lotto' for Liar's Poker or a review of your site posted on my main page.

If we have 25 - 49 people:

1st place - $35
2nd place - $20
3rd place - $15
4th and 5th place - $10
6th and 7th place - $5
Anyone who beats me - Your choice of either an entry into a randomized 'lotto' for Liar's Poker or a review of your site posted to my main page.

If we have 50+ people:

1st place - $50
2nd place - $35
3rd place - $25
4th - $20
5th and 6th place - $15
7th, 8th and 9th place - $10
10th and 11th place - $5
Anyone who beats me - Your choice of either an entry into a randomized 'lotto' for Liar's Poker and Beating the Market (by Charles Kirkpatrick) or a review of your site posted to my main page.

Again, I am not competing for the money and am competing merely to reduce the amount of front page reviews I will have to write (or whatever prize we happen to think of). That means that all of the money is for you (well, you in its plural form).

There are a few rules that Wall Street Survivor requires everyone to follow:

- Each of the participants must make at least 10 trades in order to count towards the money.
- You will not be able to spend more than 25% on any one stock.
- You get 100% margin.
- I think they have delayed prices, so please use Google Finance or some other real-time service to get your quotes.

My own rules:

- No resets! (Not sure if it will be turned on or not. But you will not be able to do it without making me, and the other contestants, very angry!)
- One account per trader! (I don't want the same person winning all of the prizes; any extreme similarities between account trading styles will be investigated, and I'm definitely not dumb enough to send two cash prizes to the same paypal account).
- PayPal charges and shipping costs will be covered by me. After I receive the check from WSS I will deposit it and send you the money through paypal (or some equivalent service). You'll receive all of your prize with nothing subtracted by the paypal monster.
- I may insert more rules before we start. Please help me out here. I want this game to be fair and fun.

Last, but not least: If you have any ideas or think that the prize ratios should be restructured, let me know. Comment, comment, comment. And, of course, let me know if you want to participate. I'm not going to start the competition by myself.

The Trend is Your Friend (and most likely a demi-god, so be nice)

Odds of 58.2% with equal downside and upside is a bet you would want to take, especially if you could take it again and again. Although the edge may look insubstantial, no casino you go to or lotto you participate in is going to give you such an edge. If you're relatively patient, I'm certain you'll be somewhat pleased over time (unless you were looking for a rush).

The screenshot clip is from a new game at Wall St Survivor that allows you to bet 50 "loyalty points" on the next tick on a random stock. What I did for 122 times (I had to get to class, but I did this last week too, with similar positive results) was place my bet on whatever direction the stock was heading at the time. Basically, I was following an extremely short range trend. If the line chart was heading up, I bet up; and, vice versa. Not bad for little effort (albeit, you need 50,000 loyalty points to trade for $5...if only I could develop a cmoputer program to do it for me).

You may be thinking: hey this is cool, but I don't think it will work on a larger scale. Well, I beg to disagree, and so do many influential and successful economists, traders, and investors. Here is my theory--derived and distilled from such brilliant minds as Robert J. Shiller, Charles Kirkpatrick, and Michael Covel, among many, many others:

Trend following works on the large scale because when companies are successful (or percieved to be successful) people will continue to invest in them, pushing stock prices up. Most people are not going to put their entire savings into a stock and never invest in it again. Many people are going to put some money into a stock, wait for their next paycheck and put more money into it as long as the stock continues in a positive direction. They may also tell others about their success, increasing the demand for the shares, further strengthening price. This is what Shiller refers to as a postive feedback loop. As money experiences success, more dollars will follow.

The same works for the downtrend. If people are panicking around you, you (maybe not you but the statistically average person) are also going to panick. The process feeds on itself driving prices further downwards. People will probably tell their friends about their lack of success in the stock market and warn them to stay away. People may also feel sick to their stomach continuing the optimistic investment process they had performed up until then, further reducing demand.

So, why does this work in the short term? Well, in order for the line chart to be driven upwards, greater demand than supply must be present, meaning more buyers than sellers (i.e. a greater chance for an uptick). When there is a greater supply than demand, you will have the opposite.

Put your bet where you have the greatest odds.

Seven Important Candlestick Reversal Pattern Pairs

Candlestick reversal patterns can be a boon to any trader's repertoire. Combining them with support/resistance lines and other indicators can increase a trader's edge substantially. Each set below contains both the bearish and bullish counterparts. These are ideal setups that require directional movement (i.e. nothing range bound). The more volume at the given point, the more strength each of these patterns portend.

Bearish and Bullish Harami - Identified by a long bar followed by a very short one. Harami signal a loss of momentum and a possible reversal.

Dark Cloud Cover and Bullish Piercing Pattern - The dark cloud cover and bullish piercing patterns reveal weakness in the current trend and emerging strength in the opposition.

Shooting Star and Inverse Hammer - Both the shooting star and the inverse hammer have a small body with long upper wicks. THe shooting star shows the failed attempt of the bulls at maintaining control over higher price levels, while the inverted hammer is like a spring ready to pop.

Bearish and Bullish Engulfing Patterns - In the bearish and bullish engulfing patterns, the opposing side's strength overwhelms previous advancement. These tend to be stronger than the dark cloud cover and the bullish piercing patterns. Make a note of the difference: in the engulfing pattern the second candle completely overtakes the first.

Hanging Man and Bullish Hammer - Both the hanging man and bullish hammer resemble the shooting star and inverted hammer, however they are flipped. The hanging man and bullish hammer display a struggle between the bears and the bulls. In the first, the bears are beginning to gain traction against prior bullish strength. In the second, any movement downward has been stalled, signalling a possible bullish reversion.

Southern and Northern Dojis - The southern and nothern dojis are some of the most watched patterns in the candlestick charting world. The both signal a parity between the bears and the bulls. At the moment a doji forms, and as with all these signals increased volume strengthens the pattern, momentum has been prevented from continuing. Sometimes this signals confusion, sometimes this signals a stronger opposition with increasing attrition of the side previously in control.

Morning and Evening Stars - The morning star and the evening star do not necessarily have a doji as pictured here. The top candlestick will be shorter and if it is a doji, signals increasing odds that a reversal will take place. These two patterns, though rare, give the highest odds of reversal. Strength goes in, it faces stiff resistance, after which control shifts hands.

Saturday Night Live Speaks the Truth About Brokers

Straight Talk - Stock Market
by senatork

Saw a link to this clip on Twitter.

PS: Reading and playing Inspectd. Trying to get my equity up to $500 million. Might be a little too ambitious. I got up to $10million, but then got destroyed. Some people on there have $100 Septillion. I really need to work on my technical analysis skills. =)

The "W" Formation

This is the first pattern that I ever learned. It signals bullish action. What you're looking for is one candlestick that looks almost like a cross (these are called "doji"). If the stochastic is low, the RSI isn't too low (not less than 30) and volume (in the chart here there's no volume because volume doesn't function the same way in the forex market) is high, then you're on your way to forming a "W". What you want to look for next is a burst of strength to the upside; this will form your center point. Eventually you will use this as a confirmation. And you will need Surety Bonds. Watch for another pullback creating a higher low point. This candlestick will likely be shorter than the previous base, although this too could be a doji. Look for the stochastic to be oversold again, but not quite as low as before. As the chart shifts off the low look for an increase in the RSI that surpasses the previous reading. It's good if this continues going up--the stronger the better, until somewhat over 70 (then the chart may be getting top heavy). In any case, the "W" formation is confirmed as long as the RSI continues upward and the candlesticks pass the mid-point in the "W". In my experience, it tends to be a reliable indicator. Again, the more volume on the two bases and the stronger the RSI the better.

PS: My links are nearly all cleaned up and the post labeling is done on all back posts! Something to be proud of =) I am developing my own resolutions chart (a la Happiness-Project) and have come up with several ideas to improve the blog. More later.

Doji with Volume

Volume significantly picked up today on all of the indices, plus dojis formed on, at least, the DOW and the S&P500. Dojis accompanied by heavy volume tend to signal reversals, which, at 820 on the S&P or ~8000 on the DOW (both areas of previous resistance) makes sense. While a rise isn't guaranteed, this setup certainly increases the odds, as does anticipation of Obama's inauguration next Tuesday.

Kurt Vonnegut on the Stock Market

"The name of the book was The Big Board. . . . It was about an Earth-ling man and woman who were kidnapped by extraterrestrials. They were put on display in a zoo on a planet called Zircon-212.

These fictitious people in the zoo had a big board supposedly showing stock market quotations and commodity prices along one wall of their habitat, and a news ticker, and a telephone that was supposedly connected to a brokerage on Earth. The creatures on Zircon-212 told their captives that they had invested a million dollars for them back on Earth, and that it was up to the captives to manage it so that they would be fabulously wealthy when they were returned to Earth.

The telephone and the big board and the ticker were all fakes, of course. They were simply stimulants to make the Earthlings perform vividly for the crowds at the zoo—to make them jump up and down and cheer, or gloat, or sulk, or tear their hair, to be scared shitless or to feel as contented as babies in their mothers' arms.

The Earthlings did very well on paper. That was part of the rigging, of course. And religion got mixed up in it, too. The news ticker reminded them that the President of the United States had declared National Prayer Week, and that everybody should pray. The Earthlings had had a bad week on the market before that. They had lost a small fortune in olive oil futures. So they gave praying a whirl. It worked. Olive oil went up."

—Kurt Vonnegut Jr. Slaughterhouse Five

This was quoted in The Market Wizards by Jack D. Schwager and the reason I am posting this--besides the fact I love Kurt Vonnegut--is because DT is hosting a book club next Tuesday, and he chose The Market Wizards for the first book. I just started reading it (d/led it) and am enjoying it immensely. I'm sure DT wouldn't mind if I invited you to join, so please feel free to click here or on any other links to his site, check it out, and begin reading.

On a side note, somewhat related, I suggest you also check out The American Ruling Class, a movie/documentary with an appearance by Kurt Vonnegut. It follows two ivy league graduates who seek advice on how to live their lives. Anyway, read more about it here or watch it here. I strongly recommend it.

Some Charts for Tuesday

I commented directly on each of the charts. I'm trying to take more screenshots as I trade the market so that I can see what I was looking at after the trade is completed. Attitude Trader talked about using X-trader's journal suggestion for the New Year, and I want to give it a try as well. Feels like it is helping me out so far. (Didn't realize I hadn't labeled the currency charts. They're all EUR/USD and mostly from the 15 minute perspective. The first is the daily outlook for the EURUSD pair.)

Some PnF Ideas

I thought it might be beneficial to show those interested one of my methods for finding playable stocks. This method involves going to Stock Charts' Stock Scan (link also in the sidebar under 'Important Technicals') and scrolling to the bottom, in the Point and Figure section. It doesn't really matter which filter you choose. Make sure you're shorting bearish stocks and buying bullish stocks, though. In this instance, I chose 'Descending Tripple Bottom Breakdowns.' It'll give you some stocks that show this pattern, and I chose a few that had a price over $10. You can go with the penny stocks, if you like, just be aware of their risk, and the fact that you may not be able to short something under $5 if you do not have sufficient capital.

Grab a few of those stock tickers, put them into the Candlestick Chart form. Add some useful indicators like RSI, MACD, Full Stochastics, 20/50/200 EMA, etc. Then do a comparison between the PnF and Candlestick charts. I've done most of the work directly on the charts below. My favorite out of the three is probably UTI. But I would be careful with any of them, as the market is in bear market rally mode. All three definitely look good for a short on overall weak market days.


Use caution. Take responsibility for yourself. Remember risk management is number one!

PS: Downloaded Think of Swim's software to do some paper trading practice. Looks solid. Thinking about posting some results as I progress.

Tres Charts

Look at the MACD slowly edging towards a positive divergence on the SPY's weekly. Signals an increasingly bullish outlook.

Charles Kirkpatrick

Three charts that I found using a slightly modified version of the relative strength method described in Charles Kirkpatrick's new book Beating the Market:

Predictions Based on Demographics

"Booms like this happen every other generation."



"Worse of the Stock crash will happen late 2010 mid-2012."

(h/t The Housing Time Bomb)

Dinosaur Trader's Best of 2008

Ready to read a kick-ass compilation of the internet's best 2008 stock market posts? Click here to savor the prime rib, first tier work of DT as he strives to make sense out of the universe--or something like that.

Predictions for 2009

Many people are interested in what will happen tomorrow, because if you know what will happen tomorrow you can profit from that information. While difficult to predict what will happen in the time ahead (e.g. flying cars, anyone?) a general idea of the future can be generated. And, at the very least, reading other people's predictions gives you insight into their preceptions and how successful businessmen think. Here are several lists of predictions for 2009:

- Many people have been waiting for the Fly's '09 predictions. The man runs a successful site, trades well, and is generally entertaining (first tier shit, baby). Check out his predictions here.

- CNBC has an entire section dedicated to '09 predictions. With two [1, 2] optimistic articles and a single slightly pessimistic one, CNBC appears to have a bright slant. While a view into where a good portion of the United States will get their economic information, I would take anything at CNBC with suspicion, especially Jim Cramer.

- Corey Rosenbloom, at Afraid to Trade, posted on Buffett's 2008 predictions, which include some all-around good advice. It is safe to say many anticipate Buffett's 2009 predictions.

- There are the very pessimistic views of Celenate, given in the post below.

- John Cassidy at Portfolio.com wrote a fairly bleak 2009 outlook, saying, "Most economists predict a recovery late next year. Don’t bet on it." He also mentions several polls with this as the highlight: "...people working in the finance business are even gloomier: 77 percent of them say their industry is in a state of crisis, and 50 percent say the economy is the worst it has been in their careers."

- Barron's has an interesting article parsing the views of a handful of economists: Troubled Waters.

- And Seeking Alpha has a rather interesting, reasonable, outlook on 2009 here. There's no prediction of sunny day's ahead there.

Feel free to post other predictions below.

Good luck in 09.

When Is It Going To Break Down? Not If.

I completely agree.