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A Trading System is a method of trading where buy/sell signal are defined as a result of technical analysis. Every investor has his own market Trading System (Trading Strategy) when it comes to making money in the stock market.
Technical analysis is not an exact science, it is more of an art and takes a considerable amount of experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all. It's up to each individual trader to find those that will fit his or her specific needs. Technical analysis attempts to use past stock price and volume information to predict future price movements.
A Trading System based on real-time charts is one of the best ways to control risk. It's not the only way, but it's one strategy that's followed by a lot of investors.
General Rules for Trading Systems
Market timing is any attempt to use past prices and other market-generated data to accurately forecast or prophesy future prices of securities or indexes, whether long-term or intra-day, consistently and persistently. It is based on various economic or stock market indicators, for deciding when to buy or sell securities. Other words Market timing recommendations are based on a Technical analysis of market data.
Timing Includes asset allocation, technical analysis, charting, momentum investing, and quantitative analysis using neural networks, genetic algorithms, artificial intelligence (AI), fuzzy logic, chaos theory or other non-linear techniques. Precisely because market prices are efficient integrators and anticipators of information relevant to security valuation, they also serve as high-quality inputs for reliable market timing models.
"Market timing has shown itself to be futile in every study ever conducted. The idea of market timing and the reality are night and day. The idea is very compelling. It presupposes you can be on the sidelines when the market goes down and in when it goes up. If you could do that you'd be richer than Warren Buffett. The reality is it leaves most people in the market when it's going down and not in when it's going up."
Forecasting asset prices is a problem that has fascinated investors since the very advent of financial markets. Accurate predictions of the market movements imply fast and substantial capital gains. Attempts to forecast stock prices are numerous.
Timing strategy provides investors with the opportunity to avoid major market price declines at the same time many argue that using any market-timing tool is a waste of time.
Every investor has his own market timing theory when it comes to making money in the stock market. Many technicians attempt to improve their performance by timing the market and adjusting their portfolio according to predictions about the market or specific sectors. Obviously, if investors can avoid weak periods in the market and participate in the strong, they can also experience superior returns over a buy-and-hold strategy. What is surprising is that studies show that investors can still outperform a buy-and-hold strategy, even if they don't participate in the strongest times - as long as they escape major market declines.
Market Timing Tips:
Technical analysis is not an exact science, it is more of an art and takes a considerable amount of experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all. It's up to each individual trader to find those that will fit his or her specific needs.
The professional investor that looks at the same stocks and only buys when there is a SALE going on doesn't have to care about analysts or market hype. So when everyone has given up and sold, he is buying. After a month or two the stock generally rebounds and Wall Street loves the stock again, then analysts hop on board and upgrade the stock to a strong buy, raising estimates and new fools come in and buy the stock at the all time high. The professional investor then dumps his stock and looks to find the next stock that is still at a bargain price.
Every technical analyst knows the importance of charts and indicators. But if these were all it took to make profitable trading decisions, everyone would be a winner. With most indicators it is possible to detect buy and sell levels, but the sport is to detect them before everybody else.
"The trend is your friend" is the motto of technical analysis
Volume analytics’ basic premise is that volume and index behaviors are closely interrelated and that the trading patterns of an index can be predicted, or at least anticipated, from a proper understanding of the unfolding volume patterns.
Volume analytics is not an exclusive discipline. It can stand fully on its own, yet may also be used in conjunction with other technical analysis methods. In fact, this approach could well be the missing piece of the market analysis puzzle that so many traders have been seeking.
Without a doubt, a detailed study of volume patterns has much to reveal, much more than is commonly believed. One of the reasons volume analytics has not always received the attention it deserves is that intraday real-time volume data and charts for entire indexes were not available until recently. Now that they are, you have the opportunity to closely monitor and analyze the volume behavior of a particular index, as it unfolds in real-time. This allows you to heed one of the golden rules of trading, “Do not play against the market”, which brings us to our next topic.
Why apply volume analytics to indexes and exchanges, rather than to individual stocks? Indexes best describe the mood of the market as a whole. Regardless of what you trade, a particular index or sub-index, stocks, options, futures, most of these trading vehicles tend to move in concert with the broad market. As a rule, the market dictates the direction of a particular security, never the other way around. It therefore makes sense to get a good grasp on what is happening at the index or stock exchange level, and we have found volume analytics to be an excellent vehicle to make that determination.
With the myriad of technical indicators, market timing systems and trading approaches available today, the question arises: why bother with volume analysis at all? The answer is that volume is the best and truest sentiment indicator for what is really going on in the markets. Volume is the underlying cause of all price movements. Without a change of volume, the price of a security cannot move. To make this point, imagine that a (thinly traded) stock does not trade at all on a particular day. Consequently, that stock’s price might not even be listed in the newspaper the following day – because if there is no volume (i.e., no one is buying and no one selling), it logically follows that there can be no price change (price movement). On the other extreme, if there is unusually high interest in a stock, everyone will hear about it, because volume levels will spike far above normal, signaling “something big and significant” went on (or is expected).
Administrator – The firm responsible for assisting in reporting and communication with investors and regulators.
Asset Class – The broad investment categories in a portfolio; for example bonds, U.S. equities, real estate, precious metals, cash, etc.
Avg Daily Vol – The mean of the number of ETF shares traded per day over any given period; although not necessarily indicative of an ETF’s liquidity.
Beta – An ETF’s level of variability of returns, in relation to a market index, usually the S&P 500 index. For example, ETFs with a beta over 1.0 are more volatile than the index, while those with a beta of less than 1.0 are less volatile.
Dividend Amount – A distribution of earnings to shareholders of a corporation or an exchange-traded fund.
Dividend Rate – The rate a fund distributes dividend and interest income earned on investments, usually expressed as cents per share.
Ex-Dividend Date – The day when a fund’s net asset value (NAV) is decreased by the amount of the dividend being paid out. When a fund is trading ex-dividend, a purchaser is not entitled to the distribution.
Expense Ratio – A percentage of assets paid by shareholders to cover the expenses of managing the fund. ETF expense ratios are normally significantly less than comparable mutual funds.
Inception Date – A mutual fund or ETF’s first day of trading, when its performance is first recorded.
Investment Policy – A fund’s stated strategy that explains how and where it will invest; examples include small-cap growth funds, emerging markets funds, technology sector funds, and corporate bond funds.
Management – The firm responsible for the day-to-day portfolio operations, which includes adjusting for index changes, managing cash flows, and other functions.
Market Cap – A public company’s share price multiplied by the total number of shares outstanding; Microsoft is an example a large-cap company.
Market Cap Classification – Usually defined as small-cap, mid-cap, and large-cap securities; although the boundaries are not standardized because mutual funds and market indexes often define them differently.
NAV – Net Asset Value; calculated by summing the fund’s assets, subtracting operating costs and other liabilities, and dividing by the total number of shares outstanding.
Net Assets – Indicates the amount of investor cash held in a fund; like a stock, determined by the net asset value (NAV) of an share multiplied by the number of shares outstanding.
P/B – Price to book ratio, another measure of valuation. Book value is the net worth of a company or its total assets.
P/E – Price to earnings ratio, a common measure of valuation. For ETFs, the P/E is the weighted average P/E ratio of the stocks in the portfolio.
Primary Exchange – The exchange on which an ETF was originally listed, although exchanges trade competitor ETFs through unlisted traded privileges (UTP).
Sector Allocation – The amount that an ETF invests in particular industry slices, such as technology, utilities, consumer staples, healthcare, etc. Broad market index ETFs are diversified across industries, while sector ETFs concentrate on particular industries.
Shares Outstanding – In relation to ETFs, the number of shares held both long and short by investors.
Style – Commonly thought of as the distinction between value and growth, both in funds and individual stocks. Growth stocks generally have higher valuations and volatility than their beaten-down value counterparts that tend to have more consistent earnings and dividends.
Top 10 Holdings – The ten securities that a fund's portfolio is most heavily invested in; commonly used as a quick approximation of the fund’s diversification level.
Turnover – The level of trading in a fund's portfolio, often expressed as a percentage of assets. ETFs usually have less turnover than comparable "active" funds because they track indexes that do not frequently buy or sell stocks.
1. Credit for discovering this effect is normally given to Gary Brinson for his article"Determinants of Portfolio Performance", published in Financial Analysts Journal in 1986. This study has been repeated numerous times by other researchers ever since, with no significant deviation in the fundamental conclusion.
2. http://www.morpheustradinggroup.com
3. http://www.etfconnect.com/education/faq.asp
4. http://www.marketvolume.com/content/chart_school/charts/amex.asp
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