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Despite all the newly released investing and trading books available. some of the older ones still remain on the top of the “must have” list.  Price Headley’s Big Trends in Trading is one of those. 


The book is divided into three major sections.

1. Getting the Market Right First – info on put/call ratios, Bix, mutual fund flows, volume and other indicators, and survey systems.
2. Stock selection techniques – ket technical indicators such as classic trend indicators, acceleration bands, momentum divergences, relative strength and more.
3. Options – a mixture of stock options strategies, trading psychology and money management.

The Price Headley trading rules are one small section of part 3.  Price’s well defined trading system is detailed out and is a model for anyone to use as a guide to developing their own system.  It’s a well known fact that all successful traders have one thing in commmon – a written plan to guide them in their quest to master the markets.

Excerpts from Price’s plan follow.

PRICE’s PRUPOSE:  To continuously learn and grow to become the best trader I can be, by simplifying and focusing my energy to achieve a balanced, centered state that controls the emotions of fear and greed, allowing me to take action when my analysis says the time is now.

PRICE’S PHILOSOPHY:  Big Trends – via Accelerations, Divergences and Relative Strength – to define the best opportunities.

Price also provides more specific trading suggestions that can be used in your own plan, such as:

• focusing on a small number of trades
• take big profits and small losses (sounds simple, but I have read or hear many top notch traders quote the same concept).
• Adjusting stops with the market
• Pre-planned entry and exit points – BEFORE placing the trades

The appendices cover a stock picking checklist, types of orders (contingency order, market and limit orders, not held order, once cancels the other, all or none, fill or kill), favorite web sites, and last but not least the favorite quotes.

“There is only one side of the market and it is not the bull side or the bear side, but the right side.” – Edwin Lefevre, Reminiscences of a Stock Operator

Big Trends in Trading: Strategies to Master Major Market Moves (A Marketplace Book) by Price Headley

Fibonacci retracement levels are a popular and sometimes wildly successful trading method.  It can be thought of as either a technical trading tool, or even a psycological trading tool.

Leonardo Fibonacci was born in Pisa Italy in the 12th century.  His father Guglielmo was a trading post director near Algiers.  Leonardo often travelled there to help his father and became fascinated with numbers and trading.  At the age of 32 he published Liber Abaci, or Book of Calculation.   One problem discussed in the book was the hypothetical population growth of rabbits, which was based on a sequence of numbers called the Fibonacci numbers.  In the sequence, each number is the sum of the preceding two – 0, 1, 1, 2, 3,  5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, and so on.  And the ratio of any number to its subsequent number approaches the golden ratio, or .618.  That golden ratio is very popular in nature, and is also sometimes effective in predicting retracement levels in the stock market.

Creating Fibonacci retracement lines is very easy to do from within Optionsxpress.  First, select Flexcharts from the Quote menu.  Next enter the desired symbol or index, select the timeframe and line type, and use the select tool to choose Fibonacci retracement, as shown below.

Fibonacci retracement lines are drawn from two extreme points within a clear past trend.  They can be drawn on a minute by minute day trading chart or a larger weekly, monthly or yearly chart.  The example below is from a 6 month daily chart of Walmart, and the Fibonacci lines are drawn using the peak and low from the large downward trend during April.  Once the Fibonacci retracement select tool is chosen, just point and click twice on the chart – once for each extreme point within the desired trend.  The example is shown below.

Exactly how well do these retracement zones work?  That you will have to decide for yourself, but do it with your own money and at your own risk! I would also recommend reading a bit more on the subject before diving in with real money.

For a more in depth explanation of Fibonacci trading, I highly recommend the following book:

Fibonacci Trading: How to Master the Time and Price Advantage by Carolyn Boroden

Trend Trading for a Living, by Thomas Carr is overall a concise but well written book on technical analysis and trading.  It starts off like a late night infomercial con artist sales pitch, but then surprisingly it gets better fast.  Here is an excerpt from the infomercial-like first chapter:

Trend trading is the ideal home-based business.  There is no inventory in warehouses, nothing to ship, no bothersome customers, no cold calling, no gimmicky marketing….  There is no Wal-Mart down the road to undercut your prices.  There are no franchise fees, no staff to employ, no lawyers to keep on retainer….Compared to most other home businesses…trend trading has as low a set of barriers to entry as any business could possibly have.  Profit margins run well over 90 percent.  It’s hard to beat that!

What the author fails to state is that most people who attempt to make a living through trading will fail in their attempts.  The author also fails to recognize that trading is nothing more than a market sum game, and that in order to beat the market, somebody else must be losing their shirts to hand you those free piles of cash.

I was almost ready to give up on the book after the first chapter, but as stated, it does get better fast.  There are many technical analysis books that are immensely more detailed than Trend Trading for a Living.  But where this book shines is in capturing only the most important topics in a concise and well written text.  Part 1 of the book starts off with the infomercial, but moves quickly into the most important technical indicators in chapter 2 – simple moving averages, MACD, Stochastics, On Balance Volume, relative strength index and commodity channel index.  There is also a brief piece on hermeneutics (the author’s doctoral dissertation subject), “the study of how the mind understand and applies the content of written texts”.  The moral of the story is to ignore the news, ignore your personal bias, ignore Jim Cramer, ignore CNBC, and just watch the charts.

Part 2 of the book goes more into the trend trading basics, setting up watch lists, determining market direction, and a good test to practice your own chart reading skills.  Part 3 of the book talks more on how to select stocks to trend.  And the best part in this section is the detailed screening list for each of the technical trend patterns discussed.  For a good “Pullback” criteria list of stocks, search the stockcharts.com screening tool for the following:

• 60 day simple moving average of volume for today is greater than 500,000
• 60 day simple moving average of close for today is greater than 15
• The chart has a bullish engulfing pattern for today
• 20 day simple moving average of close for today is greater than the 50 day simple moving average for today
• Daily close for today is less than daily close for five days ago times 1.15

Part 4 of the book provides a good summary of trend trading with stock options, and part 5 of the book unfortunately to much like the infomercial in chapter 1.  Luckily, part 5 is also short enough to be ignored completely, and there is enough worthwhile meat in the book between the first and last chapters to warrant a purchase.

Trend Trading for a Living: Learn the Skills and Gain the Confidence to Trade for a Living by Thomas K. Carr

The S&P 500 has been on a steady uphill climb over the last week, from the near death 671 level to its close of 799 today.  In the sub 700 level, there was constant talk of the S&P being “oversold“, and since the run-up, that talk has turned to descriptions of “overbought“.  Both of those terms have nothing to do with the fundamentals of the S&P 500 components.

Considering only the fundamentals, the S&P still has plenty of room on the downside.  The latest earnings estimates for the S&P 500 for 2009 are only $35.  With the S&P at the 800 level, those $35 in earnings correspond to  a price to earnings ratio of nearly 33, a staggeringly high number considering the rampant fear and uncertainty in today’s market.  And at the low of 671, the $35 in 2009 S&P earnings estimates correspond to a p/e ratio of 19, still pretty high in this environment.

But as I said, those “oversold” and “overbought” adjectives flying around are technical analysis terms used to describe the current market SENTIMENT.  And the STOCHASTICS are the technical indicators used to measure market sentiment.  The chart below is from Yahoo Finance, and it depicts the SPY (S&P 500 ETF) year to date pricing, along with the fast stochastic and slow stochastic indicators.

Similar to moving averages, stochastics can be calculated with your preferred choice of parameters – %K and %D.  It’s best explained with an example.  The slow stochastic graph above is calculated using a %K of 15.  This means that each point on the %K graph (blue line) is calculated with that day’s closing price, and the closing prices of the 14 preceding days.

%K = 100 * ((Recent Close – Lowest Low(n) / (Highest High(n) – Lowest Low(n))

The “n” in the equation above represents the last 14 trading days.

%D is calculated using a 5 day moving average of %K.

Simple enough, right?  Sure it is, but to make it even simpler, just use your favorite charting software to toggle the display of the stochastic indicators, and voila, you now have  a view of market sentiment and can determine for yourself if it is overbought or oversold.

What is overbought and oversold? – Market technicians haver differing views on this.  Some will say that any reading above 80 is overbought and below 20 is oversold, presenting good selling and buying opportunities.  Others prefer to wait for a confirmed reversal.  When the stochastic indicator crosses below 80 (after hovering above it), its time to SELL.  And when the stochastic indicator crosses above 20 (after hovering below it), its time to BUY.

But whatever decision you make, remember that it’s your money, and it’s YOUR RISK!

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Technical Analysis defined – an investment or trading technique that bases buying and selling decisions on historical market data and trends.

Fundamental Analysis defined – investment or trading decisisons are based on the study of historical fundamental data such as earnings, cashflows, peer company studies, and general economic trends.

The technicians and the fundamentalists are like doctors and lawyers – constantly pointing out the flaws in each others logic, while claiming superior systems themselves.  In reality, there are plenty of bozo technicians and fundamentalists out there.  But the best and most successful traders are equally gifted at both fundamental and technical analysis.  Here are a few thoughts on technical analysis.

1)  Moving average – This is one of the simplest ideas in technical analysis.  The idea is to create a smoother curve from market pricing points.  For a 30 day moving average, each point on the curve would be the average of that days closing price and 29 preceding days closing prices.  In theory (don’t try this at home!), you could BUY a particular stock when it closes ABOVE the moving average, and SELL the same stock when it is BELOW the moving average.  Here is a chart of ISRG showing the extreme run up in its shares, followed by a plateau period, and a sharp share price decline.  Perhaps the moving average indicator would have in fact worked here, but in most other cases, using only the moving average as your BUY/SELL indicator will probably lose you money.

2)  Analysis Paralysis – Some people like to use and seek confirmation from multiple technical indicators before placing their BUY or SELL orders.  Other people (a lot more than you think) use so many damn indicators that all they do is stare at the screen and paralyze themselves from any action.

3)  Sometimes all those funny Technical Analysis indicators form funny Black Swan images.

4) The Simplest Investing Rule – If you want a good system for trading the S&P 500 on a longer term basis, then perhaps you may be interested in Karl Denninger’s simple rule.  The rule advises to SELL when the 20 week moving average goes BELOW the 50 week moving average.  And the BUY signal occurs when the 20 week moving average goes ABOVE the 50 week moving average.  The image below is from Yahoo finance, and depicts SPY (ETF for the S&P 500), along with a 140 day moving average (20 week), and a 350 day moving average (50 week).

For another even simpler explanation of the simplest investing rule, check out the MAS informative and humorous take on the subject.

And if you still insist on learning more about technical analyisis, then check you should BUY and READ the following classic book, combining trader psycology with detailed technical analyisis information.

Trading for a Living: Psychology, Trading Tactics, Money Management by Dr. Alexander Elder

Fundamental analysis and technical analysis are two methods that investors (traders) use to narrow down the list of thousands of stocks into a single stock that meets their criteria of the day (minute) of buying or selling. With fundamental analysis of securities, investors make purchase or sale decisions based on analyzing financial statements, and determining a fair value. They buy when the market price is below their calculated fair value and they sell when it is above it.

Technical analysis, on the other hand, views financial statements as a waste of time. They view the market as efficient and maintain that all fundamental information is already reflected in any given stock price. They are more interested in the psychology of trading. Emotional responses to initial price movements lead to predictable and recognizable price chart patterns. The trend is your friend is their motto, and they jump in and out of stocks based on the initial price chart patterns that lead to a high probability of a predictable continuation pattern.

Years ago I would have sided with the fundamental analysts over the perceived voodoo of the technical analysts. But I recently came to my senses and have embraced technical analysis. I still use the fundamentals for a quick sanity check – is the company consistently cash flow positive and do they have a low or reasonable debt load. But I use technicals because they work quicker and more consistently then pure fundamental analysis. And in 2008 especially, I use technical analysis because the fundamentals are broken. Take a look at the wild price swings of a few 6 month price chart for 2008. Those wild price swings are the epitome of mass psychology, emotional responses, over reaction, under reaction, hysteria, confusion, and all things a keen understanding of technical analysis can help you capitalize on for the rest of 2008 and beyond. But the key is understanding the technicals better then everyone else.

Today’s recommended reading:

• Trading for a living: an older book written in 1993, but yet still very timely. Helps you dissect and understand your own emotional response the the markets – individual psychology – as well as the mass psychology of the market as a whole. But it goes beyond the psychology and breaks down all the key technicals, starting with a basic chart and and deeper into histograms, momentum, Williams %R, stochastic, relative strength and more.
• Technical analysis of financial markets: Slightly newer then the previous, last copyright in 1999. Not as much on the science of market psychology, but more in depth info on price gaps, continuation patterns, reversal patterns, Japanese candlesticks, Elliott waves, and other price cycles.

Trading for a Living: Psychology, Trading Tactics, Money Management by Alexander Elder

Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance) by John J. Murphy

The Geldpress team has just uncovered another excellent free stock screening tool for those that are completely opposed to paying fees for good financial tools. The downside to the free tools is that no one site has it all – clear and concise financial reports for at least 10 years, historical price data for stocks and options, and easy to use fundamental and technical stock screeners. But if you don’t mind jumping from site to site, you may want to add etrade’s clearstation site to your bag of tricks.

Start your search at the clearstation website, and then click tag and bag in the upper left hand corner. Then click on technical events under the first orange bar. There are 24 easy to use pre-programmed technical scans built in, but the one I find most useful is the first one on the list (Trending up – MACD bullish). You can limit each search to a particular exchange (NYSE, Nasdaq, etc), or bring up the results from all exchanges together. Clicking on the bullish MACD search initially brings up just the list of stocks with bullish MACD’s. A sample result is shown below from a July 16th screen:

Using the above data in combination with a more detailed chart view is highly advised. For a much more detailed view, click on one of the Graphs links, which will display the default detailed graphs as shown in the example below:

The top chart is a price chart using bar charts, which are much more useful then line charts because they show ranges of prices, and allow easy viewing of support and resistance levels. The top chart also shows red or green upper bars indicating positive or negative MACD.

The second chart is a volume indicator and very useful for confirming whether the price trend is accompanied by high volume spikes, or perhaps just a random price change. Next is the MACD histogram, which shows a more detailed view of the MACD then the top price chart does. The bottom chart is the stochastic histogram which can be used to measure overbought or oversold conditions. Registered users can customize individual graphs and settings.

Disclaimer: The data above is just a sample screen and in no way meant as a recommendation.

I’m a big fan of the free investment web tools (Google finance, Yahoo finance, MSN money), but I’ve always stated that the fee based tools are worth the money. The free information is quickly closing the information gap on the pay services, just a bit more scattered and time consuming to find. Sector rotation and industry ranking information is one key feature of many fee based financial tools, but I just stumbled across the Prophet.net site that gives it away for FREE!

Here is the top portion of a basic snapshot of the prophet.net industry rankings:

The image above only shows the higher rated industry groups so they are all green, meaning that the money is flowing into these industry groups. On the prophet.net website you can see the entire performance grid, including the bottom ranking industry groups (anyone want to take a guess?).

This layout of the chart is remarkably similar to the investools big chart, but with a few more bells and whistles. You can change the view of the prophet.net chart to either historical trends or current performance. I personally perfer the historical information, as shown in the image above. The trending is read from right to left, with the most recent data on the left. The numbers in the chart are industry group percentiles, as compared to other groups. In a nutshell, the higher the number, especially when trending upwards from week to week, signifies that big institutional money (mutual funds, pension plans) is flowing into that industry group.

The information is particularly valuable for ETF investors who want to be in the next heated sector. It’s also useful for those that want to maintain hedged portfolios using pairs of ETF’s – one long and one short for example. The proshares inverse ETF in an out of favor group could act as the downside hedge, along with an upside play on a hot performing group.

The stock screening tools mentioned yesterday are generally used for fundamental analysis screens. For technical analysis screens, there are also plenty of free scanning sites available, such as this one from stockcharts. It breaks out scanning data into several categories, including:

• new 52 week highs and lows
• overbought and oversold based on relative strength indicators (RSI)
• strong volume gainers and decliners
• movement beyond bollinger band ranges
• candlestick pattern potential breakouts

However, as with anything else in life, you do get what you pay for. The free tools are a great novelty, but I am quite happy spending money every month for access to a more sophisticated stock screening platform.

There are two types of traders – fundamentalists and market technicians. The fundamentalists don’t concentrate on dissecting the numbers – earnings, cash flow, balance sheet, future profit projections – to come up with what they perceive to be the value of a company. When the stock trades lower then their perceived value, they buy shares.

A market technician concentrates on price and volume pattern, and historical prices to determine when to buy and sell. This is not to say they don’t care about the fundamentals. They just take a leap of faith that the fundamentals have already been baked in by everyone else to come up with the range of market prices. And they also take extra caution during times when the fundamentals can change everything else – earnings season.

So what is technical analysis? It’s a study of the statistics generated by market activity – mainly past price and volume action. And it’s the extrapolation of those studies to make a determination of where the market is going next. There are thousands of indicators and study sets that a market technician uses, but they key is not to use all of them at the same time! In fact, the best approach I’ve found is to really narrow the field to just a few basic studies.

The examples below will use Boeing (BA) as an example only. And to ensure the most timely data, I will link to the Yahoo Finance pages so you can see the charts yourself.

Support and Resistance – Stocks will often stay within channels and bounce between support and resistance lines. When the price of a stock goes to low, the value investors are jumping in with their buy orders. The price point at which heavy buy activity starts is the support line. It is the low points in a chart at which the stock price stops going lower, and reverses direction to proceed higher. The resistance level is the exact opposite and it is the point at which people get nervous and stop buying because the perceived price is to high. Support and resistance levels are easier to see on range charts (bar or candle) versus line charts.

Moving Average – a moving average is a method to smooth out a jagged price chart, where each point on the moving average line is an average price over a given period. A 20 day moving average would utilize 20 days of information (today’s price plus the previous 19) for every point on the graph. Take a look at the Boeing moving average to see for yourself. The moving average is one of the simplest technical indicators. As prices broach the moving average line, many people believe it will continue in the same direction for a long enough time to yield a profit.

…Stay tuned for more technical analysis info… Coming soon at Geldpress.