Newsletter
September 9, 2006
Enable Yourself to Become Aware
Market & Sector Review
What If?
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Enable Yourself to Become Aware
If you show a stock chart to someone who knows virtually nothing about graphs and the
financial markets, what do you suppose they see? Basically, they would see a confusing
collection of lines, numbers, and so on and at most they would see some sort of wavy
pattern. Your range of awareness is contextual. In order to be aware of anything, you must
understand the nature of what you are dealing with. Your subconscious mind can only
make sense of that which it is programmed to make sense of. That is why knowledge is so
very important. In this example the subconscious will simply not take in very much
information - it just doesn't know what to do with it.
The biggest block to awareness is the often-inadvertent programming of our minds. If we
instruct our subconscious, that something is unimportant, not to take in certain kinds of
information, then it won't. It will be impossible to be fully aware of what is occurring. When
you aren't getting the results that you want, something is wrong - there is a contradiction
somewhere in your mind blocking you. Probably the biggest block to achieving, is the
limitations to awareness that we inadvertently place in our minds, through the acceptance
of negative associations and beliefs. Conversely, positive associations and beliefs enable
awareness.
You and only you are responsible for the results you realize. Super-trader and trainer Dr.
Van K. Tharp explains it this way: "The best thing and investor (or anyone) can do,
when things go wrong, is to determine how he or she produced those results. Now, I don't
mean that you should blame yourself for mistakes either. I mean that at some point in time,
for any situation, you made a choice that produced those results. Determine what that
choice point was and give yourself other options to take when you encounter a similar
choice point in the future. Change the decision at similar choice points in the future and you
will change the results you get. And by imagining doing so now you can make it easy to
select those alternatives in the future." Dr. Van K. Tharp, The Psychology of Trading,
from Market Wizards, by Jack D. Scwager
It is extremely tempting to blame our mistakes, failures, and pain on other people or events.
If, however, you continually remind yourself that they are yours and are a result of your
action, then you enable yourself to become aware of what caused them. Mistakes, failures,
and pain are a part of life, and we all want to avoid them. But you can't avoid them by
denial. If you choose to accept them as a part of life then they lose their power over us.
They become OK, acceptable, normal, even a positive opportunity to learn, and grow.
In Reminiscence of a Stock Operator, Jesse Livermore said, "I don't mind making
mistakes, what I don't like is being wrong." What I believe he meant was that making an
error is okay, but what isn't okay is making an error, not admitting it, not learning from it,
and continuing to do it.
Market & Sector Review
What If? (Indicator Development)
Many years ago there appeared a Hewlett Packard commercial on television that ended with
the saying: "We always ask what if". The saying caught my attention and stayed
with me. Prior to entering a trade I always ask myself "What if". What if this or that
indicator is really saying something other than my current interpretation? What if my overall
assessment of conditions is not correct? And so on! It's a good practice. For this week's
newsletter we will take that, "what if" a little further; what if this indicator or that
indicator was constructed differently? Would it show me a different picture? Would it be
better? Let's experiment a little bit with a standard well known calculation and see if it can
be improved? By the way I firmly believe it is essential that one understand the construction
and calculations for any indicator you use. Think for a moment; how can you possibly
understand what an indicator may or may not be telling you, if you do not really understand
it's construction? Regardless of how it may have performed in the past.
If you follow the chart postings each week of indices and sectors you've undoubtedly
noticed two breadth indicators: the cumulative running total of advancing stocks minus
declining stocks or the advance/decline line; and its cousin the cumulative running total of
volume of advancing stocks minus volume of declining stocks.
I have noticed over the years that some services have had success dollar weighting
indicators such as the put/call ratio and I thought to myself "what if" we take the
advancing volume minus declining volume and dollar weight it? That would give a 1,000
share purchase at 10 the identical weight as a 100 share purchase at 100. Will it change
the picture we view? Will it give us a better hint as to what is coming? Let's take a look at
a few charts with both dollar weighting and no dollar weighting (as of 9/1).
As you can see from the above examples sometimes the dollar weighting gave us a good
clue and sometimes it merely mirrored the original calculation. If the dollar weighting only
gives a good indication on some occasions while merely mirroring at other times, it's
probably a worthwhile substitute on our chart postings.
Think I'm finished? Not yet! Now let's take the thinking one step further, suppose ("what
if") we express the dollar volume of advancing stocks as a percent of total dollar
volume, we'll call this Buying Power. In other words:
Buying Power = (($ Vol. Adv. stocks) / ($ Vol. Adv. stocks + $ Vol. Decl.
stocks + $ Vol. of unchanged stocks)).
Without any smoothing we get a chart with extremely jagged lines, at best, extremely
difficult to interpret.
It is relatively rare that trends turn on a dime. Time is needed to accumulate stocks during
a down trend and distribute stocks into an up trend. If we smooth the above data, over
let's say a months worth of trading what kind of picture do we get?
A very interesting picture! Notice in the above chart how the one month smoothing of
Buying Power was declining as the NDX moved into its early 2006 high, and conversely how
Buying Power began increasing as we moved into the recent lows. An interesting picture,
I'm intrigued. Is there significance to the 50% line, above which Buying Power is more than
half of all volume? Honestly, too early to tell, some back testing as well as following needs
to occur, before a judgment can be made.
Caring this thinking one step further what if we called the blue line above Buying Power and
add to the graph its compliment Selling Pressure which would be Volume of Declining Issues
/ Total Volume (Orange line on charts) what kind of picture presents itself? Let's revisit the
charts above as of Fridays 9/8 close.
There remains a good deal of work on this potential indicator. This is merely an introduction
to the what if thought process and where it can lead you. I am not sure of two
things at the moment: first what is the best smoothing factor (if any); and secondly just
how to present the data for everyone to view and understand. I would be very interested
in hearing from you on what you think; especially the more experienced traders and advisors
out there, but certainly all members are welcome to respond. E-mail Bill - Are we on to
something? Possibly!
Next time remember to ask yourself "What If"!
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Have A Great
Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all
individuals. The contents of this newsletter are not a solicitation to buy or sell securities.
The opinions expressed are solely that of the author. You must do your own research,
contact your own financial advisor for suitability of any investments. Data gathered is from
sources believed to be reliable, but NO guarantee as to their accuracy is made.
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