Newsletter
September 16, 2006
Your Beliefs are a Self-Fulfilling Prophecy
Market & Sector Review
Buying Power
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Your Beliefs are a Self-Fulfilling Prophecy
Most people have similar end values, but each of us experience them differently. This is simply because of both major and subtle differences in our beliefs. Beliefs take two forms: Broad generalizations about life, people, and things; and rules we use to measure the worth of our own and others' actions. Rules are more definitive. Rules determine, in our minds, the things and events that must happen in order to experience results in a particular way. Rules take the form of "if, then" statements such as "If I make a million dollars in the market I can quit my job and then I'll be happy" or "If I make a mistake on a trade, then I'll learn from it." All of us have our own unique set of beliefs and rules, and it is this unique set that gives each of us a distinctive personality.
One of the attributes of a successful trader is self-confidence. Feeling self-confident comes from recognizing your personal worth and effectiveness. How you feel about yourself depends not so much on what you actually do, but how you judge what you do, and how you judge what you do depends on your beliefs about what it takes to be a worthwhile person. To gain self-confidence, you must establish standards that make it possible. Suppose, as a successful trader, your standard is to cover your overhead and make a profit each month. Now suppose, instead, that your standard is to net $1 million dollars each month. It would be hard to be self-confident under those circumstances. Set your goals high, but be easy on yourself in setting standards for evaluating your self-worth.
Your beliefs are the ultimate self-fulfilling prophecy. Your subconscious is gullible - it believes what you tell it to believe. If you believe you don't deserve to be successful, it won't let you be successful. If you believe you don't deserve love, it won't let you achieve love. If you believe that you aren't intelligent enough, it will make you stupid. Believe me when I say to each and every one of you, you are intelligent enough!
The statements we make to ourselves and the questions we ask are both a cause and a consequence of our beliefs. When you say something to yourself like "I am so stupid!", after a losing trade, you are both stating and reinforcing a belief, however briefly you may think it is true. You may not mean this in a fundamental sense, but if you say it often enough and especially in a highly emotional state, then your mind is very likely to start believing it.
When defining new rules that you want to adopt, remember to rig the game of life so it's easy to win. Rules that allow you to feel passion, love, happiness, success, and so forth don't have to be difficult or even impossible. We all need challenge in our life, but there is more than enough challenge in striving, for a constant progression of goal achievement without setting ourselves up for failure. Life is too short, too precious, and too full of potential to waste time by setting ourselves up to experience life as futile.
Market & Sector Review
Buying Power
In last week's newsletter (Sept. 9 Newsletter) I went through a few what if scenario's developing for us a new indicator, calling it Buying Power. I ended with a chart of the NASDAQ-100 (NDX) where this new indicator seemed to have some predictive power. But does it really? Can we use Buying Power alone as an entry and/or exit signal? If it works on the NDX will it work on other indices, sectors, or ETF's? This week we'll do some back testing to find out and then hopefully draw some conclusions on when, how, and if, to use this indicator. Let me preface this outlook with the simple statement: in my humble opinion, one should never use just one indicator to make a decision. Use an indicator to confirm or rebuff your outlook and timing, not as a sole decision maker. Personally I use indicators to merely paint a picture, in my mind, of what is happening at this point in time.
Today I will give you a very quick overview of some back-tests, and for brevity only on the NASDAQ-100. Hopefully this will give you a better feel for how this indicator may help in your analysis. Please remember this is not some mysterious proprietary indicator made to impress; you know exactly how it is constructed, you know the mathematics used for the calculation. When viewing this indicator, or any indicator for that matter, try and picture in your mind what the construction and calculations are attempting to say.
To begin I did a simple visual inspection of the charts scrolling back and forth in time. Second step: alter the smoothing, last week I presented a one month smoothing factor, but played with different time frames from a few days to several months. Visual inspection alone leads me to the conclusion that a one month smoothing factor is probably the best. Next on the agenda; is there significance to the 50% line? A quick visual said to me probably not, as the indicator spends too much time fluctuating right around the 50% line. But let's put the computer to work and do a back test on the NDX or QQQQ if you will. Criteria for back test: if Buying Power is greater than 50 - buy, if Buying Power is less than 50, sell. Test period is 1/1/2000 through 9/8/2006.
As suspected from visual inspection this amounts to whipsaw city. One interesting statistic from above is the number of days held during the largest win on both the long and short side of the NDX. This suggests that Buying Power may keep you in the markets during a strong trending period. An outstanding objective if you're an intermediate term or swing trader!
If the 50% line is not significant, "what if" we expand that and require higher as well as lower thresholds. Perhaps something we might call a buying surge; for now lets call it 55%. Of course with any new purchase we want to allow some room for the market to work; so we'll sell when Buying Power falls below 45%. Then for testing purposes, at 45% we'll turn the position around to short and cover that short on the next move above 55%. A swing system if you will where you are always in the market either long or short. Are there worthwhile improvements?
Quite an improvement, don't you think? First item I noticed; reduced trading from 149 trades down to 25 trades over the six plus years. In addition the average holding period of the winners was almost four months, compared to about two months for losing trades. Let your profits run; ever hear that! And finally the average annual return was 12.5%. That may not sound very exciting until you consider the fact: the NDX is down about 60% over the same time frame. Remember I am not attempting to devise a trading system and I am only testing against the NASDAQ-100. We're merely attempting to understand this indicator; how it maybe talking to us. This is a learning exercise and only the beginning at that. Beyond the above statistics let's take a look at a graphical display of the signals:
Today's exercise is simply to determine if Buying Power is a viable indicator, not an indicator to end all other indicators. If I were to poll all of our subscribers I'm sure I would find many different types of traders from day traders through long term investors. Here is an indicator that, in the case of the NASDAQ-100 or QQQQ seems to have the ability to keep you with the trend for the lion's share of that trend; an attribute I personally admire. On the negative side, if there is not a major trend in force this indicator, as most indicators, will have a tendency to whipsaw your trading although utilizing the 55/45 rule, not as bad as I would have anticipated.
Unfortunately time availability has not permitted any back testing against other indices or sectors at this time (perhaps soon). This indicator however, is now calculated and posted, on our index and sector charts for you to follow, become familiar with, and hopefully profit from. In addition the dollar weighted volume of advancing stocks minus volume of declining stocks replaces the older calculation.
Just for fun let's take a look at some sector charts, see if you spot anything worthwhile, could you have found a nice winner? I really think so! Always try and remember the old stock market adage: "It's not a Stock Market. It is a market of Stocks."
Sector charts as of Tuesday 9/12/06.
I believe this is a worthwhile indicator to include in your mix of indicators when analyzing markets and sectors. Why not visit these charts on Wednesday evenings and over the weekend. See if all the indicators presented on these charts help paint a picture in your mind of what is happening and the changes taking place. Your time might just yield some handsome dividends!
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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