Recently, I got a very thoughtful note from someone who clearly is trying to better himself trading by doing one thing every good trader should do- self-analysis. I opted not to do that for the first part of my career instead trying to rationalize everything I did right or wrong or simply not looking into it in thinking I'd "get to it later." So, as I know for a fact this person just started trading, it warms my trading heart to know that this person already is not making one of the biggest mistakes I made early in my career as going over my trades each and every day for awhile has contributed greatly to my success. In any case, this person analyzed data from his previous 150 trades or so in analyzing whether he was profitable on the trade, whether the trade was made with the intra-minute trade, whether the trade was made with or against the price change of the previous minute, whether the trade was made with or against the price change of the second previous minute, and over the last 5-10 minutes. He found that trades having all factors with tend to be winners, trades with 2-3 factors had negligible outcomes, 1 or 0 factors had negative outcomes, and the highest negative effects tend to be against the trend or the previous minute move. He found in his limited sample that trading with a trend does not necessarily help, but trading against a trend tends to be detrimental to one's likelihood of making money in a given trade. Several things stuck out to me after studying the situation:
a) The market may shift intra-minute or a few seconds after you enter a trade (on the next bar) so I wouldn't put a lot of stock in immediate-term analysis such as that. By that, I mean, if you buy something at 58 seconds, it may or may not finish to be an up bar and the next bar may be against you barely on a 1-minute chart (like 1-2 Dow points). Furthermore, there are definitely situations I am in particularly like SODA where it is in its own world...those will skew the results.
b) Make sure you know the stocks you're trading. I am exaggerating, but FAZ will tend to move opposite of the market. An oil stock may be declining if the broader tape is rising if oil is weak that day. And so forth. So all of that could skew your results as well.
c) He failed to denote whether the market was moving with or against the stock. I tend to find the obvious- for immediate-term plays, if I am long a stock particularly a momentum play like AAPL- I need the market to be going with me to be profitable more often than not.
d) The time of day is very very important in this type of work. A trade done at 12:30PM when prices are typically more stable tend to result in smaller deltas and make this type of analysis null and void.
e) That whole "5-10" minute thing is very very very vague. In doing studies such as this, times need to be definitive so that one is comparing apples to apples.
f) I am not sure of the stocks in the sample, but while it makes sense that if a stock tends to be up one minute, two minutes, and three minutes, it'll probably be up seven minutes later yet it can also become a problem again depending on the delta of the move. If something moved from 25 to 25.10 to 25.20 to 25.30 over the course of three minutes and went to 29 over the course of seven minutes, I am not so sure I want to step in at 29 simply because it had already risen in all time periods.
g) The last factor was the most important thing to glean. I've said it many times- trading against a trend for an immediate-term move tends not to work...but to see it first-hand only serves to reinforce that notion and drive it home when the situation arises. It is precisely why if I have all my factors in place from the Epiphany Method, I tend to buy stocks on their highs and short stocks on their lows. Contra-trend trading in the immediate-run intrinsically fails if one is attempting to fade a powerful immediate-term movement while longer-term moves such as 10 minute moves can be powerful which is why I preach not accumulating positions as they move against you...but doing so as they gradually go in your favor.
In short, self-analysis is great as long as one gets very specific about what one is looking at while taking into account The Big Picture of things like the broader market and the velocity of the move one is studying.
Markets throughout Europe in particular breathed a sigh of relief after a fairly successful bond auction in Portugal. Tokyo had a marginal move overnight but London is up 0.5%, with Frankfurt and Paris both up 1.5%. The dollar is flat, oil and gold quiet, and bonds down a little. Futures are up sharply. The MBA Mortgage Purchase Index, Export Prices, and Import Prices all came out as expected. Crude Inventories are due out at 10:30AM, Treasury Budget (-80 billion) at 2PM, and the Beige Book at 2PM. With the snow outside, look for a lower volume day than normal but the tone is wonderful. There are a few chinks in the armor with the likes of GS trading down and ACI having warned, but the broad tape is strong. The focus will likely be on the financials, big cap techs, relative strength/weakness plays, materials, coals, and small cap momentum plays.
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
APOL- closed near a high after posting great earnings
ININ- closed near a high after posting great earnings
BODY- closed near a high after raising earnings guidance
SYK- closed near a high after raising earnings guidance
OCZ- closed near a high after raising earnings guidance
CDE- closed near a high after a brokerage upgrade
PCX- closed near a high after a brokerage upgrade
TGB- closed near a high after a brokerage upgrade
CAAS- closed near a high after a brokerage upgrade
SHAW- closed near a high after a brokerage upgrade
FCX- closed near a high
IPCI- closed near a high
RIG- closed near a high
CAM- closed near a high
ATI- closed near a high
DAC- closed near a high
SINA- closed near a high
CRED- closed near a high after completing 3rd consecutive high rate Bakken discovery
EEE- continued an amazing 300% ascent in the last several days in closing near a high
LULU- raised earnings guidance
NE- to go into S&P 500 on Friday’s close
ZLC- positive same-store sales
NG- featured on “mad Money” last night
FUL- decent earnings
APWR- received two contracts in China
ITT- splitting into three companies
Bad-The following stocks have bad news and/or a weak technical pattern
BKI- closed near a low after a brokerage ratings cut
LVS- closed near a low
BGFV- earnings warning
SNX- poor earnings
CLF- announced major acquisition of Thompson Iron Mines for C$4.9 billion
GAN- closed near a low in a continued freefall after the company indicated it intends to deregister its common stock several days ago
ANN- closed near a low following TLB’s poor earnings
IGTE- closed near a low amid financing worries over impending acquisition of Patni Computer
NVTL- closed near a low amid the VZ plan to sell an iPad that connects directly to its network
TSTC- closed near a low after Forensic Factor requested NASDAQ halt trading of TSTC due to the company’s involvement with Chinese reverse mergers
ACI- lowered earnings guidance
Earnings:
WED JAN 12 BEFORE
None today
WED JAN 12 AFTER
DRWI
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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