Nickajack Creek Trading Co., Inc.

An indicator divergence is simply when price is moving in a direction opposite of an indicator.  I personally like using oscillating momentum indicators for monitoring divergences and have included a stochastic in my methodology for doing so.  In general, oscillating indicators follow price swings up and down which creates their own swings.  The direction of price and the indicator are best seen with lines drawn between two swing highs or two swing lows. 

Divergences are determined by comparing the slope of the line between the price swings with the slope of the line between the indicator swings.  If the slope of the price swings is up and the slope of the indicator swings are down at the same time, then price and the indicator are diverging.  Likewise, if the slope of the price swings is down and the slope of the indicator swings is up, the price and the indicator are diverging.

Why are divergences worth monitoring? 

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A fractal is a geometric shape that when sub-divided into smaller parts, each of the smaller parts is similar in shape to the original geometric shape.  Market charts show market price movements through time as bars or candlesticks.  Prices move up and down forming patterns on the charts.  Each price bar represents one or more trades that occured.  The chart time frame defines how many trades take place within each bar.  For example a 5 minute time frame chart says that each bar represents all the trade prices during a 5 minute period.  A 777 tick time frame chart says that each bar represents the prices of 777 trades.

So how are markets fractal in nature? 

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One of my favorite models for the markets is Auction Market Theory (AMT).  AMT is the underlying theory for Market Profile (MP).  It simply says that all markets are auctions where buyers and sellers negotiate for a fair price of the underlying instrument.  When prices become cheap, buyers step in which cause prices to rise.  When prices become expensive, sellers step in which cause prices to fall.  Price will stay in a range until the fair price expectations of the buyers and sellers change.  A change in expectation can be caused by any number of things; market news, economic information, technical breakouts, weather, some outside event, etc.

What is important in day trading is knowing what the buyers and sellers are doing.  You want to know who is currently in contol of the market.  If you know who is in control, you know which way you want to be trading.  So how do you know whether the buyers or the sellers are currently in control of the market?  Read the rest of this entry »

I’ve written a lot about trading in various list groups and forums.  My psychological problems yesterday morning reminded me about some old posts I had written which provides a perspective on how psychology fits into trading.  Now if I can only remember to follow my own advice… 🙂

Trading is much different than working a job.  With a job, if you want improved results, you work harder.  In trading, market movements dictate when you can make money and no matter how hard you work you cannot change when the market moves.  So trading is not about working hard, it’s about waiting for the proper market conditions and acting on your system’s signals once the market conditions are in place.  Burning desire to trade is almost always a killer for a new trader because it tends to lead to overtrading and taking trades when the market conditions are not conducive. 

If you think of successful trading as a chain, if one link of that chain is broken, you will not be successful.  The chain links include a profitable system, money management, hardware, software, broker, data feed, internet connection, environment, health, and your psychology (I’m sure there are more links, I’m just rattling off a few).  The psychology link is the hardest to keep whole.  Lack of discipline or strong emotions like greed, fear, or anger can break that link which in turn breaks the whole success chain.  Think about it, if you’re sick or your environment is distracting or your broker connection is bad or your hardware fails or any link is broken, your success is greatly hindered.  Success is only as strong as your weakest link.