Money and loans

More on Choosing the Length of the Intraday Bar

admin — Wed, 09 Dec 2009 18:19:03 +0000

While there is no right bar length, traders most often choose 5-, 10-, 15-, 30-minute. and 1-hour periods to chart. Most of the commercial software packages require that the interval be evenly divided into 1 hour; therefore, a 6 1/2-minute interval is not allowed. When using longer bars, such as 1 hour, it is important to consider the length of the last bar of the day. A 1-hour bar will post its first price at the end of the first actual hour, rather than 1 hour after the open; the last bar will be the interval from the last whole hour to the close. In the case of oil, this may only he 10 minutes. When bars are uneven in this way, the price ranges and corresponding volume are no longer comparable with one another.
There is a difference in opinion between analysts over the choice of intraday intervals. One group prefers to pick a standard number because it conforms to the way others trade, for example, you can expect orders to flow more actively every hour. This approach may be particularly valuable if you plan to take the opposite position. The other group of traders are constantly seeking their own time interval, avoiding uneven order flow and price distortion caused by most other traders. if you are part of this group, you may choose your interval by dividing the total number of minutes in the trading session by a value that gives you equal-length bars. You may also want to find a bar length, such as 21 minutes, that represents a Fibonacci number and comes close to dividing the day equally.

Moving Averages

admin — Fri, 04 Dec 2009 18:17:47 +0000

The intrinsic dependency on time makes a moving average less adaptable to day trading. To be used properly, a moving average must be recalculated at fixed intervals. Two phdosophic: questions must be answered with regard to intraday moving averages. Do trends exist in this short time interval, and does it make sense to apply a moving average to all intraday prices unevenly spaced with respect to time? Markets with a large noise component require more time to identify a trend, or a larger price move; therefore, it may not be possible to enter a trend trade and still have enough profit potential before the end of the trading session. it is likely that there will not be more than 25% of the daily range remaining after the trend has been identified, making the profit opportunity too small.
The versatility of computers allows all intraday prices to be used in a moving average rather than the traditional 5-minute bar; furthermore, you can create a price bar based on every 5 or 10 prices, regardless of time. In a liquid market, prices might be posted every few seconds even though volume may vary. For practical purposes, prices might be considered equally spaced. But consider an extreme example. The price of a less liquid market changes every 15 seconds during more active times, then quiets to 5-minute intervals; at one time, there is a lull of 15 minutes followed by a jump in price. Is there a difference in the way we would interpret the following two patterns? is there a difference in the way a moving average would calculate the trend?

Conditions in the Capital Market

admin — Wed, 02 Dec 2009 18:16:25 +0000

You will recall from prior courses in economics and finance that the purpose of capital markets is to bring together investors who want to invest savings with companies or governments who need capital to expand or to finance budget deficits. The cost of funds at any time (the interest rate) is the price that equates the current supply and demand for capital. A change in the relative ease or tightness in the capital market is a short-run phenomenon caused by a temporary disequilibrium in the supply and demand of capital.
As an example, disequilibrium could be caused by an unexpected change in monetary policy (for example, a change in the growth rate of the money supply) or fiscal policy (for example, a change in the federal deficit). Such a change in monetary policy or fiscal policy will produce a change in the NRFR of interest, but the change should be short-lived because, in the longer run, the higher or lower interest rates will affect capital supply and demand. As an example, a decrease in the growth rate of the money supply (a tightening in monetary policy) will reduce the supply of capital and increase interest rates. In turn, this increase in interest rates (for example, the price of money) will cause an increase in savings and a decrease in the demand for capital by corporations or individuals. These changes in market conditions will bring rates back to the long-run equilibrium, which is based on the long-run growth rate of the economy.

Point-and-Figure for Short-Term Trading

admin — Sat, 28 Nov 2009 18:14:30 +0000

Point-and-figure charting has been a primary tool of day traders for many years. Using the minimum price movement as the box size and a 3-box reversal, many traders will keep a continuous, although lengthy, chart of day-to-day price movement. Buy and sell signals can be taken in the standard manner, but day traders are most likely to use these charts for identifying countertrend support and resistance levels. Intraday point-and-figure, as well as moving averages, often show frequent changes of direction before a new buy or Sell signal occurs, even when the minimum box size is used. Trend methods are best applied to short-term overnight positions in which the size of the move is much larger.

Intraday versus Overnight Price Ranges

admin — Wed, 25 Nov 2009 18:13:30 +0000

Holding a position overnight involves margin and, above all else, greater risk. it also increases the opportunity for larger profits. In moderately active markets, the opening gap, the difference between the prior close and the next open, can be one-third to one-half the size of the normal trading range. Markets that are traded in one time zone but reflect the business of a completely different geographic region, have larger systematic gap openings. For example, the Nikkei 225 is traded at the Chicago Mercantile Exchange, but the Nikkei reflects the value of the Japanese stock market. While the day session in Chicago is open from about 7:00 A.M. to 3:00 P.m. local time, the time in japan is 10 hours earlier, 9:00 P.M. to 5:00 A.M., a period when there is no business activity in Asia. When Chicago opens, it must immediately reflect the price of the previous closing session in japan; therefore, it gaps to that level. This same situation happens to a lesser degree for European currencies, which are actively traded on Chicago’s IMM. When those markets open at 7:20 A.M., Europe is coming back from lunch and all local economic news has already been absorbed into the market.
We can see that the currencies and metals, representing markets actively traded 24 hours, have the largest overnight gaps. Viewing world markets only during the U-S. business hours can put a trader at a disadvantage and force him to deal with unpredictable, uncontrollable risks. This has prompted many traders to watch the markets through both day and night. Most computerized systems have no trouble continuing their calculation through various sessions.

Time-of-Day Patterns

admin — Thu, 19 Nov 2009 18:12:32 +0000

Time-of-day and short-term patterns are combined in the most popular forms of day trading. There are natural occurrences during the trading day that make certain times more important than others. The opening gap and the continuation of that direction usually take the first 15 to 20 minutes of the trading day, as does the reaction to the U.S. economic reports that are released at 7:30 A.M. in Chicago. After that, a price reversal occurs and a trading range is established, which lasts until the middle of the session. The midmorning period, which may marginally expand the initial trading range, tends to include low volume because many of the orders originating off the floor (called paper) are exhausted near the open; floor traders take this opportunity for a break, further reducing liquidity.
Following midday, activity steadily increases and the existing daily range is tested. It is common for most day traders to buy the bottom of the range and sell the top. A break of either support or resistance after midday is considered a major directional change; traders quickly shift to the direction of the breakout with the expectation of holding that position for the balance of the day.

APPLICABILITY OF TRADING TECHNIQUES

admin — Sun, 15 Nov 2009 18:11:25 +0000

Most traditional methods of technical analysis, in particular trend-following systems, are not used for trading intervals of less than 3 days; however, the price fluctuations during these shorter periods are nearly all technical. An economic analysis of supply and demand cannot be relevant over such a short time span; that approach can only be used for establishing longer-term trading policy. Other than the immediate reactions to overnight cash market movement, anticipated daily price changes based on political events and weather have not been successfully measured, however, techniques used for day trading can be applied to slightly longer periods of a few days. The principles used in these time frames are very different, and the number of data points used in the calculations reflect on the final reliability. For example, a 3-day daily moving average relies on only three data points for its decision of the direction of the trend; therefore, it will be very erratic.
Both day trading and short-term trading are concerned with timing to improve entry and exit points. The most common way to accomplish this is by a simple form of pattern recognition based on values relevant to the short time frame. From the floor trader’s viewpoint, only the most obvious recent key levels are important. Today’s price movements are compared with today’s opening price, high and low, yesterday’s closing price, yesterday’s high and low, last week’s high and low, very memorable older support and resistance points, and finally, life-of-contract high and low. When the same price satisfies more than one condition, there is greater confidence in the importance of that point.
The importance of noise is also very different for the day trader and the trend follower. Noise, the underlying erratic movement of prices, is not a significant issue for the position trader looking to follow interest rates to high levels over the next year. But it is very important for the day trader, because the trend component of price movement is very small over a 24-hour period compared with the noise. This makes it impossible, using the ordinary trend-following tools, to decide whether a move up over 15 minutes will begin a trend or whether it is simply part of the more common market noise.

Types of Real Options

admin — Thu, 12 Nov 2009 18:10:41 +0000

The word option is a synonym for choice—the ability to do something or not do something in the future, at your discretion. Financial options are common. The most familiar are stock options, which are traded, e.g., on the Chicago Board Options Exchange (CBOE). The prices of these options can be looked up on Yahoo!Finance. Some options are traded over the counter: if you want to purchase a 10-year option on the Sony, chances are that you would have to ask someone—typically an investment bank—to manufacture such an option for you. Other financial options are embedded in contracts and securities. For example, your mortgage contract more than likely gives you the option to pay off the mortgage at your discretion, which you should do (and refinance) if interest rates drop enough. Your car insurance liability may have a deductible, which de facto means that the insurance is only an option that gives you the right to exercise it if the damage exceeds the deductible.
But this series of posts is not so much interested in financial options as it is in real options. What is the difference? A real option differs from a financial option in that the exercise of the real option requires a change in the physical, “real” project. Such real option projects can be factories, buildings, R&D activities, and so on. The most prominent real options are
Timing Your ability to start or stop a project at a time of your discretion. Abandoning Your ability to abandon a project at a time of your discretion. Accelerating Your ability to speed up a project at a time of your discretion. Expansion Your ability to expand a project at a time of your discretion. Switching Your ability to switch to a different technology.
Real options are difficult to value, but no one would argue that this means that you can ignore them. In fact, valuing real options is often more important than getting the discount rate right. You have no alternative but to give it your best shot.

Estimating Slippage Costs

admin — Tue, 10 Nov 2009 18:09:18 +0000

If you know the cost of slippage, you can do a much better job selecting the markets to trade and have a realistic appraisal of your trading expectations. The factors that make up slippage are volatility, overall market volume, current market activity, and the size of the order being placed. Of these items, current market activity is the most difficult to record, because it requires some estimation of volume as it accumulates throughout the day. While actual volume is not available for most markets, a reasonable approximation can be made using tick volume, the number of price changes during a fixed interval. In general, tick volume is directly proportional to actual trading volume; during periods of greater activity, both contract or share volume will increase along with the number of price changes. if you have carefully recorded the order price, execution price, volatility (daily high low), daily volume, time of day, and tick volume, you can find the importance of each factor and estimate the slippage for any trade.

Price Ranges

admin — Mon, 09 Nov 2009 18:09:13 +0000

The average daily range (not the true range) shows the maximum potential for a single day-trading profit. Some markets, such as gold and corn, combine a lack of liquidity with a narrow daily range and are easily disqualified from a day trade opportunity. Eurodollars have extremely high volume but very little movement; therefore, they are also not a good candidate for day trading. When volume is combined with volatility, the world index markets, followed by the currencies and long-term interest rates, are shown to he the best choices. Energy markets represent the next tier, grains remain active, and other markets have far lower volume.
Day traders may find that those markets with traditional daily trading limits present a problem during high-volatility periods. Day trading does best in markets that have wide swings not deterred by exchange limits; a single locked-limit move can generate a loss that offsets many profitable day trades. High volatility and locked-limit moves present a contradiction for day trading. Rules that provide for expanding limits have greatly helped reduce the frequency of locked-limit days; however, traders must always be on guard for this situation.