Author: The INO.com Team

What Goes On Inside the Dow?

Posted on by The INO.com Team

Today I've invited Don Heggan from Dynamic Stock Market Strategies to discuss his insiders knowledge on what's really behind the DOW. Please take time and read the post and comment for Don to discuss.

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If you’re a trader and you don't know what’s going on inside the Dow, you don't know anything worth knowing. Learn to penetrate the smoke screen that the Dow-Jones Industrial Average has become.

The complex formula used to compute this monstrosity, called price-weighting, goes far beyond simply adding up the individual prices and dividing the whole thing by thirty. It, instead, employs a divisor designed to compensate for dividends and stock splits.

The effect of all this not only gives the higher priced issues more weight in the average but accounts for the incredibly high valuation of the average itself. Confused? Good! You're supposed to be. You see, dividing a number by a value less than one actually turns it into a multiplier!

The current divisor, as of this writing, is approximately (are you ready for this???) 0.122834016 which is the same thing as multiplying by 8!

That means a one point move in a stock is good for an eight point move in the average.

It also allows a few higher priced issues to give the illusion that the average stock is moving up when, in fact, the majority are moving down.

Imagine thirty men carrying a heavy load up a mountain. In the beginning all is well; each member is bearing their fair share of the load. As the climb continues, visualize one member at a time becoming exhausted and, unable to continue, dropping out. This means the heavy load, shouldered by a constantly shrinking number of remaining members of the climb, eventually collapses under its own weight.

If you were keeping track of the climbs' progress and noted that what started out as a 30 man team was now down to fewer than 15, what would be your prognosis?

What would be your prognosis if all you saw was the average moving higher and higher and were completely unaware of what was going on inside?

Inside the Dow: Ignore it at your peril.

Don Heggen

Publisher

dynamic-stock-market-strategies.com

Traders Toolbox: How to use the Directional Movement Index

Posted on by The INO.com Team

The Directional Movement Index, commonly called the DMI, is a powerful trend-following indicator. Many false signals generated by indicators such as the stochastics are filtered out by the DMI. Subsequently, this trading and analytical tool gives few signals, but, when generated, they tend to be very reliable.

Many, who at first glance are strangers to the DMI, find they are familiar with the prime component of the index: The ADX or average directional movement index. This discussion will center on the main use of the ADX, the turning point concept.

The DMI consists of three components: The + DI, which represents upward directional movement; the - DI, indicating downward movement; and the ADX, which signifies the average directional movement within a market.

In STRONG UPTRENDING moves, such as the late 1989 and early 1990 rally in the CRB, the + DI and the ADX turn up early in the move and move higher, with the + DI generally holding above the ADX. A high probability signal the uptrend has stalled or ended is generated when the ADX crosses above the +DI and turns down. This signal commonly occurs on the trading period of the trend change or slightly before. It rarely takes more than a few periods past a true trend shift to see the ADX turn down.

The rules for signalling a potential bottom are the same as for a top: Simply substitute the - DI for the + DI. There appears to be one slight difference between tops and bottoms: Generally, the ADX turns from a higher level when marking a top.

Several chart services plot only the ADX. In these instances, it can generally be assumed that a downturn in the ADX which occurs after crossing above 40 will have seen the ADX cross above the + DI if the market had been in an uptrend and above the -DI if in a downtrend. In simple terms, a move by the ADX above 40 followed by a downturn generally signals a probable trend change.

Signals such as those which occurred in May, 1990 and February, 1991 in the CRB index (arrows) can be very valuable in confirming a turn which had been projected by unrelated methods of technical analysis. ADX signals can help confirm the expected completion of a wave structure or to underscore a turn within a critical time period.

The DMI is based on a certain number of periods. I have had the most success with 14 days on daily charts. And with the exception of Treasury Bonds, for which I use 14 weeks, I prefer to use 9 periods on the weekly and monthly charts.

Editors note: While the examples shown are somewhat dated the concept and use of the ADX is not. The ADX indicator is available on MarketClub.

How to make money almost anywhere, even on a desert island.

Posted on by The INO.com Team

How to make money almost anywhere, even on a desert island.

It is probably every traders dream to trade from their own personal tropical island and make money, but can it be done? Oh yes, and in this short video I show you how it can be achieved. What you will see can be done from any location... so if you are on your own private island or you are still saving up to make that big purchase, this technique can be applied.

The dollar index, which is receiving a lot of publicity lately, is featured in this educational video. This index has made a major push to the upside. The question is, do you know what catalyst pushed this market higher? The other question is how high can the dollar go?

Watch the video here.

If you think it all happened just by luck, that this index is headed higher, think again. In my video I explain and show you in detail why this index is gaining upward trajectory and give specific price targets on the upside.

Summer is over, and it's time to get serious about the markets. Watch this video and see how you can get a leg up on the market for the rest of the year.

There is no need to register to watch this video, just enjoy!

Best,

Adam Hewison

President, INO.com

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TRADERS CONTEST: Do you have a good trading story? First prize is an Apple iTouch! Enter your story here. There is no entry fee.

How to create an objective trading plan

Posted on by The INO.com Team

Today I'd like everyone to welcome back Dr. Barry Burns. He was a guest blogger a few weeks back and the overwhelming response was "we want him back"! So you asked for him, I called in a personal favor, and here he is again to help teach us.

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Traders who use technical analysis rely on charts to help establish a probability scenario for entering a trade.

We generally look at 3 things:

Price patterns.
Volume patterns.
Indicator patterns.

There have been countless books written and courses sold on how to use these things to predict future market movement. Despite this, countless traders continue to fail in their attempts to become profitable.

Why?

After years of watching my father trade (he had 70 years of experience in the markets) and many years of my own experience, I’ve come to this conclusion:

None of it works!

That’s right. I haven’t found a single price pattern or indicator that could accurately predict the future of the market with enough probability to make any money.

So, is technical analysis an exercise in futility?

Although I haven’t found any one single thing to prove profitable, favorable probability scenarios can be found by combining several indicators. However this has to be done in the right way.

I identify what I call the “energies” of the market, and have selected certain indicators to measure those energies.

5 of the energies are:

Trend.
Momentum.
Cycles.
Fractals.
Blockages.

The key to success is to wait until all 5 of these energies align telling you the same thing (“go long” or “go short”) at the same time.

Indicators measure these energies. Again, I don’t have much confidence in any single indicator. After all, they only do what their name says: They “indicate;” they don’t “tell” you what the market will do next.

However, when all 5 indicators align, and they each measure a different energy, then this is a time when the probability is now on your side.

You can even use this to “score” a trade on a scale of 1-5 depending on how many “energies” (indicators) align in the same direction.

You may choose to be very conservative and only take trades that are very high probability – so you’ll wait until all 5 energies align. The downside of this is that it doesn’t occur very often and therefore you won’t be very active in your trading.

You may decide you need more trades to be psychologically satisfied and keep your interest and focus on the market. In this case you could take trades that rate a 4 (4 of 5 energies align in the same direction at the same time). You will get more trades, but your
win/loss ratio will be slightly lower.

You can choose your favorite indicators to measure these 5 indicators. Which ones you use isn’t the most critical factor … as long as you know how to use them properly.

Using this approach gives you a very measurable and objective way to make decisions and track your trades.

BIO:
Dr. Barry Burns is the owner of Top Dog Trading which teaches people how to avoid the long learning curve in day trading, swing trading and investing.
He started his study of the markets under the direction of his father, Patrick F. Burns, who became independently wealthy through trading and had over 70 years of trading experience before passing away in 2005.
He has been the featured speaker at DayTradersUSA, and developed a 5 Day Course for WorldWideTrders.
Dr. Burns has been a headlining guest speaker for the Market Analysts of Southern California, given seminars around the country at many Wealth Expos as well as many Traders Expos, been interviewed on the Robin Dayne "Elite Masters of Trading" Radio Show, and is the former moderator of the FuturesTalk chat room.
He has a doctorate in Hypnotherapy and is a certified NLP practitioner, and therefore able to help people with the psychology of trading.

Are you master of your domain?

Posted on by The INO.com Team

With Crude taking a dive this week (our MarketClub Trade Triangles getting short at the PERFECT price) I wanted to bring in Jeremy Ascher from ChartWhiz.com to bring a little insight into what he's seeing in the energy markets as we've gotten a ton of emails regarding pulling profits and controlling losses. Please enjoy the post...and take a look at our most recent signals for Crude Oil (CL.V08) if you're a MarketClub member.

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I’ve been analyzing and trading the energy markets for more than 10 years and I continue to see beginner traders make the mistakes over and over again. I know this because I made the same mistakes when I was a rookie trader. It goes something like this…you start the day with a good trade and lock in some nice profits. Then you make another and your having a pretty decent day, one in which you could easily call it a day. Let’s say for example you’re up $800 on the day. But then the greed kicks in and you want more. Ok, one more trade, let me hit that $1000 mark. Now you place a losing trade and you’re up only $600. Now you think to yourself “I should have just closed the books. Ok, let me try to make that $200 back and call it a day”. You lose again, up only $350 now. Now you’ve turned a triple into a single. Now you’re angry. That’s it, it’s all or nothing. I have $350 to risk and I’m done. This is where it gets ugly, usually turning an $800 winning day into an $800 loser, a $1600 swing.

Sound familiar? You bet it does.
Why does this happen? The answer is simple-you are not master of your domain. In other words it’s a lack of discipline. Without discipline it will be very difficult to become a successful trader. So I’ve come up with a few simple “post it” notes that should help you overcome this hurdle. I have these notes posted to my monitor in big letters to keep a constant reminder. Here they are:
1. Trade the numbers, not opinion. Before you trade you should always do your homework. I analyze the charts to derive support and resistance numbers. These are the only areas that I am willing to place trades. Anything else to me is gambling. If you have support you are buying against, you trade that number until the market tells you otherwise.
2. Patience. It is extremely important to have patience when trading. Use your support and resistance as guide lines. Do not chase the market and force trades; let the market come to you.
3. No Emotion. It is virtually impossible to not have any emotion when trading, but it can be reduced drastically. To do this, trade with a systematic approach. Determine a comfortable risk threshold to use on every trade. If you’re wrong and get stopped out, wait for the next trade with the same risk parameters. Trading a system day in and day out will help keep you off the emotional rollercoaster that so many of us experience.
These may sound too simple and basic to work, but sometimes it’s the simple things that work best. And believe me, these do. After all, not trading your numbers will lead to impatience which will lead to emotional trading. And that my friends, is a recipe for disaster. So get out your sticky notes, write these down, and stick them on your monitor and become master of your domain today.

Jeremy Ascher
www.chartwhiz.com