Project Freedom (12): Livermore Secret Market Key on Price Chart

Jesse Livermore (July 26, 1877 – November 28, 1940) is one of the most famous legendary traders in stock market.  His intriguing hero’s journey in the Wall Street was well recorded in the book – “Reminiscences of a Stock Operator” by American author Edwin Lefèvre.   And, this book is widely quoted in many trading books and recommended in many trading classes.

But, not many people know about his “Livermore Secret Market Key” which was written by himself and published in 1940.  This book can now being found in Wikipedia Link for free download.

Jesse Livermore spent up to 40% of his book in explaining the technical details of his operation in the stock market.  The challenge is for the reader to understand and implement it.

Unfortunately, it is not a simple task to understand the method in table form.  For there was no programming flow-chart during his time, he used a table and long procedures to go through how to fill it up.  Most beginners will lost his way in their first few attempts.

 

The objective of this article is to demonstrate that the 6-columns table can be programmed into 6-levels of band in modern price chart, and it would faciliate the readers to visualize the interaction of Jesse Livermore Secret Key and the stocks. 

Fig 1.  Transformation of Livermore Secret Market Key from Table to Price Chart. 

 

 

Fig 2. The Livermore  Secret Market Key in Action.

 

One of the famous quote from Jesse Liver more is:
"Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes".


So, What do you think?   IF he is still around today and using the same method, written 70+ years ago, can he still make money?

The following are various charts using Livermore Secret Market Key and they clearly demonstrate that he is right.  For this method is advocating Trend Trading and ignore minor noise (which means do not run in and out of a stock too frequently).


A Minor Change in the Rule:

During his time, Jesse Livermore used fixed amount of dollar to define the "Levels of Band" as filter, similar to Point and Figure charting method using 3 point change.  But as of today, there are stocks trade more than hundreds or thousands of dollar, so two types of changes can be applied to the original method to see the effect.  The first change in the method is, logically, using the fixed percentage change, and second, using the fixed amount of Average True Range(ATR) for the band's level.


Fig 3. Livermoare Secret Market Key applied on SnP500 ETF(SPY) (Weekly)
In Figure 3, the upper chart shows the "Fix Percent Band" while the lower chart shows the "ATR Band".




Fig 4. Livermoare Secret Market Key applied on SnP Financial Sector ETF(SPY) (Weekly)


There are two points to be made in Figure 4 (Click and Zoom In).
1) It is Crystal Clear that if one were to follow the weekly chart religiously, he will not suffer from the 2008 financial crisis. For the chart shows a clear down trend.

2) Using "ATR Method"  is superior than "Fix Percentage Method", for every stock/commodity/ETF has its own characteristics in terms of Volatility.  Using ATR method help to adjust the band-level automatically for all vehicles.

So, from here on, the following charts will ONLY use ATR band (Dynamic Band that self-adjust to the stock volatility) as demonstration.



Fig 5. Some Hot stocks - Apple and Google (Weekly).







Yes.  Due to whatever reason, even till today, there are still people using "Buy and Hold" method in the market.  From the above Chart, there are two points we can learn:
1)  IF the Goal is to make profit from the market, follows the trend.  NEVER EVER ARGUE with the price chart.  IF the Goal is to PROVE he is right that the stock will eventually go up again some time in the future while the chart moving down, by all means, let him hold on as long as he like.

2) IF the market is on side-way, using Trend Trading Method would incur in lost, therefore, one need to learn to learn the master the skill of CUTTING LOST.  It would be so much better to acknowledge that was only a small error made in the market rather than let it continue to grow and eventually becomes a BIG MISTAKE.


The following are more charts to illustrate the points mentioned above.

Fig 6. Commodity - Silver and Gold ETFs (Weekly)
.
Fig 7. Commodity - Argriculture and Commodity Index (Weekly)

NOTE: If Argiculture commodity is moving down or in a side way, chances that those related companies are not performing too, even if whatever fundamental data of the stock are strong.  Use the money to invest someway else, and wait untill the relevant commodity to move up, then buy the related stocks.


.
Fig 8. Malaysia KLSE Index and Singapore STI (Weekly)


..
Fig 9. Hong Kong HSI and Japan Nikkei 225 Index (Weekly)

.
It is very interesting to note that Malaysia market has performed so much better among her few Aisa peers since the 2008 global finacial crisis.  My guess is that the DID NOT lose so much money in that crisis in the US Banks as compare to the others. :-)

"There are many times when I have been completely in cash, especially when I was unsure of the direction of the

market and waiting for a confirmation

of the next move...."

Jesse Livermore

Project Freedom (11): What's "Project Freedom".

Good day,

 

Let's start with some questions:

Do you play Chess?  Any kind of Chess...

How long does it take to train a person to be a World Chess Champion?



Well, the answer to the latter question would not be simply a matter of time to learn.  Just like if everyone were given a chance for education, and not everyone would pass the exams within a given period of time.

 

Now, anyone who uses computer likely has heard of the real story that the long-term world chess champion, Garry Kasparov, was beaten by Deep Blue (a chess-playing computer developed by IBM) in 1997.

  

And, here are some benchmark information on the Deep Blue Computer in 1997 and today's computer technology:

"In June 1997, Deep Blue was the 259th most powerful supercomputer according to the TOP500 list, achieving 11.38 GFLOPS on the High-Performance LINPACK benchmark."

http://en.wikipedia.org/wiki/Deep_Blue_%28chess_computer%29

"As of 2010[update], the fastest PC processors six-core has a theoretical peak performance of 107.55 GFLOPS (Intel Core i7 980 XE) in double precision calculations."

http://en.wikipedia.org/wiki/FLOPS

And, from the "CPU Benchmark site", I found that my current laptop (i7 3632QM) can run about 78% of the i7 980X. Which is 7 times the execution speed of the Deep Blue!!!

Now, lets look at another scenario, if everyone were to carry the same program that was in the Deep Blue on their latest notebook PC today and play chess, who would win???

If the CPU power is the same, then the outcome would be a draw over many games.


Now...
With the above metaphor, lets look into other questions:

If there is a Computer-Aided-Trading Software that can consistently beat the market, and it is made available to the general public at some extremely low cost.  What would happen to the stock market?  Would it bring more positive impacts or negative impact?

My guess is that the software would lost it's effectiveness in making the amount of money as when eveyone has the edge means no one has an edge.

As of today's market, over long run, more than 95% of the general public are making a lost in the market.  So, if and when there is such thing available, it would benefit more than 95% of the people while disappoint the few...


So...
The next question would be: Is it possible for human being to workout such a program that can automatically adapt itself to all kind of market fluctuation and yet continue to make profits even at current environment?

For the previous chess example, it can be computerized because the chess has finite chess pieces and each chess piece has finite moves.  So, even the number would ended up as an enormous huge over many steps into the future move, it can be easily handle with today's computing technology.

And, if one were to go through all the trading books and courses, he would most likely be conditioned by them to believe that success of trading is and art which consists of roughly 30% Trading system, 30% Risk/Reward Management, and 40% Psychology.

Personally, I know that anything had been logically done by a human brian, it had gone through certian processes and can be programmed into software.  In order to write the software, a model of the stockmarket chess board has to be built first....

Take for example.... 
The following diagram shows a Stock Market Chess Model.
Note: Those item marked with "*" was posted in previous articles.  (Click and Zoom In)

And the following shows the OUTPUTs from the model.

Genting Singapore Chart (Click and Zoom In)

 

Google Chart(Click and Zoom In)

 

Apple Chart(Click and Zoom In)

 

.
The Galaxy Chart with Dow Jones Industrial Average and it's components:(How it works) <-- link="" p="">

Of course, the model is not perfect, as no model will be as stock market is a living things projected by the mass consciousness of human minds.

On the other hand, as illustrated from the outputs from the model, using it to protect personal financial wealth can be easily achieveable.

And, this is what I mean by "Project Freedom".


Bless You
KH Tang

"Whatever I desire for me,
I desire for all humanity"
- Barrie Konicov

 

---------------------------------------------- Added on 30 Aug 2013 --------------------------------------------

My Vision and Believe in Faning Out OGTS.

 

Project Freedom (10): Trading with the BBC Breadth Indicator

What is a Market Breadth Indicator?
In short, a Market Breadth Indicator is a kind of Technical Analysis(TA) that design with the intention to gauge the direction of the overall market. 

Unlike most indicators in TA, which use only the information from a single stock to workout the indicator, Market Breadth Indicators are generated by analyzing the total number of companies in a given market. 

In general, it compares the advancing and declining issues in the market and uses specific formula to generate the ratio, such as TRIN (Arms Index),  and some use other filtering technique to smooth it out like various kind of McClellan Oscillators and Summation Index.

Actually, think about it, the price chart of SPY(S&P 500) and many other indices can also be viewed as a kind of Market Breadth Indicator too.

If those who want to know more about Market Breadth Indicators, there is an excellent book with good coverage and detail formula on this area: The Complete Guide to Market Breadth Indictors: How to Analyze and Evaluate market Direction and Strength by Gregory L. Morris (Sep 21,2005)


Why using Market Breadth Indicator?
For all classical Technical Analysis text books, they emphasis on buying the strongest stocks in the strongest sectors when the overall market is bullish, and selling the weakest stocks in the weakest sectors when the overall market is bearish. 

So, the very first step is to have a reliable indicator to know how is the overall market is performing. And, the best tool would be the market breath indicators - because they are calculated based on all components in the market.

The following picture using the school of fish as an analogy to illustrate the importance of Market Breadth Indicator...  It would be interesting to note that when the market is bullish, on various time from minute, day, week, to month...  most of the stocks would be up and vice versa in bearish market.  Of course, the market is formed by individual stock anyway. 

So, here are the two key important point for using Market Breadth Indicators:
1) using the Market Breadth Indicators is the very first step that can help traders/investors operations to be in sync with the market movement/ direction and have higher probability in winning!

 2) Market Breadth Indicators are less subected to noise and market manipulation.
In a previous blog entry on BACK TESTING...  The results have CLEARLY shown that Market Breadth Iindicators can withstand the test of time.



Why introducing the BBC Breadth Indicator?
Of all the Market Breadth Indicators in the public domain, all are calculated based on the one period advance and decline issues of the market.

Whereas the BBC (Bullish-Bearish-Consolidation) Breadth Indicator can used more advanced formulas and provide even simpler presentation for the user to understand the states of the market.

Take for examples, it can workout a Multiple-Time-Frames BBC indicators and display in the daily chart (or basically any time frame).



Charting Examples of BBC Indicator:(Note: click on each chart to ZOOM IN)

The following charts show various examples for the BBC Breadth Indicator.
In the following chart:

1) the top pane shows a tri-states (Bull, Bear & Consolidation) momentum indicator of SPY.

2) the second pane shows a tri-states Trend Indicator.(These Tri-states indicators were introduced in the previous blog entries).

3) the third pane shows the price chart of SPY.

4) the forth pane shows the Momentum BBC Breadth Indicator of SPY.  It was workout according the the above attached formula.  It calculates the total number of of Bullish, Bearish and Consolidation ticker, in Momentum wise, for the SPY (in this case, a total of 500).   Then it groups the number into Percentage of  BULL (Green Line), BEAR (Red Line) and Consolidation (Blue Line).

5) the last pane in the bottom shows the Trending BBC Breadth Indicator of SPY.    It calculates the total number of of Bullish, Bearish and Consolidation ticker, in Tredning wise, for the SPY (in this case, a total of 500). Then it groups the number into Percentage of BULL (Green Line), BEAR (Red Line) and Consolidation (Blue Line).

This can provide the user to have the winning probability in mind.  The best opportunities are when both Momentum and Trending Windows are opened and in Sync on one direction!
 
SPY Chart with BBC Indicators:




^STI Chart with BBC Indicators:







Sector Chart (XHB) with BBC Indicators:

China SSE 380 index (000009.SS) with BBC Indicator

QQQ Chart: Using BBC indicators as the Galaxy Chart's Companion: 
One way to use the BBC indicators is to put them in work together with the Galaxy Chart.  For example, the BBC chart can show the overall strength of the market (in this case, the QQQ), while the Galaxy Chart can pinpoint down to which particular stock within the QQQ is leading or lagging the overall ETF perfromance.  This works in ANY TIME FRAME in run-time.

Other Points to Considers:
* Most market breadth indicator are equal-weighted.  BUT, most index are Capital Weigthed.  Some are Dollar Weighted, Dow Jones Industrial Average and Nikkei 225.  And, most ETF are Portfolio Weighted with component changing in quarters.  These are the factors that need to take into consideration when working with Breadth Indicators.

By the way, here is a link for the Typical Market Breadth Indicator and it covers most ETFs that are having USA companies too.



Wish that it has inspired you and good luck.
KH Tang



And, if it doesn't, never mind... the follow quote from "Edgar Cayce Handbook for creating your future" may....

"Are we to live only for ourselves, using others to our advantage, or are we to care

about someone or something beyond ourselves?  The first choice may lead to

greater comfort and convenience, at least temporarily.  The secand calls

for the definite inconvenience of taking on the burdens of others. 

-- Only the second choice leads to happiness!"

<Go To Home Page>


 

Project Freedom (9): Trading with the Mutiple-Time-Frames Moving Distribution Charts

I had a tug of war in my mind for some time whether it is the right time to post this new concept of trading in the public domain which I'd developed.  I tossed the coins and my subconscious mind replied: "Go Ahead and post it."

Above are few distribution charts that some financial analyists borrow from statisticians.  Usually, it is shown as a monthly, quarterly or yearly chart to describe the market performance over the state periods in terms of it percentage changes.  So, it is purely a statistic chart and has not much meaning for trading purposes.  For example, as shown in the chart, that a stock "WXYZ" is out perform the market over the last period of time, but it does not show the momentum and trending direction it is continue to move.


The following chart with New indicators - The Moving Distribution Curves, show a NEW way to trade the market.  Take for example, the following chart shows the XLE - Energy Sector ETF.  It's short term Momentum, mid-term Swing and long-term Trend are benchmarked within the whole database (in this case, all ETFs except leveraged ETFs). 

The Brownline show the Current Ticker Relative Strength, in this case is XLE, against all other ETFs in the database.  The Blackline shows the Market Reference Relative Strength, in this case is SPY (S&P500).  And, the Greyline shows the unchanged USD1 Cash Reference Relative Strength.

See...  In Bull market, stocks go up and cash reference line move down.  And, in Bear market, stocks go down and cash reference line move up. 

 

Now, here is a better way to interpret the three color lines in the follow chart.  It shows the same chart, and added the distribution chart on the indicators.  View it as the ditribution charts are moving under the price chart over time, the Brownline shows the the ticker percentile in the database at the point of time.  One would like to BUY the ticker with 1, Stronger than the market reference, and 2, above 80 percentile.  Similar interpretation goes with the Blackline and Greyline.

See.  Stocks/ETFs don't move randomly...  if there is no special demand, it would not move above the 80 percentile.   Similarly, if without special supply, it would not move below the 20% either.

 








Attached are just a few more daily chart with Moving Distribution Curve as examples: KOL, SLV, BRK-A, GLD and QQQ.

Attached are some Weekly Chart examples on: QQQ and BAL.

Note: 
* All the Charts can be Zoom to fit in 24 inch monitor for clearer display.

* The distribution shape illustrated here is for explanation purposes only, as the stock distribution over time does not necessary fit into this kind of shapes and varies over time.  And, some one had recommended me to see this article:  http://hanwangquant.blogspot.sg/2011/09/
And, I found that it helps to explain this concept, and also can be easily implemented in the moving distribution curve.

* This is a new kind of Market Breadth Indicator can be applied on single stock or ETF.

* At any one time, there are tickers fill up the full range from 0 to 100.  Choose to long or short according to th reference line position to have the edge.

* A much better way to "occupy the Wall Street" is to have the public to understand exactly how the game is played.

"Man belongs wherever man wants to go. 

He goes where his vision is!"

- Joseph Murphy

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Project Freedom (8): Follow the Money

Follow The Money: When China Stimulates its Economy, Buy Coal!

When the world economy was running into trouble since the beginning of 2008, China announced the 4000Billion RMB Project (四万亿计划) on the 18 Nov 2008. Soon after that, the economy turned around, though it did not last for very long...

Figure 1: The Correlation between FXI and KOL

The above illustration shows the XinHua China 25 index, the Global Coal ETF Charts, and their correlation.

As China is the world Largest Coal Consumer, when they stimulate their economy they need more energy for their power plants, more material to built infrastructures and consumer products, therefore the demand for coal would increase.

Figure 2: One year after the China Economy Stimulation Plan

 

The above chart shows the Result a year after the stimulation.  Though the XinHua China 25 index rose for 85%, there were many other sectors/countries performed much better than that.
 

The Top Ranking was KOL (Global Coal ETF), follow by Metal, China Real Estate and other related material producing countries.

YES…   These are History.

Is there anything that we can learn from it???

Figure 3:  China market bound on 7 Sep 2012 with new stimulation plan

 

Of course!!! 
 

Now…  Let’s look at these news:

1.  分析称我国将投资超1万亿加强基建刺激经济

  (The analyst from China said that the government will invest more than 1000 Billion RMB to strengthen their infrastruture to simulate the economy)

2.  万亿项目获批股市“一阳指”  
   (China market bounds up on the news on new stimulation plan approval)

3.  China approves US$158b in infrastructure

Yes.  The history will repeat itself to high degree (provided there is no major war and natural disaster).

 

Notes:
1)   This is similar worldwide...  It follows the Pareto Principle, since the recorded history, that 80% of the wealth belongs to the 20% of the people (these numbers are just getting bigger in spread - 90% vs 10% or worst).   The more money the governments pour into their economy would only benefits to the minority who know how to get it.   Normal working class would normally working harder to keep their job, and therefore miss the opportunities and suffer from the aftermath through inflation.


2)   Even though the world economy is in deep trouble, and it will reveal the trouble later at a bigger scale when there is not way to cover up.  But, at the moment, these stimulus could help to prolong the grow before the final collapse.  Just like giving another heavy dose of drug to keep the already exhausted sport man to continue the game...  

Therefore, timing it with charting for proper entries and exits to ride the trend is important, never argue with the mass psychology that forms Mr. Market with logic using the conscious mind.

 

"A speculator must concern himself with making money out

of the market and not with insisting that the tape must

agree with him.  Never argue with it or ask for

reasons or explanations."

- Jesse Livermore

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Project Freedom (7): The Galaxy Chart

Good day,

This article is a continuation of the previous entry of the blog...

----------8<    (Cut and paste from Wikipediaon Dow Theory     >8------------
The Dow Theory on stock price movement is a form of technical analysis that includes some aspects of sector rotation. 
------------------------------------------- 8<--------------------------------------------

As one can see from the above statement that the idea of Sector Rotation had been officially around for at least a century,  but, if one were to flip through the whole library of Technical Analysis books in the library, he may not find more than 3% of the books mention about it(been there, done that).  And, even if one can find such topic in the book, most of them merely touching the surface by introducing that there is such thing around.
Personally, I think that the traditional way of analyzing the price chart is hard to VISUALIZE how these rotation take place.   Here is to introduce a tool that could facilitate the user to visualize and understand how the Rotational of the stocks/sectors are taking place in the market.    Thanks for the exponential grow of personal computer's speed over the years and these CPU intensive tasks can be handled with ease nowadays. :-)

(1)  Transformation of Traditional Chart into a X-Y Cartesian Plane.
Figure 1: Transformation of Traditional Chart into a X-Y Cartesian Plane.

Figure 1 shows how a normal chart can be transformed into The Galaxy Chart in showing the Relative Momentum and Trend of multiple stocks.   Though the human eyes can ONLY see the 2-dimensional chart, it is up to the programmers' IMAGINATION to incorporate N-dimensional information into it.  For instance, add a filter to get rid of those stocks that are moving side way.


(2) Understanding the meaning of The Galaxy Chart

Figure 2.  The Galaxy Chart


 
Figure 2 shows a typical Galaxy Chart.   Every stock is represented with a comet-like diagram with multiple dots in its tail.  The POSITION of the biggest dot in the comet represent the last bar's RELATIVE STRENGTH  of the momentum and trend with respect to others stock in a same watch list.  The length of the comet tail can be set by the user, and each additional dot appears on the tail mean an additional look-back period.  Therefore, the DIRECTION and LENGTH between the dots show the change of strength in Momentum and Trend dynamically over time.   So, it provides more information than a normal static list of stock scan from explorer as it shows the dynamic trail.


Figure 3. Zooming-in to the Upper Right Corner where both Momentum and Trend are both Postive.


















Figure 4. Statiscal and Probability wise...

.
Figure 4 is to illustrate how to focus on the fastest moving stocks visually.  Note that there is a criss- cross with grid lines in the center of the chart, which represent the (0,0) origin position of the X-Y co-ordinate.  The upper half of the chart represent the +ve momentum and lower half of the chart represent -ve momentum.  While the right hand side of the chart represent the +ve trend, and the left hand side represent the -ve trend.

Therefore, the top right corner of the chart can only be populated with stocks that are both +ve in momentum and trend.  The further away from the center are the faster the runner, and they are not range-bound.  While the bottom left corner is just exactly opposite.  (Note that the distribution chart in the figure is for illustration purpose ONLY, it does not mean that the stocks in the market have normal distribution in +/- profits over time.)


Video 1.  Play back of Rotational Movement


The above video shows the SPY and its 9 sector ETFs on how Rotation in the sectors take place over time. 

(3) Set up
Figure 5. An example on dual monitors intra-day set up

This is user preference... 

It can be in various time frame.  Start from Intra-day to Monthly.

(4) Caution!

Although any programmer with graphic programming experience can build up this platform within a week or so...

And: 

(a) Knowing to use the right alogrithms to feed in the X-Y co-ordinate is the key. GIGO(garbage in garbage out)!

(b) The sector rotation concept is simply another form of Trend Trading.  Therefore, it inherited a drawback from the Trend Trading Methodology.  That is the deep drawndown during the change of trend, where the fastest stocks could fall the fastest and weakest stock rebound the fastest.   Therefore, a very STRONG filtering technology MUST be built-in to the system to prevent such thing to happen during such period -> take the profits or cut losses quick.  Such as Vibration Energy Filter or any equivalent... Then it can be considered as a complete system.

(5) Conclusion

The last few articles are shared not because the author/programmer, I AM, do not understand nor under estimate their value and shared them accidentally.  Rather, they are shared because I strongly believe that when these concepts is fan out openly...  it may be duplicated to a certain degree that could help the general public to equip themselves with a better understanding and tools to handle the market.

Just to side track with a small story that happened in my kid's science class not long ago...

The teacher in the class asked the students that "What If Thomas Edison did not invent the light bulb?"  Then looking for the standard answer: "Oh!  We are still having to light the candle at night!"

"NO! NO! NO!" I told her... 

"If Thomas Edison did not invent the light bulb.  Someone else would have invented it just slightly later.  Or, if someone else did not invented the light bulb, daddy - me could have invented the light bulb.  And, if I don't invented the light bulb, you may have the chance to invent the light bulb yourself!"   Then I had to add, "Now you know the real answer, BUT, in the school test or exam, you MUST use your teacher's answer."

The morale of telling this story is that...  If one don't share it, someone else down the road would share it anyway. 

Happy reading.

KH Tang

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Project Freedom (6): Back to Basics

About 5 years ago, I came across an old and experience trader in a forum...  In asking for advice, he said that "All you need to read and understand about trading is in a few classical theories already exist about a century ago: 

(1).  The market waves in Dow Theory, 
(2).  The Vibration Energy by WD Gann, and
(3).  The philosophy of riding the Leaders by Richard Wyckoff or Jesse Livermore.
All the modern books are more of repeating and re-phrasing what had been said."

That's very true.
And, I find that to add in another guru would be more complete:
(4).  The trading psychology aspect by Mark Douglas.

The following charts are used to illustrate the implementation for these gurus' theories.

(1).  On Dow Theory.
Dow Theory is the grandfather of all Technical Analysis.  It consists of a set of 12 "Basic Tenets" (ref: Technical Analysis of Stock Trends - Edwards & Magee).  
Over here, the follow charts just focus on the implementation on one of the Basic Tenets - "The Three Trends in the Market".

Here is the definition cut and paste from wikipedia on this particular tenet:
-----------------------------------------8<-----------------------------------
The market has three movements

(1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement (momentum)varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

-----------------------------------------8<-----------------------------------
Now let see how to apply these theories on the following chart.  This is China Shanghai Stock Exchange Index.

On the following diagram, when Zoom in, it can see that there are three indicators below the price chart.  Which are (1.) Momentum, (2.) Medium Swing, and (3) Trend.  These are corresponding to the 3 movements (waves) in the market.

At any one time, these 3 three indicators may run into different direction (up or down), and when the 3 movement are in sync into one direction (either up or down), then usually there will be significant movement on the price.
As shown in the price chart area, it is labeled with green when color when all the three movements are up.  Red when all the three movements are down.  And, yellow when there are moving in different direction - usually at the stage of consolidation or pull back.

If one were to use some kind of multiple moving averages such as, 25,100, 200 to determine buy or sell, then he is also using this theory.  Just that normal MA, EMA are having too much lag that will not produce good result.  It got to be dynamically mapped. (Inspired from reading "Holophany - a New Philosophy and Logic" by Clara Szalai.)

The Multiple-Time-Frame concept using daily and weekly chart is another form of waves analysis.

The JM Hurst Cycle Analysis aims to find the synchronization of shorter cycles within longer cycles is also another form of wave analysis.

Their COMMON goal of these analysesis to LONG when all the waves are moving in the up direction while SHORT when all the waves are moving in the down direction.

(2). On Vibration Energy.
The Law of Vibration in the stock market was introduced by W.D. Gann.  Gann's work is hard to understand as it involves astrology, ancient geometry and mathematics.  But, nevertheless, if one were to study and think about them long enough, he may get something out of it...  Just that if a group of ten persons doing the same research, they might get twenty versions of the interpretation.   And, this is merely my personal interpretation...

If the stock is in its steady state of vibration towards up and down direction, it would has certain amount of vibration energy level pointing in the same direction.  If it is on the sideway, it is pretty much random and will cancel themselves.  Therefore an adaptive filter can designed to capture such energy.  As compare to the previous diagram, the price chart is now built-in a filter to detect the state of trend (up, sideway, and down trend).  Also just below the price chart, there is an Adaptive  Vibration Energy Indicator to indicate the worthwhile trend. 

Adding this filter to the Dow Theory would very much reduce the trading frequency as its goal is to eliminate trading when the stock in it consolidation state.

(3). On the Philosophy of Always Riding the Leading Sectors/Stocks
In reading Richard Wyckoff and Livermore books, one can find that they put emphasis on trading the leading stocks in the leading sectors.  This philosophy itself has the following important implication:

1)  Benchmarking the stocks with their Relative Strength.
In order to find the Relative Strength of a stock among all the other stocks in the market, the indicators used MUST NOT be range-bound to certain value.  For example, many popular indicators are swinging between a certain ranges, such as 0 to 100, -100 to 100, etc.   When one compare APPLE COMPUTER to bond market, these range-bound indicators can't differentiate which is stronger in relative sense. 

2) Rotational Trading.
In rotational trading philosophy, it recommends jump to the faster running horse when it find one (of course, one need to set the period of doing so, say one week or so...  And, very much depends on individual perference time-frame of operation.)

One simple way to achieve these two KEY POINTS is to insert a reference ticker inside the current monitoring stock indicator.  For example, in the following diagram, the Momentum, MediumSwing and Trend indicators are inserted with the SPY (S&P500) as reference ticker. 

Note that there are some circles highlighted in these indicators.  Without the reference, the indicators would have give green signals when they are above "Zero Line", and give red signals when it is below "Zero Line".  Now, with such reference line, they must be greater than both the reference strength and the zero line in order to generate a green signals...  Same idea applies to the downside.  Or it would just generate a yellow signal.

One can use this idea to find the stronger sectors in the market using SPY as reference strength, then find the stronger stocks using that particular sector as reference strength.

To further illustrate the point on Relative Strength Benchmarking....  Below is diagram showing the Strait Time Index (STI) and its 30 components. 

Most Benchmarking methodology is to compare the percent price movement over a period of time.  This could be useful most of the time.  BUT during the transition of changing trend, it would produce a great lag that is not acceptable.

Instead, one can compare their indicators strength in the same pane and rank it... It would definitely produce much timely result.

(4). The Trading Psychology

There are quite some materials on Trading Psychology in the market today.  Recommend to go through the material by Mark Douglas as they are very helpful.  Especially when he talks about the Probability and Edge.   Here has a snapshot:->

http://blessedfool.blogspot.sg/2012/01/project-freedom-3-why-and-how.html

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"Our most valuable possessions are those

which can be shared without lessening;

those which when shared multiply."

I DARE YOU - William H. Danforth

To be continue with  ->The Galaxy Chart.<-