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Daytrading With The NYSE Tick Indicator

03/10/08 02:20:58 PM PST
by Larry Swing

Studying the movements on the tick indicator will help you understand what is really going on.

It's not easy to make a trade within a minute or even a longer time frame like five minutes to one hour. Anyone who has daytraded stocks knows that not knowing which way the market will go or the market sentiment within the next few minutes is the fastest way to go broke. To avoid this situation, I have found that watching the breadth of the broader composites such as the NASDAQ, Dow Jones Industrial Average, or the Standard & Poor's 500 is a fundamental tool used to daytrade effectively. Having an idea of the market sentiment is crucial in seeing when and where the buyers or sellers are coming in. Believe it or not, stocks are not islands and are not random. Participants move in and out for reasons other than prices of stocks.

There is always a correlation to some type of data, be it news, earnings, or the action of related stocks. Finding a reason behind the move can give traders an edge.

There is an important indicator that can lead the stocks to move in certain ways. It is always a good idea to monitor the breadth of the big players and watch the movements of the collection of large-cap stocks that influence the stock a trader wants to trade. The NYSE tick indicator takes the stocks in an exchange and shows how many are ticking up and how many are ticking down. For example, at a time when 500 stocks may be moving up while 400 are moving down, the reading would be +100. So the uptrend momentum occurs when it is in the positive number while a downtrend tendency occurs when the number shows a negative reading.

So how does one use the tick indicator to increase his or her advantage in profiting from the market? The first task is to analyze the immediate trend in the last hour or last few hours (depending on the time frame used, five-, 15-, 60-minute, or other). The way to determine the trend is determining pivots such as higher highs and lows for uptrends or lower highs and lows for downtrends.

Once the short-term trend has been established, we look at the NYSE tick chart to find the setup. The best entry, as everyone knows, is buy/short the pullbacks. We turn to the $TICK chart (Figure 1) to look for one extreme of the reading to find the right spot to trade. If the stock is in an uptrend, we look for an extreme negative reading to go long; when it turns upward, we take a long entry. If the stock is in a downtrend, we look for an extreme positive reading to go short; when it begins turning down, we go short. Let's take a look at an example.

FIGURE 1: NYSE $TICK CHART. Here you see a display of the values and the reading of the sentiments of the market.

FIGURE 2: PRICE ACTION. You need to keep an eye on the price action as well as the $TICK chart to determine anything about the trend.

Looking at the chart of RIMM in Figure 2, we established that the trend has been down since the opening bell. Now, take a look at the $TICK chart. At 3:25 pm the $TICK moves into positive territory (Figure 3).

FIGURE 3: THE TICK CHART. The tick chart tells you if there is more buying or more selling at any moment in time.

FIGURE 4: PRICE RETRACEMENT. When prices retrace from a particular trend, then an entry on the pullback has a good chance of profitability.

Next, look at the price chart to see what the stock price is doing. At 3:25 pm the stock of RIMM has retraced from its downtrend, so a pullback entry is imminent (Figure 4). At 3:26 or 3:27 pm, the $TICK turned down toward a negative reading. With the confirmation of the price action, breaking the low of the previous bar at 3:29 pm, a short entry is taken (red down arrow in Figure 5).

FIGURE 5: MAKING THAT TRADE. When price action and the tick correlate then it's safe to place a trade.

It takes time and experience to know how to use the tick indicator with price action. But as with all other indicators, once you understand what the indicator reveals, it can be useful, especially for daytraders. Often the tick will divert from price action of the individual stocks or instruments. This could be a reversal indicator, and knowing what to do when this happens will help prevent losses. It's a good idea to spend time studying the movements on a tick chart to understand what is going on beneath the numbers.

Larry Swing

Larry Swing is the president of the day- and swing trading site, where free daily articles and videos on education, market analysis, and picks from Swing and other well-known traders can be found.


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