If you haven’t done so already, take a look at thinkorswim’s weekly Wednesday’s lectures. They are by far the most useful lessons on the internet today. I’ve compiled my own notes on this week’s lectures. If you’d like, use them and supplement them with your own notes. These notes help me become a better trader so I hope they can do the same for you. Enjoy!

· General Market Psychology

o Markets tend to overshoot based on psychology

o Great traders are made when they show poise and confidence and rational behavior in the face of irrational behavior

· “End of the world” - capitulation

o Markets normally shoot first, ask questions later

· Timing always a problem

o Lowest levels of cash held by funds usually signals a market top

· No cash available -> no way to push markets higher

· What is window dressing?

§ Funds attempt to keep numbers up for end of quarter/year and promptly sell afterwards

o Most technicians prefer to see a weak open and strong close

· Flushes out all the sellers giving room for buyers

· Normally a bullish sign if for at least a short term bounce

o Two stages of market environments

· Economic and market events

§ Repricing of assets, economic status

· Geopolitical economic shift

§ Election year

o Market dynamics which accelerate selloffs

· Margin calls (forced liquidations)

· Forced redemptions

§ Shift from equities to fixed income

· Perception of a due “dead cat bounce”

§ Market orders tend to widen bid/ask spreads

o Markets are pendular!

o Risk management

· Risking 10% to make 2% can and will burn you

· Best traders are obsessed with risk management, NOT PROFITS!

o Interest Rates

· Cutting rates expands P/E multiples and vice versa for rate expansion

o Always have Live News (fundamentals) up on TOS

· Watch CNBC but don’t listen to the pundits 100% of the time

· Couple news with technical analysis and intuition!

o Portfolio Analysis

· Play both sides of the markets

· Extreme delta portfolios can cause trouble

· Balance out long positions with some short positions and vice versa

§ Gains aren’t maximized but risk is limited and margin pressures are reduced

· Fully invested at all times isn’t rational, have some cash at hand at all times

· Market Indicators

o On TOS platform

· Right click - Public - Indicators

o TRIN

· Designed by Dick Arms

· Formula for upticks and downticks

· Above 2.0 - markets oversold

· Below 0.5 - markets overbought

· $TRIN - NYSE, $TRIN/Q - NASDAQ

o Advancers and Decliners

· $ADVN / $DECN - NYSE Advancers / Decliners

· $ADVN/Q / $DECN/Q - NASDAQ Advancers / Decliners

· Diversion

§ Markets generally heading in one direction while ADVN/DECN are headed in the opposite direction

· NASDAQ down 50 points with $ADVN/Q and $DECN/Q reverse heading

o Advancing and Declining Volume

· $UVOL / $DVOL - NYSE Advancing / Declining volume

· $UVOL/Q / $DVOL/Q - NASDAQ Advancing / Declining volume

o Diversions in the Market

· Study: RSI Wilder

§ Below 20 (or 30): markets are at extreme oversold levels

· Call strategies

§ Above 80 (or 70): markets are at extreme overbought levels

· Put strategies

§ Technicians prefer to see more than one tag at either level for confirmation

· Study: Slow Stochastic

§ Typically you can buy (with other confirmation) when red crosses blue

o VIX Indicator

· Contrarian indicator

· “Fear Index”

§ Higher the fear, markets can be oversold, and vice versa

· Readings above 22/23 can indicate an oversold extreme

§ “World coming to an end” - capitulation!

o “Generals and Soldiers”

· Soldiers - gain 20-30% per year but aren’t considered “sexy”

§ Defense, steel, other low beta stocks

§ Usually fall first in a down market

· Generals - “turbo stocks”

§ Grind up quickly but grind down even quicker

§ Fall after soldiers

§ Keep on a watch list (GOOG, POT, RIMM, AMZN, etc.)

o Moving averages simply do not work in an irrational market

o Market volumes

· Analyze market volumes

· Study: Volume Average (30d for day /short term traders, 50d for swing traders)

§ Stocks at extremes tend to trade at extreme volume levels

§ Volume spikes - possible change of direction in stocks when facing market extremes

§ False rallies occur with low volume