The very first thing I analyze once i am creating my daily automated program is the market classification. - education
The main reason? Because, according to which scholar you read, the market itself contributes as much as 50% with the return of individual stock gains/losses. It's wise to me then the most important single factor ought to be the beginning to look into.
Should you only get one thing right, it should be the current market condition.
I take a look at market symptom in 2 time dimensions: Long lasting and Intermediate term. The time periods I chose are specific towards the way I trade and also the typical periods of time I look to hold individual positions. I believe that your time and effort frame should affect your image at the market. I really believe one-size-fits-all strategies are not well suited for individual success. Therefore, I consider long term is the last 180 days and short term to be the last 10 days.
I look at long-term market symptom in 2 dimensions: Price level and Relative Volatility. Without entering the precise techniques I personally use to classify individual states, suffice it to say i have 3 price categories: Bull-Sideways-Bear, and 3 volatility conditions: Quiet-Normal-Volatile. This creates a 3�3 matrix, with 9 possible market condition states. (See table below)
Looking back at the last 13 years of S&P 500 price data (that's as long as the S&P ETF: SPY, has price data available), I analyzed the statistics from the returns with the marketplace for the following day depending on the current market condition as defined, and figured that there were distinct differences in the final results for every from the 9 states. Apparently there are just 4 from the 9 states where, on average the following days return is positive.
It is really an extraordinarily important little bit of information to understand when viewing trading opportunities for the following day, particularly when your trading instrument or "target" is strongly correlated towards the US large cap market. The picture here is an illustration of this the marketplace classification matrix in action. It should not surprise you to view industry is currently (by Oct 4, 2008) in Bear Volatile: the worst condition for expected returns.
What's worth noting is the fact that my analysis model classified the marketplace as Bear Volatile on Sept 9, and possesses remained there ever since. Industry is down above 10% for the reason that time period. It's over 20% since entering Bear Quiet mode on June 03, 2008. Being aware of market condition can prevent those forms of losses from occurring and add tremendous value and insight to the long lasting investment program in addition to inform short term trading strategies. - education