Tips on setting up a winning trading workspace

Since this is a holiday shortened week and many folks have already fired up their backyard BBQs, I’ve decided to run a couple of “back-to-basics” articles. Today, I’ll be showing you some tips on how you can efficiently set up your trading workspace. This will be of special benefit to newbies, but even you crotchety old-timers might pick up a useful tidbit to chaw on.

Setting up an efficient workspace
You might be using your broker’s trading platform or that of an outside source. Although every trading platform is different, most of them offer many of the same features. Below is a basic workspace designed as a trading tool and also as a portfolio tracking tool. [Click on images to enlarge.]

sample-workspace2

This workspace is divided into windows containing quote sheets, watch lists, time & sales data, and stock charts. Let’s first focus on the top of the workspace.

Macro constituents
The top left window contains real-time data reflecting the current state of the market. The major indexes are represented here along with several indicators that measure market temperature. These indicators include the following:

The volatility index (VIX) measures the degree of fear or uncertainty in the market. Typically, if the VIX is moving higher means that the market is moving lower.

The TRIN, aka the Arms Index, looks at the strength of advancing issues relative to declining ones. An unusually high TRIN (above 2.50) is regarded as an early indication that the market is running aground and will reverse to the upside. An unusually low TRIN (around 0.5) generally indicates the opposite.

The TICK measures the number of stocks trading on an uptick minus the number of stocks trading on a downtick. The tick is an instantaneous measure of market temperature—in fact, think of it as the market thermometer. If the tick is trading on average over 1000, you know the market direction is bullish even without looking at a single chart. Conversely, if the tick is trading under -1000 (the tick is one of the very few indicators that can be negative), the market is declining. Extreme values in the tick (greater than 2500 or less than -2400) signal that the market is reaching emotional extremes and a reversal in direction is most likely to be imminent.

A candlestick graph of the S&P 500 is to the right of the market quote sheet. This is a one minute chart that tells you where the market is heading in the short term. Although the market was down overall, it closed on a relatively upbeat note. Note that if your portfolio follows Dow Industrial stocks or follows tech stocks, you might want to make your market graph track the Dow or the Nasdaq respectively instead of the S&P.

These two windows give you an immediate glimpse into the temperature of the market. The direction of the market will dictate what types of trades you should be making. Should you go long? Should you sell your positions and go into cash? Or, should you start shorting, if that’s your style?

We’ve finished looking at the macro constituents, now let’s focus on the micro constituents, that is, the stocks in your portfolio.

Micro constituents
The quote sheet labeled “My Portfolio” directly under the market quote sheet tells you the state of your portfolio. It contains the stocks (and options and futures if you trade them) that are in your portfolio. (You can have several of these quote sheets depending on how many separate portfolios you have.) At a glance, you can see how each of your holdings are faring by the P/L % column. Should one of your holdings trigger its stop/loss point (in Qcharts you can set this point), this is a signal for you to exit the position. (Many exit when a stock is down 8-10%.) How well your portfolio is doing is given in the row named Total at the bottom.

The above workspace only shows a truncated portion of the Portfolio quote sheet. Below is a copy of the extended quote sheet which shows further position details:

my-portfolio-6-30-09

The window directly to the right of the Portfolio window gives information about a stock that many find useful such as the dividend yield, the ratio of stock price to earnings (P/E), and the market capitalization (the number of shares traded times the stock price).

The Time & Sales window is adjacent to that. Click on the name of a particular stock and the current sales figures will appear in that window. This is a real-time chart and you’ll be able to see by how fast it’s updating and by the trade size how popular (or unpopular) the stock is. Further information can be gleaned by a Level II quote window, but if you don’t have that, don’t worry. Unless you’re a day-trader, it’s not particularly useful.

The rightmost window is a hot list specific to my charting program. This one shows the trade rate which you can think of as a measure of a stock’s current popularity. Hot lists are ways for you to identify potential stock trades based on your own selection criteria, so if your charting program offers them, by all means take advantage of them.

The chart beneath all of these windows highlights the stock you have selected. This is where you can add studies to the chart, such as volume, moving averages, MACD (moving average convergence/divergence), Bollinger Bands, stochastics, moving average crossovers, and other indicators that you understand and that are provided with your trading platform. (“Standard” studies are included in most platforms.)

What are the best studies to use? If you’ve just decided to dangle a toe in the trading waters, my advice is to start out with a candlestick chart and volume. It’s upon these two quantities that 99% of the underlying indicators are based. They are still the most powerful ones out there. Learn how to read these well and you will have essentially mastered the art of reading charts.

Adding indicators can give further confirmation to a bullish or bearish signal. One indicator that I really like is the Commodity Channel Index, the CCI. Most indicators tend to lag the price of the stock, but the CCI is the least of the laggards and the most reliable if you set it right. Most defaults set the CCI to a 20 period average, but for best performance, you should adjust it to each stock or index you’re following and consider the time frame of your trading. Investors with longer expected holding times should consider bigger CCI parameters, such as 50.

Summary
That’s about it. Unless you subscribe to the same charting service that I do, you won’t be able to exactly duplicate this sample workspace. But with enough savvy and creativity you might be able to duplicate its spirit. Just remember that you will want your workspace to contain the same information: What is the current state of the market? What is the current state of my portfolio? And finally, how can I adapt it to fit my trading objectives?

A properly designed workspace will give you the answers to all of these questions. The day-trader’s workspace will undoubtedly look vastly different from that of a long-term investor: the elements will be the same but the time-frames and chart indicators may be worlds apart.

I hope this short tutorial will give you some guidance on how to lay out your trading workspace for maximum effectiveness. Happy trading!

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