Does anyone know a good book about market breadth, volatility, sentiment and related indicators? Any hint would be greatly appreciated.
Two people at the opposite ends of the spectrum on sentiment indicators are Bernie Schaeffer (likes sentiment indicators) and David Nassar (thinks price and volume says everything). I think sentiment indicators like put/call ratios are a little like momentum oscillators like slow stochastics and RSI. They're both contrarian indicators yet they can both stay at an "extreme level" while the price continues in the same direction. I'm going to explain. Let's say a lot of people buy put options (to make money when prices go down) and the put/call ratio goes to an extreme level meaning lots of people are betting that prices will go down. If prices sometimes turn around when people are very bullish (meaning they think prices will go up) or very bearish (meaning they think prices will go down), some traders will use that as a contrarian indicator. In other words, some people think by the time the everyone is bullish, everyone who wanted to buy has already bought. So, they'll use very bullish or bearish levels to fade (go against) the move. Unfortunately, both types of indicators (sentiment and momentum oscillators) have the same weakness. They can continue to stay at an extreme "overbought" or "oversold" level while the price continues in the same direction for a long stretch. This mean you might end up fading a move way too early. I thought at one point I could possibly "correct" the weakness of the slow stochastics by using the strength of moving averages. Moving averages can do well in trending markets (in other words, large moves). By the time a large wave is over, then moving averages will cross giving you a signal to go the other direction. Note however that moving averages don't do well in trading ranges. So, moving averages are a trend following indicator that work well in trends and not in trading ranges. Contrarian indicators can do well in trading ranges and fail in trends. I recently did some backtesting with moving averages and was so impressed with the ability of the JPY to produce large waves, that I decided to try to find ways of correcting the weakness of the moving averages to improve my odds. Well, I thought of using the slow stochastics to be more selective. In other words, maybe only take moving average crossover signals if the slow stochastics is at an extreme level. Then, just by sheer coincidence, I bought a book by Ed Ponsi called "Forex Patterns & Probabilities" that pretty much addresses the kinds of problems I was thinking of. The first 97 pages of this book describe, in my opinion, a very good way of trading the markets. As a matter of fact, after reading several books on trade setups using technical analysis and looking at hundreds of stock charts for hundreds of hours trying to see if those setups work, and looking at various methods at all kinds of angles, I can tell you I believe Ed Ponsi' method is a highly intelligent one. Of course, nothing beats developping your own method because then you'd know exactly what the strengths and weaknesses of your method are and why it works when it does and what its limitations are. That's what gives you the confidence to put real money at risk. I think it would be a bad idea if anyone wanted to just rush ahead and read Ed Ponsi' book and start trading right away. In my opinion, if someone wanted to truly let the ideas sink in so they can clearly see the type of situations that Ed Ponsi describes, I would start by reading "Getting Started in Technical Analysis" by Jack Schwager and the small booklet and DVD by Oliver Velez called "Swing Trading" (often on sale at traderslibrary) and "Mastering the Trade" by John Carter. Then I'd spend hundreds of hours looking at hundreds of stock charts with moving averages and momentum oscillators trying to see if John Carter' and Oliver Velez' setups work. Do that until you can clearly see the strength and weakness of both indicators very quickly when you glance at a chart. Another suggestion I have is to go to prophet.net, click on snapcharts at the bottom of the page and experiment with various parameters. Like change the moving averages from 5 & 10 to 6 & 12 and so on and so forth. Do the same thing with the momentum oscillators. And then experiment with different time frames like let's say one day 3 minute chart, two day 5 minute chart, five day 15 min. chart, fifteen day 60 minute chart, daily 6 mo chart, three year weekly chart, ten year monthly chart. You should be able to see that the best fit moving averages are easier to find when you choose the correct time frame. Oh yeah, and choose candlesticks. lol For Forex, I would try the demo of Dealbook 360 available on GFT Forex.com. That software is very flexible too. If any beginner is reading this, I suggest you print this out and put it on your wall. I'm not pretending to be smart and that my ideas are "special" but I've put A LOT of work into my ideas. It's kind of hard to reinvent the wheel. If you look at one that's already partly assembled and play around with it to figure out how it works, it should save you some time.