PrimeTrading Market Model (#PTMM)
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PrimeTrading Market Model (#PTMM)
Stay on the right side of the market, and make better trading decision by following PRICE, MOMENTUM & BREADTH.
Hi!
Here is the latest PrimeTrading education series article about my Market Model, PTMM. This model tracks the market direction, health, and strength based on three key components and guides all my trading decisions within my system.
Here’s what you’ll learn:
What the model is built on
How do I use that model? (System rules)
Real-life examples
Enjoy, and I hope this tool proves to be a game changer, as it was for me! ✌️
SUMMARY
In the trading world, having a well-defined strategy is crucial for success. The PrimeTrading Model (PTMM) is a powerful tool that helps traders make informed decisions by tracking market direction, health, and strength.
PTMM is built on three core components:
PRICE
MOMENTUM
BREADTH
This article delves into how each element works and how they're used.
Price: Price movements in the market reflect the interactions between buyers and sellers. Moving averages, like the 10-day, 21-day, 50-day, and 200-day moving averages, are instrumental in identifying trends and crossovers that signify market shifts.
Momentum: Momentum assesses the speed and strength of price movements. Upward momentum suggests bullish trends, while downward momentum points to bearish trends.
Breadth: Market breadth gauges the depth and breadth of market participation. Components like Net New Highs/Lows, Advances and Declines, Up/Down Volume, and Cumulative Indicators play a pivotal role in assessing the overall health and strength of the financial market.
The PTMM model uses a daily dashboard to track these indicators and provides clear signals to guide traders. These signals are categorized into four conditions:
RED: Signifying a short-term downtrend with bearish price and momentum, the McClellan Summation Index (MCSI) trend is down.
ORANGE: Indicating a bullish short-term trend and momentum, MCSI is in an uptrend, offering potential buying opportunities.
YELLOW: Representing a medium-term uptrend with solid market breadth, an ideal setup for medium-term swing trades.
GREEN: Signaling a long-term uptrend with strong price performance and momentum, suitable for longer-term swing & positions.
Furthermore, PTMM tracks assets meeting specific criteria, including average volume, float, liquidity, price, and market capitalization, ensuring that the assets being tracked align with the model's objectives.
This article provides a comprehensive overview of the PTMM model, its key components, and how it's used to make trading decisions. It offers traders a valuable tool to enhance their trading strategies and improve market timing.
The PTMM daily dashboard serves as the central hub of information and critical indicators for the model, offering traders a comprehensive overview of the market's health and direction. It condenses essential data and indicators into an easily digestible format, ensuring that traders have all the necessary information at their fingertips.
Here's what the PTMM dashboard includes:
ADVANCES/DECLINES
Advances and declines track the number of assets that have seen their prices increase or decrease during a specified timeframe, often daily.
Advances: More advances indicate that more assets are experiencing price increases, suggesting a positive market sentiment.
Declines: A higher number of declines means more assets see price decreases, indicating a negative market sentiment.
MCSI
The McClellan Summation Index is designed to gauge a market segment's overall health and direction by analyzing the net advances and declines of a group of stocks.
Here's how the McClellan Summation Index works:
Advances and Declines: The McClellan Summation Index is derived from tracking the daily advances and declines.
Smoothed Indicator: It is a smoothed, cumulative indicator that smooths out daily fluctuations by taking a moving average of the daily difference between the number of advancing and declining stocks. This smoothing helps filter out short-term noise and provides a more comprehensive view of market trends.
Long-Term Trend Analysis: The McClellan Summation Index is used to identify longer-term trends in the market. A rising McClellan Summation Index suggests sustained buying pressure in the market, indicating a healthy and bullish trend. Conversely, a declining index may show a weakening market with a bearish sentiment.
Action: MCSI is one of the primary tools for me to get involved early in anticipation of a market turn, even before the PTMM signal changes.
On market tops, I like to reduce my positions or short the market when I see MCSI curling back down and pushing it even more when it crosses the 10dma.
On market bottoms, I like to test the market when I see MCSI curling back up and pushing it even more when it crosses the 10dma.
UP/DOWN VOLUME
Up and down volume measures the total trading volume of assets that have risen (up volume) or fallen (down volume) in price during a particular period.
Up Volume: High up volume suggests that assets rising in price have substantial trading activity, which can confirm bullish momentum.
Down Volume: High down volume indicates that assets falling in price have significant trading activity, confirming bearish momentum.
NEW HIGHS/LOWS
Net new highs and lows represent the number of assets in a market that are reaching new high or low prices over a specific period, typically for the last 52 trading weeks.
Net New Highs: A high number of net new highs indicates that many assets are reaching new high prices, which can signify bullish sentiment and market strength.
Net New Lows: Conversely, many net new lows suggest that many assets are hitting new low prices, indicating bearish sentiment and market weakness.
PTHL
This indicator tracks the cumulative net new highs or lows over time.
A rising cumulative new 52-week high line suggests that many stocks are in strong uptrends, indicating a healthy and bullish market. It reflects broad-based buying interest and positively signals the market's overall health.
MOMENTUM
Upward Momentum (Bullish): Asset prices rise when a market experiences upward momentum and buyers are in control. This often occurs when there is positive news, strong investor sentiment, or increased demand for equity assets. Swing traders may seek to capitalize on upward momentum by buying assets, expecting prices to move quickly and continue to rise.
Downward Momentum (Bearish): Conversely, when a market has downward momentum, asset prices are falling, and sellers are dominating the market.
DAILY RATIO
The ratio between stocks that are up 4% or more versus stocks that are down 4% or more on a given day is a daily momentum indicator used in stock market analysis. This ratio is often called the "4% Up/Down Ratio" or "4% Up/Down Day."
Here's an explanation of how this works:
Calculation: To calculate the 4% Up/Down Ratio, I count the number of stocks that have increased in price by 4% or more on a given day and divide it by the number of stocks that have decreased in price by 4% or more on the same day.
Interpretation: The resulting ratio provides insights into the overall momentum or sentiment of the market for that specific day.
Ratio > 1: If the ratio is greater than 1, it indicates that there are more stocks up 4% or more than those down 4% or more. This suggests bullish momentum for the day, with more stocks experiencing significant price increases.
Ratio < 1: Conversely, if the ratio is less than 1, it means there are more stocks down 4% or more than there are stocks up
Extremes: Extreme readings could be seen as climatic moves and be treated as contrarian to either take profits or get engaged early.
SHORT-TERM
5 & 10-day ratio
The 5 and 10-day ratio between stocks up 4% versus those down 4% on the day is a short-term momentum indicator that assesses the strength and direction of momentum in the market over a short-term period.
Here's an explanation of how it works:
Calculation: To calculate the 5-day ratio, I count the number of stocks that have risen by at least 4% from their previous day's closing prices over the last five trading days and compare it to the number of stocks that have fallen by at least 4% over the same period. Similarly, the 10-day ratio looks at the same comparison over the last ten trading days.
Interpretation:
5-Day Ratio: This ratio provides insight into the short-term momentum over the past week. A high 5-day ratio (more stocks up 4% compared to down 4%) indicates short-term solid bullish momentum, suggesting that recent days have seen more stocks experiencing significant price increases. Conversely, a low ratio means short-term bearish momentum.
10-Day Ratio: This ratio extends the analysis to the past two weeks. A high 10-day ratio indicates stronger short-term momentum, reflecting a sustained bullish sentiment over the past two weeks. A low ratio, on the other hand, suggests a bearish sentiment over the same timeframe.
MEDIUM-TERM
The 1-month ratio between stocks up 25% versus those down 25% in a month is a medium-term momentum indicator that assesses the strength and direction of momentum in the market over a relatively longer timeframe than short-term indicators.
Here's an explanation of how it works:
Calculation: To calculate this ratio, I count the number of stocks that have risen by at least 25% over the past month (roughly 20-22 trading days) and compare it to the number of stocks that have fallen by at least 25% over the same period.
Interpretation:
Medium-Term Momentum: This ratio provides insight into the medium-term momentum in the market over the past month. A high 1-month ratio (more stocks up 25% compared to down 25%) indicates medium-term solid bullish momentum, suggesting that, over the past month, more stocks have experienced significant price increases. Conversely, a low ratio means medium-term bearish momentum.
Duration: Unlike short-term indicators, this ratio considers a more extended timeframe, making it suitable for traders and investors with a medium-term perspective. It captures trends that have developed over the past month.
LONG-TERM
The 3-month ratio between stocks up 25% versus down 25% in the last 3 months is a longer-term momentum indicator that assesses the strength and direction of momentum in the market over a relatively extended timeframe.
Here's an explanation of how it works:
Calculation: To calculate this ratio, I count the number of stocks that have risen by at least 25% over the past three months (approximately 60-66 trading days) and compare it to the number of stocks that have fallen by at least 25% over the same period.
Interpretation:
Longer-Term Momentum: This ratio provides insight into the longer-term momentum in the market over the past three months. A high 3-month ratio (more stocks up 25% compared to down 25%) indicates longer-term solid bullish momentum, suggesting that, over the past three months, many stocks have experienced substantial price increases. Conversely, a low ratio means longer-term bearish momentum.
Duration: Unlike short-term or medium-term indicators, this ratio considers a more prolonged timeframe, making it suitable for investors and traders with a longer-term perspective. It captures trends that have developed over the past three months.
PRICE ACTION
As a trend swing trader, I effectively use a combination of very short-term (10-day), short-term (21-day), medium-term (50-day), and longer-term (200-day) moving averages, along with the 10/21 and 50/200 crossovers, to comprehensively assess the market trend and position themselves accordingly.
Here's a step-by-step explanation of how to use these moving averages and crossovers:
Very Short-Term Moving Average (10-day EMA):
Trend Confirmation: The 10-day moving average reacts quickly to recent price changes, confirming very short-term trends.
Short-Term Moving Average (21-day EMA):
Short-Term Trend: The 21-day moving average provides insight into short-term trends and helps confirm trend direction.
Medium-Term Moving Average (50-day SMA):
Intermediate-Term Trend: The 50-day moving average is a commonly used timeframe for assessing intermediate-term trends.
Longer-Term Moving Average (200-day SMA):
Long-Term Trend: The 200-day moving average is instrumental in evaluating the market's long-term trend.
Crossovers - 10/21:
Bullish Signal: A bullish crossover occurs when the 10-day MA exceeds the 21-day MA. This suggests a short-term positive shift in momentum and can be seen as a potential entry signal for short-term swing trades.
Bearish Signal: A bearish crossover occurs when the 10-day MA crosses below the 21-day MA. This signals a short-term negative shift in momentum and can be considered a potential exit signal for short-term positions.
Crossovers - 50/200:
Golden Cross (Bullish): When the 50-day MA crosses above the 200-day MA, it's known as a "Golden Cross." This crossover is a strong bullish signal, suggesting a potential longer-term uptrend. Swing traders may view this as an opportunity to enter or add to long-term positions.
Death Cross (Bearish): Conversely, when the 50-day MA crosses below the 200-day MA, it's known as a "Death Cross." This crossover is a strong bearish signal, indicating a potential longer-term downtrend. Swing traders may use this to consider exiting or shorting positions.
GLOBAL DAILY BREADTH (GDB)
To calculate my "GLOBAL DAILY BREADTH" (GDB) score, I create a composite score that combines these indicators below to assess the overall market breadth for a given day. The GDB score aims to capture the breadth and strength of market movements across various aspects.
Here's a step-by-step explanation of how I calculate it:
Daily Price Change:
Calculate the average daily price change for the broad market. This is done by summing up the price changes of individual securities or the index constituents and dividing it by the number of securities.
Daily Net Advance/Decline Ratio:
Calculate the number of advancing stocks (stocks that went up in price) for the day and divide it by the number of declining stocks (stocks that went down in price). This ratio measures market breadth in terms of the number of stocks participating in the move.
Daily U/D Volume:
Calculate the total volume of shares traded in advancing (U) stocks and declining (D) stocks for the day. I calculate the U/D volume ratio by dividing the total U volume by the total D volume. This reflects the volume dynamics of advancing and declining stocks.
Net New High/Low (52w) Ratio:
Calculate the number of stocks making new highs and divide it by the number of stocks making new lows for the day. This ratio indicates whether more stocks are reaching new highs or new lows and reflects market sentiment.
Daily Momentum Ratio:
The ratio between stocks that are up 4% or more versus stocks that are down 4% or more on the day is referred to as the "4% Up/Down Ratio".
Once I calculate these indicators for a given day, I combine them into my GDB score.
Here's the approach to creating the composite score:
I assign weights to each indicator based on their relative importance (secret sauce).
Standardize the values of each indicator to ensure they are on a consistent scale. This involves transforming the values into % ratios.
Multiply each standardized indicator by its assigned weight.
Sum up the weighted, standardized indicators to calculate my daily GDB score.
A higher score suggests broader market participation and strength, while a lower score indicates weaker market breadth.
Interpretation:
GDB > +400 = Breadth Thrust
GDB < -400 = Distribution
Uptrend: During an uptrend, I’ll want to see steady positive readings during the ascent, with low to medium negative readings during pullbacks.
During the uptrend, I want to see GDB between +50 & +400.
After an extended uptrend, a GDB > +400 could signify an exhaustion move, especially if we are already extended for kma’s.
Once a pullback is confirmed, I want to see GDB stay contained above -400. Otherwise, it’s a distribution sign.
Following a shallow pullback, a GDB breadth thrust reading > +400 is a good confirmation for upside continuation.
Downtrend: During a downtrend, I’ll want to see steady negative readings during the descent, with low to medium negative readings during pullbacks.
During the downtrend, I want to see GDB between -50 & -400.
After an extended downtrend, a GDB > +400 could be a sign of an exhaustion move, especially if we are already extended for kma’s.
Once a pullback is confirmed, I want GDB to stay below +400. Otherwise, it’s an accumulation/breadth thrust sign.
Following a shallow pullback, a GDB distribution reading < -400 is a good confirmation for downside continuation.
Market bottom: If the market makes a HIGHER LOW while in a confirmed downtrend, and GDB shows breadth thrust reading, then it’s considered as an FTD and potential market bottom.
Market top: If the market makes a LOWER HIGH while in a confirmed uptrend, and GDB shows distribution reading, then it’s considered as a potential market top.
MARKET EXPOSURE MODEL
Here's an explanation of the four different signal conditions of PTMM based on short-term (ST), mid-term (MT), long-term (LT) breadth, price, and momentum:
RED Signal 🟥:
ST trend is down: This component indicates the short-term trend is in a bearish (downward) direction. It suggests that recent price movements in the short term are negative.
Rule: Price > 21dma
ST momentum is down: Short-term momentum is also bearish, meaning there's downward pressure in the short-term price movements.
Rule: 5 & 10-day ratio > 1
MCSI trend is down: The McClellan Summation Index (MCSI) trend also points downward, further confirming the bearish sentiment.
Rule: MCSI uptrend
A RED signal suggests a bearish outlook across multiple short-term indicators, indicating a short-term downtrend.
Action/Rules:
No new LONG exposure
Protect breakeven on existing long positions
SHORT trades allowed
1/2 positions only (10%)
Trimming 1/3 at 1R & 2R
Keeping 1/3 as a runner position
New open risk > 0% (meaning all new exposure is financed and paid for with trims)
ORANGE Signal 🟧:
ST trend is up: In this case, the short-term trend is bullish (upward), indicating positive recent price movements in the short term.
Rule: Price > 21dma
ST momentum is up: Short-term momentum is also positive, reflecting upward pressure in the short-term price movements.
Rule: 5 & 10-day ratio > 1
MCSI trend is up: The MCSI trend is pointing upward, confirming the bullish sentiment shift.
Rule: MCSI uptrend
An ORANGE signal indicates a bullish short-term outlook and potential & unconfirmed market turn, suggesting potential buying opportunities soon.
Action/Rules:
New LONG exposure allowed
1/4 positions only (5%)
Trimming 1/3 at 1R & 2R
Keeping 1/3 as a runner position
PF exposure max = 20%
New open risk > - 0.25% (meaning all new exposure is financed and paid for with trims)
YELLOW Signal 🟨:
MT trend is up: The mid-term trend is bullish, indicating positive price movements over a slightly longer time frame.
Rule: 10dma > 21dma AND price > 50dma
MT momentum is up: Mid-term momentum is positive, reflecting upward pressure in mid-term price movements.
Rule: 1-month ratio between stocks up 25% versus down 25% (MT_momentum) > 1
MCSI trend is up & above the 10dma: The MCSI trend remains upward and is above the 10-day moving average (dma).
Rule: MCSI uptrend & > 10dma
PTHL is up: Price-to-Highs/Lows ratio is up, indicating a positive sentiment.
Rule: PTHL uptrend
This YELLOW signal suggests a bullish outlook focusing on the mid-term trend, momentum, and market breadth, indicating potential opportunities for medium-term trades. In other words, we are one step away from confirming a strong & sustained uptrend.
Action/Rules:
New LONG exposure allowed
1/2 positions only (10%)
Trimming 1/3 at 2R & 3R
Keeping 1/3 as a runner position
PF exposure max = 50%
New open risk > - 0.50%
GREEN Signal 🟩:
LT trend is up: The long-term trend is bullish, indicating positive price movements over a longer horizon.
Rule: 50dma > 200dma
LT momentum is up: Long-term momentum is also positive, reflecting sustained upward pressure in the long-term price movements.
Rule: 3-month ratio between stocks up 25% versus down 25% (MT_momentum) > 1
PTHL is up & above 50dma: Price-to-Highs/Lows ratio is up and remains above the 50-day moving average (dma).
Rule: PTHL uptrend & > 50dma
This GREEN signal also suggests a bullish outlook, focusing on the long-term trend, momentum, and price performance relative to the 50-day moving average. It indicates potential opportunities for longer-term investments. In other words, we confirmed a strong & sustained uptrend.
Action/Rules:
New LONG exposure allowed
FULL positions (20%)
Trimming 1/4 at 2R & 3R
Keeping 1/4 as a runner position
PF exposure max = 100% or margin
New open risk > - 1%
ASSETS TRACKED
PTMM tracks specific assets that constitute the New York Stock Exchange (NYSE) and the NASDAQ stock exchange. These assets are selected based on certain characteristics to ensure they meet specific criteria.
Here's an explanation of the characteristics that these assets must respect:
Minimum Average Volume (Min Avrg Vol): 0.25 million dollars
This criterion specifies that the assets being tracked should have an average trading volume of at least 0.25 million dollars. Average volume measures how many shares of an asset are traded on average during a specific period, usually a day. A minimum average volume ensures that the assets are actively traded and have sufficient liquidity.
Minimum Float (Min float): 10 million
The "float" represents the number of outstanding shares of an asset available for trading in the open market. This criterion sets a minimum float of 10 million shares. A higher float generally indicates greater market liquidity and may reduce the impact of large trades on the asset's price.
Minimum Liquidity (Min LIQ): 10 million dollars
Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price. The criterion specifies a minimum liquidity level of 10 million dollars, ensuring the assets have sufficient trading activity and depth in their order books.
Minimum Price (Min Price): 5 dollars
This criterion sets a minimum price of 5 dollars per share for the tracked assets. A minimum price helps filter out lower-priced and potentially more volatile assets, focusing on those with a higher nominal value.
Minimum Market Capitalization (Min CAP): 1 billion dollars
Market capitalization (market cap) is the total value of all outstanding shares of an asset, calculated by multiplying the share price by the number of shares. The PTMM model requires assets to have a minimum market capitalization of 1 billion dollars, ensuring they are relatively larger and more stable companies.
Maximum Market Capitalization (Max CAP): 10,000 billion dollars (10 trillion dollars)
In addition to the minimum market capitalization, there's also a maximum limit. This criterion sets an upper cap of 10 trillion dollars, ensuring that the model does not track exceptionally large companies that may not align with the model's objectives.
By adhering to these specific characteristics and criteria, the PTMM model focuses on assets that meet certain liquidity, size, and trading activity standards, providing a framework for analyzing and tracking assets well-suited to its objectives.
REAL-LIFE EXAMPLES
STRONG UPTREND
STRONG DOWNTREND
BOTTOMING ACTION
TOPPING ACTION
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Alex ✌️🛡️
PrimeTrading Market Model (#PTMM)
Awesome, Alex!
Good job Alex! And thank you for those clear explanations. PTMM is one my favorite compass, to infinity and beyond!