In 2014, I spent about 6 straight months with this unique tool for traders called Market Internals, exploring its possibilities every day, looking for new and creative implementation ideas for my own automated trading systems (ATS). With a real obsession with this concept, I eventually found almost 40 new ideas (mainly my own proprietary ideas) on how to get the most out of this great tool, and slowly began to implement many of them in my own trading, with great success.
I truly believe that Market Internals can give a merchant a bit of an unfair advantage, if thought through and implemented well, especially in new and creative ways. So, in this article, I’d like to give you a brief introduction to the world of Market Internals, along with an example of one of my private Market Internals filters, to show you just how dramatic the impact of implementing Market Internals can be. favorably.
Introduction: What are Internal Markets (IM)?
We all know how difficult it is to find a new and viable business advantage. We are also aware that the scope of our possibilities is quite limited: it doesn’t really matter what trading indicators or other technical analysis tools we use; anyway, most of the time they all use the same data source. This data consists of the open, high, low, and close values of the bars on our trading chart, and whatever trading indicator we use, we basically use only a slightly different interpretation of the same OHLC values.
So if we really want to go a step further and implement a broader vision for our trading decisions (trade entry/exit conditions), we need to start looking outside of OHLC securities. We can, for example, implement information like Volume or Open Interest to our trade entry/exit conditions, which is not a bad idea at all, and many of my ATSs use OHLC values alongside Volume effectively.
However, we can still go one step further.
We can do something that many traders have no idea they can do: we can start making our trading decisions (entry/exit) based not only on the data coming from the underlying market but also in taking into consideration the market (its general direction, quality, strength and general “mood”) as a whole!
Just imagine:
Wouldn’t it be great to know where the stock market is? like an everything Where are you headed, before entering a position in our emini S&P strategy?
And that is exactly what Market Internals is all about: The ability to read the market as a whole and effectively incorporate this much broader view into our trading decisions.
Market Internals: A Quick Introduction
So what exactly are Market Internals? Where do they come from?
It’s very simple: Market Internals is information about the stock market in general, provided by the stock exchanges (NYSE, AMEX), usually in the form of an independent data source.
And this data source instantly provides us with real-time information about the general situation of the stock market.
Using Market Internals we can immediately, in real time, start receiving information such as:
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How many stocks in the Dow Jones Index have just gone up and how many have just gone down?
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Is the volume of all rising stocks in the Dow Jones Index greater or less than the volume of all falling stocks?
Or even:
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How do ALL stocks move across the NYSE? Are most of them going up or down?
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How many shares have a price that hasn’t changed?
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What is the direction of most of the volume? Up or down?
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Do the 30 stocks in the Dow Jones Index match the rest of the market, or is the Dow Jones Index now living its own life?
As you can see, there is a lot of information that can be obtained through this independent data source about the stock market as a whole (and later, for use in our strategies).
All of this information can be divided into several different categories, with each category having its own meaning and preferred method of implementation. However, because space for this article is very limited and the Market Internals topic could spawn more than a dozen articles like this, I will focus on just one category of Market Internals, one of my favorites, the MI UVOL pair. . -DVOL.
Internal Market: UVOL-DVOL
This category of MI simply consists of two separate data sources provided by the exchange:
$UVOL monitors the total volume of all rising stocks on the exchange.
$DVOL monitors the total volume of all shares that fall on the exchange.
By using these data sources (often called MI indicators), we can monitor the volume of one side or the other, so that we can get a better idea of where the volume is moving, i.e. which side is stronger. . This is of course a very powerful view of the market that can give us a lot of important information (if we know how to use it).
From a practical point of view, we usually add two different data symbols on our chart (data2 and data3) to start using the UVOL-DVOL pair for our trades.
We can then start using these MI indicators as additional or even primary filters (or, as I often call them, “super filters”) for our existing systems, with the goal of significantly improving them.
Let’s take a look at such a condition in practice. I am going to reveal one of my proprietary conditions UVOL-DVOL MI, which I use as a filter for many of my breakout index or stock strategies (MI can only be implemented on index or stock index futures).
UVOL-DVOL as a filter for significant improvement
To demonstrate the effect Market Internals can have, I’ve decided to use the simplest condition I could think of: a primitive breakout condition. tall = tallest(h, N1). I have not performed any optimization of the N1 parameter, nor have slippage and commission been included in the results shown below – the purpose of this article is not to present a functional breakout trading system, but rather to demonstrate that Market Internals can be apply even to the most basic systems and obtain immediate and often dramatic improvements. For the N1 parameter, I have used the first number that came to mind, 20.
Here is the basic code that I will use to demonstrate the impact of the Market Internals “Super Filter”. The test will be completed on the EMD.D market, within 15 minutes, from 03/22/2006 to 03/21/2016:
If high = higher (h,20), buy this bar at the close;
sets stop loss (600);
setext close;
Here are the results:
Net profit: $79,440
Profit factor: 1.17
Average Trade: $36.52
Max Drawdown (near closing): $12,650
Net Profit / Max DD: 6.28
Number of operations: 2175
Now let’s move on to the implementation of a very simple internal market condition that is based on the following rules:
- Calculate the difference between UVOL and DVOL,
- Calculate a 30-bar simple moving average of this difference,
- If the UVOL-DVOL difference is above the moving average of the UVOL-DVOL difference AND high = higher (h,20), a long position is opened,
- The position is closed at the end of the day or when the stop loss of 600 USD is reached.
In a moment I’ll show you the result of applying this code to the original system. But first, I should mention that I have used several small plugins, such as taking into account the zero line of the UVOL-DVOL difference to cancel the “Super Filter” in certain situations; all of this is included in the code and workspace that you can download at the end of this article. However, the basic idea is exactly as I described it: to work with the UVOL-DVOL difference and with the moving average of this difference.
Let’s take a look at the results after applying the Market Internals “Super Filter”. First, the performance report:
Net profit: $76,000
Profit factor: 1.38
Average Trade: $63.81
Max Drawdown (near close): $7,790
Net Income / DD Max: 9.76
Number of operations: 1191
And finally, the comparative table that shows the results before and after the application of the “Super Filter” based on Market Internals.
Metric / Before MI / After MI / Improvement
Net Profit / 79,440 / 76,000 / -4.3%
Profit Factor / 1.17 / 1.38 / +17.9%
Trade Average / 36.52 / 63.81 / +74.7%
DD max (C to C) / 12,650 / 7,790 / -36.8%
Net Profit Max DD / 6.28 / 9.76 / +55.4%
Operations / 2175 / 1191 / -45.2%
I think the numbers speak for themselves: max drawdown has improved by almost 40% (36.8%), average trade by +74.8% and net profit to max DD ratio by +55, 4 %. All really great improvements, and I see similar improvements from Market Internals very often.
Conclusion
I have been using Market Internals for my own trading since 2014.
Here’s what I’ve generally achieved by implementing them into my own trading strategies:
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reduce max. Reduction
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Improve Average Trade
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Improve the ratio Net Profit / DD Max.
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smoother equity curve
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Overall portfolio performance improvement
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Gain additional psychological confidence knowing that I only trade in very favorable market conditions.
I was very surprised that so few merchants use Market Internals; however, when I introduce them to the possibilities of Market Internals, they are usually quite excited and implement it into their own business systems with instant positive impact.
This is exactly why I like them and encourage all traders to look into them further.