Trading with Tick Index: How to Normalize Tick Index Readings

By Lawrence

Many day traders who use Tick Index as part of their market timing tools often find that it changes its behaviour every few weeks. The most obvious issue is that the level of the extreme readings are not reliable / stable from day to day let along over months or years. This instability makes it difficult to identify recurring patterns. It also makes it difficult to produce trading models based on Tick Index that can stay profitable over long period of time without re-optimization.

The truth is that it not that difficult to normalize the Tick Index readings so that it becomes more suitable for short term pattern recognition and as an input to trading models. The key is to understand the relationship between Tick Index and its counter-parts advance issues and decline issues. I will show you how easy it is to normalize the Tick Index in this article.

Topics covered:

  • The Close Relationship Between Advance Decline Issues and Tick Index
  • Normalizing the Tick Index
  • Visualization of the Normalized Tick Index
  • The Reason Why Tick Index Morning Readings Are Different
  • The Advantages of Normalized Tick Index
  • Custom Tick Indices Do Not Need Normalization
  • Summary

 

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Comments
  • raker October 22, 2014 at 4:58 am

    great article Lawrence , I have have been normalizing custom breadth indicators into percentages for years , one of my favourites , no. of stocks greater than the current day vwap , with normalization you can compare different periods of volatility such as 2006 to 2008 to now …

  • WeeklyOF November 9, 2014 at 10:17 pm

    Could you please clarify,
    “Notice the normalized version is telling us how strong the selling into 11 am on Oct 8 really is while the normal NYSE Tick Index was giving us a higher low. ”

    The higher low actually gave you heads up on the divergence with price and price did follow higher for that DAY. are you saying by using normalized, it is a better tool for a longer term (2-5-10 days) of strength/weakness of the market trend? In this case, we saw more selling the next day.

    • Lawrence Chan November 12, 2014 at 6:25 pm

      The higher low with the regular NYSE Tick is an illusion because it is based on a different total # of issues.

      The bounce was a result of the strong divergence signal you see developed there by itself over that 20 min, not as a comparison against the prev day readings.

      You get it right that the normalized reading tells you the sell trend was not broken yet.

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