In 2014, I spent about 6 months straight 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 true obsession with this concept, I eventually found nearly 40 new ideas (mostly my own proprietary ideas) on how to get the most out of this great tool, and slowly started implementing many of them in my own trading, with great success.

I truly believe that Market Internals can give a trader 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 just use a slightly different interpretation of the same OHLC values.

So if we really want to go one step further and implement a broader view for our trading decisions (trade entry/exit conditions), we need to start looking outside of OHLC values. We can, for example, implement information such as 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 ​​in conjunction with Volume effectively.

However, we can still go one step further.

We can do something that many traders don’t even have a clue 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 heading, 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 business 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 stock exchanges (NYSE, AMEX), usually in the form of an independent data source.

And this data source instantly provides us with real-time information on the general situation of the stock market.

Using Market Internals we can immediately, in real time, start receiving information such as:

• How many Dow Jones stocks have just gone up and how many have gone down?

• Is the volume of all rising stocks in the Dow Jones index greater or less than the volume of all falling stocks?

Or even:

• How do ALL stocks move across the NYSE? Are most of them going up or down?

• How many shares have a price that has not changed?

• What is the direction of most of the volume? Up or down?

• Do the 30 stocks in the Dow Jones index match the rest of the market, or is the Dow Jones index now living a life of its own?

As you can see, there is a lot of information to be gained from this independent data source about the stock market as a whole (and later, to use in our strategies).

All of this information can be divided into several different categories, and each category has its own meaning and preferred method of implementation. However, because space for this article is very limited and the Market Internals topic could spawn over a dozen articles like this, I will focus on just one Market Internals category, one of my favorites, the MI UVOL pair. . -DVOL.

Market internals: UVOL-DVOL

This category of IM 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 falling stocks on the exchange.

By using these data sources (often called MI indicators), we can monitor the volume on one side or the other, so 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 operations.

We can then start using these MI indicators as additional or even main filters (or, as I like to 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 UVOL-DVOL MI conditions, which I use as a filter for many of my breakout indices or stock strategies (MI can only be implemented on future indices or stocks).

UVOL-DVOL as a filter for a significant improvement

To demonstrate the effect that 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 on the N1 parameter, nor have slippage and commission been included in the results 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 to even the most basic systems and get immediate and often dramatic improvements. For the parameter N1, I have used the first number that came to mind, 20.

Here is the basic code 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 close;

set the stop loss (600);

setextonclose;

Here are the results:

Net profit: $79,440

Profit Factor: 1.17

Average Trade: $36.52

Max Drawdown (near close): $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 spread is above the moving average of the UVOL-DVOL spread Y 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 will 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 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: work with the difference UVOL-DVOL 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 Profit / 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%

Average Trade / 36.52 / 63.81 / +74.7%

DD max. (C to C) / 12,650 / 7,790 / -36.8%

Net Income Max DD / 6.28 / 9.76 / +55.4%

Trades / 2,175 / 1,191 / -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 quite often.

conclusion

I have been using Market Internals for my own trading since 2014.

This is what I have generally achieved by implementing them in my own trading strategies:

• reduce max. Reduction

• Improve Average Trade

• Improve the ratio Net Profit / DD Max.

• Smoother equity curve

• Overall improvement in portfolio performance

• Gain additional psychological confidence knowing that I only trade in very favorable market conditions.

I was very surprised that so few traders use Market Internals; however, when I introduce them to the possibilities of Market Internals, they usually get quite excited and implement it into their own trading systems with instant positive impact.

This is exactly why I like them and encourage all traders to investigate them further.