ASX Momentum Trade Book - Part 2

Welcome to the "ASX Momentum Trade Book - Part 2" thread.

This is a continuation of the Pavilion103's LIVE ASX Momentum Setup Trading Thread. Please read that thread as I've posted my introductory remarks, goals of the portfolio and many notes on my trade management style in that thread.

We're here to increase our trading capital by trading ASX stocks that we anticipate to move higher. As this thread will contain more short term trades than medium term trades I've called it a trade book rather than a portfolio.

Why do this? I found this a tough question to answer. Fun, yes! Ego, yes, but my name is not on the thread title. The market does a good job of ego control and we must remain humble in order to deal effectively with uncertainty.

Blogging seems to provide additional motivation as I know someone is watching and waiting for the next update. I manage several ASX portfolios of various sizes so it's important to stay in touch with the small caps as well as the others. This is my contribution to the ASF community.

I'm happy to contribute opinions and suggestions to others through this forum. I've done this sparingly in the past and have included much more in the Pav's thread. I enjoy helping others get those rare "ah ha!" moments that we need to experience on our trading journey.

Comments and questions: Yes please, feel free to join in. If you don't ask then I may not tell you. I'll assume you've read Pav's Momentum thread. This thread will only be educational to you if you ask.

This thread builds on what we have accomplished in Pav's thread. That means we take the capital and the profits earned last FY and grow them this FY. This thread will be more of a trade journal rather than an educational demonstration of a trading methodology. We've done that in Pav's thread. The addition of a new strategy and improved flexibility turns our trading activity into a small business that can operate in all market conditions. I assume this is what you want to see.

The additional trading activities that we will employ may make this thread seem busy all of a sudden. Effective organisation is key. Adding another strategy to your trading tools will only work if everything is organised. It's not organised if it's not written down and handy to reference. A new strategy will mean new scans, another watch list and maybe some slight modifications to your trade management rules/guidelines. I can't do that for you. I will try to introduce new topics as we need them.

I will continue using the records and spreadsheet from Pav's thread. Accountability is mandatory and so is integrity. I'll be trading every one of these trades myself. It's a new FY and I have to earn my keep. This will not be a signal service. I'll post the charts with a description of the setup and any targets AFTER the entry. Occasionally I might post a setup or some stock codes before they trigger, but don't hold your breath waiting for them. I've been known to pre-empt a BO. Be warned.

I'll continue providing my comments on trade management, but I won't divulge my exact exit plans ahead of time.

There will be no trades started before July 1st. I'm giving you advanced notice to help you get organised if you are going to follow along. The next post will show why you will need to be organised.

Are you ready to rumble?

Woo who peter! THANK YOU
Yes I'm ready

More than ready Peter, thanks for continuing this journey.

I'm know there are many out there like me that needs to be more organised in their trading plans, so this is just ideal.

I'm sure you knew I'd be following you over to your new thread with a lot of interest and hunger, as I'm not finished with you yet. This thread will be viewed, explored, studied and the hints and tips ripped out it for years to come by ASF members. Good Luck Peter and thanks again.

Cheers ... Debtfree

Thanks Peter for all your efforts. As always, am very eager to learn more watching your trading style/activities and will watch this thread closely like Pav's thread.

Pavilion103 showed us his enthusiasm to trade break-outs from small price consolidations. We traded many and noticed that the number and profitability of these opportunities vary due to current market conditions. It's time to create more opportunities by expanding our range of BO setups and adding another strategy. A new strategy means more scans, another watch list, but we should be able to slip it into our existing ASX equity trading system. That's going to be your first organisational challenge. We'll go through these extra setups soon.

(1) We are going to expand our break-out opportunities.
(2) New strategy. We are going to trade the anticipated price swing after a corrective pull-back. I'll explain the setup and multiple entry triggers later.

I'm going to give a an extra challange and you have less than a week to get organised (I sound like a TV reality show, sorry). There's no rush and no pressure the markets will be there when you're ready.

We are also going to add another trading system to our trading business.

We've seen that the market can go down and being long only is not fun. When the index goes down, we reduce our open risk and protect our capital, but we can't profit from the move or offset the loss of open profits unless we can short. I'm going to include shorts on the index only. I've thought about shorting individual stocks but there can be issues with availability and we will be exposed to the occasional stock shocks. Trading indicies removes the stock shock and they are available to trade almost 24hrs. Most cfd providers offer an ASX index that we can use.

(3) Trading the ASX200 index (long and short).

That should make you both excited and overwhelmed. We will go through the extra BO setups first, then the pullback setup and multiple entry triggers. I'll leave the ASX200 index trading system until we need it, but you've been warned that it's coming. At first we'll only use it when we are near fully invested (long) and it looks like the market may turn down. We'll use it to offset the loss of open profits and if the market continues lower we might make a profit as well. This is not a hedging system.

At first we'll only use it when we are near fully invested (long) and it looks like the market may turn down. We'll use it to offset the loss of open profits and if the market continues lower we might make a profit as well. This is not a hedging system.

Click to expand...

Looks like hedging?

More opportunities DOESN'T mean more profit. More setups to go long won't help if the market goes down. In fact, more opportunities should frighten you. It means you'll have to make a subjective choice from the many opportunities that will be available. Think about how you are going to make that choice as we go through these additional setups. I'll give you a few suggestions on how to cope but ultimately it's your job and your business.

"Business" is the new key word for this thread. You are the manager of this business, but there are many times when you should think of yourself as an employee as well. As the manager, how would you ensure that your employees executed their duties correctly every time? Yes that's right. You'd give them written instructions until they learned what to do.

peter2 said:

We've seen that the market can go down and being long only is not fun. When the index goes down, we reduce our open risk and protect our capital, but we can't profit from the move or offset the loss of open profits unless we can short. I'm going to include shorts on the index only. I've thought about shorting individual stocks but there can be issues with availability and we will be exposed to the occasional stock shocks. Trading indicies removes the stock shock and they are available to trade almost 24hrs. Most cfd providers offer an ASX index that we can use.

Click to expand...

It is possible to profit from longs during downturns.

A crude mean reversion strategy which "percent ranks" the rolling 2 day Rate Of Change (ROC) and only buys when the rank is in the lowest decile (i.e. buy when the 2 day ROC is in the 10% of lowest readings for last 252 days) and holds cash when above had decent returns from a few selective trades on indices (basically buying on the steepest down days and exiting within ~5 days) during the GFC.

2007-07-02 till 2009-03-12

ASX:STW

Code:

                          daily.returns
Annualized Return                0.0739
Annualized Std Dev               0.1555
Annualized Sharpe (Rf=0%)        0.4754

NYSE:SPY

Code:

                          daily.returns
Annualized Return                0.1731
Annualized Std Dev               0.2080
Annualized Sharpe (Rf=0%)        0.8325

This is without any position sizing or stops. You can also improve this strategy by using limit orders at the daily lows and raising the threshold for moving to cash, but I just wanted to demonstrate it's possible to harvest mean reversion longs during protracted bears.

Examples of BO setups: These are pretty obvious but there are subtle differences.

This chart of SBM shows three types of BOs. The first setup is an ordinary BO-NH formed over a few weeks (note the HL). In this chart it's a reversal BO but they are generally trend continuation setups with variable R:R parameters. The second setup has taken several months (note the HL) and when the supply is finaly exhausted or withdrawn price may go higher quite quickly. The last is the small consolidation Pav likes to trade as they have good R:R possibilities.

In this thread we will add to our initial position if there is another setup and the TS on the initial position is at BE. Adding to winning trades is going to be a new aspect that we will be working on. It's easy to add when we start at the right place and price moves immediately in our favour. It's when things don't work out that we need our management rules.



Sorry. Didn't I mention pyramiding in the intro's? This means some of our trade management rules/guidelines will need to be modified to include when/how we pyramid and then how we manage the new larger position. We will have the same max position size of 20% so only the smaller priced stock trades will be able to handle a pyramid opportunity.

sinner said:

It is possible to profit from longs during downturns.

A crude mean reversion strategy which "percent ranks" the rolling 2 day Rate Of Change (ROC) and only buys when the rank is in the lowest decile

This is without any position sizing or stops. You can also improve this strategy by using limit orders at the daily lows and raising the threshold for moving to cash, but I just wanted to demonstrate it's possible to harvest mean reversion longs during protracted bears.

Click to expand...

Interesting. It's these "not common sense" approaches where edges are now found I reckon.

Trembling Hand said:

Interesting. It's these "not common sense" approaches where edges are now found I reckon.

Click to expand...

The returns on short term mean reversion shorts during periods spiking volatility are much much better (i.e short 90% decile) and broader (i.e. short 50% decile) but I think it's important to know that long alpha does exist (even if only briefly) in bear markets.

Here is a two part post on a much more refined version which is obviously curve fit but demonstrates how you can explore the parameters (you can adopt an adaptive algorithm to vote on the parameters in real use instead of hardcoded parameters).

https://engineeringreturns.wordpress.com/2010/07/13/tsi_rsi_system_parti/
https://engineeringreturns.wordpress.com/2010/07/14/tsi_rsi_system_partii/

Thought these looked interesting.

I've posted my initial thoughts about expanding our BO opportunities and mentioned that we're going to look at pullbacks and some index trading. Over the last few days I've been thinking that I should slow down. There's no benefit in having too many opportunities and it could be a disadvantage. I don't want to confuse new traders and I've always suggested that they master one type of setup before adding others. For July I'm going to stick with BOs and let the other strategies appear when the time is right. It's quite possible that a BO setup occurs at the end of a corrective pullback. When I see one like that I'll point it out and we'll introduce other aspects of these pullbacks at that time.

There are lots of charts showing corrective pullbacks right now as the market has dropped. If the market rallies then most stocks will rally. All setups will look promising. If the market falls further then these setups will fail. Stocks showing the greatest relative strength will be those stocks making new highs. I prefer to be buying new highs in all market conditions as these are the strongest charts. Of course they don't all work out. That's why we manage our exposure (heat).

(1) I'm looking for charts with clearly market horizontal resistance in a weekly or monthly up trend. They're for my SMSF. (Weekly Darvas scans)
(2) Next I'm looking for charts near their yearly highs with shallow consolidations (in weekly charts). (Daily Darvas scans)
(3) Then I'm looking for 10d BO with volume (thrust bars) You can see these in all three of tech/a charts HSN, SIQ, YOW. (Daily pm scans)
(4) Then I'm looking for small consolidations in strong trends (hope this rings a bell, Pav response)

Every weekend I find all the stocks that are stronger than the index (XAO) over the past 13 weeks (RSC(XAO,13) > 0). I throw them all in a watch list and sort through them. Charts with clear resistance levels go into a pending BO list. Charts showing corrective pullbacks go into a pullback list. Charts that are going sideways after a down trend go into a reversal list. Every PM I review those watch lists and wait for perfect low sized risk setups to buy them. There are approx 20 charts in each list. I don't let them get too big. When the chart looks poor and the anticipated opportunity isn't progressing as I'd like I ditch it.

I only mention this as it might help some of you organise your thoughts and procedures.

For July, focus on finding those perfect BO setups. They're out there.
ALU > 4.80, APE, BAL, CDA, DNA >0.80, FLN >1.40, NUF>8.00

I'm pleased to be waiting for new FY for our trade book. Patience is a good thing when dealing with the markets. There will be a time to act. So, enjoy the show. This happens every time market outlook becomes uncertain. I'm excited. I love this sort of market. People that stick to their plans can do very well. This "panic" can provide us a good start to the year.

I want to point out a classic divergence that I love to see and take advantage of. The divergence between the market index (XAO, XJO) and the banks. The indices are making new lows, but the banks are not. The banks are not even half way to their recent low. This sort of price action sets up the first HL in the banks and many other charts. I'm looking for charts that show the weekly trend is still up, this pullback is corrective and price is back at a prior BO level that coincides with the 50% retracement.

If the market continues to fall and the banks do make new lows then I don't lose anything and just wait for that first HL.

The value investors should be loving this panic as well. Good companies going much cheaper if the investors have managed their cash well.

Trading update: I'll sell both ISD and FLN this pm unless they close above their TSs. Apologies we should have sold ISD on today's open after those 4/5 down days that ended 0.02 above our exit trigger. This is a trading mistake and costs us money.

Peter. You are definitely not talking to yourself . Including myself, I'm sure there are many many who read this thread. I for one am constantly checking on it, throughout the day on my phone then a in the evenings I try to re-read when I have more time.

A few pages back in the other thread, I mentioned letting life get in the way of documenting some setup rules/money management. The beginning of this thread is a good opportunity. After so much wasted time reading and off track reading (I have a focusing issue ). I've decided to focus on one style of setup, this is a great thread to start with.

In my journal/rules book. It'll include as much info as I can think of and will be added to as I go, as we go. It'll be broken down into sections such as "entry" "exit" rules.

Anyway, I just wanted to say thanks for your time and efforts, it's appreciated. Also to pav for getting the ball rolling, tech/a (and others) who have contributed. All appreciated.

Back to the topic. A couple of questions:
How does volume play a role in determining a BO setups? Is it an important enough factor to give consideration?
Will an RSI be beneficial? Again... Is it an important enough factor to give consideration?
The universe we're working with here will be the ASX 200?
Could you please tell us your criteria for determining an up trend in the index again?

Cheers and sorry if the questions seem a little ""newbie''.

Trading update: A new FY, a new start or a restart.

AMA: Sold at our TS (0.59).
BAL: New trade, bought 4.40. Liked this little consolidation. (iSL 4.00)
PPS: New trade, bought 0.36 (iSL 0.32).

PPS is an example of what I call a pull-back trade. After the huge impulsive move to 0.44, price has drifted down with the market blues. Now there is a little 123 Low which creates the BO entry for us. The first target is the old high (0.44) which provides an acceptable RR.

Open trades: ISD, SEN FLN. They're hanging on in spite of the thin MD.

Interesting charts: CDA, SRF.
There are lots of nice PB setups, but I'll like to see the market start to rally first. That may not happen until the Greek tragedy is sorted.

bonkerrs: No need for the apology. I'm happy to help anyone who asks. The effort to get more consistency in your trading actions will definitely pay off. There are two payoffs, more profit and less stress. Win, win.

Volume: is a confirmation factor for me not an essential. Obviously we want to see lower volume during the consolidation and then higher volume on the BO. I do have the volume indicators OBV and TMF on my charts and I prefer to see them rising as price gets closer to the BO level.

RSI: is helpful when looking at PB opportunities, not very helpful with BOs. In PB setups the RSI should be <30, but I wait for price to move up first. In my charts (see PPS chart) you'll notice that the bars turn blue when price moves >2ATR(10) [It's actually the SuperTrend (10,2) indicator]. I scan for this crossover, check to see the pullback is corrective in nature, RSI(7)<30 and then .... Sorry about that, you've got me talking about my PB setups and it's a bit early for that.

The universe is anything with enough volume for me to trade myself. There are about 300 - 500 stocks with enough volume.

Index: Weekly, I look for HH and HL. Daily is similar but I'll place a line on my chart as an indicator.

Hi Peter

With the PPS entry, would you watch or set an alert, to see it trading above .36 and then place the order checking market depth?
Or would you enter a buy stop in the system beforehand?

I often wonder whether my buy stop "lazy" entries on these types of stocks give me a dud inflated price, and whether I should learn to read the depth to avoid this.

myrtie100: Tough question as I don't think there is a best procedure. It will depend on whether you can watch the market during the day. When I was working (for others) I used pending buy stop orders and only found out if I'd bought something when I got home. Most of the time the close was higher than my entry. Sometimes it wasn't. The buy stop orders got me into the best trades. Slippage increased since those days and I stopped using the conditional orders when I "retired". I don't know whether this is a good thing or not, because now I miss the trades that go through the BO level and take off. I hate chasing the next day, so I do miss some good ones. Missing a good trade is probably worth a lot more than accumulated slippage in thin markets. You would have to check this, of course.

If we've found a high probability setup then we should just take it asap. Slippage is frustrating but a cost of doing business.