ASX Momentum Trade Book - Part 2

[peter2]

Trading update: My daily market risk indicator has turned down indicating that there is a higher probability of lower prices in the short term. This change means that its time to reduce our portfolio heat slightly and be a bit more defensive. However our recent cautious approach has kept the portfolio heat at comfortable levels and we've been able to raise our exit stops on many of the trades. Raising them higher would only strangle the trades and force their closure. The market risk indicator is there as an objective warning signal and if we hadn't already raised the exit stops, now is the time to do it. Let's review our open trades. We're going to close a few to refresh the portfolio but there is no hurry to do it.

NVT: We've been in this trade for quite a while (78d). This is unusual for a short term momentum trading style, but as the trend was reasonably strong we stuck with it. The price swing up is not impulsive which means it's corrective in nature and we can anticipate that the next impulsive move may be down. For this reason we're closing this trade with a sell limit of 5.32 to reduce our heat.
Note: My personal exit stop for this stock is at 4.80 and from a medium term perspective (weekly chart) there is no reason to sell.

EGH: Continues to move slowly higher and is now at our T2 target price (and yearly high). I've been concerned by the thin market depth for some time and the price can fall 0.03 - 0.04 easily on any day. We are going to sell this one at 0.74.
Note: My personal exit stop is at 0.60 (BE) and there is no reason to sell looking at the weekly chart.

EPD, GXL: Price remains near the BO levels and I'm inclined to leave them. There is no point (room) raising our exit stops without strangling the trade.

IMF: Nice bullish day yesterday (1/6/16), with some selling today. Price is near the 1.50 level and we can anticipate some resistance at this level. Our exit stop is at 1.30 which leaves enough room for us to wait and see where price goes next.

LPE: The opportunity to sell at 0.049 is passed. Now, do we allow price to fall further or take the +1R profit. As this is a short term trading thread lets take the profit.

These exits will allow us to refresh the portfolio with newer opportunities and we'll be on the lookout immediately. The market pause will create the setups that we want to trade and if the market dips then we will wait for our setups without concern for our portfolio value.

 

[peter2]

EOW 66 update: ASX Momentum Portfolio +21.8% ( 37% invested in 3 trades ) XAO -8.6% (past 66wk)

Our portfolio went down with the market this week. Nothing out of the ordinary.

This weeks sells: NVT (+1.3R), EPD (+2R), LPE(+1.1R)
This weeks buys: GXL (BO-HR)

After holding on to NVT for 78d and EGH for 86d I was starting to feel like a medium term investor. My thoughts were getting slow and sluggish.

We grabbed the profits and will refresh the portfolio with "new blood" asap. I may even add another setup to our arsenal to keep our minds active.

Outlook: Anything can happen from here, a new break-out above 5400 or an EOFY dip below. We'll wait for our chart setups to get us into the market.

 

[Quant]

I dont mean to be pedantic but if you are comparing your returns to the Index it would be a better , fairer more equitable way to compare to a total return div adjusted accumulation index such as SPAX2F15 .... just saying . You are not alone doing this as many are guilty of same thing . I am not denigrating your returns at all they are great outperforming market spectacularly , well done

 

[peter2]

Thanks for the suggestion of using SPAX2F15 as our benchmark. I've included the SPAX2F15 in this chart. The difference between SPAX2F15 and the XAO is due to dividends and franking credits. This difference compounds over time.

The XAO is far from a perfect benchmark. especially when compared to a portfolio with only 5 - 8 stocks in it at anytime. These half a dozen stocks will never refect the composition of any general market index. An index like the XAO does illustrate why there are times when the equity curve goes down, sideways and eventually up.

We overlook/ignore the positive aspects of dividends in this thread. I agree that the positive effect of compounding dividends over time should never be dismissed. However the emphasis in this thread is on compounding profits from trading with an edge. This is primarily an educational thread demonstrating the basics of trading profitably.

We also ignore/overlook the effect of taxation on our profits. This would cut 15 - 49% of our profits each year (outside of SF).

 

[peter2]

Trading activity: One sell and one buy.

GXL: Closed below our exit trigger (7.40) yesterday (7/6/16) and this means sell next open (today).
It was an unusual price gap down with huge volume in huge parcels. My own exit stop is 7.00. Will watch the next few trading days with interest.

EGH: Our re-buy order triggered today and we paid a little slippage to buy (0.765). Our iSL is 0.72.

NVT: We'll re-buy this if it closes >5.50.

I'm considering the charts on AZJ, CAT, CL1, GXY, ILU, IPL, NMT, SEN this evening.

 

[peter2]

Trading update: New trade

ADA: Bought the BO-NH after the BO-HR. we have bought the BO of a trend continuation pattern (retest of BO-HR level). Initial SL is 2.50. There have been a series of HLs indicating some underlying demand prior to the BO.



CL1: Opened higher than our buy limit. I'll leave the buy order in for a few days only. A minor gap fill may help us get filled.

GXY: Opened higher than our buy limit and undergoing merger with GMM. Removed buy order.

 

[peter2]

EOW 67 update: ASF Portfolio +21.3% (31% invested in 4 stocks) XAO -8.6% (past 67wk)

The week ended at pretty much the same level it started. No joy for the ASX portfolio managers.

This weeks sells: GXL as it closed below our exit trigger.
This weeks buys: EGH, ADA

EGH: We have been trapped in another capital raising. Our trading plan states that we exit asap next open.

Outlook: More of the same directionless trading is expected due to EOFY and election blues. I remain cautiously bullish, but a close below 5350 (XAO) would make me reduce my portfolio heat a little. This portfolio is only moderately invested so we have no need to do anything yet.

We could start a lot more trades as there have been plenty of opportunities, but I've noticed many break-outs have failed to go higher and some have reversed. There have also been a few price spikes down after poor news. This volatile and directioness environment would see our portfolio suffer many small losses. Losses of this type do add up and I prefer to avoid this outcome when the general market is listless. Unfortunately this will mean we miss a few winning trades. That's trading. You may trade for the action, but this portfolio trades for profit.

It's time we diversified our trading business into other markets. I've mentioned this in the past and it's time I got off my ... seat and got things started. I'll get myself organised over this long week-end and start something next week.

 

[peter2]

EOW 68 update: ASX Momentum Portfolio +20.4% ( 24% invested in 3 trades ) XAO -11.0% (past 68wk)

The market lost 2.5% while our portfolio lost 1%. Our cautious approach saved us a little once again. It's quite likely that a few readers are thinking that this thread is dying. No it's not. The trading activity has slowed due to the markets trading sideways and now falling. We follow our trading plan and when our market risk filter indicates risky conditions we take notice and reduce our activity.

This weeks sells: EGH (resumed trading after news of cap raising.)
This weeks buys: None, as the market fell.

Outlook: Expect continued volatility in all markets due to uncertainty in the outcomes of many political events.

No chart this week as nothing's changed.

 

[grah33]

yeah, would be great to learn some forex here.. not much opportunities with shares...

 

[peter2]

This thread is experiencing a lull in activity as the market conditions have become unfavourable for our strategy. This happens to every strategy at some time. There are always plenty of opportunities to trade short term momentum strategies in the ASX. You just have to look for them. The micro cap sector (sub 10c range) always has a few "pump and dump" type opportunities. These rallies only last for a few days (eg LNG). Price and volume activity scans will find them. We haven't traded in this sector although it was Pav's and tech/a's favourite source for short term momentum trades because it requires watching the price action during the day. I prefer to manage the trades at the EOD.

A lull in activity doesn't mean we abandon the strategy and look for something else. This is the reaction of losing traders. We will stay with our strategy because we know that we can be profitable using it.

What we can and will do is to add another entry setup. Currently we use a BO-HR setup to buy at the start of a trend and a BO-NH of a shallow price consolidation as an entry into a trend continuation. Often these pull-backs get much deeper and the RR of the BO entry is unfavourable. We need another entry mechanism to buy into these trend continuation opportunities. Currently our market index is experiencing a pull-back within its weekly and daily up trends. This means many of the charts will be showing the same thing. If the market makes a higher low and starts going back up, we want to buy into this resumption of the up trend much earlier than waiting for the BO.

Let's call this a pull-back (PB) setup and define it.
Stocks: Any stock that is very liquid, traded heavily every day with good market depth. It's important that we can buy and sell whenever we want using limit orders. This is not a strategy for thinly traded stocks.
Context: Weekly trend is UP. Daily trend is UP, although the recent price action is going down.
Location: Price should be near the 50 - 61.8% retracement zone or approaching a previous break-out level. Price must not have closed below the prior swing low as this would negate the daily up trend. There is one exception to this guideline and that is the formation of an abc corrective pattern. This abc correction must end in the 50 - 61.8% zone.
Entry: We won't buy when price is going down. We wait for price to go up and close above an entry trigger. The entry trigger is based on a 2 or 3 bar count back level off the higher swing low. This trigger level is similar to a 1.5(2) x ATR(10) increase off the higher swing low.

The addition of another setup is to increase our trading opportunities but we mustn't overlook our best setups, the BO trades. We'll prioritise the setups so that we don't overlook the best ones when the market conditions are not providing them.
1. BO-HR to get the best trend starts.
2. BO-NH to join the established up trend.
3. Pull-backs in persistent up trends.

 

[kid hustlr]

Sounds good!

 

[Telamelo]

Excellent post above Peter as really well explained.

See link below that I use as a quick guide to see what is trending up/down in the short/medium/long term (currently above/below 200dma etc.)

http://au.bannronn.com/ e.g. alerted me to uptrending stocks such as DUE on b/o above $2.35 and MTS on b/o above $1.90 (both offered short term gains) ............. don't know if this may help anyone but happy to share and hear people's thoughts.

Cheers tela

P.S. currently waiting on BAP and APE for pb's? but bought MEP last week on b/o

 

[Lone Wolf]

G'day,

Let me start by saying that I think everyone agrees you've done an excellent job Peter, nothing I write below is meant to detract from that in any way.

I have a query on how to develop consistent profits. This strategy, like any, works best in certain market conditions and treads water for the rest of the time. This exercise has run for over a year and the bulk of the profits were made in a two month period. That's fine, you can't knock a strategy has made a very good annual return and limited losses during unfavorable periods. I agree it should not be abandoned.

But if for some reason you had been unable to trade for those two months the equity curve would be looking a bit flat. What would be the best way to achieve more consistent profits? I figure you need higher trade frequency if you want more consistency? For the discussion, lets assume you have the capital required to effectively run two systems in parallel. You are looking for consistent returns and accept that you may need to sacrifice some total return to get it. But lets also stick with end of day systems.

- As you've suggested, add more entry opportunities to the same system. This will get you into more trades. But if all ships fall with the tide, won't you still struggle during market downturns?

- Run a different stock system in parallel that works during times this one is flat? Mean reversion maybe? Since you'll need to take capital out of the first system to run the second, the second will need to have a similarly decent annual return and a comparable draw down. We want the second system to compliment the first, not eat away at it.

- Trade other markets. Index CFD's/futures, commodities, forex. This would offer diversification compared to adding more stock trades. It could also offer the advantage of not having to split out so much of your capital. As CFD's/futures are leveraged, most of your capital can remain in the stock system while you add a second system. Total heat of the two systems combined to be considered. However, you would need to be able to trade these different markets successfully and since they behave differently to stocks there's a learning curve in there.

- Pair trading seems to be a way to avoid the affect of overall market conditions. But from what I've seen on this forum, I think successful pair traders are successful because of the work they put into understanding the companies they are trading. Probably not suited to systems traders or pure technical traders.

Thoughts?

 

[peter2]

Telamelo: Thanks for the interesting resource. I hadn't seen that one.

LoneWolf: Thank you. I've been waiting six months for those suggestions having hinted at the possibilities myself. I wasn't willing to start something else unless there was a genuine interest. A mean reversion strategy would compliment our momentum strategy. It's not something I use as IMO it requires some degree of automation to do it consistently well. Pairs trading: I think this has been well demonstrated in this forum by people who do it regularly. They use finesse, but I'm sure brute force will work as well. You didn't mention shorting ASX stocks to try and profit when the market falls.

I'm willing to include a few shorts in this thread when the time is right (about a week ago, ). We can use the same three setups that we have to go short, BO of support, BO-NL of shallow sideways consolidation and we can short a rally in an established down trend. We'll have to use CFDs for the shorts and the leverage provided will mean we have enough capital to do it.

As for your suggestion of trading in other markets using leveraged products, yes well that has me licking my lips. :taz: That's what I do. I trade these other markets in different time frames to capture short term movement (days) and very short term movement (hours) in price.

To reply to your query about generating consistent profits, multiple systems is the answer. Do you think it's time for us to diversify our trading business?

 

[PeterJ]

Hi Peter
I personally look forward to learning more about diversifying our trading business !
:bounce:

Peter

 

[Lone Wolf]

You didn't mention shorting ASX stocks to try and profit when the market falls.

I did consider shorting stocks as an option, but I wasn't sure how the two systems would work together if simply using the same setups in the opposite direction.

My impression was that adding short trades to a stock system generally hurt the performance. I have no evidence of this, I just seem to recall thinking years ago that I can improve my profits by trading in both directions but was disappointed in the results. I think the problem was that shorting improved performance during a market downturn, but was actually more of a detriment when the market was going sideways. Although that might've been due to poor system design on my part.

In any case, that's why I felt a different system, or different markets would be preferable to "fixing" the current system to work in unfavorable conditions. But I'll be quite happy to be corrected.

To reply to your query about generating consistent profits, multiple systems is the answer. Do you think it's time for us to diversify our trading business?

I don't feel comfortable commenting on what you should do with this excellent exercise you're running. I for one am very interested in diversification. Even if you didn't include it as part of this journal, one day I'd like to hear your suggestions on how you approach trading other markets. But whether you do that, or add short trading the the current system, or simply continue as you are, it's all appreciated.

 

[peter2]

Normally I'd say that using the long setups in an opposite way to short would be a losing strategy. I'm aware that many back tests show this. However this thread uses discretion that back testing can't model. As this is an educational trading thread we can do a few short trades at the correct times for educational purposes. With a bit of luck we may add to our performance. I've noticed that ASF has a few canny contrarians in the community and I might use their intuition at times.

I prefer to keep this thread trading ASX stocks only. The majority of trades will be long, using our three setups but I think a few shorts every now and then might be educational as well as profitable.

As for those other markets, that's a flame that needs fanning.

 

[lindsayf]

Happy to do some fanning.
Would like to see some forex trades in here.

 

[Lone Wolf]

Sounds like a good plan Peter.

 

[Wyatt]

Hi Peter2,

Love your work and generosity to other investors/traders. This thread is gold for both novice and recovering investors (recovering from past lessons)
I am also pleased you are expanding your trading arsenal for our viewing pleasure, and in particular the pullback setup.

What are your views on this chart, it is the sort of setup you are considering?
After a capital raise, RCG lost all the wind from it's sails. $1.25-$1.27 did provide a solid support area for entry and is now back up to resistance @ $1.43.



Cheers,
Wyatt