ASX Momentum Trade Book - Part 2

My SF tried to use the mthly/wkly as a trend filter but I was never comfortable with the larger loss of open profits. Total portfolio heat has always been limited to 10% as this is the DD I wish to avoid. That 1% number must have been a misprint, should be 10% total and 1% per trade.
Yes, if the exits are further away we can exit earlier to reduce downside exposure.

One big down day in the US mkt is not a reason for panic. IF I thought my portfolio heat was too much then yes I'd reduce it. The key to being in control is never let the heat get too high, so that only one down day causes a panic response.

peter2 said:

RSG: Gold producer. I am surprised that gold didn't rally with the huge fall in stock indicies. Maybe it will next week. Nothing to do here.

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FWIW, most goldies have broken down much more decisively than RSG. Apparently RSG is/will be included in some global Gold ETF so perhaps there's some passive demand. Whilst I am not macro-ly bearish gold... most stocks in the sector tell a different story.

Not trying to influence your trading... looking across the sector sometimes helps and sometimes hinders. But being a pairs trader I often look at significant outperformance as having a higher chance of mean reversing.

peter2 said:

My SF tried to use the mthly/wkly as a trend filter but I was never comfortable with the larger loss of open profits. Total portfolio heat has always been limited to 10% as this is the DD I wish to avoid. That 1% number must have been a misprint, should be 10% total and 1% per trade.
Yes, if the exits are further away we can exit earlier to reduce downside exposure.

One big down day in the US mkt is not a reason for panic. IF I thought my portfolio heat was too much then yes I'd reduce it. The key to being in control is never let the heat get too high, so that only one down day causes a panic response.

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Makes sense to me now Peter, thanks for your reply ... debtfree

Peter: Just looking at TPP at the moment and I'd dare say you would have to be a little concerned with it now after finishing below .26 as it looks like it's lost all momentum now. Would this be your thoughts?

Cheers ... debtfree

Trading update: exit triggered

TPP: The exit has been triggered for this portfolio and we'll sell on the open.
From a medium term perspective: The pull-back in price is minor and has been done on decreasing volume in a falling market. This one is worth monitoring for another trade when price trades >0.30 (asc tri pattern) or if price bounces off 0.20 (abc corrective pattern).

This trade result will be about break-even. Should we give it more time thinking it's a reasonable medium term prospect? NO. If we do that, then we won't be trading our strategy of short term momentum. We all fall into the trap of turning a short term trade into a longer term trade (or investment). I do it too many times, so I know you do it too.

Peter: When you first started Capital at Risk in a Bull market was 6% and 4% in a Bear market. Now we have 5% in a Bull and I'm not quite sure what your limit is in a Bear market at the moment. I am interested in the fine tuning of this area and the reasons behind it so I know what to be aware of and the way you adjust to cater for the reasons if there is any. Is it simply the cost of brokerage that was $12 ($6 in & out) and then going up to $30 (in & out)? So brokerage was going to be a bigger factor and to overcome this make each trade slightly bigger, resulting in cutting down the number of trades and also cutting down brokerage cost at the same time?

Thanks for the update on TPP ... debtfree

Sorry for your confusion about the capital risk limits. The difference between 4% and 6% is only two trades. The value of 5% shown in the EOW pic doesn't change as it's not linked to a market risk descriptor.

Basically you don't have to worry about my application of the capital risk number if you're comfortable with the usual max DD's that accompanies momentum/trend trading strategies (approx 20%). If you want similar rewards with lower DD then you have to be more aggressive with exits and entries.

My endeavours to be more aggressive focussed on the amount of my own capital that I'd put at risk rather than the open profits that were at risk. It became clear that I could reduce the DD with the inclusion of a market risk filter to guide when I risked my capital in the market.

Every market risk filter is a lagging indicator and although it lowered the number of losses it caused me to miss many setups that triggered before the filter turned bullish. An off/on filter works nicely with large rallies, but works badly with small ones and markets that go sideways. I needed a risk more/less filter.

I monitored the capital risk number and used it with the market risk filter to indicate the appropriate number of trades to be started for the current market conditions. Sometimes the market conditions become unclear and thus the correct number of trades to be started is unclear. This is probably where the confusion appears. If you've undertood me so far, then you'd realise that it doesn't matter if the number is 4% or 6%. I use the number that feels right for the conditions.

Before I had this cap risk number I had no problem getting out of trades because I always used the exit triggers. My problem was getting back in quickly when the market turned up. My participation (% invested) lagged the market as my opinion of sentiment is a lagging indicator. Again not a problem if the rally is large enough, but deadly when the rally is small or the market goes sideways. The number (whether its 5% or 6%) is there to remind me to start more when I'm feeling bullish and the market turns up. The number also prevents me from starting too many trades when I get overly bullish. If I can't get into one or two good trades out of five tries, then starting more won't help.

Think of 5% or 5 trades as a guide. If you prefer to use a lower amount of risk/trade (eg. 0.7%) then you can start more trades before hitting the 5% limit.

This parameter and applying the guidlines I've outlined helps keep the max draw down to <10%. I don't believe one can reduce the max DD any less and still earn a reasonable reward (trading one system based on momentum or trend).

I hope this explanation helps clear your confusion.

ps: The increased brokerage hasn't influenced any trade management decision. I ignore it.

Thanks Peter for your detailed response, that has certainly answered all my questions in regards to the Capital Risk Limits area plus a few extra details within your post has helped the clarity as well, appreciate it.

Cheers ... debtfree

peter2 said:

If I can't get into one or two good trades out of five tries, then starting more won't help.

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This bit should be gold plated and hung on the wall.

Even an experienced trader can't expect (or afford) to try and be right in almost every case.
But, its also wise to pay heed and reduce trading or size if you're not succeeding in hitching any rides at all....

Trading update: New trade

RAP: Bought today's BO-HR at 0.420, iSL at 0.36

EOW 81 update: ASX Momentum Portfolio +39.6% ( 77% invested in 5 trades )
Benchmark index : SPAX2F15 (incl. divs and franking credits) -2.0% (past 81wk)

The market bounced a little at the end of the week after going down hard Monday. One up day (today) doesn't change the down trend, but it's a start. Our portfolio gained a little thanks to price rises in IMF and AMA.

This weeks sells: TPP (loss of brokerage only)
We may have sold this a little early and not given price a chance to test the BO that we bought. Market sentiment was quite bearish at the time and called for a little portfolio defence. I'm comfortable with that. We've got re-entry conditions in place should price kick up from here.

This weeks buys: RAP

Outlook: After ducking for cover on Mon I'm peering out from behind that cover and feeling a little bullish. Another up day and our daily trend will turn UP (Wkly DN). Enough for us to consider another trade or two next week as we've raised a few stops this week. Late Sept/early Oct is no time to be over extended.

Trading update: New trade

EMC: Bought today 0.845, iSL 0.72.
Might have bought this a little early today, but can't ignore my optimism and the temptation.

I think it's time to diversify our trading business.
This will lessen our reliance on a bullish ASX and increase our trading opportunities via the major world markets.

Now that I've posted an end goal I want to get there.

This thread will continue trading the ASX Momentum Portfolio exclusively.

A new thread titled "P2 Trade Book" will journal trades in the major world markets using futures, forex and cfd financial products.

Congratulations on your 1,000th post Peter but most importantly, Congratulations on the content of them.

I look forward to the new Thread and will be following with great interest, see you over there as well.

Cheers ... debtfree

peter2 said:

Outlook: After ducking for cover on Mon I'm peering out from behind that cover and feeling a little bullish. Another up day and our daily trend will turn UP

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After last Friday why would another up day turn the daily trend UP?
I couldn't see the XAO going above a previous high.
I know you have a personal criteria to change the background color of your charts to green if bullish, was this criteria close to triggering?
OR
Was it because price had gone above the 2ATR 10day line and changed your bars to Blue on your charts?

No big deal but just interested and thought it might get me into the bullish trend a little earlier.

Another question if I may Peter while I'm here:

In your weekly wrap-up on Fridays you have a column in the middle of each trade that is colored with SL, TS, BE, +, ++, +++
I can see the SL, TS & BE changes once you update the Current exit stop so no questions for these.

I know that the +, ++, +++ must also change with the updated Current exit stops but what do they mean or represent? I know and I can see that the Current exit stop level is now above the BE level and is in profit but does "+" mean the exit stop is now above 1 risk profit and "++" mean the exit stop is now above 2 risk profit and so on or does it represents a different level of profit? Naturally I do understand if this is a personal criteria for your own use.
I love the story it tells in 1 cell.

Thanks for your time Peter ... debtfree

The daily bars turned blue when it closed above 5400 (> 2ATR off low). That was enough to turn my daily trend to UP, but the weekly is still down and it needs to do a lot more. Once the daily turns up, it's my reminder to think about starting one or two trades if the capital risk is low, but don't over do it. If I exit quickly then I must also enter quickly or I'll lag behind the market. I don't chase price so it's important that I buy at the correct time.

I view every dip as a buying opportunity, but I must wait for the daily trend to turn up for confirmation. Until the market gets above 5700, I'll be buying in the dips and selling at the old highs.

Yes, you're correct regarding the "+" signs. They're markers. I order the list by the open risk. The winners float to the top.

Trading update: New trade. Second attempt at a BO-HR.

MYX: Bought at 2.05 today, iSL is 1.90.
This is our second BO attempt in MYX. The reason I have a second go is due to presence of the HL.
OBV and TMF values are rising indicating accumulation.

I appreciate the speedy and informative reply Peter, plenty to be aware of and nice of you to point it out.

Cheers ... debtfree

EOW 82 update: ASX Momentum Portfolio +42.5% ( 102% invested in 7 trades )
Benchmark index: SPAX2F15 (incl. divs and franking credits) -0.2% (past 82wk)

The market continued higher this week and so did our portfolio which hit a new eow equity high (another DD mastered!). It's nice going through a dip in the market and not having to close many of our trades. It shows that we're in stocks that are in demand.

This weeks sells: nil
This weeks buys: EMC, MYX

Outlook: We should be bullish after seven days with higher lows. It was good to see demand for the banks.

Note: The closing prices of AMA, RSG have been adjusted for their divs. Yep, we earned the divs just like real investors. IMF is going XD (0.07) on Mon. That's why the TS is further back than it could be.

Note 2: I'm going to remove the red line that tracks the portfolio heat in the weekly chart. The heat values will be visible in the results header and of course they'll be monitored as usual. I'll be removing the heat line to include another line. The new line will show the combined performance of this ASX portfolio and the new P2 trade book.

Before the portfolio heat red-line leaves the weekly chart it's worth pointing out a few things. This line shows how we've managed the portfolio heat or downside exposure during the last 18 months (82wk). When the market went down, we reduced the heat. When the market went up, like now, the heat is allowed to get bigger. The heat waxes and wanes due to a consistent application of a plan. Without a plan or an indicator (like our market filter) to guide our actions we are easily misled by the market commentary and our emotions.

Managing your overall risk is the most important aspect to profitable trading. Get this right and you must be profitable. Get it wrong and any edge you think you might have will disappear along with your capital.

Looking at the chart. I can say, we did a good job overall. Sure there were plenty of mistakes, but the overall job was done to a high standard.

I hope I've shown that portfolio risk management is not just about managing each trade. Every portfolio has its own risks that must be managed at the same time as each trade.

This chart shows each trade result in chronological order.



I've got to repeat, that profitable trading/investing is all about managing the downside exposure within your personal risk tolerance. You must do this to a very high standard to be able to profit from the financial markets.