Example of my conservative trading strategy

[lukeaye]

Hi guys, thought i would update this thread, to see how my progress has tracked.

Primarily my Trades are now based on volume spread analysis, support and retracement levels.

My positions are based on fixed risk of 2% per trade.

I'm using discretionary methods, as i simply don't have time or the desire to learn computer language for systems trading.

So here is a trade i took on thursday, David Jones.

Entry; $5.06
Stop loss; $4.91
Target; break of $6 then use trailing stop.

Since its lows, it has had an amazing run, and the christmas period and stimulus obviosuly really helped boost retail stocks. Since its high it has pulled back for the last 4 months, and briefly touched the high once more.

Now to why i have entered this stock.

(1) Looking at support and resistance i can immediately identify one thing. Volume is high at support, and low at resistance. So we have more support, then resistance. Also i note that the rally has driven this stock up for some time, so it is a given that some time will be needed to remove any sellers before strong demand, and the rally can resume.

(2) The relative spread to volume of up downs to down days is much larger. What i mean is, there is less effort required to move the stock up (demand) the same spread, as there is to move it down (supply) on the same spread.
I would label what im talking about but i couldnt be bothered at the moment, so sorry.

(3) The other thing, is it has found support near the high, it is currently consolidating near its all time high, instead of being sharply rejected. The last time price was at these levels, it spent half as much time there, and found no real area of support. this graph doesnt show it, but look at a weekly on a larger chart and you will see what im talking about.

So that concludes David Jones. I will share some of my others soon

Comments are appreciated, try to make them constructive, if you don't agree with some analysis, please give me a reason why, i don't want some idiot comenting and just saying "your wrong". Tell me why, so myself and others can learn. Thanks you!

 

[lukeaye]

Now everyones opinion on this trade should be interesting.

Are you ready for this. Fundamental analysists will love this.
I am long worleyparsons.

Entry $25.30
Stop $24.80
Exit $29.73

Its no secret that WOR's profit outlook, is not hot. Hence the large gap down on huge volume.

Looking at the technicals i am long biased and here is why.

(1) $25.00 is a clear, and very very well defined level of support. It has had large volume confirmations on support, even in the last 3 days of trade.

(2) The low spread on these high levels of volume means that there is somebody (demand) more then happy to absorb these sellers (supply).

So the next few days really should provide guidance as to where this stock is heading, a close below $25.00 would indicate a poor outlook, a bounce would be viewed very positive.

So My analysis tells me long. In my eyes, the damage is already done, if you were going to go short you should have done it at $30. The evidence of a negative report was there on the charts. High volume down downs leading to the report. The smart money was already selling, and in my mind, is now rebuying.

 

[motorway]

Looks like a TOP ( DJS chart )

There was plenty of activity at the higher prices
Price gave DEMAND every opportunity to BUY

You say back to SUPPORT
But should we not want to see a HIGHER POINT OF SUPPORT ?

To what extent is the recent action
a sign of POOR DEMAND ?

DO you ever look at comparative RELATIVE STRENGTH ?

Question on a RELATIVE BASIS
is there a SUPPORT ? ( not near my Software to look )

If it is a range NEED TO SEE MORE WORK for BULLISH CASE
IT COULD break LOWER

Looking at support and resistance i can immediately identify one thing. Volume is high at support,

There are those who will buy DIPS on what they think are UP TRENDING STOCKS... BUT demand could not take this HIGHER and it made a DEEP retrace SO IS IT UP TRENDING ANYMORE ?

and low at resistance.

YES MADE A SECOND TOP . why ?

Then it makes a LOWER POINT of RESISTANCE ( JUST UNDER YOUR AVERAGE ) WHY WAS NOT that THE ENTRY But not for a LONG ?


Motorway

 

[lukeaye]

Looks like a TOP ( DJS chart )

There are those who will buy DIPS on what they think are UP TRENDING STOCKS... BUT demand could not take this HIGHER and it made a DEEP retrace SO IS IT UP TRENDING ANYMORE ? YES MADE A SECOND TOP . why ?

Then it makes a LOWER POINT of RESISTANCE ( JUST UNDER YOUR AVERAGE ) WHY WAS NOT that THE ENTRY But not for a LONG ?


Motorway

Hi motorway,

Well the stock has trended up for a long time. Therefore there may be several months of sideways range bound trading, to remove sellers or buyers. I am more inclined to say accumulation rather then distribution for the reasons i mentioned. Stronger volume at support, lower volume at resistance, and the spread.

When you say made a second top, are you talking about the old top from 2 years ago? Or the recent top from the one a couple of months ago?

When you say average are you talking about the moving average? If so i give no weighting to that for any kind of entry, i don't even know why its on the chart, i think its just defaulted.

 

[motorway]

Hi motorway,

Well the stock has trended up for a long time. Therefore there may be several months of sideways range bound trading, to remove sellers or buyers. I am more inclined to say accumulation rather then distribution for the reasons i mentioned. Stronger volume at support, lower volume at resistance, and the spread.

When you say made a second top, are you talking about the old top from 2 years ago? Or the recent top from the one a couple of months ago?

When you say average are you talking about the moving average? If so i give no weighting to that for any kind of entry, i don't even know why its on the chart, i think its just defaulted.

Yes there is the OLD top
BUT referring to the recent one

Yes the moving average .. Not giving it weight either
Just the action that happens to be UNDER it .
Not that it is UNDER the AVERAGE but that it is a lower point where SUPPLY overcame DEMAND ...

Motorway

 

[lukeaye]

Yes there is the OLD top
BUT referring to the recent one

Yes the moving average .. Not giving it weight either
Just the action that happens to be UNDER it .
Not that it is UNDER the AVERAGE but that it is a lower point where SUPPLY overcame DEMAND ...

Motorway

I can see what your saying, the demand wasn't as strong of support this time, to move it higher towards resistance again? Is that correct?

So perhaps ideally, or perfectly, we would have liked to have seen that strong volume push prices much higher, instead they were overcome by supply at a lower price?

 

[lukeaye]

I see the point where you say supply overcame demand, but the length of time and effort it took to get it back down to support, still doesnt confirm enough to me to say its distributive. I still think its accumulation.

I agree though, it could break lower, failing any demand steps in, but im fairly happy with buying at that level as if it is to move up, it should do so from here.

 

[skc]

I don't see any fault with the entries, given that they are both fairly reasonable tight stops, clear support lines etc. Obviously many people will have different interpretation of the volume / supply / demand characteristics but that's why chart reading is an art and not a science.

Question regarding your exit targets...Personally I think $6 is achievable for DJS as long as the overall market holds up. $29.7 seems ambitious for WOR given the news and I would move my stop up move aggressively and most happy to take profit at 4R.

It would be great to hear more about your trade management plan on both. With DJS it looks like you are keeping to your stop where it is until it breaks $6. Do you care if the XJO starts heading down before that happens? Do you have a time-based stop? Same questions with WOR.

The other thing to look out for is the absolute position size... you do realise that the tight stop on WOR means you have a position size that's 100% of your capital? Stranger things have happened in the market and I think there is a layer of risk management to be observed there from this perspective.

 

[lukeaye]

It would be great to hear more about your trade management plan on both. With DJS it looks like you are keeping to your stop where it is until it breaks $6. Do you care if the XJO starts heading down before that happens? Do you have a time-based stop? Same questions with WOR.

Hi Skc,

Before i start talking fundamentals, i'm not overly experienced with so please excuse any ignorance. Ok well for DJS the broader market does not concern me so much. Retail sales are particulary strong at the moment, so the sector is performing very strongly. I'm happy to hold until either my stop is hit, or my $6 target is hit. If the stock doesnt break $6 with enough confirmation i would sell, and possibly re-position on another swing low given the opporunity.

Wor on the other hand is i think very dependent on the broader market. The only way the stock can, in my eyes, move back to its old levels is through the markets moving strongly up. If there is a little move back up from here, on low spread and not much volume, then i will revise my profit target. Then if the market reverses, it could very easily collapse, and switch from being a long to a short set up.

Time based stops im afraid i have to little knowledge of to apply effectively. I have studied it somewhat, and can't find a constructive use for it in my trading. Perhaps somebody else uses them effectively? But for me, my analysis is far from perfect, it will never be perfect, adding another variable such as a time based exit, gives me another element to be wrong about, lowering my probabilty of sucess. The only time i would exit based on time, would be if i needed the capital, which has only happened once or twice.

The bottom line is, i don't want to enter a position, give myself a 7 day period to hold the stock, then sell and have the stock rally in my favour. It has happened before. I have tried to work on a momentum time based exit. that is, picking a swing point, and have an expectation of a sharp quick reversal. The hard part is the entry, anticipating the exact swing point. Once it is identified correctly, then you can make an entry on time. usually 1 or 2 periods or an immediate exit. The trouble i have found with this method is the low probability of sucess, often R:R can be good, but im just wrong too frequnetly and it ****s the equity curve.

Perhaps somebody else can shed light?

 

[peter2]

I am concerned by three aspects.

1. Your MA in both charts has turned down. This does not confirm your view that price is trending up. This may or may not be a required confirmation filter for your setups but I think it worthy of consideration to identify "perfect" setups. (Motorway alluded to this possible change in trend.)

2. Position sizing: (Nicely picked by skc.) The low sized risk setup for WOR will have you using too much leverage for your capital. You should consider a 20% of capital maximum size limit. WOR has already gaped down by $3, it may do so again on further downgrades. This would give you a $3/.50 = -6R result which would be -12% of your account.

3. Mismatch between size of trade risk (2%) and the setups shown. The low sized risk setups will have a much lower W% (IMO about 30%). This W% will have longer losing sequences than a higher W%. My estimate of an average losing sequence (1000 Trades) is 19. Can you handle losing 19 x 2% and still trade the same way? (The estimated losing seq. assumes that each trade is uncorrelated. We know that is not the case when trading top ASX200 stocks.) Are you prepared to tolerate even larger losing sequences using these types of setups?

 

[lukeaye]

Hi peter,

I am concerned by three aspects.

1. Your MA in both charts has turned down. This does not confirm your view that price is trending up. This may or may not be a required confirmation filter for your setups but I think it worthy of consideration to identify "perfect" setups. (Motorway alluded to this possible change in trend.)

I refered to this earlier, i give no weighting to moving averages. The view of trending up or down is very subjective. One must know the period the moving average is set to, to establish in there definition an up or down trend. As you don't know what that is you cant really draw any conclusion from it. As i said, i haven't got it set up for anything, its just a default, so it neither confirms or denies the current trend. Often my swing trades will have slow period moving averages pointing down, means nothing IMO.

A moving average has never for me, given a set up anymore perfection. At times, i want the moving average to be pointing as far down as possible.

2. Position sizing: (Nicely picked by skc.) The low sized risk setup for WOR will have you using too much leverage for your capital. You should consider a 20% of capital maximum size limit. WOR has already gaped down by $3, it may do so again on further downgrades. This would give you a $3/.50 = -6R result which would be -12% of your account.

Yes, i have been asked this before, and there is no solution i found to the problem that i happy to accept.

G-stop loss is the only solution. The only problem with this is there is a min stop distance, and it is often far to far away from where i want my stop, it makes the position not worth taking.

As you state the alternative is a lower position. Which is probably the most sensible solution. The drawdown has already been taken into account though.

3. Mismatch between size of trade risk (2%) and the setups shown. The low sized risk setups will have a much lower W% (IMO about 30%). This W% will have longer losing sequences than a higher W%. My estimate of an average losing sequence (1000 Trades) is 19. Can you handle losing 19 x 2% and still trade the same way? (The estimated losing seq. assumes that each trade is uncorrelated. We know that is not the case when trading top ASX200 stocks.) Are you prepared to tolerate even larger losing sequences using these types of setups?

I have very very high tolerance. I suffered a long string of loosers about a month ago, which drew about 30% of my account down. And i did not panic, it did no change my trading. The last 3 weeks i made it all back and then some.

Thanks for your genuine concern however!

 

[Wysiwyg]

I don't see any fault with the entries, given that they are both fairly reasonable tight stops, clear support lines etc. Obviously many people will have different interpretation of the volume / supply / demand characteristics but that's why chart reading is an art and not a science.

I remember reading that same line just recently.

As always in technical analysis, learning how to read indicators is more of an art than a science.

Good examples of your trades Lukeaye. Now they're out there. Win or lose, who knows.

 

[motorway]

Obviously many people will have different interpretation of the volume / supply / demand characteristics but that's why chart reading is an art and not a science.

Supply overcomes DEMAND PRICES FALL

DEMAND overcomes SUPPLY PRICES RISE

That is my interpretation of SUPPLY & DEMAND .

VOLUME arises when SUPPLY or DEMAND meets the other side
The subsequent action is then important
and always will be !

LUKE the volume on DJS YES is larger in the BARS you have circled as support.

But what about volume aggregated across the RESISITANCE vs across the
SUPPORT

DISTRIBUTION IS BY DEFINITION something that unfolds and is seen ON BALANCE ( not talking OBV but the aggregation of many bars into the BUYING SELLING WAVES )


Here is RELATIVE CHART ==> WHEN IS A HIGHER TOP NOT A HIGHER TOP ?
WHEN it is DISTRIBUTION !

and an ABSOLUTE CHART==> note The different behaviour in the THRUSTS ( shortening -->top red lines )

and IF I zoomed the chart. ALL THE VOLUME IS (ON BALANCE ) OFF and AT the TOP of the RANGE not the BOTTOM.


DOES NOT MATTER THAT THESE ARE P&F CHARTS ( WELL IT DOES but )
IT IS THE ACTION of the WAVES not the type of chart.

The red lines are in the SAME places on BOTH CHARTS

The view of trending up or down is very subjective

No IT is ( HAS TO BE ) OBJECTIVE....


SOME would call the BLUE line
THE IMMEDIATE TREND

OCT 09 strong reversal pattern
But LOOK at the RELATIVE CHART ! Also action at JAN this year !

Motorway

 

[Mr J]

Obviously many people will have different interpretation of the volume / supply / demand characteristics but that's why chart reading is an art and not a science.

It's both. It's still the same data.

 

[lukeaye]

LUKE the volume on DJS YES is larger in the BARS you have circled as support.

But what about volume aggregated across the RESISITANCE vs across the
SUPPORT

DISTRIBUTION IS BY DEFINITION something that unfolds and is seen ON BALANCE ( not talking OBV but the aggregation of many bars into the BUYING SELLING WAVES )

I didn't even look at the volume on price levels, I use it on my amibroker but i didn't think ig markets had it. Very Interesting observation. It appears that the volume is higher at that price level.

I should have really cross checked that.

The only problem i note with using that volume analysis though motorway is this.

Djs has spent more time at those high then at the lows, so more transactions have occured at higher prices then lower prices. Therefore your on price volume is somewhat biased towards distribution.

On my chart i note 33 periods at the top two of my price on volume, and 7 for the bottom two. The length of the Vol on price at the upper levels vs lower levels is not in proportion to this equation, so i therefore think it is inconclusive, if anything still pointing towards accumulation? Correct me if im wrong.

 

[motorway]

Djs has spend more time at those high then at the lows, so more transactions have occured at higher prices then lower prices..

EXACTLY ---SO the fact we are below or if we were above that price level
becomes SIGNIFICANT..

For the very fact that so much activity occurred there.. ( demand had opportunity etc)

And THAT VOLUME ACTIVITY COULD BE BELOW THE CURRENT PRICE ACTION COULD IT NOT ! IF PRICE HAD MOVED UP ?

WHEN BEHAVIOUR CHANGES... HOW Long the STATUS QUO was in PLACE
has a large bearing on SIGNIFICANCE

Think of any example in History

whatever was only ephemeral and transient the fact it changed meant NOTHING-- does not become even HISTORY
Just like a 1 box wide CONGESTION ZONE on a P&F CHART

But when an EMPIRE that endured for a aeon loses a WAR or STARTS to DECLINE.... (Just like a LARGE CONGESTION ZONE on a P&F)

Then forces are in play that YOU DO NOT WANT TO BE IN THE WAY OFF.

And take careful note of the relative chart's WEAKNESS
For the WHOLE MOVE UP THE RELATIVE CHART was WEAKER ( MADE LESS GROUND )

That is a sign of something important .i In this case bought about by a VERY OVERSOLD CONDITION IN 2009 ( We can see that FOR A fact )... SO DJS has got back to WHERE it SHOULD BE MAYBE .. Maybe OVERSHOT ?

Q HOW WAS IT PERFORMING JUST BEFORE THE GFC THEN ?


Motorway

 

[motorway]

On my chart i note 33 periods at the top two of my price on volume, and 7 for the bottom two. The length of the Vol on price at the upper levels vs lower levels is not in proportion to this equation, so i therefore think it is inconclusive, if anything still pointing towards accumulation? Correct me if im wrong.

You need to break the phases up in more defined way
would not count the action on the Left OF YOUR CHART
START at SEPT

Motorway

 

[lukeaye]

And take careful note of the relative chart's WEAKNESS
For the WHOLE MOVE UP THE RELATIVE CHART was WEAKER ( MADE LESS GROUND )

That is a sign of something important .i In this case bought about by a VERY OVERSOLD CONDITION IN 2009 ( We can see that FOR A fact )... SO DJS has got back to WHERE it SHOULD BE MAYBE .. Maybe OVERSHOT ?

Q HOW WAS IT PERFORMING JUST BEFORE THE GFC THEN ?


Motorway

Not sure what you mean by the whole move up was weaker? are you talking about the move pre GFC as appose to the current move?


Before the GFC, at the peak it was around these levels. But so was many other stocks, and they have continued to overshoot old marks, like JBH.

Are you saying the failures at 5.45 are significant in determining accumulation distribution?

 

[motorway]

Not sure what you mean by the whole move up was weaker? are you talking about the move pre GFC as appose to the current move?


Before the GFC, at the peak it was around these levels. But so was many other stocks, and they have continued to overshoot old marks, like JBH.

Are you saying the failures at 5.45 are significant in determining accumulation distribution?

Both charts have same BOX size in %
RELATIVE CHART makes ~ 100 BOXES on the move
ABSOLUTE CHART makes only ~ 60 Boxes on the move

The Absolute chart overstates the strength of the MOVE = So ? ( a BUBBLE MOVE )
But it was OVERSOLD...

so reactive move not an active MOVE.. ( a GETTING BACK )

Before the GFC, at the peak it was around these levels.

So the Q was . Was it a BUY THEN ? what was the TREND ACTION LIKE THEN ?

Motorway

 

[lukeaye]

Looking at the monthly chart, i would have to say this rally looks much stronger then the rally pre GFC. The volume is stronger, the spread on each bar is larger, and it took far less time to get there.

Unfortunetly im losing you with this P&F stuff