Improving Chart Analysis

[MichaelD]

Addendum to last post:
Position sizing: 2% of total capital risked per trade

It's a remarkably effective trading technique, but the vast majority of the unprofitable masses will reject it for purely psychological reasons. Their loss.

 

[tech/a]

Hi Michael,

That is certainly a most interesting method of trading. What ever happened to the buy low and sell high philosophy ?? I suspect that Kerry Packer will be turning in his grave if James was using this investment technique.

I doubt it.(Packer).
Buy high sell higher.
Todays high will be tommorows low (wish Id bought it then,that stock,that house,that business,that land---you get the drift).

BTW, I will be curious whether anybody has done extensive backtesting on this trading method to see what sort of results one would get.

I've done much and in the end settled for a 180day EMA of the low exit.(which I trade---the method has been traded live for 4 yrs on Reefcap---techtrader). ATR works fine and I know many who use it. Happy to run as many tests as you want at whatever * ATR you want, Michael is right its very profitable for long term methodologies,not an exit for short term systems.
I now of one method trading weekly and doing very well---he will pipe up (make comment) if he wishes!

Ultimately, you are correct in stating that the exit is much more important than entrance. With solid position sizing, money management, Stop Loss settings etc etc, one really could come up with a very solid strategy irrespective of where the entry is.

Pretty well---you can use random. However there are more aspects to a system or trading methodology than purely profit.
Smooth equity curves are something I like,the consistency and confidence goes a long way. Minimising strings of losses and sensible leverage with profit re investment are also musts in my veiw.
Positioning of entry opportunity (by that I mean taking the highest high means your trading with the trend rateher than taking the lowest low in a bullish trading method) has a role to play rather than the specific entry trigger.

 

[nizar]

tech/a - u say that 180ema is one of your exits. If u take a look at KZL, for example, its trading at about $6 on a massive uptrend but its way above its 180ema which is sitting at around $4. What would be your exit in this case? Obviously u wouldnt want to lose 66% before you were "stopped" out.

michael - what do u mean by "no pyramiding of trades" and "% drawdown"

BTW thats fairly impressive stats you have there. 2% of initial capital works if you are starting with 50,60k+. Anything less and your stop will be too narrow, though as tech/a has pointed out, such a technique can still work. A bullmarket would have helped as well. So there may be less opportunities in a bearmarket but i think there will still be opportunities. They'll just pop up less so u just trade less, yeh? Probably go on a holiday or something when that happens...

 

[barney]

Oh nice one...
Im studying Pharmacy


Good onya Nizar, I knew you sounded switched on for a "young fella" .

ps You shouldn't be staying up so late .... bad for your study Cheers, Barney.

 

[nizar]

Good onya Nizar, I knew you sounded switched on for a "young fella" .

ps You shouldn't be staying up so late .... bad for your study Cheers, Barney.

Thanks barney.
Yeh i was "studying" last nite, got exams soon.

 

[bingk6]

In fact, I've just quickly done a backtest on the strategy up to close of trade Friday. Backtesting does have many caveats which are beyond the scope of this post, but the results are;

Universe: Current ASX300
Trading: From 1-Jan-1996
Starting Capital: $100,000
Reinvest All Profits
No pyramiding of trades
Entry: Close at all-time high
Exit: 6.5 ATR

Finishing Profit: $2,638,159.39
Win %: 53.86%
Drawdown %: 10.96%

Hi Michael,

Amazing stats to say the least. Can you tell me whether these trades include both long and short positions ? Just curious to see how effective this technique is when applied to a stock or index (if any) that are on its way down.

Secondly, would also like to see how pyramiding of trades affect the results.

 

[MichaelD]

Michael D - Can u please elaborate in what exactly the above entails ie. trading education and research? Thats a lot of hours a week, hopefully at the end u will find what you are looking for.

I spend 1-2 hours per weeknight risk managing my open positions. It's a precise, written down routine that I go through every weeknight, over and over again.

If a stop loss has been hit, I'll arrange for the position to be closed the next day and for new position(s) to be opened - almost invariably these are pyramids of existing profitable positions.

Most days this system does not trade.

I'm also trial trading three systems at present; one is a short term breakout system with 4 positions, one is an experimental CFD system which has 1 position which I'm using to learn how to safely trade with leverage, and one is a shorting system being paper traded.

These systems take a little more time as I'm also collating additional information about these systems as they go - learning the lessons the positions are teaching me.

I have a daily worksheet which I complete for all of these systems every day and which I can refer back to if necessary.

After I've completed my risk management I'll then report to my wife on the day's trading. This acts as my trading diary where I have to 'fess up to my weaknesses.

I'll then cruise several of the stock forums if I have time left.

Fridays (or one weekend day) I do additional work, calculating portfolio HEAT and doing data maintenance.

I read books in bursts - I travel a lot for my real job and will often use this time to read. I'd probably read on average 4 hours a week.

Some weekends I will spend a fair bit of time backtesting any concepts which I've picked up which sound promising. Most of the time this is a complete waste of time and I don't find anything more profitable than what I already do, but occasionally I'll find something useful for trading. I have come to accept that finding something useful is rare in this game.

Will I find what I'm looking for?

Yes I will. I am already trading a positive expectancy system which has taught me a lot about the markets and about myself. I have a very specific goal in mind - that of living off the proceeds of trading, which is slightly different to the concept embodied in the "trading for a living" mantra - and I am in a position where I can work at my real job as much or as little as I need to so that I don't need to put pressure on my trading to produce results too soon. I do not want to sit in front of a screen all day trading. My systems are all based around this core concept - they fit what I want to achieve.

Is it a lot of hours a week?

How many years of study are you putting in to get your degree so that you can earn a living as a pharmacist? Why should trading be any less rigorous?

Will I succeed?

Yes I will. I am 100% convinced that I will succeed. The basics of profitable trading are now completely ingrained in me (stop losses, letting winners run, positive expectancy, money management). I know with 100% certainty that the key to successful trading lies within myself. I find trading intrinsically fascinating, and the fact that it makes money is a secondary bonus.

 

[machi]

It doesn't work. You keep buying lower, and lower, and lower...and then the company's suddenly gone. At the very best, the company wallows in the doldrums for months/years before finally rallying. Buy high and sell higher works much better.

In my opinion totally incorrect. Some of the best investors in the world i.e. Buffet, Templeton to name a few have made it big time, buying low and selling high.

Obviously you have no other mechanism for buying a stock other than the fact that it is making new highs. How do you know it's not just a rally in a bear market? Simple you don't. Buying on breakouts to new highs is a poor strategy in my opinion. A breakout to new highs can lead to a false move. False moves can lead to fast moves in the opposite direction

 

[tech/a]

tech/a - u say that 180ema is one of your exits. If u take a look at KZL, for example, its trading at about $6 on a massive uptrend but its way above its 180ema which is sitting at around $4. What would be your exit in this case? Obviously u wouldnt want to lose 66% before you were "stopped" out.

No thats the Risk if you want to call it that that you take. Stock rarely drops 50% of its value if its a blue chip,does happen but to spike off 50% then in KLZ's case Zinc would have to become as common as dirt!
remember that the method has been tested over 20000 portfolio's and cases in isolation can and do happen but overall the ruturn is consistant.For my portfolio to be the one in 10000 that has a disaster or 2 would be pretty unlikely (I havent won the lottery yet!!). Most stocks have a distribution phase at which time the EMA catches up. I can show you many charts which i have held for years and would never have done so with a closer exit.
Having said that I also trade a small amount in a discretionary manner in search of the odd HDR. etc.

michael - what do u mean by "no pyramiding of trades" and "% drawdown"

Adding to trades which trigger again whilst your trading it.
% drawdown can be either the initial loss of capital before a portfolio reaches a profitable point----very common when starting a new portfolio or way of trading.
OR Peak to Valley drawdown where your open profit will fluctuate from its high to a pullback low. This varies throughout the life of a portfolio and is reported in testing as the Maximum found during a test period.

BTW thats fairly impressive stats you have there. 2% of initial capital works if you are starting with 50,60k+. Anything less and your stop will be too narrow, though as tech/a has pointed out, such a technique can still work. A bullmarket would have helped as well. So there may be less opportunities in a bearmarket but i think there will still be opportunities. They'll just pop up less so u just trade less, yeh? Probably go on a holiday or something when that happens...

Quite true. Infact I'm looking at swithes for turning on and off portfolio's. Unfortunately the Tax issue makes it very difficult as soon as you sell you have a 50% tax slug. Hold for 12 mths and its 25%. Still working at it!

 

[tech/a]

In my opinion totally incorrect. Some of the best investors in the world i.e. Buffet, Templeton to name a few have made it big time, buying low and selling high.

Obviously you have no other mechanism for buying a stock other than the fact that it is making new highs. How do you know it's not just a rally in a bear market? Simple you don't. Buying on breakouts to new highs is a poor strategy in my opinion. A breakout to new highs can lead to a false move. False moves can lead to fast moves in the opposite direction

I wouldnt say totally incorrect.

Its as valid a stratagy as buying a pullback.
Simply when you buy a pullback even if you use fib or Elliot or Gann or whatever as analysis you wont know before time if the pullback will hold or keep going---just as you wont know for a high to continue higher.

By the way Buffet made his money buying a run down company at a bargain and turning it into a winner. He owned the company---big difference!!!

As for saying its a poor strategy,I would love to see evidence to support a comparison of the 2. hypothesis and rhetoric dont qualify in my veiw as supporting evidence.

 

[nizar]

Thanks tech/a and Michael D
Much appreciated

 

[machi]

As for saying its a poor strategy,I would love to see evidence to support a comparison of the 2. hypothesis and rhetoric dont qualify in my veiw as supporting evidence.

Open up your charts and have look.

I would rather be buying a stock on a pullback after initial move up from lows anytime. What your eye has to catch is the fact that you have a higher low. That higher low( or successive higher lows) is what is needed. It can be the start of a multi month or year move. It can also be a dud. But if it's not a dud it may lead to a huge % move from those lows. Unlike a tired stock that has been already rising for x amount of years, and maybe coming to the end of a run and have the potential of small % move.

Take an example, look a stock that once for example traded at $100. It then falls to $1. From 1$ to $3 is a huge gain. Even though it nothing compared to $100. But $100-103. Well....

As for a pullback. There are specific aspects to look out for in a pullback, especially where to place stops. Positioning of stops is the hardest thing you can do in trading. Also what sort of move was the move down? You aint gonna buy at a specific level simply because it is a fib level. You have to examine the price and evaluate how it has trended down. Ie it may have trended in a struggling manner and taking the same time or even longer than the move up. i.e the market has found it easier to go up than down. It may have exhibited specific patterns

Buying breakouts is an old Wall street axiom. There are better strategies in my opinion. If it works for you guys then fine

 

[swingstar]

I think you guys are comparing different systems. One (machi) sounds like swing / short-term, and the other (tech/a, Michael) position / trend following.

machi, your system puts a lot of emphasis on entry, which the other guys have little interest in. They have certain conditions that when met they enter, then as they're met again they pile in the profits. The pyramiding makes the bulk of the profits, not win/loss or scalping swings.

 

[Porper]

Take an example, look a stock that once for example traded at $100. It then falls to $1. From 1$ to $3 is a huge gain. Even though it nothing compared to $100. But $100-103. Well....

A bit of an extreme case don't you think machi.Who said they thought a stock going from $100 to $103 is a good trade ?

Positioning of stops is the hardest thing you can do in trading.

Why is it ?

It is very simple.Place an initial stop at entry.Then a breakeven stop (if this is how you trade) anyway there are several types of stops, too many to go into, you get the drift.But all have very exact specific rules.There is nothing difficult about it at all Machi.I am a beginner and if I can do it so can anybody.

 

[MichaelD]

As for saying its a poor strategy,I would love to see evidence to support a comparison of the 2. hypothesis and rhetoric dont qualify in my veiw as supporting evidence.

Totally agree with Tech/A here and disagree with you, machi. Buying on pullbacks may be profitable, but is it MORE profitable than buying at random or buying on breakout or buying on highest close ever?

Well chosen examples are great for writing and illustrating books, but that doesn't mean the strategy is any better or worse than any other at selecting for the outlier big winners when it is actually properly tested.

If the exit is the same, there is virtually no difference in overall outcome. It is the exit which selects for the outlier winners, not the entry.

Humans, however, have an inherent need to DO something which they perceive will make a difference on trade entry.

 

[MichaelD]

michael - what do u mean by "no pyramiding of trades" and "% drawdown

No pyramiding = not adding to winning positions.

% drawdown = drawdown is the % your equity will go down from its peak before making another peak.

Example - say you are trading a system with a 50% win/loss ratio and you take 10 positions. How does this trade in real life? What follows is an oversimplification, but makes the point.

Trend following cuts losses short and lets winners run.

You start with $100,000 and 10 trades, each risking $2,000 of your capital (2%).
5 trades will lose money and will be stopped out, so you're down $10,000 in closed trades from your starting point. However, the 5 winners are powering ahead so overall you've still got about $100,000 worth of stock.
You replace the 5 losers with another 5 stocks.
2 or 3 of these will be stopped out, so you lose another $6,000, but now 7 are powering ahead.
You replace these, and 1 more gets stopped out, so you lose another $2,000 while 9 are powering ahead.
Eventually, you're left with only winners which keep on trending.

So, even though you started with $100,000 and lost $18,000 (18% drawdown) to begin with, you come out way ahead in the long run.

However, very few people can handle "losing" $18,000 (9 times in a row) before starting to win.

Can you tell me whether these trades include both long and short positions ?

Secondly, would also like to see how pyramiding of trades affect the results.

Long only. Long term shorting is not a profitable strategy.

Pyramiding:
Position size 0.5%, pyramid up to 2.5% (which is my personal preferred pyramiding strategy)
Profit $2,483,835.53
Drawdown 6.94%

Important: What's significant about this is the much lesser drawdown, NOT the profit figure. The profit figure also doesn't take into account the necessity of taking out tax and money to live on if that is what you are trying to achieve. It's much more important to focus on the drawdown than it is to focus on the profit.

Pyramiding smooths an equity curve, which then opens the possibility of safely using greater leverage. Tech/A has posted much on this, but it really boils down to the concept that the amount of drawdown you are able to tolerate defines the amount of profit you will take home.

 

[wavepicker]

A bit of an extreme case don't you think machi.Who said they thought a stock going from $100 to $103 is a good trade ?



Why is it ?

It is very simple.Place an initial stop at entry.Then a breakeven stop (if this is how you trade) anyway there are several types of stops, too many to go into, you get the drift.But all have very exact specific rules.There is nothing difficult about it at all Machi.I am a beginner and if I can do it so can anybody.

hi,

I think the point he is trying to make is that you have to place a stop in a strategic position. I mean I know traders that place an arbitrary stop and then they get stopped out. Repeatedly. A stop must not be placed in an obvious position. Most likely if you have placed your stop in an obvious position, then so has everyone else. All you end up with in the end is a string of stopouts.

Personally I don't like placing stops. I don't like to let the market know my intentions. I either use a mental stop or close out the trade based on market movement and behavoiur, ie the patern of the trend. Unless of course I will be away or I have a position running in a market when I am asleep.

Cheers

 

[It's Snake Pliskin]

MichaelD,

Addendum to last post:
Position sizing: 2% of total capital risked per trade

It's a remarkably effective trading technique, but the vast majority of the unprofitable masses will reject it for purely psychological reasons. Their loss.

So at $100,000 total capital 2% is $2000.
10 losses at 2% = $20,000. You can see why I don`t like the arbitrary percentage determining how much I will risk.

I prefer something more like 0.5% or less = I don`t know but it is way less than 2%.


Nizar

michael - what do u mean by "no pyramiding of trades" and "% drawdown"

BTW thats fairly impressive stats you have there. 2% of initial capital works if you are starting with 50,60k+. Anything less and your stop will be too narrow, though as tech/a has pointed out, such a technique can still work. A bullmarket would have helped as well. So there may be less opportunities in a bearmarket but i think there will still be opportunities. They'll just pop up less so u just trade less, yeh? Probably go on a holiday or something when that happens...

Your stop determines your tradable risk, so the above is fallacious unless employing a percentage stop of say 2% as your tradable risk. (look above)

I want at least 3 to 1 reward to risk with not more than $300 loss per trade (yes this is arbitrary) sometimes $500. At, say $100,000 that is 0.3%; 10 losses = $3000, I still have plenty to recoup the losses with and IF getting some wins at, at least 3x, maintaining or improving the expectancy curve - the goal!

The only offset with this is sometimes my initial purchase is small until breakeven and then pyramided with more funds as it goes higher increasing brokerage. But you can`t have your cake and eat it too, as the saying goes.

 

[nizar]

MichaelD,


So at $100,000 total capital 2% is $2000.
10 losses at 2% = $20,000. You can see why I don`t like the arbitrary percentage determining how much I will risk.

I prefer something more like 0.5% or less = I don`t know but it is way less than 2%.


Nizar

Your stop determines your tradable risk, so the above is fallacious unless employing a percentage stop of say 2% as your tradable risk. (look above)

I want at least 3 to 1 reward to risk with not more than $300 loss per trade (yes this is arbitrary) sometimes $500. At, say $100,000 that is 0.3%; 10 losses = $3000, I still have plenty to recoup the losses with and IF getting some wins at, at least 3x, maintaining or improving the expectancy curve - the goal!

The only offset with this is sometimes my initial purchase is small until breakeven and then pyramided with more funds as it goes higher increasing brokerage. But you can`t have your cake and eat it too, as the saying goes.

Yeh snake i understand your point but when placing a stop, dont u have to take into account the behaviour of the particular stock (?), and thats the reason why people use ATRs.

$100k at say 20k position size, $300 is not that much. It wouldn'ty allow for the average movement of the stock. A stock may move this much and STILL be in an uptrend. The whole point of a stop is to get you out of there when the trend changes, isnt it? For example if you bought PDN at $5, thats 4,000shares. $300 stop would be set at $4.925. or 1.5%. This would almost definately get hit. But i guess 2% is a bit loose.

Point taken.

Snake do u use trailing stop losses and when?

 

[Magdoran]

Hi Guys, Have to go out shortly, but just a quick one regarding PMN below. Curious as to anyones opinion on a likely scenario for this stock. They are going to be bought out by Suncorp I believe hence the SP spike, but then a massive SP down turn on another up day for the Oz Stock Market. Interesting ........... Could have been seen as a long position 2 days ago ........... Now maybe a short? I don't know; just curious for more experienced opinions, Cheers Barney.

Hello barney,


Re Post 290:

In periods of high volatility when events like takeovers or significant bad news are in play, there is considerably more uncertainty involved (although smart people like Soros and Buffet can sometimes take advantage of this of course n their respective ways – but this is another discussion outside of chart analysis entirely – look at Soros’ theory of “Reflexivity” for instance).

In essence with moves like PMN currently (this is not financial advice for this particular stock, but a general observation about the pattern and takeover events generally) I perceive as highly dangerous to trade once a situation like this is known in the public. Unless you have specific information that is not widely known (and even if you possess this, markets can still do erratic things contrary to what you’d expect), it is really a coin toss as to what may transpire from the chart image you have posted.

Where do you think the price might go? In high momentum vertical moves, going long or short in the middle of such spikes could see great gains or losses. There are some traders who specialise in this. If you were long in this case, you could have taken profits on the gap up day (I certainly would have – I may even have exited the whole position).

The problem is that if you can’t assess the situation and have exit rules in place, these moves are very hard to trade effectively consistently. If you have traded these for years and know what you are doing, fine. But for newbies, this kind of move can be a real trap.

What would I do here? I fully agree with Michael here. Personally I’d stay well clear of it. I need a reason to enter, and I have a process for constructing a trade.

The question you need to ask yourself barney is wether you feel technically proficient enough to construct a consistently successful approach to this kind of volatile move or not. If not, you need to study these moves more if you want to trade them. You may also later come to the same conclusion that Michael and I have – these moves once in play are high risk trades, and hence should be avoided (That doesn’t mean you can’t enter earlier and be in them when they happen – preferably on the right side of the market).

Of course you may have a gift for reading these situations and become a master trader in playing the odds here. Fine if you can do figure out a way to do this consistently. There are traders out there that play these moves, and you may be one of them. Me, I have tried and won and lost heavily trying to do this in the past.

Now, I look for specific situations to trade, and more importantly, recognise specific situations NOT to trade. This is one of them.

Food for thought.


Regards


Magdoran