P2 US Equity Portfolio

[peter2]

P2 US Equity Portfolio: Suitable for beginners and much easier than day trading.

I'm going to establish and manage a portfolio of stocks from the US markets. My main reason for doing this is to gain more experience with US equities. The trading strategies for this portfolio will be based on the weekly and daily price charts. The main bulk of the capital will be used for the weekly positions leaving a little for some shorter term trades based on the daily charts.

I'm going to start with a small account balance. This is not something I would recommend because brokerage costs in Aust are too high and severely reduce performance in small accounts. However one of the benefits of trading US markets through a US broker is that the brokerage costs are much lower.

This project will be maintained until the EOFY (30th June 2020, Aust). This will give the project a little over six months to show its worth.

The plans for both the weekly and daily strategies are similar to those outlined in the P2 Wkly/Dly Portfolio thread in the ASF Members section. If you want to know the details and are not a member please sign up. Then you may ask questions and I'll reply.

I'm going to start with the Russell 3000 list. At the moment I'm going to focus on the lower priced stocks as they will use less capital.

Starting account balance $25,600
Initial Trade Risk = 1%. Max position size 25%, Min pos size 3%

Method: The aim is to buy near the start of a new up trend (BO-HR) or at the next opportunity (BO-NH). Chart examples will be posted.

Week-end scans of Russell3000:
(i) Weekly Bullish Key Reversal bars
(ii) Weekly Bullish bars (up bars with above average volume that are moving off the 13wk ema)
(iii) Weekly Darvas boxes

 

[peter2]

Chart showing the setups for this portfolio. The up trend is defined by the weekly 13 and 21 emas. I must wait until prices are above these emas before looking for a setup.

(1) Start of an up trend (BO-HR). Best entry setup.
Both the weekly key reversal and bullish bar scans would have found the weekly bullish bar arrowed below the (1). The buy is triggered either immediately (next Monday's open) or waiting for price to trade above the horizontal resistance (HR )line at 5.60.

(2) First opportunity after the start of the trend (BO-NH).
This entry is triggered by price making a new high above 6.40 or 6.50. The 6.50 is a new yearly high in this chart (orange line).

Buying at the new highs above 8.45 and 9.26 are considered too late for this system. The earlier setups provide the best reward for the initial risk.

 

[qldfrog]

Much appreciated Peter as i am toying with the idea of using a bigger market as welll

 

[peter2]

Looking for bullish setups on some weekly charts of the US Russell 3000. There were 35 bullish key reversals (only 5 worth more consideration). Then scanned for bullish bars and 425 appeared. OK that's too many. Cut the share price to <$40, 216 appeared, cut it again to <$20 and there's still 140 to go through. Clearly a work in progress to reduce the number in the scans.

 

[Warr87]

Looking for bullish setups on some weekly charts of the US Russell 3000. There were 35 bullish key reversals (only 5 worth more consideration). Then scanned for bullish bars and 425 appeared. OK that's too many. Cut the share price to <$40, 216 appeared, cut it again to <$20 and there's still 140 to go through. Clearly a work in progress to reduce the number in the scans.

That's the appeal of the US market -- greater liquidity and many more opportunities (And lower brokerage costs).

What's the appeal for you to trade the Russell3000 over the other exchanges?

 

[hallph]

Very interested to monitor this as I have slowly been adding some US names to my portfolio. As I like to sleep I am working on a weekly system, set stops, let them go

 

[peter2]

@hallph Thanks for your interest. This project continues to baffle me. I started with the idea of applying a similar price action system that I use in the ASX (bullish bars rising of a MA and breaking out from a trading range). The number of opportunities are huge and I'm having difficulty reducing them to a manageable number. Looking through the scan results there are lots of perfect setups that have provided great profits. However there are three times as many opportunities that fitted the perfect criteria but didn't produce any profit. I've been so far unable to filter out enough of the rubbish from the scans.

Currently I'm considering a very small number of stocks that cover the main sectors of the US markets. This list includes ETFs and some major companies in some sectors where the sector ETF price is too large. One benefit of ETFs is that there's less interference from earnings news and broker upgrades and downgrades.

This is probably a better starting point for a beginner thread. I'm back testing the strategy on this smaller list over the holiday period to see how it performs.

 

[Warr87]

that's certainly a problem. I wish I had ideas for you on how to narrow down the list. Adding some kind of ranking matrix is going to be needed, but no idea on how you will do this. I'm looking forward to this and learning what you do.

 

[ducati916]

@hallph Thanks for your interest. This project continues to baffle me. I started with the idea of applying a similar price action system that I use in the ASX (bullish bars rising of a MA and breaking out from a trading range). The number of opportunities are huge and I'm having difficulty reducing them to a manageable number. Looking through the scan results there are lots of perfect setups that have provided great profits. However there are three times as many opportunities that fitted the perfect criteria but didn't produce any profit. I've been so far unable to filter out enough of the rubbish from the scans.

Currently I'm considering a very small number of stocks that cover the main sectors of the US markets. This list includes ETFs and some major companies in some sectors where the sector ETF price is too large. One benefit of ETFs is that there's less interference from earnings news and broker upgrades and downgrades.

This is probably a better starting point for a beginner thread. I'm back testing the strategy on this smaller list over the holiday period to see how it performs.

Cross biotech off of the list. Too manic.

The other issue is that the US market operates very differently to the Aus. market. The US has Market Makers. They have a huge influence in the stock market. Then you have the FOMO in the Treasury market. The Arbs cover the Futures/Stock Indices spreads, but they tend to have an impact near the close and you can get some funny prints. Add in all the crazy algorithm traders that turn on a dime and you have either a day traders paradise or a swing trading nightmare.

I would agree that ETFs are the way forward. There is an ETF for everything.

I remember Skate saying that trading a parcel of his $400K he would sometimes move the market with an order. Here trading the full $400K in a stock won't even make a ripple, remember you have a few stocks just below a Trillion in market cap. You have tight spreads in anything listed in QQQ/SPY/DIA.

You also have a very active Options market operating in all stocks listed above and a whole cadre of traders that trade nothing but the Options market, which makes for another level of volume that does not appear on a stocks volume (if volume is a trigger or part of your analysis).

It will be interesting to see what you come up with.

jog on
duc

 

[peter2]

It's a hot smokey day in Sydney. The light has an eerie orange glow as the smoke haze filters the sun. Those lines remind me of Snoopy starting his novel, "It was a dark and stormy night".



However unlike Snoopy who was sitting on top of his kennel, I'm in air conditioned comfort. Let's continue this thread so we can start making some USD.

The difficult decision for me has been selecting which stocks to use as a trading universe. As mentioned earlier there's just too many that appear in my scans. When I do my 1st BB scan on the ASX each pm there's about 20 - 30 and I can go through them in a few minutes to find the few that are worth further consideration. When I do this scan on the Russell 3000, there's 200 - 400 results. If I took the time to go through these there will be about 20 - 30 perfect charts to consider. Selecting only a few is very difficult and makes me feel like I'm depending on luck rather than probabilities.

Same thing with Darvas boxes, too many. I've considered high volume gap ups (news). There's just too much work finding a few perfect setups.

I've decided to do the opposite and start with a very small list of trading candidates. They're mostly ETFs with only a few mainstream stocks.

The next decision was to go long only. For the beginners, this means we'll be buying first and selling later. Good when the market goes up but what happens when it goes down. Well, the list includes some inverse ETFs. When the market goes down these inverse ETFs go up. This makes it easier as we're only looking for setups in one direction.

This list is only a starting list. I will add to this list as we progress. Various sectors and commodities become "hot" in the media throughout the year. We'll add the occasional "hot" stuff to our list. eg. Last year the cannabis sector was hot. It shot into blue sky, exploded like fireworks and has been going down since then. We can trade these booms and busts when we see them.

This is were you can help out. If you see a "hot" prospect, mention it here and we'll find something to trade it.

 

[peter2]

US trading candidates: Starting List.

General US market ETFs:
SPXL = SP500 stocks [ inverse = SPXS ] SPY is too pricey (>$320)
TQQQ = Nasdaq stocks [ inverse SQQQ ]
TNA = Russell, small/mid caps [ inverse TZA ]

Sector ETFs:
LABU = biotech [ inverse LABD ]
SMH = semiconductors (too pricey so we'll trade the stocks AMD, MU, WDC)

Other sector ETFs (banks, retail, REITs, utilities etc ) are too correlated with the market and we're going to stick with the general market ETFs.

Commodity ETFs:
GDX, JNUG = gold [ inverse DUST ]
XLE, XOP = Oil producers and explorers
LIT = lithium
URA = uranium
REMX = rare earth materials

I've excluded the cannabis sector for the present but it's a strong possibility to be included soon if I can find a highly traded instrument to use. Remember when the plant based burger was news! That was a hot topic at the time (BYND).

 

[peter2]

I've put these instruments (stocks, ETFs) into a watch list for easier access and review.



Now I need to outline what we're looking for as a trading setup. We're going to trade the price swings that we see in the daily charts. As we're only looking for long setups our task is much simpler. I'm going to restrict our trading setups to only two. Both of these setups are based on the price action that we see on the daily charts. We'll be able to identify the setups as they form and when they complete we'll be able to place our orders into the market before they trigger.

One setup is a reversal and the other a pull-back.

Trading the daily charts means we have each evening to do our pre-market work. Not having enough time is no excuse if you're really keen to learn how to trade.

 

[aus_trader]

Cross biotech off of the list. Too manic.

Totally agree. Even worse than the Aussie Biotech's when it comes to those wild price swings with massive gaps as well usually !

 

[peter2]

First setup: 123 Low reversal pattern.

An old classic and my favourite. We need a down trend and then a swing low (pivot low). The swing low is labelled as the #1 point. Then we need to see a swing high that we label as the #2 point. Then we need another swing low that does not go below the #1 point. We label this higher low as the #3 point. If price goes below our #1 point then the pattern is restarted with a new swing low (#1).

The buy trigger is when price trades above the #2 point. Yes, it's a break-out strategy. I've labeled two 123Low patterns on this chart.


There's tons of information on this pattern on the net. People try to complicate the pattern with extra indicators but they don't help.

We will trade this pattern using conditional buy orders (or they're called buy stop orders in some platforms). The initial stop loss (iSL) is placed below the #3 point or #1 if you're more conservative.

If you're new to the markets and are interested in following this thread then it would be wise to find this pattern in all the charts you look at. Sometimes they work out and sometimes they don't.

 

[sinic]

Regarding comments that prices are too "expensive" - Interactive Brokers are now offering fractional shares purchases on US stocks - and also the ability to purchase a $ amount rather than share quantity. For example you can buy $200 worth of Amazon.

 

[peter2]

The semiconductor sector is in play because of the US-China trade talks. It's also a dominant sector of the US market. The semiconductor ETF that's heavily traded is SMH. SMH is difficult to trade because of all the gaps. These price gaps happen because of news that is released when the US market is closed.

The current price of SMH is approx $143 USD and if we had a setup with a small iSL size then we would use most of the capital in our account for a trade position. eg if our iSL size was $2, we would buy 260/2 = 130 shares of SMH worth $18,590USD (>70% of our starting capital).

I find it easier to trade a few of the main components of the sector ie AMD, MU and I throw in the disc drive stock WDC.

@sinic Thanks for that info.

Here's the 2nd last 123 Low pattern in AMD.

 

[peter2]

Sometimes we don't get the nice 123Low setup that we prefer. The market zooms higher and we have to wait for a pull-back entry.

Second setup: Pull-back into an up trend.

The first requirement is an impulsive swing up to a new high. This swing up must break through a horizontal or sloping resistance line. Next, we have to wait until price touches the 50% pull-back level. It's better if the corrective pull-back is sloppy or has an appearance of a three wave abc correction. As soon as price trades below the 50% level we look for an buy setup.

There's a few possibilities here. We could use a 2bar count back line (CBL) on the daily chart (popularised by D Guppy) OR we could use a 123Low setup using the 1hr chart.

The conservative place for the iSL is the low at the start of the impulsive swing up. I sometimes use an arbitrary level of 80% or the #1 point of the 1hr 123 Low setup.

If these options seem messy, it's because the corrective pullbacks are generally messy and identifying the exact low of the pull-back is difficult. What makes these setups so good is that our trade is nicely profitable before price gets back to the recent high.

 

[peter2]

Important aspects that we must consider and manage with our trading plan.

(1) Correlation: Most of the instruments that are in the list are highly correlated to each other. When the market goes up SPXL, TQQQ, TNA and most stocks will be going up also. We should consider placing a limit on the number of trades or the amount of heat that we use when trading multiple instruments that are highly correlated. I will start with a limit of 3R (=3%).

This methodology that I've outlined is currently long:
SPXL, TQQQ, TNA, LABU, XLE, XOP, AMD, MU, WDC, LIT.
We have insufficient capital to be holding all positions, but we don't need to. Our job is to deploy our capital in the markets that are going up and manage the portfolio heat.

(2) Focus: Our trading will mostly be in the index ETFs. As we're watching both the normal and inverse ETFs we'll usually have a position in one of them. The market will be going either up or down. When we exit out of LABU there'll probably be a setup into LABD that triggers at the same time.

We have to be focused and organised. We don't want to miss the next big swing. Speaking about the big swing the next point is very important.

(3) Adding to a winning position (pyramiding): It's very important that when we get into a move that starts well, we add to it. Index and sector swings can turn into large trends that last months. We must add to all our winning positions as soon as practical (ASAP).
ASAP is when the iSL of the next setup is at or above the prior one. See next post. . .

 

[peter2]

I agree that the biotech sector is volatile when were talking about individual stocks. Let me show you the latest chart of the biotech sector ETF LABU. This chart shows a huge move up as the market makes new all time highs. The large cap biotechs have boomed with the market. This swing is smoother than the market ETFs (SPY and QQQ). It's been on a dream run (if we're holding it).



The initial 123 low pattern (pictured) triggered 14 Oct 19 and is currently +6R at it's trailing stop. This is a good result, no doubt above average. +6% over 2.5 months I'll take that.

BUT we can do better. Adding to the position at the two levels indicated by the green lines there's another 11R available. Now we're talking, +17% in 2.5 months.

This one trend will make our year if we trade it properly. Adding to our trades is a must.

 

[aus_trader]

I agree that the biotech sector is volatile when were talking about individual stocks.

Very true. But as you have been kind enough to show us, it may be possible to trade the ETF with sensible position sizing without having to crap on your seat when you open the chart the next time to have a look at how your trade is going.

Plastic seat cover is recommended with trading individual Biotech stocks without proper position sizing