Closed Trades : BTT & PTM

The recent push up in the All Ordinaries has been a welcome respite from the bearish action of the last two months. In fact, this system turned back on last Friday's close but I won't be buying anything until January. Primarily this is because the holiday period is a very illiquid time but also because personal factors mean I may not be able to trade on my own account in the foreseeable future.  I need to see how these play out before I kick off a fresh group of trades.

This morning the markets made another little push up and that was enough for BTT and PTM to hit their initial targets.  It was a nice change from my recent results but I still haven't made a new equity high since the 8th November.

BTT was trending nicely when I bought it and the price surge over the past few days was too rapid for the target to be pushed up

PTM had similar price action to BTT.  There was a prior trade here that was a loss even though the trend never really changed.  This can be one of the less desirable features of shorter term trading systems.  All one can do is keep taking the trades as they come for as long as the trend lasts and let the probabilities play out.

Charts courtesy www.IncredibleCharts.com

Method Part 4 : Opening Trades – Entry Method - Continued

This is another entry method that works well in trending markets. I am using the 63 day moving average (Black) to define if a stock is trending. I have also placed a couple of Bollinger Bands on the chart. The upper band (Green) is at 1 standard deviation and the lower band (Red) is at 2 standard deviations of price. The middle Bollinger band (Blue) is the 20 day simple moving average of the close.

I tend to be a momentum buyer of stocks, so initially I look for a pause in the trend signified here by a close below the middle (Blue) band followed by the price taking off again, signified by a close above the upper (Green) band. Then it's simply a matter of buying the following days open, holding on for the ride until the price closes below the lower band and exiting on the following open.

Courtesy of www.IncredibleCharts.com

I mentioned before that it's hard to lose money when a stock trends as well as MFG did and this is a spectacular example. If you took the first entry and hung on to the final stop, you trebled you money which is all well and good, more importantly you made a massive return on risk and it is return on risk that ultimately defines our success as a trader. There were a few later entries in this trend, one profitable, one not. As a trader you have to decide if you should take only the first entry or any of the subsequent ones, I offer no guidance on this subject except to be consistent.

I will discuss Risk : Return later, but the one thing I urge anyone to take away from this chart is that if you take enough trades you will, from time to time, own a stock like this. When you do it's very important to just hang on and let the trend play out. It is in our nature to try to think of a reason to snatch the profit available when it looks decent enough particularly if we have had a bunch of losses recently or some scary economic events spouting out of the TV. The simple solution to this urge is Don't Do It! These trades are your wealth builders. There has never been a large profit that wasn't once a small profit.

There are endless variants on entry methods in stock trading. I am, at heart, a rules based discretionary trader so I use rules to enter and exit trades even though I can demonstrate that most of them don't really add an edge (another future post). Just now I stuck “stock trading entry methods” into Google. It returned exactly 193 million results in 0.39 of a second (a suspiciously round number, I thought.) When I Googled Exit methods there were 'only' just over 31 million results, which may be one of the reasons most people don't make money trading stocks.

If you want to learn and understand a few different styles of entry AND exits, then I would recommend reading “Unholy Grails” by Nick Radge and “The Layman’s Guide to Trading Stocks” by Dave Landry. As I mentioned before, I don't get paid for mentioning these books but having read around 100 different trading books, I can happily say these are a couple of books (and people) that I wish I had come across much earlier in my trading endeavours.

Closed Trades : ARG & VRT

System Status - Off

The Australian All Ordinaries index has fallen over 7% in practically a straight line since early November.  As a result the trades keep hitting their stops rather than profit targets.  It's not particularly pleasant but this part of the trading cycle is about capital preservation rather than piling up profits.

ARG went from a decent start to just meandering sideways for quite a while.  By the time the stop was hit the cost of carry practically chewed up the profit in the trade so even though it was marginally up it was a scratch

Courtesy of www.IncredibleCharts.com

 VRT falls into the category of "damned if you do and damned if you don't".  I use a hard stop in all my trades to keep the amount of margin used in check and to provide disaster cover should a black swan fly in.  For the stop to be meaningful in any way it has to be close enough to protect capital but ideally never be tagged under normal trading conditions.  Unfortunately VRT tagged the hard stop causing just over 1R of loss in what had been a reasonably good trade under present market conditions.

Courtesy of www.IncredibleCharts.com

I have only 4 trades currently open and even they are only hanging on by the skin of their teeth.  It's about now that one starts hoping for the Santa Rally

Closed Trade : GEM

GEM has been a bit of a pain trade for me.  Frankly I'm glad it has gone.  I realized shortly after I had bought it that they were undertaking a rights issue at a price below my stop loss.  Even then I had a few opportunities to exit without taking too much of a loss but instead I carried on with the original plan.

There is probably some virtue in sticking to your plan through thick and thin but when the circumstances of a trade are radically altered like this I try to manage my way out of it.  Sometimes I do quite well and sometimes not.  In this instance my loss was 1.5 times the intended maximum which isn't too bad when it happens only sporadically.  If I were regularly taking losses this size I would think I had to alter my plan.  As it happens I have slightly altered my plan in the last week or so to refine the way I manage my hard stop/time stop but it would have only saved me a cent or two here and didn't alter any of my other open trades either

Chart courtesy of www.IncredibleCharts.com

Method Part 3 : Opening Trades - Entry Methods

There is quite a bit to discuss when it comes to kicking trades off.  Indeed, there are probably more books, blogs, twitters, spams, magazine pages and acres of newsprint written on this one subject than any other aspect of trading.  Personally I think the amount of time dedicated to entering trades is disproportionate and I hope to throw light on this over the following posts but, given that, to trade - one has to enter trades, I will add my own few hundred lines on the subject to the existing morass.

In 'Method part 2' I discussed what my short list of stocks looks like. Given that I have risk limits and portfolio size limits (you can just imagine more method posts coming can't you?) how do I pick which to buy on any given day?

I think I mentioned that, as the list comprises a bunch of rising stocks, I could just toss a coin, throw a dice or use a random number generator to select one and buy it. I don't believe that any entry method offers superior returns, I don't believe that money is made on the entry at all, but, I also don't toss a coin etc. to choose stocks. Why not? Well simply because I am human I suppose, and, this means that my entry method has to match my personal beliefs about when is a good time to buy.

So rather than go into the nut's and bolt's of my entry method I will look at a few different styles and what I think each may deliver. I will start this discussion by stressing that the entry alone means nothing! I never make a trade without knowing what will cause me to close it. I cannot stress enough that I believe it is the method of closing trades that makes the money.

Now that I have become all excited with bold underlined text - lets get into it

I will start with a chart of MFG, This stock was in a fabulous up trend for a considerable period and this chart shows theoretical entries using my current method. Alas I didn't actually take these entries – I marked this chart up while I was digging around creating the method, I wasn't chucking money into it at this stage but it was almost the ideal stock for a while and I love this chart because it shows what can happen when things are going well.

Chart courtesy of www.IncredibleCharts.com

 The first alternative entry method is using an inside candle (A candle where the high and low are contained within yesterdays high and low). You can find this method all over the internet but basically it consists of finding a trending stock and buying the break above the inside candle. All I have done here is used a group of moving averages to determine that a trend exists and close below an average true range trailing stop as an exit. Lovely isn't it? Bear in mind it's hard to lose money when a stock trends like this

Chart courtesy of www.IncredibleCharts.com

   To be continued...