Hitcher System 3 : Exit(s)

I use the term exit(s) in the title but obviously I can only sell the stock once.  There are three scenarios that will cause me to get out.

chart courtesy of www.IncredibleCharts.com

Initial and soft stop (Orange Line)
this is the low of the last 25 days - I will calculate my position size from this and it will be my trailing stop but only on paper - if there is a close below this line I will move my hard stop up to the low of the day.

Hard Stop (Red dots)
I never leave a trade in the system without some kind of disaster protection.  When the system is on then the lower of the two stops should do the job.  When the system is off then I will be more defensive and use the higher of the two.

Target (Blue Line)
Occasionally things bubble up and I like to take my money and run when they do.  I know that's not a normal part of the trend followers creed but we all have our quirks - note  that my target will never go up and down like this wiggly line - up is the only acceptable direction.  Also, I will set this at 3R profit at trade inception - that is the minimum I want for a snatch and grab style trade.

Hitcher System 2 : Entry

An unseemly amount of time has passed since I discussed the on/off rules for this system.  As they say - "Life is what happens while you are making other plans!"

So let's get stuck into the rest of the plan and start making trades.

Assuming our system is turned on we need a universe and a buy rule.  For this exercise my universe is all ASX stocks priced between 20 cents and 10 dollars where the 20 day moving average of value traded is above $500,000.  I take that list about once a month and immediately remove anything not in a decent up trend.

When will I be buying?

chart courtesy of www.IncredibleCharts.com

Remembering that I once said "If your universe of stocks are all in an uptrend you can just about buy randomly and trail a stop".  It therefore follows that I don't believe in getting too complicated with buy criteria.  Quite simply I'm looking for a dip in the RSI followed by a volatility breakout then I will buy the next open PROVIDED THE RISK IS LESS THAN 10% OF THE OPENING PRICE.

Next...  Exits

Hitcher System 1 : On/Off

The Hitcher system is one I have devised and intend to paper trade live to see how it stacks up.  It is completely untested but will use the standard trend following ideas I usually adhere to so I expect it to make money.

The first idea is the on/off switch.  To see how switches affect trading performance it is worth reading "Unholy Grails" by Nick Radge.  He back-tests a number of systems with and without an on/off switch and the general outcome is that by using one you make less money BUT the you also suffer less severe draw-downs.

Taking huge draw-downs is never much fun so, from my perspective, the smooth equity curve is desirable. There is another feature of the switch that I have come to love, it becomes a type of holiday setting.  When the system is off I don't bother looking for new trades and managing the existing trades becomes progressively easier.  Generally you lose a few quite quickly and the rest either keep going or eventually drop off the perch.  In the meantime it's simply a case of firing up the PC, checking a few charts and adjusting a stop or target here and there then heading for the beach, lakes or mountains or perhaps, the renovations but I like the idea of beaches and mountains better.

"Everything should be made as simple as possible, but not simpler." - Einstein

In keeping it the above, I present (drum roll) the traffic light.

All Ordinaries - Click to enlarge
Chart courtesy of www.IncredibleCharts.com

All I have done here is taken the Australian All Ords index and applied

• 10 day Exponential Moving Average - Green
• 20 day Exponential Moving Average - Amber
• 30 day Exponential Moving Average - Red

When they are lined up like a traffic light the system will buy.  When they become scrambled the system will pause and when they are inverted the system will get defensive and tighten the hard stops.

Final Summary (until next time)

Now that ANN is done and dusted, all the Trades opened in October are complete.  The results for October were...

I opened 10 Trades - 2 Wins and 8 Losses - Win Rate a meager 20%
Average win 0.20 R and average Loss 0.90 R
Expectancy was Negative 0.68

So October was practically as bad as a month could be.  I opened almost the maximum number of trades the system allows in one month and most of them lost practically the maximum loss.  The two winners made just enough money to buy a cheap lunch and a bottle of wine to drown my sorrows.

So what went wrong?  Surprisingly,  nothing went wrong!  These are the lumps and bumps of trading.  When the Index takes a nosedive any trend following system will manage to drag you into a few losers.  It was this phenomenon, and my desire to 'fix' it that kept me on the beginners cycle for many years.

Dave Landry, in his book 'The Layman's Guide to Trading Stocks' says that, the smarter you are, the harder trading is.  His premise is that professionals have a desire to get things right and can't accept that there can be periods where 80% of trades lose money.  All I can say is that, by that measure, I must be very smart.

These days I know full well that the solution to bad months is simply to keep going.  Soon enough a good month will come along and three or four winning trades will re-fill the coffers from the damage done by eight losers.

The overall performance of this system for the six months matched my expectations for that type of market

38 Trades - 15 wins and 23 Losses - Win rate 39.47%
Average win 1.70 R - Average loss 0.75 R - Win : Loss ration 2.27 : 1
Expectancy 0.22

I traded this with leverage of around 6 to 1 and in a period where the index only gained a little over 6 % I managed to increase my account by 18%.

I'm pretty happy with that and I intend trading this system again as soon as my personal circumstances allow.

 In the meantime I will build and give life to a new trading system from scratch right here on the world wide web.

Closed Trade : ANN

ANN was the last open trade in the KraB system and the numbers out of China yesterday were enough to slay this limping beast.

Chart Courtesy of www.IncredibleCharts.com
Click to enlarge

You can see from the chart that upward momentum didn't resume after I bought ANN and it became another loss management situation rather than the nice 'ignore the trade except for raising the target' ones that I prefer.

Summary for Trades Opened : November 2013

This system turned off in early November. It's important to remember that an on/off switch like this is not an attempt to predict the future. It merely keeps you out of the market during protracted down trends and lets you know when to get back in again. Sometimes it is very accurate while, at others, there will be whip-saws.

Chart Courtesy of www.IncredibleCharts.com
Click to enlarge

While in some methods the off signal is used to either bail out completely or tighten stops, that is not the case with my short term method. All it means is that I don't take any new positions.

In this instance I only opened 4 trades for November before the method switched off. The 4 are now all closed while I still have one live trade remaining that opened in October. This is why I am reporting November first.

So, in November

I opened 4 Trades – 2 wins and 2 losses – win rate 50%

Average win 2.29R average Loss 1.16R so win : Loss Ratio of 1.98 : 1

Expectancy 0.57

The October trades haven't been very profitable so far and I don't think the last trade will rescue them, but that is simply how trading works. One should never venture into this arena expecting a nice straight equity curve.

This is the distribution of returns for all trades except the lone open trade.  That trade is mildly in profit at the moment but going nowhere fast.  When it finally closes I will update this

The important thing to note here, is that even though the loss side of the distribution is far more crowded than the profit side, this period is profitable over all.  Trading isn't about picking winners so much as managing losers and leaving the winners alone to do their thing.  This is why trading is simple but it isn't easy.

Closed Trade : TGR

My rule for the stop Losses, is that it takes two closes below my stop to close a trade, but after 16 days I want to place a hard stop with the broker at the initial stop loss point from when I placed the trade.  Generally in a decent market any good trade will not hit that point after it has been running for 16 days, so it's just another way of weeding out the baddies.  TGR falls into the category of black hat wearing bad guys!

This trade can best be described as 'difficult'.  TGR was in a decent trend when I bought it, but the overall decline in the index dragged TGR into sideways action.  The day prior to having the hard stop placed with the broker TGR had a big decline.  

I placed my hard stop at the low of that day which was well below anything that might be considered optimal.   TGR then dragged along for a further month and a half or so but was positive enough that I was able to grind the hard stop up to the initial stop position.  This almost immediately tagged. Unfortunately by the time I allowed for the cost of carry, the loss was 1.22 R rather than 1.0 R

Chart courtesy of www.IncredibleCharts.com
click to enlarge

That was the last of the four trades I opened in November, so now I can calculate the November results.

I have just one trade open which I bought in October (ANN_AX).  I mentioned elsewhere that personal circumstances mean I can't continue trading this method at this time so I intend paper trading a fully disclosed trend trading model to continue the blog for the immediate future - watch this space!