Registered User
Joined: 8/11/2005
Posts: 26
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I'm still learning and would love to hear from the pros if they look for market and sector being on the same side of stock's direction. I know there are different trading styles and everyone does what suits them best. But my question is what do you guys do if you spot a great stock for instance YMI, GEOI that seems like its resuming uptrend but then the market is headed down. Do you not trade during months of questionable market direction? And if you do trade during these months do you actually make money?
Thanks in advance!
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Registered User
Joined: 12/8/2004
Posts: 1,301
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My trading style before using elliott waves (which I am testing now) was
1. Determine overall trend of market. For this I used the 150 day moving average of the russell 3000. If the trend was up, I went long. If the trend was down I went short. If the trend was flat, I never traded. I still plan on not trading if the trend is flat with elliott waves. I also stop trading when I reach my financial objective of 20% total return. I did have one year where I made my 20% return by late January and I did not begin to trade again until december because I knew I would be holding the stocks into the next year.
2. I would use a pcf that gave me stocks where the 150ma and 200ma were close, but where the 50ma and the current price were above the 150ma if I was going long.
3. I would immediately eliminate all stocks that were going to report earnings in less than a month from the time I planned to purchase it. I always put earnings dates in the notes of all stocks which were under consideration.
4. I then looked at the latest major support(after strong downward correction), and then the resistance. I would draw flat trendlines and label them long or short term resistance. What I basically did was compare the price to these levels to see how far the price was away from major support (my risk) versus how far it was away from major resistance (my reward). I basically assummed that all stocks were in a huge long term trading range. If the stock had at least a 2:1 ratio in favor of risk it would be considered. I had to do this all manually.
5. I would make my final decision on which stocks to buy based on this ratio, and then I would confirm that the market sector would also above it's 150ma, TSV22 was at least rising if not above 0, and MACD12.26.9) was also at least rising. If all of those conditions were met I made the trade.
I would do the opposite if I was going short.
My strategy was never to trade against the trend under ANY circumstances. If the overall market or sector trend looked like it was beginning to change in the opposite direction I would shorten up my stops on everything, and I would not trade again until I could confirm which direction the sector and market were heading.
This method has been extremely successful, but it requires looking at a lot of charts.
All losing trades were put in their own watchlist to later be evaluated as to the reason for failure.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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pv78
Your question is a complicated one. I would say that
it depends on why the stock is going up (new product,
earnings, strong sector) If its just going up because
of the general market trend then it will probably fall
with the market. If it has a special reason it will
probably resist the decline and outperform as the
market falls.
Check these points from another post of mine.
I think the starting trader needs 2 basic questions answered.
1. Are we in a bull or bear market.
2. What should I buy or sell
Since this can overwhelm the starting trader I would keep it simple.
Use something large like a 45WEEK moving average on the SP500.
If the market is above it and the avg is rising it bullish.
If the market is below it and the avg turns down its bearish.
On stocks you could use a moving average cross. The smaller the
averages the shorter term the trading would be.
5 period mav crossing a 20 period mav (short term)
15 period mav crossing 42 period mav (intermediate term)
Basically you would look for longs when the market is positive(based
on 45WEEK MAV). You would go to cash or do some short if the
market turns negative.
I use simple MAVs and I like the fast mav to be the close and the
slow mav to be the lows.
As for stocks I would try to find stock rated highly by other sources.
Value Line, IBD, Stockscouter and so on.
The IBD Large Cap 20 is a safe source for solid stocks. (its in the paper
every Tuesday).
After a buy signal I would place an 8% stop under your entry price.
Your goal is to actually sell when the mav crosses back down.
(Hopefully with profit) The 8% is just for emergency should something
go wrong.
One more point I would do this with no more then half my portfolio.
You should focus on learning. Seeing if this fits your personality.
Learning about TA and so on.
There will be plenty of time to dive in with both feet once you
gain experience.
Good Luck
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Registered User
Joined: 8/11/2005
Posts: 26
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Thanks so much for your comments. I have tried a lot of different trading styles in the past year but ended up losing half my potfolio. I constantly come across different advice and am not sure what really works in the market. I would really appreciate your help on what I can do better. Here are some of the trading styles I've tried:
* Buying stocks with TSV divergence when they bounve off of previous support and raising stop loss every day.
* Buying stocks that are uptrending in an upward trending sub-sector
* Buying stocks that rebound on above average volume
Most of the times I have been getting stopped out at a loss. I don't know what additional filter I can layer on - strong fundamentals? IBD top 100 selection? Any help would be appreciated.
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Registered User
Joined: 12/8/2004
Posts: 1,301
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If you have lost half of your portfolio then you are risking too much money per trade and/or setting your stops too close or too far away.
Whatever the value of your portfolio is multiply it times something in between .1 and .5. If you have 10,000 that means you cannot lose more than 100 - 500 dollars per trade.
Now say you find a stock you want to buy selling at 10.00 but it's last support level was 9.00. That means you have 1.00 per share risk if you get stopped out, which would mean you could only purchae 500 shares of this particular stock. In order to lose 1/2 of your portfolio with this system you would have to lose 100 trades in a row without one winning trade, a very unlikely scenario.
Now remember, if your portfolio drops to 9000 dollars then you can only risk 450 dollars per trade, and if your portfolio goes up to 11000 dollars you could risk 550 dollars per trade.
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Registered User
Joined: 12/8/2004
Posts: 1,301
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the .5 should be the max. If I were you I would use the .1
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Registered User
Joined: 1/28/2006
Posts: 291
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HNC...is that a variant of 'Kelly'?
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Registered User
Joined: 1/28/2005
Posts: 6,049
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awshucks
quote:"HNC...is that a variant of 'Kelly'?"
No this is a simple fixed percent risk.
The user chooses a "risk tolerance" and sticks with it.
I personally have found this equation difficult to use. If you have a "low risk"
purchase it can calculate to more than your entire portfolio.
The only plus I would give it is a least you are following some type of discipline.
My guess is the "ultimate" portfolio equation is based on
RISK/REWARD/DIVERSIFICATION.
My view is $1 in the market is $1 worth of risk.
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Registered User
Joined: 1/28/2006
Posts: 291
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Thanks Dice,
To my mind one minute of life is one minute of risk...embrace it, and mitigate it with all available tools.
I favor Kelly because trading levels are weighted using trader ability, not because it necessarily mitigates risk. You can still suffer catastrophic drawdown.
Interesting to note the personality characteristics evidenced by the ways they chose to impose a comfort level, which I think is more to the point.
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Registered User
Joined: 12/19/2004
Posts: 457
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As I develop my trading philosophy, I'm attracted to the long/short portfolio.
If you are good at selecting stocks, there is no reason why you can't put together a selection of stocks that will go up and go down. At the very least, a long/short portfolio will reduce some of the general market risk that a long only portfolio would have.
There are many ways to put together a long/short portfolio. You can be conservative, and create a "market neutral" portfolio, which strives for an absolute return (ie. somewhere around 10-15%). To do that, the dollar amounts long are equal to the dollar amounts short.
Or, you can implement some market timing into the long short strategy, and overweight the long side if you are a bull, or the short side if you are a bear.
If you have $100,000 and want to be 60% short, devote 60,000 to the short portfolio, and 40,000 to the longs.
I'd say 4-5 stocks on either side of the market would be plenty. The quants say that 8 stocks in a portfolio mitigates nearly 90% of the company specific risk. So having 4-5 on each side of the market should reduce risk quite a bit.
Some long/short strategists get very involved, looking to make sure that the longs and shorts are in similar industries, and have similar correlations. This is more akin to pairs trading.
I believe in looking at each position independently. I wouldn't short a stock simply because it was in the same sector where I had a stock that I'm long. I want to make money on both the shorts and the longs, if possible.
Each position is managed independently. Stopped out trades require putting money into the cash reserve, and waiting to find another trade on that side, or adding to the other trades that are working out better.
In determining weights on the long or short side, I'd look at market breadth. Are more stocks above a long term moving average, or below? Are stocks mostly way overbought, or oversold? Then I'd weight the portfolio accordingly.
An easy way to do a long/short strategy is to use the ETF's. Do you want exposure to oils? Buy the oil service index. Want to short the transports? Short the DJ Transports ETF.
This is the strategy that many hedge funds use. It is the classic "hedge" fund method.
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Registered User
Joined: 1/28/2006
Posts: 291
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Thats true rmr...but if one wants to straddle in order to hedge, then one would use the instruments and tactics to do so...as the hedge funds do. They tend to invest in the high leverage instruments and strategies that are a tad more esoteric than most here currently appreciate.
While I appreciate your pov, I would think that an 'all in, with a bias' tactic is fraught with slippage and limits profit potential. Best to wait for the overt signal and capture the bulk of the move regardless of direction.
Agree further on weights and measures. Most listed tech indicators are vast over generalizations (some are outright frauds) and need much refinement to use properly.
The best hedge is applied knowledge and experience.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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rmr1976
I to have been looking into this idea. I once saw an article where it was implemented using vectorvest. The 25 best rated stocks would be put
up against the 25 worst rated stocks.
IBD now has a feature I think in Thursdays paper. Where they show the
200 best rated stocks and the 200 worst rated stocks in their database.
This seems like it would be fertile ground for finding long/short candidates.
I am also (for my IRA) looking into the concept of dynamic asset allocation.
You divide your portfolio into 10 baskets. Using some type of relative strength
measure you switch between 2 asset pairs in each basket. preferably they are
not correlated and one is usually less risk then the other.
Small cap growth vs. US bonds. Gold vs. international bonds. International
Value vs. US bonds and so on.
This all seems easier in today's world with the improvements in technology,
ETFs and so on.
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Registered User
Joined: 12/19/2004
Posts: 457
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"While I appreciate your pov, I would think that an 'all in, with a bias' tactic is fraught with slippage and limits profit potential. Best to wait for the overt signal and capture the bulk of the move regardless of direction."
I would agree with you if you are referring to the classic strategy of matching longs and shorts in a particular industry sector, where the correlations are high.
As for slippage--that's a cost of doing business. If you trade off the weekly charts, it shouldn't be much of a problem.
As for limitting profits, you have the same effect with diversification. The goal isn't to make huge profits with good directional bets, it is to make more consistent profits regardless of what the market does. It is the same thing with spread trades in futures, vs. strict directional trading.
When I think of doing long/short, I want the longs and shorts to have as small of a correlation as possible. I don't want my shorts to take much profits away from my longs, and would go so far as to cut shorts that didn't work out as anticipated.
I treat them as independent trades that have the benefit of reducing my risk of loss should the market tank, or take off.
Correlations among stocks tend to converge in times of crisis. That is where a long/short strategy would be helpful.
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Registered User
Joined: 1/28/2006
Posts: 291
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Ok, understood. I'm more of a Buffet guy I suppose, not in favour of diworsification. I call direction well and limit trades to best net effect/best odds. I agree on the noncorrelation and treating each issue as its own entity. I was under the mistaken impression that you were constructing an ersatz straddle with entire account, but understand that rather than both ends towards the middle you are working middle to both extremes. Sound principle.
And I was using the term 'slippage' in improper context...was attempting to capture the issue of wash trades between some of the long and short positions. It was late and the eyes were bleary...
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Registered User
Joined: 12/8/2004
Posts: 1,301
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QUOTE (diceman) awshucks
quote:"HNC...is that a variant of 'Kelly'?"
No this is a simple fixed percent risk.
The user chooses a "risk tolerance" and sticks with it.
I personally have found this equation difficult to use. If you have a "low risk"
purchase it can calculate to more than your entire portfolio.
The only plus I would give it is a least you are following some type of discipline.
My guess is the "ultimate" portfolio equation is based on
RISK/REWARD/DIVERSIFICATION.
My view is $1 in the market is $1 worth of risk.
Can't you see that it doesn't if it calculated to your whole porfolio, or your whole account amount? The risk is still the same. If the formula comes out that you cannot lose more than 500 dollars per trade then that is your loss whether you buy 100 shares of a 500 dollar stock or 50,000 shares of a 1 dollar stock. THE MOST YOU CAN LOSE IS STILL 500 DOLLARS.
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Registered User
Joined: 12/8/2004
Posts: 1,301
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GEEZ, LET ME REWRITE THAT.
QUOTEI personally have found this equation difficult to use. If you have a "low risk"
purchase it can calculate to more than your entire portfolio
It doesn't matter if it calculates to your whole portfolio because you are still risking the same amount of money per trade. If the formula comes out that you cannot lose more than 500 dollars per trade then that is your loss whether you buy 100 shares of a 500 dollar stock or 50,000 shares of a 1 dollar stock. THE MOST YOU CAN LOSE IS STILL 500 DOLLARS. You are not risking your whole portfolio, you are risking 500 dollars.
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