What does Weekly/Monthly “Basis” mean?
We Enter/Exit positions based on the closing price of either a Weekly bar or Monthly bar. This means intra-week/intra-month gyrations do not cause us to act.
How do you position size?
Position sizing is based on the entry price compared to the stop price. The difference between where we enter and stop out is our “risk” per share for the trade. Once we know our risk per share we can calculate the proper position size depending on the overall risk we want to take within the account.
I generally risk 0.5% of my account equity on each trade. As an example we will use a $100,000 account size. 0.5% of 100,000 is $500. $500 is the maximum I want to risk on any single trade.
We then take our risk per share and divide it by the $500 allowable amount. Suppose we enter at $50 with a stop at $45, which is a risk of $5 per share. We then divide our $500 by the $5 = 100 shares.
100 shares x $5 per share risk = $500 or 0.5% of the 100,000 account size.
When do you add to positions?
When a stop is trailed higher, due to a new valid pattern confirmation, I will recalculate my current position size with the new stop level. A new trailing stop doesn't automatically mean add to the position, but as long as the open risk with the new stop is under 0.5% of my total account size, additional shares can be purchased to "fill out" the current position.
For example, say I buy 100 shares of XYZ stock with a stop $5 below my entry (5 x 100 = $500 risk or 0.5% of 100,000 account). If I were then to receive a new trailing stop confirmation where the stop sits only $3 below the new signal closing price, the position size can be recalculated.
100 shares x $3 = $300 risk. Since 0.5% of our account equity is $500, it means we can buy more shares to bring our new risk up to $500. 500 / 3 = 166 shares. With the new trailing stop we can add 66 more shares to the position and still be within the 0.5% risk amount.
Just because we can add to a trade doesn't always mean we need to. I like to add to a weekly basis position early in its emerging long-term trend. i generally only want to add to a trade within the first couple trailing stops. Once a trend becomes older the likelihood of failure increases. In my experience its better to add early in a new trend rather than later. The decision to add usually comes down to the position of the monthly base; an extended monthly pattern generally means an older trend, whereas a more coiled monthly pattern means a more explosive opportunity.
What kind of trading style do you use?
I consider myself a hybrid Swing/Trend trader. Over time I have evolved my strategy to stick with the dominant primary trends while also be opportunistic in the event of a significant price increase to rotate funds away from the stretched risk/reward situation into a more favorable opportunity.
What is your primary strategy?
I look for BIG moves emerging on the Monthly timeframe. I like to build a core position based on the long-term chart and then drill down to the Weekly timeframe to take advantage of intermediate-term trends emerging.
There will be shorter-term opportunities that do present themselves in certain circumstances, but overall I have found much more success sticking with the larger trends than jumping in and out.
We want stocks that have rested and are coiling up with tighter price action. Ideally these rest periods will be occurring above a rising moving average, which tells us we are trading in the direction of the overall trend. We look to enter once price begins to pivot higher off of this trend support and place our stop levels below the recent pivot area low.
The theory is that we want to get into a major move just as its beginning but not sooner. Price will often make a defined “swing” type of turn and that’s where we look to get involved. This keeps risk as low as possible.
How many set-ups do you use?
I have one primary setup and that’s a coiled Monthly chart trading above and near the rising 20 Month Simple Moving Average (SMA). From there I follow the price action with Double Bottoms, Inverse Head/Shoulders, and Bull/Bear Flags. I try not to get too hung up on pretty price patterns; I look for structure in momentum and price behavior. But I do pay attention when I see price forming what appear to be bullish or bearish formations.
Most of the time sticking with the trend will achieve exactly the same result. A Head/Shoulder top is simply a lower high and lower low, a bull flag is a higher high and higher low, etc
How do you trail stops?
All trailing stops are predicated on a new bull flag pattern triggering and confirming. Once that pattern confirms I trail up to near the new swing low. This can be applied to any timeframe (Hourly, Weekly, Monthly).
Why do you use the 20 Period Simple Moving Average (Monthly/Weekly/Daily/Hourly)?
I sort of stumbled onto my relationship with the 20 SMA over the years. I’ve tried tons of them. For whatever reason the 20 SMA seems to fit my comfort zone for trend maintenance, but still alerts early enough to get out of the way of real trouble.
While it is true not all stocks behave similarly with a particular MA. I also realize that I can’t own all stocks. I’d rather trade something that trades well according to my parameters than constantly trying to optimize an indicator to fit a stock. There is only so much time in a day.
Studying past trading results to my system’s signals is something I always try to do before entering. Depending on how well a particular stock of interest has rewarded my system’s signals in the past helps determine if I will get involved or pass on it. How it trades around the Monthly 20 SMA is of paramount importance to me first and foremost.
Other than Price and MA’s do you use any other indicators for your trading?
I use a few: Fibonacci Extensions, MACD, Relative Strength and some Volume.
MACD I use as a trend health indicator and not a direct buy/sell signal generator. Above the Zero line is an uptrend, below is a downtrend. I watch for specific behavior of the MACD around the Zero line. Coiling above and near Zero is a very bullish indication, while often bullish cross-over signals below Zero can be strong trap signals. Most who use MACD just look for crossovers of the signal line. I find that works anecdotally, but over time is a loser. It’s more important and profitable to note behavior around Zero as the signal instead of Bull/Bear crosses alone.
Fibo’s I use extension levels for Bull Flag patterns and bases. I will also look at key retracement levels (mostly 61.8) during declines for turns. The key levels I use for upside objectives are the 161.8 extension and then 261.8 extension. These tend to be important levels for the market and offer a good basis for risk/reward in a new potential setup.
Volume is not a major factor for me but I track it and like it when it suits my bias ; ) But it is true that certain instances can show a large shift in investor behavior through a big spike in trading volume. Often this can be an indication of a sentiment shift.
These indicators and “target” areas only offer estimations and further confirmation and are not carved in stone. Price behavior is still the most important element of my strategy and I will yield to that regardless of what any indicator tells me.
Do you base your trades only on technicals or do you use fundamentals as well?
I am a believer that anything we can do to improve our odds is to our advantage. As far as fundamentals are concerned, they tell me “what” to buy and the technicals tell me “when” to buy them.
I use a simple scan that I have honed over the years to filter for strong fundamental performance as well as confirming price action. A stock can have the best numbers in the world on paper, but if the market is not rewarding that then it doesn’t really matter. We are here to make money, not look and sound smart.
I scan through TC2000’s charting software. It’s about half and half technical/fundamental criteria:
I check the scan at the end of each day for total opportunities (Breadth)
I skim the stocks and look only at the Monthly chart for tight base structure with bull flag setups
If a stock fits the Monthly pattern I add it to my watchlist. From there I look for further actionable signals to get involved.
Does your Weekly timeframe outperform your monthly timeframe performance?
Generally the Monthly accounts outperform in a strong uptrending market. In a downturn the Weekly accounts will obviously be faster responding to the turn. I find value in both as the Weekly allows me to be more tactical in my positioning both in terms of adding to trades or reducing exposure. But the Monthly accounts go through such little trading and churn that costs are low and big moves can be very profitable. I think it is very important to diversify in timeframe as well as asset selection.
Do you have a set number of stocks you want in your portfolio, is there a range of stocks you keep in a trending market?
I generally like between 15-25 at the most. But over 10 and under 30 are about the same. You reduce your ability to significantly outperform but have more balanced holdings. Plus I trade a positive expectancy plan, the more bets I take, the better odds I will hit more winners.
If your system is a 50/50 winner but pays 2-1 on winning trades, you don’t want 2 holdings. The risk of missing both is very high. If you have 15 the returns will begin to separate and tip in your favor. It’s like playing cards and you know a certain hand wins most of the time, you want to play those hands as much as possible to put the returns in your favor. Within reason though as well, because the markets are highly correlated you don’t need 50 stocks to do well. Half of that is plenty, but you also want more than 3.
Do you use hard stops, mental stops, or computer alerts when stock is at nearing stop location?
I use mental stops and computer alerts through TC2000. I know where the trend is invalidated for all my positions at a glance. I don’t use hard stops as the likelihood of manipulation is too great and I prefer closing signals for my exits. Fairly often my stop levels are violated intra-week, but by the close of Friday they have recovered. Some of my largest winners have done this very thing before ripping vertical.
Markets these days are designed to trick human emotions and get us to panic in both directions to short-term gyrations. I have found much success in simply waiting a day or two to let a week or month close before making position decisions.
Do you hold positions into earnings?
I hold through earnings.
I position size for volatility and as long as the pattern is intact I find the likelihood of a better than expected outcome is more frequent. With a longer-term methodology it simply doesn’t make sense to remake your portfolio every quarter.
Earnings are what provide the continued catalyst for big growth winners. If you can put a few quarters together that’s where you hit the “baggers”. One year of strong EPS growth can easily turn into a +100% winner. Some can keep it going for multiple years. That is what we look for.
What size of swings are you comfortable with? How do you deal with volatility?
Often with monthly positions you can see up to 50% swings during big trends. This is why smaller sizes matter for longer-term trading. I try to base all my positions on a set amount of risk, by default this means the more volatile movers tend to be smaller positions overall. That helps mitigate big drawdowns, as does taking gains off at certain intervals. Buying in proper position with relation to the long-term trends will help reduce big drawdowns as well.
But I fully expect that I could theoretically have a 30-50% account drawdown at some point in long-term accounts. I set risk for about 10% drawdowns by sizing positions around .5% of account. If I have 20 stocks at .5% risk then if all fail I stand to lose roughly 10% of the account. Now with longer hold periods things don’t always stop out right at your stops, often slippage can occur which can cause larger drawdowns.
So assume the market goes to hell and all my positions get stopped out. I can take a double expected loss and still only suffer about a 20% drawdown. Now that’s notable and I likely would not be happy, but I trust my system to recover over time. And likely if I suffer a 20% drawdown likely the market was quite strong prior and built accounts up nicely.
To answer the question more directly, I am prepared mentally for an account drawdown of 30%. I hope it never happens, but it’s possible. This is why I manage on multiple timeframes and scale out of trades. Before anything too bad happens I will hopefully be reduced down by quite a bit.
Is it policy to allow your accounts to get to 100% invested? When do you go to Cash?
I let the market dictate my positioning, if the setups are there and plentiful I will most definitely get 100% invested. I will do some trimming, rotating, etc if individual positions need maintenance or to make room for something new or to add to an existing holding.
But in bull markets like this most of my funds are always in play. When conditions weaken overall, my scan will stop presenting many opportunities (hence the New 50 Day Highs I scan for) and I will know that things are cooling. If no new opportunities are presenting themselves and breadth is weak, I will likely begin to get stopped out of positions gradually which raises cash. Should conditions deteriorate further I will continue with this reduction.
I will certainly get defensive in the event indices begin violating the 20 Month SMA. I still stick with my individual holdings but I start to really put the brakes on when a breakdown of that size occurs. Historically the worst bear markets always have occurred after prices have broken below the 20 Month Moving Average.
As markets firm up more scan opportunities will begin presenting themselves, support will become established, and I will start to receive new buy triggers. This allows me to put money to work as setups form and trigger. The more that trigger, the more I become invested, and so forth.
If fully invested how do you react to a Black Swan Event?
Well I try to limit reactions to this. That’s part of the deal. Theoretically the system has been back tested through all kinds of weird volatile events. Usually the market can prepare for these a bit and they don’t just appear out of thin air. If a major natural disaster occurs or something I will just stick with my process. There will likely be signals triggered on Weekly accounts and hopefully I will have had a chance to rotate some of my big winners down with ongoing position management.
We can’t build a system that accounts for 1% events. We have to prepare for the other 99% and compound returns. I feel most people spend too much time looking for and preparing for the 1% events. They simply don’t occur that often and even when they do, price tends to telegraph some trouble ahead of time. ’87 for example declined for 3-weeks into Black Monday and sliced cleanly through the 200 Day SMA on the Friday BEFORE the event. This triggered all kinds of Weekly basis stops, etc. This is very similar to the “flash open” we had at the end of August 2015. The 8/21 weekly bar stopped me out of about ¾ of my positions. The close of the month two weeks later closed out the rest but not before a nice bounce came in at the end.
We simply have to do the best we can with the info we have. As Peter Lynch famously said, “more money has been lost preparing for corrections than has been lost during actual corrections.”