Breakeven today

...cont'd from yesterday...

Yesterday, April 29, 2009, SPY showed the following at the end of the day after all trading had been completed yesterday.

Day Chart. Stage 2. First bar since ricocheting upwards.

Hourly Chart. Stage 2.

Half-Hourly Chart. Stage 2.

Quarter Hour Chart. Stage 2, until 3:30 pm when price bars went to Stage 3.

Inferences at the Open of today.
The Charts in the aforesaid time frames are mixed. Therefore, expect trading to be choppy until they all get into the same Stage.

Decision.
Wait until the Quarter Hour Chart returns to Stage 2. Then go long. If that doesn’t happen, do nothing until the Hourly, Half-Hourly and Quarter Hour Charts are all in the same Stage. Then when all those charts are in the same Stage, go long if in Stage 2 but go short if in Stage 4.

Results.

SPY opened into Stage 2 today on a 15 minute chart. The opening price was 88.55. Using the 15 minute chart Prior Bar Countertrend Extreme, the long was stopped out 88.58 Thereafter, the 15 minute chart fell into Stage 4 but the Hourly Chart stayed in Stage 2. Therefore, nothing was done for the rest of the day. Both the 15 minute chart and the 30 minute chart closed in Stage 4 while the Hourly Chart closed in Stage 2.

...cont'd tomorrow...

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Sidestepping FOMC Whipsaw

...cont'd from yesterday...

Cont’d example of my application of Stan Weinstein’s Stan Weinstein's Secrets For Profiting in Bull and Bear Markets for the purpose of deciding whether to buy, sell or keep my money safely tucked away in my mattress.

WARNING: The contents hereof shall not be construed or relied upon as investment advice, and the contents herein shall not be relied upon to do anything or refrain from doing anything.

Yesterday, April 28, 2009, SPY showed the following at the end of the day after all trading had been completed yesterday.

Day Chart. Stage 2. Prices have made two consecutive days of lower lows and lower highs.

Hourly Chart. Stage 4.

Half-Hourly Chart. Stage 3, prices both above and below the 20 Moving Average.

Quarter Hour Chart. Stage 3, prices in a sideways range.

Inferences.
Today, price likely to just go sideways in a range between about 86.50 on the upside and 85.50 on the downside. For the entire day today, stand aside because of the FOMC report coming out in the afternoon.

Decision.
Take today off from trading with real money.

Results. No trades today.

...cont'd tomorrow...

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Money stayed stuffed in mattress

...cont'd from yesterday...

Cont’d example of application of Stan Weinstein's Secrets For Profiting in Bull and Bear Markets for the purpose of deciding whether to buy, sell or keep my money safely tucked away in my mattress.

WARNING: The contents hereof shall not be construed or relied upon as investment advice, and the contents herein shall not be relied upon to do anything or refrain from doing anything.

Yesterday, April 27, 2009, SPY showed the following at the end of the day after all trading had been completed yesterday.

Day Chart. Stage 2 with Gravestone Doji. Expectation today was downward price direction.

Hourly Chart. Stage 3, sideways price movement, but downwards if price breaks below 85.50. Targe is about 84.

Half-Hourly Chart. Stage 4, price definitely downwards, target below is 85, not 84 as suggested by Hourly Chart.

Quarter Hour Chart. Stage 3, sideways prices expected. Range bound between high of 87 and low of 85.50. But if price breaks below 85.50 then expect more downward movement.

Inferences. Price will be sideways until break down below 85.50, after which price will go down to 85 and possibly 84; alternatively, if price breaks to the upside, it could go to about 94.50 before taking a rest.

Decision. For today, wait for price to break out of the Range between a high of 87.00 and a low of 85.50, keeping my money safely tucked away in my mattress until that occurs. Meanwhile, look for stocks with similar pattern but greater volatility to short sell when and if SPY breaks below 85.50 or to go long above 87.00.

Results.

On Tuesday, April 28, 2009, SPY opened at around 85, gapping down below yesterday’s range. SPY then went up to about 86, then went sideways between about 86.30 upside and 85.70 downside. SPY briefly poked above the upside to about 86.60 and promptly fell back inside the range, continuing down to poke below the lower end of the range, going as far as 85.50 downside.

Throughout the day, SPY did not trigger the cue for going long so no long position taken.

SPY opened gap down triggering the cue for going short. But instead of going down some more, SPY went up from there back into yesterday’s range.

...cont'd tomorrow...

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How to Profit in Up and Down Markets

One of the first and most insightful books I have ever read about trading and investing is Stan Weinstein’s book



The main idea in Stan Weinstein’s book is this. According to Stan, there are four stages in any market. Here’s my interpretation of Stan’s advice.

In Stage One, prices go sideways. That is the time to wait with cash safely tucked in your mattress.

In Stage Two, prices go up. That is the time to buy.

In Stage Three, prices go sideways. That is the time to exit longs and wait with cash in hand.

In Stage Four, prices go down. That is the time to short sell.

In this week’s blog, I’ll be writing out my thoughts each day about what the stock market is doing. For that purpose, I’ll use the Exchange Traded Fund SPY as a representative of the market for discussion purposes.

...cont'd tomorrow...

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Number of trades not relevant

...cont'd from yesterday...

In answer to the criticism desceibed yesterday, I’ll demonstrate that, mathematically, the number of trades is not relevant to the outcome on a day-to-day basis.

Given the mathematical formula for Expectancy and that the Daily Profit/Loss is Expectancy multiplied by Number of Trades, then the factor of Number of Trades is neutralized and made irrelevant.

Expecancy per Trade
= [(Average Win x Percentage Win) – (Average Loss x Percentage Loss)]/Number of Trades

Daily Profit/Loss
=Expectancy Per Trade x Number of Trades

The factor of “Number of Trades” appears in both the Numerator and the Demoninator, which has the effect of cancelling each other out, thereby making that factor not relevant.

I'm taking tomorrow (Friday) off, so I'll be back next week.


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Get real about the number of trades

...cont'd from yesterday...

Another criticism of the method is that it assumes six trades everyday. That’s not going to happen consistently in real time.

...cont'd tomorrow...

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No 3R's, No Problem

...cont'd from yesterday...

Here’s some ideas for working around the problem described in yesterday’s blog article.

1. Repeat the same Level (“Day”) until you have accumulated the 3R profits and then use the same formula for calculating how much to increase today’s risk. This allows the model to work, albeit at a slower pace. The annual return will be lower, but will still be very high.

2. Use “Accumulated Profits To Date” since Day One as a substitute for “Yesterday’s Profits” in the formula for calculating how much to increase today’s risk. This allows the model to work at a slower pace, but does involve risking more of the profits.

3. Any day you lose all of yesterday’s profits (namely 3R), stop trading so that you don’t lose more than 3R. Then the next day, just repleat the same Level (“Day”).

...cont'd tomorrow...

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What if you don't get 3R profits everyday?

Last week’s blog articles were about using the magic of compounding profits to turn a random 50% win-loss system into a huge winning system…all the while using very small risk. Profits were risked aggressively to achieve huge profits in that system, while starting capital was largely safeguarded from exposure to risk of loss.

This week, I’ll explore some of the shortcomings of the system as well as solutions to overcome them.

One shortcoming of the model described last week is that it system assumes that everyday you generate profits of 3 times risk. That in reality will not happen. Instead, what is likely is a random series of profits and losses. For example:
Day One: 3R profits.
Day Two: 1R profits.
Day Three: No profits/no losses.
Day Four: 1R loss.
Day Five: 3R loss.

...cont'd tomorrow...

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Figuring out 3000% per annum profits

...cont'd from yesterday...

Day Five.

Risk 1D on each trade PLUS one third of yesterday’s profit. In this case that would be
= Risk 1D + (Yesterday’s Profit of 12D/3)
= 5D Risk

Then:

Trade One: lose 5D
Trade Two: lose 5D
Trade Three lose 5D
Trade Four: win 10D
Trade Five: win 10D
Trade Six: win 10D

Net profits for the six trades today is (10 + 10 + 10- 5 -5 -5)D = 15D

Total Net Profits For The Week
Day One + Day Two + Day Three + Day Four + Day Five
= (3 + 6 + 9 + 12 + 15)D
= 42D

Now if 1D is equal to 2% of your account balance, then your Net Profits Per Five Days
= 42 x 2%
= 84% in Five Days

There are about 52 “Five Trading Day Weeks” each year. To be conservative, allow for four day weeks and frequent lengthy holidays so as to round that 52 down to 40 such weeks. Then your annual net profits would be
= 84% x 40
= 3360%

In other words, in one year you have multiplied your starting account balance by more than 30 times. That’s 3000%.

Limitations and Shortcomings

In real time, the foregoing results are only one of many possible outcomes. Here are some reasons.

With any system, the order in which your wins and losses manifest are unknown. You could get six losers in a row or six winners in a row or some other combination of winners and losers instead of the 3 losers-followed-by-3 winners as illustrated.

Six trades is too small a sample to use in a scientific test. However, six trades per day is what was used in the examples. Therefore, the examples do not meet scientific standards.

The system would have to be altered to address for the foregoing and other issues. DO NOT USE the system exactly as given.

These limitations and shortcomings will be further discussed next week along with possible solutions.

...cont'd next week...

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Day four of risking yesterday's profits

...cont'd from yesterday...

Day Four.

Risk 1D on each trade PLUS one third of yesterday’s profit. In this case that would be
= Risk 1D + (Yesterday’s Profit of 9D/3)
= 4D Risk

Then:

Trade One: lose 4D
Trade Two: lose 4D
Trade Three lose 4D
Trade Four: win 8D
Trade Five: win 8D
Trade Six: win 8D

Net profits for the six trades today is (8 + 8 + 8- 4 -4 -4)D = 12D

...cont'd tomorrow...

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Risk profits aggressively, risk capital conservatively

...cont'd from yesterday...

Day Three.

Risk 1D on each trade PLUS one third of yesterday’s profit. In this case that would be
= Risk 1D + (Yesterday’s Profit of 6D/3)
= 3D Risk

Then:

Trade One: lose 3D
Trade Two: lose 3D
Trade Three lose 3D
Trade Four: win 6D
Trade Five: win 6D
Trade Six: win 6D

Net profits for the six trades today is (6 + 6 + 6- 3 -3 -3)D = 9D

...cont'd tomorrow...

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Risking yesterday's profits

...cont'd from yesterday...

Day Two.

Risk 1D on each trade PLUS one third of yesterday’s profit. In this case that would be
= Risk 1D + (Yesterday’s Profit of 3D/3)
= 2D

Then:

Trade One: lose 2D
Trade Two: lose 2D
Trade Three lose 2D
Trade Four: win 4D
Trade Five: win 4D
Trade Six: win 4D

Net profits for the six trades today is (4 +4 + 4 - 2 -2 -2)D = 6D

...cont'd tomorrow...

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3000% per annum with very little risk plus some math

Do you get advertisements about newsletters that get 100% per annum profits?

In this week’s series of blog articles, I will be writing about a way to get more than thirty times that (i.e. 3000% vs underacheiver's 100%) and with very little risk.

The philosophy behind the system is that you risk your profits aggressively but risk only a tiny portion of your original capital.

The example used involves intraday entries and exits, but you can adapt it to a longer holding period if that is the way you enjoy trading. The method involves a bit of math, but only high school algebra is a prerequisite to understanding the method.

Assume the following:

1. Assume you use a system for entries that gets 50% winners and 50% losers (i.e. a random 50% win/loss system).

2. Assume that of the winners you get 2 times the amount you lose on the losers (i.e. Reward-Risk Ratio is 2 to 1).

3. Assume you do six round trips each day (i.e. buy and sell 6 times each day).

Also, let D=Dollar amount you lose if your Initial Stop is hit on any single trade.

The following would be the results on each of the next five days.

Day One.

Risk 1D on each trade for six trades today.

Trade One: lose 1D
Trade Two: lose 1D
Trade Three lose 1D
Trade Four: win 2D
Trade Five: win 2D
Trade Six: win 2D

Net profits for the six trades today is (2 + 2 + 2 - 1 -1 -1)D = 3D

...cont'd tomorrow...

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