Market Breadth and Account Risk

There are four account sizes I trade with: 0, Quarter, Half, Full+.  Based upon my assessment of market breadth and trading conditions I will decide how much of the account will be in play over the upcoming week.  If the trading conditions on my time horizon are not conducive I will go in with 0.  If things are humming I will go into the week with full trade size and possibly margin.  These conditions are fairly easy to assess based on overall expansion of contraction of stocks.  In between is a bit more art meets science.

For example:  If stocks are in a deep correction and I'm not trading but there is a breadth flip, I'll look to enter with 25% account size where four positions is generally risking 1%;  should things improve and trades work out, then bumping up to 50% account size would risk 2% of account with 4 open trades.  I allow breadth to determine the expansion and contraction cycle of account at risk.

Currently upside momentum is moving into a waning phase.  Upside moves are muted and contracting while down side moves have shown some expansion and acceleration.  This is a situation in which I would be looking to pare down account size at risk and move into the 25% quadrant.


Since peak exuberance on the first of July, stock moves across a number of metrics have been waning and beginning to invert across multiple time horizons.

Monthly Exuberance

In conjunction this can be visually confirmed with the number of stocks above their 20 period moving averages declining.

>20MA Declining

The number of stocks making new highs across multiple time horizons is hovering around a net negative zone.

New Highs / New Lows

There is a decline in the stocks within the trading universe.

Trading Universe

Muted moves across the time period positions are held for.

Holding Period Decliners Expanding

The combinations of these factors suggest that the margins within which I trade have thinned and account risk is increasing.  One way to mitigate account risk is decreasing to a 25% risk profile until more favorable conditions are present.

Sometimes You Don't and Sometimes They Do

Sometimes you sell...

Sold

when the best buy...

Different strokes for different folks.

How I Trade Anticipation Set Ups

Sunday through Thursday I run scans across my stock lists to find 6 stocks that I expect to have breakouts the following morning.  My objective is to enter before they trigger a signal on my breakout scans.  This process also doubles as a market awareness exercise.  If I don't find many, the process provides awareness of market behavior on my time frame.  The same if there are are more candidates than manageable.

When there are candidates found I set up the parameters of the trade in a spreadsheet.

Trade Parameters

The spreadsheet calculates my stop, targets, and distance from close to my entry which acts as a filter.  As I am expecting these to breakout, I am more stringent on the distance as there is no point entering a stock that would otherwise show up as a breakout.  With stocks between 10 to 25 I generally filter around 2%, under 10 I'll allow a little more percentage wise, and over 25 I'll start to look at the distance in dollar values. 

The spreadsheet also notes the high of the day which in the current example is at the close of Friday.  So I know 2 triggered.  When they trigger, I follow the price action over the next ten days and note whether or not price reached 2-1 or 20%.  This process also gives me information about the market on my time frame.  It informs if anticipation setups are working well in the current environment.  It informs me of the max profit potential of the trades over a ten day horizon, and whether or not my targets are being hit during these moves.  In general I look at taking half off at 2-1, trail a stop, and aim for the 20% threshold.  But, if 2-1 is all the market is giving I'll look to take more off or exit completely.  If 20% targets are being hit with frequency and the market is hot, then I'll look to push the edge to capture more.

With the parameters set, it's time to set alerts.  Of the list above I settled on 5.

Trade Alerts

Alerts also double as a market awareness exercise.  While I am willing to allow an hour from open to take these trades, ideally an anticipation trade should trigger an alert within the first 30 minutes, preferably within the first 15.  If all of them trigger it informs me about market direction for that day.  None of them triggering tells a story as well.  After the opening hour stocks that didn't trigger anticipation will be followed for triggering a break out later in the day.  This is a FIFO process and I predetermine how many I will take based upon current held positions.

After one triggers and I enter the trade, I'll set my stop and target alerts.  Within the first 30 minutes this is the price action I expect.

Expected Price Action

At no point after entry is that price point challenged.  This indicates that I am on the correct side of the order flow for my time frame. 

By the close the daily bar confirms the trade and is therefor held.

CAE Daily

The second trade I took that morning was IOVA which triggered and showed price confirming that I was on the correct side of the order flow for my time frame.

IOVA: Expected Price Action After Entry

However, by the end of the trading session price action on the daily time frame did not confirm with a breakout and closed below entry which is an exit signal for a small loss.

Price Fails to Confirm Daily Breakout

Once a trade is taken the management is as follows: 

• EOD close > Entry or jettison the trade
• Day 2 Close > Day 1 entry or jettison the trade
• Day 3 premarket move stop to BE
• Day 3 if no profit targets are hit then take half off EOD and move stop to LOD
• Trail stop to each successive higher low, take off remainder at 2-1 or stop hit
• If 2-1 target hit, continue to ratchet LOD stock and aim for 20%

Control What Can Be Controlled

When it comes to executing a trade I hold two beliefs, control what you can control, and the only thing you can control is entering the trade.  Once the trade is entered the shift is to self-control and therein lies the crux of trading.  Self-control is setting the stop or alert.  Self-control is setting targets.  Self control is exiting when stopped or target hit.  Self-control is following what was planned.  Between these lines many things blur when capital is on the line.

2-10 Anticipation

Scanning is a balance between restricting a trading universe while capturing candidates.  Too loose on the requirements and there will be noise.  Too restrictive and there will be few signals.  When constructing scans I tend to gravitate towards complimentary signals that form a logical set up that weigh price and volume.

LK 2-10 Anticipation

One scan I use focuses on stocks that are within 2% of their 10 period moving average, have the narrowest range day in 10 days, and the smallest volume print over 10 days.  The logic being that a stock within 2% of its 10 period average is unlikely to be extended, a narrow range day shows price contraction, and a low volume print suggest disinterest.  From there additional characteristics can be used to further reduce anticipation candidates to a more manageable watchlist.

In general, when looking at an anticipation candidate I am looking for a stock where the close and high are within 2% of each other as a break of a high is the signal.  LK fits this criteria.  Additionally the chart pattern forming is constructive. Further, previous moves when this has passed the scan requirements have had follow through.