#STUDY: Data Driven Trade Idea

During the market doldrums I uncorked an idea that I had a while back but was unable to trade successfully.  I had shown myself that it was a profitable system but I couldn’t internalize it and become a profitable trader using it.  I still firmly believed there was an edge and decided to investigate once again.  

I began with questioning why I was having difficulties trading this system to begin with.  Upon inspection I realized that I was overly optimistic as to how many stocks I could track.  My first step in the process was to reduce the numbers of stocks observed to a more manageable number through stricter filters and focus on just four.

The next step was to address where I was having issues with trade management.  I realized that I was using too much size for my experience level and opted to trade small over a sample of approximately twenty trades and document a number of price action metrics that occurred during the duration of the trade.

Trade Sample.

Trade Sample

From this I had the following results.

Metrics

Of note is that after 18 trades, this system as implemented made 0 dollars.  Literally 0 dollars.  I was stopped out for maximum loss on 4 of these trades.  50% of the sample hit the low of the day.

The question I wanted to answer is what adjustments could be made for this system to be profitable.  As I’m already trading small, I dismissed reducing risk through positions size as an option.  Only 4 of 18 were stopped out.  With only 20% of the sample size being stopped out I dismissed moving this up — for now — particularly since moving the stop up to the low of day would increase my being stopped out 100% due to 9 of 18 clipping the low of the day. 

Given that I was comfortable with the current trade risk and stop level I looked at selling into strength.  While top ticking is a foolish pursuit, since this system is intraday it’s the only metric I have.  Using the top tick of the day I determined the price differential from my entry.  This averaged out to $1.52.  I adjusted prices from $1.52 downward to a level I concluded didn’t choke off the trade potential too soon yet also captured profit.  Calculating this I accepted that a $1 trailing stop would capture an acceptable profit to make this system viable.

From Marginal to Profitable

With this information I will pursue another sample of trades, collect further data, and use these metrics to refine this system further, making one adjustment at a time.

#STUDY: Improve Market Timing and Risk Management

When the underlying market structure is no longer in agreement with periods of peak effectiveness and profitability, my focus turns to assessing information that suggest a realignment between how I trade and how stocks are behaving.  In order to quantify this I defer to the facts of my trading results, the expansion or contraction of my trading universe, the effectiveness of my signals, and the quantity of stocks that match gains over my holding period.

My process is as follows:

Breadth of my trading universe.  How many stocks are in my trading universe and is it contracting or expanding?

How are stocks behaving over my time frame?  How many meet my average gain over this time frame?

How are my signals behaving over my time frame?  

My trading universe is dynamic and based upon a simple calculation of momentum over a 3 and 6 month time frame.  Being dynamic this will contract or expand depending upon the underlying market structure.  There are currently 5700 stocks and ADRs in Telechart and of those only 357 meet my 3 month requirements and 161 my 6 month requirements.  This is clearly a period of contraction and indicates that the market I trade on my time frame is not conducive.  What would indicate to me that there is an improvement on my time frame would be seeing this universe expand to 10-20% or more. 

Universe

How many new highs are there over a 3 and 6 month period?  Currently they are inverted.  1 month highs have moved above 1 month lows which is positive for my holding period of 5 to 10 days, however stocks that meet my momentum requirements are currently inverted with new lows eclipsing new highs. 

New Highs-Lows

In addition I have a scan based upon weekly price action.  One of the benefits of dynamic scans that have consistent properties is they expand or contract based upon the underlying market structure.  This particular scan is based upon a decrease in price volatility.  For this week there are only 346 of 5700 stocks that meet the requirements which is on the lower side.  Clearly there has been an increase in volatility which is reflected in the return numbers of this scan.  Periods where I have traded better have lower volatility, so as volatility decreases this scan will reflect that and indicate the structure of the market is realigning to my strengths.

Weekly Watchlist

Weekly Watchlist

Moving from trading universe to trading signals, I asses how many stocks that met my entry trigger have had a follow through on day two and are higher by my time stop —day 5.  As the numbers currently show, by day 5 only 48 of the stocks that flashed a signal ended higher than signal day.  This indicates that even with a decent bounce in the general market as represented by the major indices, price from my signals on my time horizon is not well reflected.

Price/Time Horizon

My weekly signal gives a wealth of information.  From this universe I assess whether or not there are there stocks that meet my technical requirements to trade.  How many there are and how they behave over my time horizon gives me information about current structure.   Are they triggering?  Are they reaching my exit signals or stopping out due to a loss or time stop?  How are they behaving over the entire ten days?  A time comparison of these metrics is a useful template for when the market is realigning or diverging.

Period of Alignment

Period of Divergence

During times when the underlying market structure is congruent there will be a number of candidates, they will trigger, and expectations will generally be met over time as targets are hit.  When there is divergence the candidates decline and fail to trigger, or trigger and targets aren't hit but stops are.

Another piece of information from my trading results is what is my typical gain and how many stocks have met that over my holding period.  If on average my exit is in the range of a 12% gain and my average dollar is $2, then knowing how many stocks are up 12% or $2 over my time frame is useful information that marries my expectation with what the market is offering.  Conversely, knowing how many stocks retreat the value of expectation highlights periods where I may be out of alignment with market structure.

Leadership

Through using one’s trading stats along with periods of peak profits as a template, the current market backdrop can be more clearly assessed.  Risk reduces when the market structure aligns with one's trading metrics.  Market analysis through the lens of one's metrics gives quantifiable information to filter the current structure and behavior that can be repeated.  This is an inherent part of risk management, trading aggressively during conducive periods while tampering down during divergences, and a repeatable process helps ensure consistency. 

Additionally, filtering the market through metrics assist in timing during corrective periods.  Instead of falling into the trap of guessing a top, allow the contraction of one's trading universe and a divergence of expectations to be the awareness that structure may be changing.  Instead of falling into the trap of picking the bottom, allow metrics to be the guide when stocks realign with expectations, one's universe increases, and behavior over one's time horizon improves.

Weekly Chart 11/02

Lower low established.  With most major indices down ~10-15% this weeks low may be a key pivot establishing whether this is a reflexive bounce or has legs.

COMPQ Weekly

NYSE Weekly

IWM Weekly

SPY Weekly

October 2018 Monthly Perspective

IWM Monthly with 10%, 15%, 20% levels

COMPQ Monthly with 10%, 15%, 20% levels

SPY Monthly with 10%, 15%, 20% levels

NYSE Monthly with 10%, 15%, 20% levels

Weekend Review 04/17/2017

There is sufficient evidence to indicate that the general market has been correcting through time.  The issue I see moving into the next couple of weeks is will this translate into a correction through price?  Market breadth trends are weak enough that I considered it worth taking the short side through an exploratory position in the SQQQ and TZA.  The charts offer a clear line if I'm wrong and a clear line of confirmation if I'm proven correct.  With earnings season beginning on the 24th I expect one of these sides to resolve.

One of the breadth trends I pay attention to, the number of stocks over a ten day period that have had more break outs to break downs has been mostly flat to slightly negative.  It's much simpler to trade a stock market than a market of stocks, and the later type of market has been the dominant force over the past month.

Buying-Selling

On a higher time frame, one of the breadth metrics I tally has been predominately negative over the past month.  So, not only is buying to selling been hovering in more of a trough zone than peak zone, on a higher time frame this has been even more pronounced.

Secondary Ratio

One time frame up the story is becoming consistent across three time horizons.

Primary Ratio

Earlier this week I posted three charts using a GMMA and 2-Month momentum time frame on the IWM, SPY, and QQQ noting three distinct periods that I assess as prime for aggressive trading, cautious trading, or short oriented trading.  By the close of this week all three indexes have shifted to short oriented trading.

IWM

SPY

QQQ

This week also closed with with expanding lows on a one and three month time frame which is close to flipping across all higher time frames as well.

New Highs : New Lows

This week I also took some notes regarding the IWM, SPY and QQQ.  The critical price zone that I am paying attention to is the recent local low.  A break below this low and I fully expect the market to begin correcting through price.  My expectation would be 5-10% retracement from recent all time highs.  A break out above the recent lower high is where I consider my assessment to be incorrect and opposite the markets potential.

IWM

SPY

QQQ

The current market structure is beginning to shift from ambiguous to clearly negative.  Personally, I find weak markets untrustworthy.  Not only are they difficult to trade, but in addition weak markets have the potential of having the rug pulled out from under them.   Perhaps earnings season will be the catalyst and spark to renew the upside, but any misses will be severely punished and could be potentially infectious.  From my analysis the market is offering an opportunity to the short side with a break of the recent lows as confirmation and perhaps the path of last resistance trade.

Weekend Review 04/08/2017

This weekend I decided to revisit an old chart template representing a trading idea I had long ago to see if my perspective has changed, there is something I understand now that I didn't gleam then, or if it is wroth considering given what I know now.  One concept I never underestimate in trading is that it takes time to find one's time frame as well as constant reevaluation of previous ideas to see if what was muddy waters is now morning coffee.

The system I devised was a trend trading concept based upon two signals, a Guppy Multiple Moving Average cross over coupled with a two month momentum indicator.  From these two signals I documented three zones: green for aggressive trading, yellow for cautious trading, and red for avoidance or short oriented trading.  The green zone consisted of positive momentum and positive GMMA.  The yellow zone consisted of three potential signals:  a transition from positive to neutral momentum, a GMMA flip while momentum is positive, or a positive GMMA crossover with waning momentum.  The red zone is waning momentum with a negative GMMA crossover.  When momentum itself inverts this suggest severe market weakness.

One of the things that has held me back from implementing this is that I have yet to be able to marry a holding period with a reasonable position size and stop to allow for the weeks to months required for a trend to unfold.  Regardless, it is still an idea that I return to every so often and take notes of for future reference.  Something that stood out for me this weekend, though, was that it actually translates well with breadth metrics, divergence, as well as strength and weakness.

QQQ

First up is strength.  Based upon the analysis criteria, the QQQ is in a zone of caution.  Taken from a positive, the only detriment is waning momentum.  Neither has the GMMA flipped nor momentum turned red.  I see no evidence from this chart that there is much to be overly cautious about.  However...

SPY

The S&P is suggesting a more confusing narrative.  For one, there has been a GMMA flip from positive to negative to positive.  These flips were concurrent while momentum is waning.  Also, the frequency of horizontal bars has is higher over the last two months.

IWM

The IWM is showing the worst of the lot.  Over the past few months momentum has been in a zone I quantify as neutral, there have been multiple GMMA crossovers, and the frequency of horizontal bars is the highest of the three indexes as ETFs.  Given that this index is considered to be the geiger counter of riskiness of market participants, the current consensus a belief of risk off.

So... from a breadth perspective I'm beginning to see the value of this analysis.  There are clean points of quantified reference indicating distinct periods of aggressiveness as well as  long, short, or neutral bias.  There are also clean references when one index is outperforming the others as well as distinctions when it's preferable to rotate into one or the other for long/short or both.  Now to throw it back into the cookie jar and see what I think down the road.

Lower Highs with Lower Lows Affirmed

Over the past two weeks I've been paying attention to the IWM as this index was showing continued weakness, particularly in relation to the QQQ.  One of the pivot levels I was focused on was 138.  This area was the first lower high after making an ATH.  While nearly clipped earlier this week it has remained unbroken for 13 trading days.  Additionally of the three trading days this week, two have been range days with higher volume to the downside.

IWM 04/05

The SPY has also been unable to make fresh ATH and continues a pattern not dissimilar to the IWM.  While a recent lower high was clipped today, the fade by end of day brought it back below.

SPY

The QQQ continues to be the strongest of the three, making a fresh ATH today yet reversing to finish near the low of the range on high volume.

QQQ

Also of note is an increase of new lows to highs across three time frames.

New Highs New Lows

The next key pivot level I'll be paying attention to is the 03/27 lows.