El Capitan

The following entries are the content and results of the task that was given to me a few weeks ago.

Previous Entry: Put Into Test

After more than a week of looking at charts. I was able to record and analyze the results. Overall performance or hit rate of the system is on the profitable side. 73% hit-rate is unusually high. But one of the person in the group that talks to me constantly said that the high hit rate is due to the time frame that I chose to conduct the study in. Most of them are bull market. Hence the high hit rate.

Observation & Recommendation

Observation

• Stocks in PUA have a tendency to give a better hit rate against stocks in AOTS
• Stocks in PUA have a tendency to give better average gains against stocks in AOTS.
• Stocks in PUA have a tendency to be held longer before trails stop is hit against stocks in AOTS.
• The bigger the resistance, the bigger the reward.
• Previous Darvas Box Resistance or New Darvas Box Support sometimes snaps first before the MA20.
• Slow uptrending stocks are more prone to fake outs.
• Breakouts can sometimes happen in the morning. EOD entry usually is more than 4% from breakout point.
• Snapping of trails stops usually happen a few days after Blow-off candles, bearish engulfing and shooting star.
• Sometimes the trend is moving too slowly that the small gain doesn’t justify the long holding period.

Recommendation

• Prioritize stocks in PUA over AOTS.
• Prioritize bigger boss breakouts.
• Incorporate Darvas Box Support and Resistances as another Trail Stop option.
• Be careful entering slow uptrending stocks. Be on the look-out for fake outs.
• Use price notification features like InvestaWatcher to notify entries and exit in cases breakout happens intraday.
• Be mindful of signs of weakness after a breakout (eg. Blow-off candles) as it may signal a short term correction or pull back. Adjust to nearest trails stop if there’s a confirmation.
• Consider incorporating a Time Stop for slow moving stocks. Time lost in consolidation is opportunity lost in other moving stocks. 

Building the System 2.0

Incorporating the results of the back testing process, here is a revised version of the system.

The Trading Setup

Define your timeframe and indicators based on your trader profile.

• Use Daily and Weekly Chart only (Trend Following)
• Indicators to use: Moving Averages only
• MA20 (Red)
• MA50 (Magenta)
• MA100 ( Blue)

The Trading Rules

Determine your Entry/Exit triggers.

Entry Rules

• Stick to up trending stocks.
• AOTS in Daily Chart (Alignment of the Stars – where MA20 > MA50 > MA100)
• Prioritize stocks in PUA (AOTS in Daily and Weekly Chart)
• Prioritize faster moving uptrend (MAs wider apart)
• Darvas Box or Major Resistance Breakout
• Minimum 3-Month High/Resistance Breakout
• Prioritize bigger Boss Breakouts
• where All Time High> Multi-year High > 12M > 9M > 6M > 3M
• If breakout happens in the morning session, enter within 4% from breakout point but execute cut loss if setup is invalidated (eg. whipsaw)
• If breakout happens in the afternoon session, enter at confirmed breakout towards end of day (EOD) to avoid whipsaws or fake outs.
• At any situation, if risk is more than 4% away from breakout point, DO NOT ENTER.

Trail Stops

• Use Technical Stop - MA20 as Trail Stop when entry or AEP is 10% away from MA20
• Use nearest Darvas Box Support as Trail Stop if MA20 trail stop is not applicable yet.
• If breakout turned out to be BORG play – use close of previous candle as trail stop, sell 50% of position, let the remaining position ride the trend;
• Use Time Stop of 10 Days - If upon entry, the stock goes into a long consolidation or when the trend is moving too slow, and current gain is less than 5%, execute time stop only if a better play presents itself.

Cut Loss

• Maximum of 4% loss per trade. Respect you Cut Loss level.
• If bias is already invalidated, cut, even if loss is less than 4%.

Other Rules

• Trade only stocks that are liquid.
• Do not execute unplanned trades.
• Portfolio Allocation – Maximum of 3 stocks (33% portfolio allocation per stock)
• If Trend is strong, add volume on succeeding breakouts (Conviction Trade)
• Use Investawatcher notification to monitor entry and exit areas.
• More importantly, be honest. Be patient. Stay disciplined. 

 

Overall Conclusion

Who you are

There are tons of trading systems that were formulated and are being used by many traders nowadays, but many traders still lack discipline to follow the rules and as a result, they still end up losing money. The critical part between making money and losing money can be as simple as trading blindly or trading with a plan and a system.

Your system should fit you. Your lifestyle. There’s no such thing as ‘one size, fits all’ when it comes to trading. Every trader is different. Don’t compare yourself with other players. Focus on learning. Focus on the process, not the rewards. Focus on yourself. (non-verbatim, Alpha Centauri – ZFT)

Focus on finding ‘who you are’.



Mastery

25 Dec ’18 [Edit]: There’s this TEDx Video on Zeefreaks’ wall about a guy who free-soloed El Cap, in which I replied and commented the following (which I thought was a good outro for this study).

I think the message is “practice and repetition”.

The guy practiced climbing indoor for years with the goal of climbing walls- I can relate this to back testing. Then the guy transitioned to climbing outdoor - I can equate this to forward testing.

Then he practiced climbing El Cap with a rope - this is like paper trading a certain system/play/setup so you know that it works. Then he finally climbed El Cap without ropes - this is the time you finally do the real life trading of the system that you’ve been back testing and forward testing.

Notice that he only focused on one wall at a time, which is El Cap. And he practiced climbing the same wall numerous times. To get a feel of it. To find a sequence that felt secure and repeatable. He had to make sure that they are deeply ingrained in him. Staying calm and performing at his best. Same with trading, you focus at one system/play/setup one at a time to achieve that consistency and mastery. You practice your system numerous times to minimize trading errors. You plan for every scenario so that you don’t spend your time scrambling during trading hours when things don’t go as planned.

And when the day of the actual climb has come, the guy was ready. He climbed the wall just as he practiced it. Take note - JUST AS HE PRACTICED IT. And when he reached the top, it felt like MASTERY.

He climbed the wall just as he practiced it.

In trading, you basically do the same. You build your system. You test it. You practice it. And when the time comes that you use it in actual trading, you execute it JUST AS YOU PRACTICED IT. You stick to it. You don’t deviate from it. Because not following your rules brings you closer to failure. You have to have rock solid discipline. Be honest. Be patient. Stay disciplined. So that when you reach your trading goal and you’re already at the top, you’ll feel MASTERY.