Sep

12

You guys are into counting and numbers - so here are a few in this excerpt from my blog post today. It partly speaks to the recent discussion here about stops.

The market coughed up another 32 points today, putting it about only 35 points above where it was in the lowest closing low in August (S&P 1119). Whereas the CAD-adjusted S&P500 is currently 3.6% higher than that low close, the portfolio is now 11.7% higher. That's an 8.1% gain on the benchmark in one month. That's an impressive demonstration of the internal dynamics of the reversal trading.

Now mind you the volatility over that month has been inordinately high, but even 2-3% a month (as it was tracking before the downslide) is very impressive outperformance. So far so good.The portfolio again lost ground in the past two days, but is still slightly positive in September at +.21%. It's way ahead of the benchmark at +3.87% in the first 7 trading days of September, and is 3.04% ahead of the benchmark as of the beginning of this year. A comeback is definitely under way -though not yet obvious in that the portfolio (which was not using the reversal trading prior to late May) is still down on the year by 5.35% from prior losses.
So this is the setup for BUYS for any of the vehicles being used:

DAY 1 The closing price is less than previous day's intra-day low, AND the position has so far built to less than four tranches (2% of the portfolio $ value); 4 tranches is the maximum position. DAY 2 Set a limit order to buy one tranche (2% of the portfolio $ value) one cent below DAY 1's intra-day low.

And the setup for SELLS is the inverse:

DAY 1 The closing price is greater than previous day's intra-day high, AND you have at least a one tranche position (can't sell something you don't have). DAY 2 Set a limit order to sell one tranche one cent above DAY 1's intra-day high.

This extension beyond the previous day's extreme serves to widen the average "spread" between buy and sell orders; sometimes you catch nice gaps. You keep buying and selling tranches of fixed markets in this fashion based on this simple setup. And you don't use stops - you're trusting that the world or financial system won't end overnight.

Where there are ETF long/short pairs, I buy and sell both sides of the market, but only use the short ETFs when the price is above the 50-day moving average. Short ETFs erode much more quickly than long leveraged ETFs (has to do with how they are re-balanced to match and multiply (double or triple) the move of the underlying market or index). I don't go short while I still have an open long position (I prefer to "run out" of long inventory), but I do start going long again if I still have an open short position. The strategy is biased to primarily trade the long side and only use shorts at higher extremes to mitigate the cost of short ETF erosion and losses during smooth, sweeping bull trends and/or sharp rallies.

Leveraged ETFs of course increase the "spread" by the leverage multiple (2 or 3 depending on which you are using), and therefore project greater profitability. The only downside to leveraged ETFs is that they erode over time if held, especially over periods of high volatility. They work well as long as you don't hang on to them for months. If you are relatively quickly in and out, the higher volatility will easily overcome the erosion factor.

The overall results are still preliminary, as I've only been using this for a little over two months, but so far it seems to be following back-test projections. Worst case scenario is a steep one-way drop; not so bad but likely an underperform is a long unbroken rise. This risk is mitigated with a portfolio approach. Not all markets are in sweeping trends, or maintain the same correlations at any given point in time. These offsets mitigate having everything going against the same way at once. Highest correlation is in panics. You can't avoid drawdowns (my deepest was 13.9% in August at the worst of the panic), but you can substantially mitigate them, as the first paragraph in the post above shows.

In my blog I document all trades and portfolio results/status, and discuss the reversal trading dynamic in relation to market activity on a day-to-day basis - kind of like a lab experiment. If interested send me a note and I'll pass on the URL. I'm finding the results interesting - some of you might too.

Cheers,

George


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1 Comment so far

  1. Adam Kretschmann on September 12, 2011 9:57 am

    A link to the blog might be helpful -http://stockadventures.wordpress.com/

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