More paper results, and how buy stops save the day

So I’ve been trying a few different techniques, and some have worked pretty well, some have either pretty much failed or are at least up in the air.

Here’s the technique that I had the most success with in paper trading – it involved screening to buy a stock using the following list of criteria:
* Price just crossed above either the 20 or 50 day SMA
* This crossing happened with strong volume. By strong, I mean preferably at least 150% of average volume for that stock.
* Stock has a *rising* SMA
* Chart candle on last trading day has no large topside “wicks” on the candle – having one tends to indicate strong downwards pressure on the price
* Price is significantly below any obvious resistance levels
* If placing the order the night before (as I tend to have to do), use a stop buy (that’s right, I said *stop*, not limit!)

A very high percentage of trades I made using these criteria made good positive gains in paper trading, fact I would roughly say probably well over 80% of them did well.
And I have to say, one of the strongest tools I had against losing money in a highly volatile market was the stop-buy.

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I should probably mention what the heck a stop buy actually is, because it seems like you almost never see the term even mentioned in regards to buying – it’s almost always used just for setting a stop-loss selling point (ie a point to sell at if it goes below that price).

Well, thing is, a stop can work in the opposite direction as well – that is, you can place a stop order requesting that the buy only take place if the price goes *above* a certain amount.

Why would you want to do this, when almost all the “wisdom” out there regarding trading says you should use a limit order, and few to none say to use a stop??

Here’s why it works for me so well as someone who has one of those “day job” things and so I can’t sit in front of my computer all day babysitting my trades:
This year the market has been very bad about surprising traders with unexpected gains and/or losses – the financial news sites can be painting a rosy picture of how great things are recovering on a Monday, only to have the market tank on Tuesday because of some random piece of news.
Well – what happens then if you place an order on Monday night based on everything looking good, and you used a market order or a limit order?
Well, you lose either way.

You have no control over what happens with a market order – you’ll buy at whatever the price happens to be at one the order goes through (which often isn’t the price you expected – especially if you placed the order the night before).

And a limit order essentially says “don’t buy it unless the stock is under this amount.”
That’s fine for day-traders who can sit in front of the computer and baby-sit. But in the above scenario? If the stock has a down day and the price is going down, it will of course be below the price you specified, so it’ll buy. And then it will continue to go down. And down, and down.

How’s a buy stop different?
Quite simply, if you set a buy stop instructing your order not to go through unless the price hits an amount at least a little bit above yesterday’s closing, probably a good 8-9 times out of ten, if not more, your order isn’t going to complete unless the stock is having a positive day. In fact, in all of the paper trading I’ve done over the last few months, I can only think of one example right off hand where this didn’t work as expected – the stock had a good morning, which meant it went above the price I specified, but then fell a little later in the day.

I just used this safety measure today in an attempt to jump back into actual trading, and it saved me. Last night all signs looked great – it’s “earnings season” and most of the news has been pretty good. Using a stock screener I found a stock that fell under all of the criteria I want (BTW, this hasn’t happened in probably a good 3 weeks! These criteria are safer than the ones I was using before, but you sure don’t get daily hits on the stock screener, especially in a volatile market), so I placed an order to buy some shares of FLR the next day.
It had closed at $50.92, so I set my buy stop so that my buy order wouldn’t go through unless the price went over $51.10.
Well, if I had used either a market order or a limit order, I would have been screwed. I had to be at work at 7am this morning, which in my time zone is before futures even start trading, let alone the start of full market trading.
I went to work, and some bad financial reports came out. The market dropped for the day, as did FLR starting in pre-trading.
Thus, the price didn’t go over my stop amount, and my buy request didn’t go through – saving me from losing my money.
We’ll try again next week.
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Oh, if you’re curious what I’ve tried that hasn’t been working?
* Trading based primary on MACD & stochastic crossovers, even with good volume.
* Trading based on 10/30 day SMA crossovers. This method was highly recommended on a swing trading site I read. It might work OK when the market is in a strong, long-lasting rally, but in my testing, even getting a hit on this method was very rare, and when I did get them the rally was usually at the end of it’s life.
* Sticking only with Dow index or otherwise huge name companies. In fact if anything, these companies often seem to be more effected by stuff like news releases than some of the smaller companies are.
* Shorting. You’d think I’d be able to just take my screening criteria, use it in reverse, and be able to use it to make good shorting picks. Hasn’t worked out that way.

Still paper trading, learning tons

My virtual portfolio is still going fairly strong in the long categories, not so much in the shorts (thankfully I’m not real worried about shorting yet).

Currently when picking stocks I’m looking for the following criteria:

*MACD Fast line is above the Slow line and pointing northwards. Forgot to look at this several times and made bad trades.
*Verify that closing price has crossed above specified SMA for the technique being used (10, 20, or 50).
*The SMA line should be in a RISING pattern, not declining.
*Volume on the upswing should be significantly above average
*No tall “wicks” on the prior day’s candle
*Don’t buy if price is about to hit a prior resistance level
*(optional but still taken into account) ADX above 20
*(optional but still taken into account) PE ratio above 1
*USE A STOP or STOP-LIMIT buy order. This will almost always (though it’s not fool-proof) keep you from getting screwed if the stock unexpectedly opens at a lower price instead of higher (lots of readings say to simply use a limit – this will not help you if the bottoms drops out of the stock)
*BE PATIENT – unfortunately putting all of these rules into place has meant significantly fewer screen hits while the market goes through these up-one-day down-next-day patterns it’s been going through lately, which means there have been several days that my portfolios sit empty while I wait for a good trade to show itself.

Paper Trading: 2 weeks later

My “primary” portfolio, which is based on finding an entry point with solid volume after the chart price breaks the 50 day SMA, is currently at 18.49%. It consists of $500 each placed into AAV and CPKI.
AAV moved strongly for several days and then started struggling as the market made its way through “earnings week,” pretty much flat-lining for the last week. Looking to see this week which direction it decides to go – though the higher volume still appears to be in the upwards direction.
CPKI acted similarly, moving strongly upwards for a few days and then tightly consolidating through a few days of earnings reports, but unlike AAV broke back out a few days ago and started heading upwards again.
Pretty happy with this portfolio so far, but we will still need to see how I do once it becomes time to exit.

A few days after starting that one, I started one more with another 2 equities, this time with upwards moves that did have above-average volume, but that had already been in an upwards rally for a few days.
EGY started struggling almost immediately, and although it’s still above my buy price, it has started dipping again after a few days of consolidation, and I’m watching closely in case a sell may already be at hand – will likely sell if it goes below 50% retracement of previous dip or if it crosses below the 50 SMA.
SOL on the other hand isn’t doing as badly, even though it had also been in rally for a few days when I picked it up – it did also consolidate for a few days last week, but since has had a couple of days of positive movement with good volume, so hopefully that will continue.

Other “experimental” paper portfolios:

A portfolio based buying when stock is above 10/30 SMA crossover, which is partially based on suggestions found here.
I say partially because when I started the portfolio I wasn’t paying much attention to volume, and I also wasn’t able to use the author’s suggestions regarding entry points, since they basically only work when a stock is in a rally for an extended period of time, which hasn’t been an easy find.
Not doing horribily, but only at about 10% right now. May need to reset this one and try again taking volume into account to see how much better it fares.

And finally, I tried a portfolio that was all about shorting. I can’t short right now because I don’t have enough capital to do so, but I thought I’d give it a try and see what happens.
So far haven’t been doing well, at about -4%. Will continue to play with this one though.

Finding an entry point, volume, and a few words about my blogging

Over the last 18 months or so that I’ve been stock trading, I’ve read a lot of ideas about how to successfully pick stocks. A LOT of ideas.
These of course primarily fall into two main branches: choosing based on company fundamentals, and choosing based on the stock charts.

It may be due to my entry into the stock trading world during a market recession, but I was quickly not a fan of picking based on fundamentals – the reason being, that fundamentals really didn’t seem to make much difference – if the market was generally in a bad mood, which it frequently has been over the last couple of years, companies with good fundamentals were still dropping like rocks – it didn’t seem to matter.
While at the same time, dozens of other stocks seemed to go up while all the others were going down – and often for no real explainable reason.

I started reading a lot, and found the idea of “trend following” most appealing and sensible – the idea basically being that although there may be a few up or down days away from the norm here and there, as a general rule stocks would tend to continue in a particular direction for a significant amount of time, and that really all you needed to do is jump in during one of these upwards trends and ride it out until the trend appears to have stopped.
Most of the discussions and books that I read also believed strongly in using the SMA as a predictive tool to assist in finding entry and exit points to your stock.

And, basically taking that over-simplified idea and running with it, I did a lot of stuff like buying stocks simply because they had hit their 50 day SMA, or because they had been in an upwards trend for a few days.
And lost a lot the majority of my money in the process.

I’ve written a couple of other extended blog entries about my trading history and ideas both on my personal blog and on TradeKing, and although the personal blog is pretty much ignored, I did get some responses on TK that gave me a few ideas that sparked me to do some additional reading on specific topics, the most important probably being ways I might be able to do a better job of getting in at a spot where the stock won’t die right after I buy it.

A lot of ideas were suggested, such as looking into DeMark indicators, retracements, looking for certain P/E ratios, making sure a stock price has reached a certain historical low before expecting it to rise again, etc – all of which people seem to have had some success with.

And I discovered a couple of things in one of my favorite (at least as far as finding it interesting to read) books about trend following, Invest Like a Shark by J. DePorre, that I had pretty much completely ignored, and it appears this may have been a very bad idea.

He talks for several pages about the importance of volume, and how there needs to be a spike in volume present if you’re to expect upwards gains to continue. Lack of volume shows lack of investor interest, which means there isn’t much strength behind any recent gains.

And, looking at through dozens of charts, there appears to be a lot of merit to this. Although not always immediate, a large volume spike will almost always result in the stock trending in that direction for at least several trading sessions if not an extended period of time. especially if it happened shortly after a reversal.
On the flip side, if the stock has been trending upwards for a while, and there’s a spike in negative volume, chances are pretty good the stock is about to reverse.
Intraday trading volume that remains at a level average for the stock doesn’t appear to have the strength to change overall trend direction – ie if a stock is trending up, and there are a couple of down days both with low to average volume, it’s probably not going to change the trend.
(Note this is all from studying historical charts and not from actually putting into practice, so take with a grain of salt).

I might also mention that in DePorre’s book, I recently noticed almost all (if not completely all) of the example charts he uses to show successful trades show an entry point that was after a recent reversal of a down trend or breakout – something he doesn’t even mention in the actual text of his book.

Retracements I find interesting, though I’m not sure yet if they’re truly of much actual use in trading beyond getting an idea what to put on your watch list. Primarily the idea is that after a significant time in a trend, a stock will tend to periodically fall back (or “retrace”) in the other direction for a while, and these retracements frequently turn back around again at a certain percentage.
My charting software has tool for drawing Fibonacci retracements which I’ve been playing with, and the results are interesting. Although it’s been working more frequently for me while applying it to weekly rather than daily charts, many of the charts I have did change direction almost precisely at one of the points indicated by the retracement indicator.

So, in short I’m trying to learn more about how to do a better job of picking an entry point that is less likely to have the stock price tank the day after I buy it.

[[An aside about my blogging - I thought I should mention, I started blogging a while back on a personal blog, and recently started posting my more extensive entries on TK as well. The hope is that by expressing my ideas, sharing them with others, and possibly getting feedback, that I (and possibly others reading) can increase my trading skills.
I do *not* consider myself to be an expert at what I'm talking about, as can be witnessed by my history of gains (or lack of), which as of right now is a loss of over 80%. With only a rare few exceptions, almost all of my trades have been losses.
There's no need to rag on me for my lack of expertise - I'm aware of it, thus why I'm blogging.
Although pretty much ignored on my personal site, on TK I have received several comments and suggestions from readers, ranging from trying to be helpful, to borderlining on implying that I'm a complete moron. I've received a couple of comments where people seemed to annoyed that I appeared to be ignoring their advice after they took the time to give it, and I wanted to say that's not the case - I appreciate the comments, and I'm looking into everything everyone has mentioned in comments, even those who weren't real friendly about doing so. It's just hard for me to give you a response about what I think about it until I've had a chance to try it out - which is probably weeks worth of time.
I know that especially those on TK are probably used to reading blogs from people who know more about the subject than I do - but I thought I'd take it in a slightly different direction and discuss what's wrong and how I might be able to go about fixing it, in hopes that everyone can take something from it. - thanks]].

Letting fear keep me from not following my own MACD rules has cost me a ton

Thought I’d take a trip down memory lane, and review some charts for several of my past trades, and review how paying attention to the MACD may have allowed me to actually make a good amount of cash, rather than losing lots and lots by panic selling when it wasn’t really needed:

1) AMD

Mistakes:
a) The upwards MACD trend was already well established when I bought in, and, in fact, had already started to dip.
b) Even accounting for this, I sold way too early. One of my primary sell rules is to hold off until the MACD starts to significantly point downwards, and/or drops below zero. This actually did not happen until about 12 trading days after the buy. In actuality I panic sold the very day after I bought this one.

Actual gain: -7.5%
Theoretical gain if MACD rules followed: -3% (so either way, buying at the apex of the MACD trend would have killed this one – just not as badly if I had stuck with it)

2) PANL

I again bought well after the MACD had been into its upward trend – something that we’ll likely see as a common theme.
A fairly tight stop caused it to sell 3 days after buying.

Actual gain: -0.3%
Theoretical gain if MACD rules followed: 7%

3) CTV

Again bought after trend already running it’s course. Swine flu news caused a trailing stop to kick in 9 days later.

Actual gain: about 5%
Theoretical gain if MACD rules followed: about 32%

4) TNS

Again bought at the apex of the MACD upwards trend.
Pretty much follow the rules with this one – the price basically doesn’t move one way or the other for the next 9 days until I finally give up on it and sell, just as the MACD decides to drop. So, no problems with not waiting for a sell signal on this one – just bought way too late into the trend.

Actual gain: about 3%
Theoretical gain if MACD rules followed: sell signal followed

5) CBOU

Upwards MACD trend already well established. A couple of large drops cause a panic sell 5 days later, regardless of how the MACD looked. In actuality although most of the steam had run out, did regain fairly well after the drop, which I would have seen if I had not panic sold and waiting for my MACD sell signals.

Actual gain: 16.25% (still not bad)
Theoretical gain if MACD rules followed: about 48% (*kick self in butt*)

6) MOS

Again bought after the MACD had been established into positive territory for too long, catching the apex. Started consolidating almost immediately, pretty much flatlining for about the next 10 days until it finally stopped out.
My MACD sell signals would not have helped this one – only getting in earlier would have.

Actual gain: -6%
Theoretical gain if MACD rules followed: sell rules followed

SOL

Bought near the apex. Trailing stop kicked in 3 days later.
Nothing I could have done selling-wise, but should have gotten in earlier.

Actual gain: 7.5%
Theoretical gain if MACD rules followed: sell rules followed

9) BIOS

MACD had been in an upwards trend for nearly 4 months straight.
A tight stop caused this one to sell a mere 3 days after buying, with the MACD still strongly in positive territory – should have held on to this one longer.

Actual gain: -9%
Theoretical gain if MACD rules followed: unknown, MACD sell signal has not triggered yet

So, in total for trades discussed here:

Actual gain: about 9%
Theoretical gain if MACD rules followed: Not counting the last one where we haven’t gotten a sell signal yet, about 89% (!!)

I’m thinking I need to stop panicing and just follow my own rules.

(Side note: My *real* gains are actually nowhere near 9%, and are closer to about -80%, due primarily to a couple of very, very bad FAZ hits and a couple of other similar 3x fund trades that were very bad ideas and that I will never touch again, but the reason for error being “because I was stupid” didn’t have anything to do with following the MACD so I didn’t include those ones…)

BIOS stops out, I reconsider my strategy again

OK, this is obviously not working. I manage to get a lucky hit here and there, but overall I’m losing a few percent here, a few percent there, and it’s “nickel and diming” me into broke-land.

I noted last night that this was also stressed in one of my favorite books on trading, “Rule #1″ by Phil Town, where he states the following regarding the idea of just using charts to trade successfully:

“In the long run I feel confident that you won’t make any money with [charts] unless you know the value of the business you’re buying. Remember that in the short run anything can happen to the price of a business, but Mr Market has a set of scales and will properly weigh each and every company and give it its correct price at some point.

“If you ignore the Four Ms [essentially, Town's term for the fundamentals he feels are important] and accidentally buy businesses that are priced above their value, the prices of those businesses will eventually correct themselves downward toward the Sticker Price [essentially, Town's version of the PEG ratio, from what I can tell].. So, in spite of short-term trends, momentum, and psychology to the contrary, the longer-term trend, momentum, and psychology are going to be downward, as sure as there’s gravity.

“People who buy and sell based solely on these types of [charts] find themselves losing a little here and there over and over as the price of the stock corrects downward toward its real value. Trying to use [charts] to trade a stock that’s headed down is like death by a thousand little cuts. You can lose half a percent or 1 percent or 2 percent only so many times before it starts to really add up to a shellacking.”

This has very much been the case for me over the last two years of trying to trade using charting and timing techniques indicated in books like Invest Like a Shark and The Complete TurtleTrader over the last couple of years.

Although it’s possible it’s due to the high volatility of the market during this “learning period” of mine, the fact remains that much more often than not, once I find an entry point described by one of these systems, the rally has already had it’s run, and usually the price begins to drop as soon as I jump in. It has been happening over and over and over and over again.

I “only” put a couple of grand in the market to test the waters, but as if right now I’ve lost nearly all of it. I’m talking around 80% has gone down the toilet.

I really wanted to believe that you could make money hand over fist by just getting good at reading charts – these books swear it can be done, and there at least seem to be other people out there who are having success at it – but if they are, I’m sure as heck not able to figure out how.

As a result I’m considering large addendums to my strategies: I will start taking PEG ratios into account when deciding what to buy. I’ll try to stick to companies that I, or at least most other people, have actually heard of. The charts will still play a part, but primarily to help find good entry and (if needed) exit points, rather than simply the “if it goes over n SMA or n and n SMA cross over, it’s time to buy” type logic that I keep reading about all over the place even though it doesn’t seem to actually work in anything but a strongly positive market.

Oh, and until I can prove to myself that it actually works, I’m sticking to simulators rather than real money.

I think one of my strongest hurdles is probably going to be my impatience to get in there – always that feeling of “I’m potentially losing money by being out of the market right now!” that I always get when I’m not in. Right now I have about 30 companies on my watch list, and not a single one of them is at a good buy point. I’ve got 5 of those marked as ones to keep a near-term eye on because they could shift into a place where they’d be in a good entry point in the near future, but they may not.

It almost makes me wonder if my dad had the right idea in investing in nothing but CDs and federal savings bonds.

Bought BIOS

Very good chart on this one.

It actually dropped slightly today, but it had a large jump yesterday and it’s still in line with the upwards trend, so unless something drastic happens it shouldn’t have any trouble regaining tomorrow.

Sticking to the sidelines for a bit

Very indecisive market right now, flip-flopping between up and down.
If the market was positive I could just find a upwards moving stock and go with it.
If the market was negative I could buy into an inverse ETF such as SDS and still make some gains.

But, with it going back and forth, there’s just no telling which way to go – so I’m going to have to sit aside for a bit until it looks like there might be another trend starting – maybe next week after the Fed meetings are over, etc…

SDS stops out already (-4.1%)

Can’t say that I’m surprised – I had set a pretty tight stop on it because I knew it was really little more than a gamble.

Current portfolio value: $457.40 (-$19.68, or -4.1%).

Going Short

The market has been having a rough week, seeming to go into correction after having such a really pretty unfounded rally for the last three months.

As a result I’ve decided to buy into SDS this morning, which is a leveraged ETF that goes up when the S&P 500 goes down.

Futures on this one are already up after FedEx released bad news this morning.