My Trading System
My Trading System
Short-term trend following. This is based on research that shows that, over the
short-run, trending price movements of a threshold vigor are likely to continue in
their present direction, while over the longer-run, they are apt to reverse.
Breakout. This is based on research that shows that, when there is no established
trend and the market is trading within a range, a break above or below that range
is likely to continue in its present direction if it reaches a threshold vigor, and is
likely to reverse if it does not reach this critical mass.
by registering new short-term highs or lows. I maintain a basket of stocks that I follow
closely intraday. If half or less of the stocks in the basket fail to register a fresh new high
or new low during a candidate breakout move, the system will not take the move. (If the
Trend is going the other way, the system could even fade the move per the rules above).
Only when price, TICK, and new highs/lows are moving in concert does the system take
a breakout move.
Exits are primarily time based with two overrides. The same modeling process mentioned
above is used to generate a profile for the duration and extent for expectable moves,
given similar markets in the past. Once the duration or extent is reached and there is a
very short-term loss of momentum (assuming the trade is profitable), the position is
exited. The first override is if the position is profitable and volume and/or volatility
expands in the direction of the trade by a threshold amount, an immediate profit is taken
as soon as very short-term momentum wanes. The second override is a stop loss, which is
averages 3 ES points, but is adjusted for volatility. This stop loss is moved to breakeven
once the position is profitable by a threshold amount (averaging 1.5 points, but also
adjusted for volatility.
The general goal is to exit under one of three conditions:
When the trade is profitable and traders begin piling into the move, raising
volume and volatility to unsustainable levels.
When the trade is unprofitable from the outset and it is important to limit losses.
When the trade is neither profitable nor unprofitable, but isnt moving in the
expected direction in the expected time frame. The time-based stop allows the
trader to scratch the trade before it hits the stop loss and becomes a loser.
My informal observation is that the third stop condition is the most important. If I am
following my rules and trading in the direction of trend, institutional activity, and
momentum, my trade should go profitable in a relatively short amount of time. Once a
threshold time period is reachedand research is needed to define what that period is
the odds are no longer in the trades favor (partly because the market momentum is being
lost). Learning to exit trades before they are losers is a skill critical to maintaining a
favorable P/L.