5 pillars of active trend trading - bay area money makers · 5 pillars of active trend trading...
TRANSCRIPT
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5 Pillars of Active Trend Trading
Timing is More Important than Price. ~~ W.D. Gann
Dennis W. Wilborn
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Disclaimer
U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futuresand Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willingto accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer toBuy/Sell futures or options. No representation is being made that any account will or is likely toachieve profits or losses similar to those discussed in this training. The past performance of anytrading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All Materials presented are for training purposes only . Traders should paper trade any new method prior to risk of personal capital.
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5 Pillars of Active Trend Trading
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Pillar 1: What to Trade
Fish Where the Big Fish Hang Out
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1. Clarity, Simplicity & Time
2. Find a reliable source to do
your searches
• ATTS
3. Combination of both
Number 2 can make a lot of sense
for busy traders
Searchable data bases:
- IBD: MarketSmith
- StockChart.com
- BarChart.com
- MarketWatch.com
- Finance.Yahoo.com
- Brokers Website
- TOS
Why is knowing what to trade important?
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1. Sound Fundamental Growth Stocks
2. Index/Sector ETFs with huge volume and liquid Options
My Solution: Use a list provided by a reliable source with a proven winning track record!
IBD 50 (Primary)
Leaderboard
Stocks on the Move
Sector Leaders
IBD Screens
Select Index/Sector ETFs
All at www.investors.com or www.ActiveTrendTrading.com
Criteria for Trophy Stocks
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1. 50 top-rated growth stocks with top fundamentals showing
strong relative price strength in the market
2. Computer generated list
3. Excellent Record of providing trophy stocks year after year
4. Downloadable
5. Easy to keep up to date
IBD 50: What is it?
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2007: S&P Return = 3.53%
Of the 100 stocks on the list at the beginning of 2007
77% of the stocks had an average return of 78.95% from low to high of the year
42% of the stocks had an average return of 56.9% from the beginning of the year to end of year
2008: S&P Return = -38.51%
Of the 100 stocks on the list at the beginning of 2008
95% of the stocks had an average return of 78.77% from low to high of the year
22% of the stocks had an average return of -19.2% from the beginning of the year to end of year
2009: S&P Return = 23.45%
Of the 100 stocks on the list at the beginning of 2009
57% of the stocks had an average return of 121.6% from low to high of the year
32% of the stocks had an average return of 58.4% from the beginning of the year to end of year
2010: S&P Return = 12.78%
Of the 100 stocks on the list at the beginning of 2010
93% of the stocks had an average return of 78.77% from low to high of the year
44% of the stocks had an average return of 52.0% from the beginning of the year to end of year
2011: S&P Return = 0.0%
Of the 50 stocks on the list at the beginning of 2011
88% of the stocks had an average return of 43.10% from low to high of the year
34% of the stocks had an average return of 22.1% from the beginning of the year to end of year
2012: S&P Return = 13.41%
Of the 50 stocks on the list at the beginning of 2012
88% of the stocks had an average return of 45.93% from low to high of the year
44% of the stocks had an average return of 35.91% from the beginning of the year to end of year
IBD 50: Track Record
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2013: S&P Return = 29.6%
Of the 50 stocks on the list at the beginning of 2013
78% of the stocks had an average return of 68.39% from low to high of the year
52% of the stocks had an average return of 44.9% from the beginning of the year to end of year
2014: S&P Return = 11.39%
Of the 50 stocks on the list at the beginning of 2014
80% of the stocks had an average return of 51.51% from low to high of the year
38% of the stocks had an average return of 35.86% from the beginning of the year to end of year
2015: S&P Return = -0.73%
Of the 50 stocks on the list at the beginning of 2015
92% of the stocks had an average return of 46.9% from low to high of the year
66% of the stocks had an average return of 20.61% from the beginning of the year to end of year
2016: S&P Return = 9.54%
Of the 50 stocks on the list at the beginning of 2016
90% of the stocks had an average return of 46.9% from low to high of the year
44% of the stocks had an average return of 27.16% from the beginning of the year to end of year
IBD 50: Track Record
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Season 1: First of the year until Feb-March
2 Fishing Seasons
Season 2: March-June through End of Year
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Refining to the List: Finding Where you’ll fish first!
- Account for stocks moving on and off the list- Running List- Stocks from other Sources (Stock Check Up)
- Reduce the list to the most tradable Stocks!- Volume- Options Liquidity- Patterns- Moving Average Sorts
- Develop a routine- Daily—Short List- Weekly—Short List, IBD 50, Running List on Daily/Weekly Chart- Monthly—Short List, IBD 50, Running List on Weekly/Monthly Chart
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How & Where
- Account for stocks moving on and off the list- Running List—ActiveTrendTrading.com or keep your own- Stocks from other Sources (Stock Check Up)—Investors.com
- Reduce the list to the most tradable Stocks/ETFs- Volume (simple sort)- Options Liquidity (visual inspection)- Patterns (visual inspection)- Moving Average Sorts (simple custom sort)
- Develop a routine- Daily—Short List- Weekly—Short List, IBD 50, Running List on Daily/Weekly Chart- Monthly—Short List, IBD 50, Running List on Weekly/Monthly Chart
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Sector ETFs Biotech Seasonality
ATTS Copyright 2007-2018
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ATTS Copyright 2007-2018
Wait for Winners
5 Runs in 2 years
Average Move = 76.6%
79% 9 Weeks
84% 9 Weeks
66% 7 Weeks
89% 9 Weeks
65% 8 Weeks
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Summary
✓ Find where the Trophy Stocks Hang Out
✓ Get the List
✓ Refine the List
✓ Strategically Plan when & where you’ll fish
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5 Pillars of Active Trend Trading
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Sound Trading Systems tell us:
1. When To Enter
2. When To Exit
Each of these Pillars should have the following characteristics:
A. Have Estmated Objective entry/exit Action Points
B. Be Planned For
Pillar 2 & 3
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When to Enter & Exit falls into these categories
1. Trend Line Breaks
2. Moving Average Breakouts
3. Support & Resistance Bounces/Failures (Up or Down)
4. Candlestick Reversal Patterns
Pillar 2 & 3
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Modeling Bullish Trades on the SPY from 2004 through 2013 with all
triggers allowed with the exception of trend line breaks showed the
following.
Pillar 2 & 3
Summary Model Results Available at: http://activetrendtrading.com/expectations/
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Trend Line Break Entries: Probably the easiest but least
total objective
1. Trend susceptible to the artist and the canvas!
2. Best when used with supporting clues
3. Can be used with conditional order but one needs to
buy on strength at a define level above the trend line
How Much breakout? 10¢, 20¢, 50¢, $1.00 depends on
the entity being traded
Pillar 2 Entries
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Trend Line Break Entries Examples TNA
6 Entry Action Points in 9 months
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Trend Line Break Entries Examples TNA
Entry Order Set Up1. Estimate Value of trend line at “A”
2. Determine Trigger Price by adding Trigger Value
3. Determine Position Size
4. Determine Stop Loss
5. Determine Profit Target
The trend line at “A” is Approximately 67.04
Trigger Value = 25¢
Trigger Price = 67.29
Shares: ?
Stop Loss: ?
Profit Target: ?
Time for conditional order: ?
Each trader must determine these last four based on
their risk tolerance and account size.
A
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Support & Candlestick Set Ups 1
What is Support:
1. Define Yours
- Horizontal
- Moving Averages
- Keltner Channels
2. Establish Trigger Values
- How Much to add 10¢, 20¢, 50¢, $1.00 depends on the entity being traded
Notice there is consistency here between the triggers. Once you choose stick with
the choice and refine slowly
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Support & Candlestick Set Ups 1
Horizontal Support
Reversal Candlesticks
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Candlestick Entries TNA
Candlestick Set Up
Better Convergence of Clues
1. Well Defined Support
2. Retesting Support
3. Legitimate Reversal Candles or Doji’s
4. End of Day or After Hours Set up
The Order Set Up
1. Define the high of candle signal
2. Determine Trigger Price by adding Trigger Value
3. Determine Position Size
4. Determine Stop Loss
5. Determine Profit Target
Top of Support Zone at “B” is 64.76
Trigger Value = 20¢
Trigger Price = 64.96
Shares: ?
Stop Loss: ?
Profit Target: ?
Time for conditional order: ?
Each trader must determine these last four based on their risk tolerance and account size.
B
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TNA TIPS
Be Aware of difference
between RUT & TNA
RUT TNA
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Summary
✓ Four Major Entry Signals For Long Trades
✓ Estimated Objectiveness
✓ Decide and Then Be Consistent
✓ Monitor & Refine
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Entries are one time events
Exits require more strategy, planning and patience
Greater “Pucker” Factor
More Emotional and with Impulsive Temptations
Like getting out of a relationship
Types of Exits
- Partial Profit Exits (T1)
- Full Profit Exits (No Such Thing)
- Time Exits
- Loss Exits
- “Line in the Sand” Exits! -5 to -7% from purchase price
Pillar 3--Exits
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Trend Line Break Exits: Probably the easiest but least
total objective
1. Trend susceptible to the artist and the canvas!
2. Best when used with supporting clues
3. End of Day Exit
How Much breakout? 10¢, 20¢, 50¢, $1.00 depends on
the entity being traded
Once new downtrend is established, can use to enter
bearish trades
Pillar 3 Exits
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Trend Line Break Exit Examples TNA
Macro & Micro Trend Breaks
for Exits & Entries
Exit
Exit
Entry
Entry
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Trend Line Break Exit Examples TNA
Exit Order Set Up 3-101. Estimate Value of trend line at “A”
2. Determine Trigger Price by subtract Trigger Value
3. Determine Position Size to Close
The trend line at “A” is Approximately 81.79
Trigger Value = 25¢
Trigger Price = 81.54
End of Day if Price is below 81.54 sell to close
Shares: ?
Stop Loss: ?
Profit Target: ?
Time for conditional order: ?
Each trader must determine these last four based on
their risk tolerance and account size.
A
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Trend Line Break Exit Examples TNA
Exit Order Set Up (what Happens)1. Next Day Closes below 81.54
2. Close Position
If you are not around just before the Close, place a
conditional order that will sell the position on a close
below the Trigger Price.
The trend line at “A” is Approximately 81.79
Trigger Value = 25¢
Trigger Price = 81.54
End of Day if Price is below 81.54 sell to close
Shares: ?
Stop Loss: ?
Profit Target: ?
Time for conditional order: ?
Each trader must determine these last four based on
their risk tolerance and account size.
A
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Summary
✓ Six Major Exit Signals For Long Trades
✓ Entries for Short Trades after confirmed downtrend
✓ Estimated Objectiveness
✓ Decide and Then Be Consistent
✓ Monitor & Refine
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5 Pillars of Active Trend Trading
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Sound Trading Systems tell us:
4. Strategy to Use – Or when to apply our Strategies
5. What to Expect
The last 2 Pillars are often either overlooked by traders or ignored.
Strategies without the Foundation of the System are prone to Failure!
Systems & Strategies without knowing the Expectations is like being in the Fog. No Landmarks to let you know how you’re doing!
Pillar 4 & 5
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Strategies with increasing levels of complexity due to more
variables and knowledge requirements
1. Buy & Sell Stocks and ETF
2. Buy & Sell Options
a. Covered Calls
b. Directional Options
c. Spreads (debit & credit/Vertical, Diagonal, Calendar)
d. More Exotic Option Trades (Iron Condors, Butterflies,
Straddles, Strangles and more.)
3. Futures & Forex
4. Others (Mutual funds—not complex just no control)
Pillar 4
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Stocks & ETF’s: Buy & Sell based off of proper Action Points from the System.
Variables:
o Stocks
o Earnings
o News
o Index ETF’s (bullish)
o No Earning Surprises
o News
With a Margin Account can be leveraged up to 2-3X depending on the stock and broker
Pillar 4
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Options: Buy & Sell based off proper Action Points from the System
Attraction: More Leverage with small account! Some times the Attraction is Fatal! Leverage is a two edged Sword!
Fact: Greater Reward/Greater Risk than trading stocks/ETFs
Variables: Many more variables—must be MORE RIGHT!
For a trader who is anchored to a great system trading options can work very well, but many jump into option strategies without being successful in trading stocks/ETF’s.
The allure of turning small money into big money blinds them to the downside risk—They buy cheap out of the money option on a hope and prayer it will run up, but……it expires worthless!
Pillar 4
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• Futures & Forex: Similar Challenges as Options but often with great leverage. Requires more skill and potentially more time to trade.
• Fact: Even Greater Reward/Greater Risk than trading stocks/ETFs
• Others (Mutual funds—not complex just no control which is a different kind of risk)
Regardless the strategy, knowing and using a sound trading system is critical to successfully applying the strategy.
Too Many Trader focus on just the strategy and this is hazardous to the health of the trader’s trading account!
Pillar 4
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How do we define expectations for a Systems?
What are the most important characteristics to define?
Which of the following is most important?
▪ Winning %
▪ Losing %
▪ Number of Trade
▪ Size of winning trades compared to Size of losing trades
▪ Defined Expectancy (How much you can expect to make per
trade on average)
Pillar 5: Expectations
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While each of the preceding elements are important some are
more important than other in defining the Expectancy of a
system.
Least Important: Winning % and Losing %
More Important: $ gained per Win & $ lost per loss
Expectancy and Win/Loss Ratio
Pillar 5: Expectations
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Lease Important: Winning % and Losing %
Example: A system that has 70% winning trades, sounds great but.. What happens if each winning trade gains less than each losing trade loses?
Average Winning Trade Gains $100
Average Loosing Trade looses $400
Out of 100 trades
70 winners x $100 = +$7000
30 loses x $400 = -$12000
Net Gain/Loss = - $5000
The system would have a Negative Expectancy and thus not a good system
Pillar 5: Expectations
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Lease Important: Winning % and Losing %
Example: A system that has 40% winning trades, sounds great but.. What happens if each winning trade gains less than each losing trade loses?
Average Winning Trade Gains $400
Average Loosing Trade looses $100
Out of 100 trades
40 winners x $400 = +$16000
60 loses x $100 = -$6000
Net Gain/Loss = + $ 10000
The system would have a Positive Expectancy and thus system worth checking out
Pillar 5: Expectations
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Most Important: Win/Loss Ratio & Expectancy
Psychologically a system with less than 50% winners might be challenging to trade!
Win/Loss Ratio =
(Total of Profitable Trades/Number of Profitable Trades)
(Total of Losing Trades/Number of Losing Trades)
From the past example of 40% winners
(Total of Profitable Trades = $16000/ Total Profitable Trades = 40) = $400
(Total of Losing Trades = $6000/ Total Profitable Trades = 60) = $100
Win/Loss Ratio = 400/100 or 4:1
For every dollar I risk I have the potential to gain $4
A system with a W/L Ratio of > 2:1 is very good
Pillar 5: Expectations
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Most Important: Win/Loss Ratio & Expectancy
Expectancy: Tells us how much we will like earn on each trade & we want this to be positive greater than zero
Expectancy = (Ave Profit X % of Winning Trades) – (Ave Loss X % Losing Trades)
From the 40% example:
Ave Profit = $400
% Winning Trades = 40%
Ave Loss = $100
% Losing Trades = %60
Expectancy = (400 x 0.4) – (100 x 0.6) = $100
So over time we could expect to earn $100 per trade
Neither of these calculations answer the questions of trade frequency per year or how much capital is required. Frequency is a function of what entity is being traded.
Pillar 5: Expectations
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The Active Trend Trading System over 10 years trading SPY Long
Average Winning Trades = 72%
P/L Ratio: 4.4:1 average over 10 years
Expectancy : $193.64 per Trade
Average Trades per Year: 16.70
On a $10,000 account trading only Long SPY
Ave Profit per Year = 16.70 x 193.64 = $ 3233.79
Ave Return Per Year = (3233.79/10000 ) x 100 = 32.34%
Pillar 5: Expectations
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Summary
✓ Learn the system before apply the strategy
✓ Start with the simplest Strategy
✓ Know what to Expectations on each trade