Style of Trading

[Foghatlive]

I'm not a pro, but I have an ETRADE account and trade from home.

I'd describe my style as taking a bunch of jabs in order to occasionally deliver a haymaker.

I'm greatly influenced by Jesse Livermore who believed in price and time limits. If my stock goes down a certain %, or doesn't do what I expected it to do in two weeks, I'm out. If the stock turns around after the initial drop or after the two weeks, I don't sweat it.

I know people tend to be hush hush about their techniques, but, feel free to describe yours.

[kimchi]

I use 3 systems for different investment vehicles, time-frames, and objectives. They are briefly:-

1. Long-term trend following (years)
I use my own version of a RSI against my own index of mutual funds to ensure I'm always invested in the best performing sector/region.

2. Medium term trend following (months)
I use a trend-folloing system - probably similar to Jesse Livermore's. This buys/shorts medium term breakouts and sells/covers short/medium term breakdowns. I have no price objective.

3. Short term swing trading (weeks)
I create a medium-term EMA channel around a stock or future's price and buy below a shorter EMA or sell above it depending upon the direction the longer-term EMA is heading. The price objectives are just inside the extremes of the channel walls.

The last 2 systems contradict each other, but since I use different markets and time-frames, they essentially (hopefully) increase my return/risk ratio. I trade tax-free derivatives for these.

An interesting point (for me) is that the first strategy is the simplest, takes 3 minutes per day to implement, makes only an average of 1 trade every couple of months, yet produces the greates profits.

I believe this is due to the high costs associated with trading frequently (commissions, spread, slippage, financing, etc. - even though I don't pay tax) as the last 2 systems could produce spectacular returns when these costs are stripped away.

Most of my money is invested in system 1, closely followed by a buy & hold stategy. The last 2 systems only attract a small % of my money as I'm still very much learning how to trade, and I've spent around 5 years studying, developing and testing them in my spare time. Most of the time was spent on risk management, although (worryingly) cannot be applied to system #1 for various tax reasons.

I only use EOD OHLCV data and MS Excel. I don't use any charting software, although I do use it to make discretionary trades using various indicators, including my favourite - MACD & histogram. This is probably -EV, although it's entertaining as those 3 systems are pretty boring to use. This small entertainment is probably +EV for my portfolio however, since it prevents me from being "entertained" using money ring-fenced for my other methodologies.

[JJay1231]

The way I trade; Identifying stocks in a an uptreand with the use of the GMMA (Guppy Multiple Moving Average)and entering on a resumption of the trend after a pullback with a trailing stop of 2.5 x Average True Range from the close. simple and effective.

With reagrds to JL, Ive read ROASO (a must read for any trader) which is apparantly based on him, but it doesn't really go into any great detail about his trading style, other than it was a type of swing trading technique, not based on time or %. It may have been "Gann" swing charts or maybe something else.

[Foghatlive]

[ QUOTE ]

With reagrds to JL, Ive read ROASO (a must read for any trader) which is apparantly based on him, but it doesn't really go into any great detail about his trading style, other than it was a type of swing trading technique, not based on time or %. It may have been "Gann" swing charts or maybe something else.

[/ QUOTE ]

This is the only book actually written by Livermore. In it, he goes into detail about his trading. I'm glad you brought up ROASO. Haven't read it awhile. Now, would be a good time to do so.

How to Trade in Stocks

[JJay1231]

Ive known about HTTIS for a while but have never got around to buying it. May pick it up one day.... and yeah ROASO is a must read and re-read.......I read it at least once a year.

[mrbaseball]

For daytrading/market making I trade noise. I take a highly correlated spread and fade the fluctuations and hope it doesn't break out on me. I will also sometimes trade short term flucuations on outright contracts using typical TA (support/resistance, breakouts, ocsillator divergances etc.)

My medium/longer term trades tend to involve option volatilities of different but correlated vehicles and arbitrage.

[donkeykong2]

have you tried to backward test these systems if they wouldve worked in the past? can you say how risky these systems are and if it quite surely works or you just got lucky?
this would really be interesting to know for me.

[mrbaseball]

[ QUOTE ]
have you tried to backward test these systems if they wouldve worked in the past? can you say how risky these systems are and if it quite surely works or you just got lucky?
this would really be interesting to know for me.

[/ QUOTE ]

Backtest what? It's called scalping. The spreads flucuate (hopefully) in narrow ranges. So you buy and sell and sell and buy and run when you start to get steamrolled. I am a market maker and go for the very short term move. The shorter I hold them the better.

[kimchi]

[ QUOTE ]
have you tried to backward test these systems if they wouldve worked in the past?

[/ QUOTE ]

I've backtested extensively. Backtesting has many flaws and you have to be careful not to curve-fit your data. Splitting data into 2 chunks and forward testing on a portion of your data can be useful.

Nothing can prepare you for live testing though.

[ QUOTE ]
can you say how risky these systems are and if it quite surely works or you just got lucky?


[/ QUOTE ]

The system should be as risky as you want it to be. Risk is one of the few things a trader has some degree of control over. I risk between 0.5% and 1% (including spreads, commissions etc) on a single trade and never have open positions that risk more than 5% of my account should all my worst-case scenario stops be hit. I also use a monthly stop at which I suspend trading for the month.

If I doubled my risk I could effectively double my return.

There are methods to maximise your return and risk such as the Kelly formula, but I prefer to take tiny risks due to my inexperiance (ineptitude). There are also specific ways to measure profitability and compare systems such as measuring the % of profitable trades and average profit per trade. This allows you to measure the reward per unit risked.

Then there's the opportunity factor. MrBaseball probably gets many opportunities per day and thus can be profitable most days (or at least most weeks). A long-term trader's system can remain unprofitable for a year or more.

[donkeykong2]

thx for your explainations. what is the reason for these things working in your opinion? are these systems only applicable for certain markets/situations so you have to work this out and control it often? could you make significantly better earning if you would just run these systems with more money?