5 Pillars of Active Trend Trading Timing is More Important than Price. ~~ W.D. Gann

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1 5 Pillars of Active Trend Trading Timing is More Important than Price. ~~ W.D. Gann Dennis W. Wilborn

2 Disclaimer U.S. Government Required Disclaimer Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to 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 to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this training. The past performance of any trading 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.

3 5 Pillars of Active Trend Trading

4 Pillar 1: What to Trade Fish Where the Big Fish Hang Out

5 Why is knowing what to trade important? 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

6 Criteria for Trophy Stocks 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 or

7 IBD 50: What is it? 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

8 IBD 50: Track Record 2007: S&P Return = 3.53% Of the 100 stocks on the list at the beginning of % 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 = % Of the 100 stocks on the list at the beginning of % 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 % 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 % 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 % 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 % 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

9 IBD 50: Track Record 2013: S&P Return = 29.6% Of the 50 stocks on the list at the beginning of % 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 % 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 % 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 % 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

10 Season 1: First of the year until Feb-March 2 Fishing Seasons Season 2: March-June through End of Year

11 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

12 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

13 Sector ETFs Biotech Seasonality ATTS Copyright

14 66% 7 Weeks 89% 9 Weeks 65% 8 Weeks 84% 9 Weeks 79% 9 Weeks Wait for Winners 5 Runs in 2 years Average Move = 76.6% ATTS Copyright

15 Summary Find where the Trophy Stocks Hang Out Get the List Refine the List Strategically Plan when & where you ll fish

17 5 Pillars of Active Trend Trading

18 Pillar 2 & 3 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

19 Pillar 2 & 3 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

20 Pillar 2 & 3 Modeling Bullish Trades on the SPY from 2004 through 2013 with all triggers allowed with the exception of trend line breaks showed the following. Summary Model Results Available at:

21 Pillar 2 Entries 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

22 Trend Line Break Entries Examples TNA 6 Entry Action Points in 9 months

Trend Line Break Entries Examples TNA Entry Order Set Up 1. Estimate Value of trend line at A 2. Determine Trigger Price by adding Trigger Value 3. Determine Position Size 4. Determine Stop Loss 5.

23 Trend Line Break Entries Examples TNA Entry Order Set Up 1. 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 Trigger Value = 25 Trigger Price = A Shares:? Stop Loss:? Profit Target:? Time for conditional order:? Each trader must determine these last four based on their risk tolerance and account size.

24 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

25 Support & Candlestick Set Ups 1 Reversal Candlesticks Horizontal Support

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.

26 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 B Top of Support Zone at B is Trigger Value = 20 Trigger Price = Shares:? Stop Loss:? Profit Target:? Time for conditional order:? Each trader must determine these last four based on their risk tolerance and account size.

27 TNA TIPS RUT TNA Be Aware of difference between RUT & TNA

28 Summary Four Major Entry Signals For Long Trades Estimated Objectiveness Decide and Then Be Consistent Monitor & Refine

29 Pillar 3--Exits 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

30 Pillar 3 Exits 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

31 Trend Line Break Exit Examples TNA Entry Entry Exit Exit Macro & Micro Trend Breaks for Exits & Entries

Trend Line Break Exit Examples TNA A Exit Order Set Up 3-10 1. Estimate Value of trend line at A 2. Determine Trigger Price by subtract Trigger Value 3.

32 Trend Line Break Exit Examples TNA A Exit Order Set Up 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 Trigger Value = 25 Trigger Price = End of Day if Price is below 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.

Trend Line Break Exit Examples TNA A Exit Order Set Up (what Happens) 1. Next Day Closes below 81.54 2.

33 Trend Line Break Exit Examples TNA A Exit Order Set Up (what Happens) 1. Next Day Closes below 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 Trigger Value = 25 Trigger Price = End of Day if Price is below 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.

34 Summary Six Major Exit Signals For Long Trades Entries for Short Trades after confirmed downtrend Estimated Objectiveness Decide and Then Be Consistent Monitor & Refine

35 5 Pillars of Active Trend Trading

36 Sound Trading Systems tell us: 4. Strategy to Use Or when to apply our Strategies 5. What to Expect Pillar 4 & 5 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!

37 Pillar 4 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)

38 Stocks & ETF s: Buy & Sell based off of proper Action Points from the System. Variables: o Stocks o Earnings o News Pillar 4 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

39 Pillar 4 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!

40 Pillar 4 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!

41 Pillar 5: Expectations 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)

42 Pillar 5: Expectations 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

43 Pillar 5: Expectations 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 $100 = +$ loses x $400 = -$12000 Net Gain/Loss = - $5000 The system would have a Negative Expectancy and thus not a good system

44 Pillar 5: Expectations 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 $400 = +$ loses x $100 = -$6000 Net Gain/Loss = + $ The system would have a Positive Expectancy and thus system worth checking out

45 Pillar 5: Expectations 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

46 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 Pillar 5: Expectations 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.

47 Pillar 5: Expectations 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 : $ per Trade Average Trades per Year: On a $10,000 account trading only Long SPY Ave Profit per Year = x = $ Ave Return Per Year = ( /10000 ) x 100 = 32.34%

48 Summary Learn the system before apply the strategy Start with the simplest Strategy Know what to Expectations on each trade

Active Trend Trading Rules Review

Active Trend Trading Rules Review Active Trend Trader: Dennis W. Wilborn A Trend Should Be Assumed to Continue in Effect Until Such Time as Its Reversal Has Been Definitely Signaled Edwards & Magee Disclaimer