always searching, never finding!

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Marshall Wells
5 years ago
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1 March 29, 2015 Random Rambling Ruminations of a Relic Part 3 in a Continuing Series A trading plan what is it and why is it important? Ask 10 traders this question and get twenty answers. In a previous life I was an instrument-rated pilot (I have not flown in years due to a medical condition). There are many similarities between an FAA-filed flight and a trading plan they both involved detailed procedures. Here is my definition of a trading plan: A set of principles/guidelines/rules that dictate all aspects of the trading process and provide for predetermined reactions to as many contingencies as possible. The Factor trading plan addresses just some the items listed below: Trade identification -- what is a trading signal and what is not a trading signal? Overall capital risk management o Risk per trade in basis points o Composite risk on highly correlated positions o Composite risk on an entire portfolio o Defining circuit-breaking events Trade entry Determination of the sizing of each trade Establishment of initial risk point on each trade Moving the initial protective stop how, when, why? Ongoing trade management Profit taking I could write a thousand words of explanation on each of the items listed above. In fact, I did it was called Diary of a Professional Commodity Trader. Whenever I recall that my trading has stretched over five decades two thoughts come to mind first, that I am on my final lap, and second, that I have been lucky to have survived more different types of mistakes than I can count. In the process of I have learned quite a few things about market speculation. One of the things I have learned is that success is not possible without a plan of attack that takes into account as many of the variables of the trading process as possible. Believe it or not, I have run into many novice traders with no real plan to guide them. Needless to say, they do not last very long unless their destiny is to turn a large fortune into a small one. I have also met far too many traders in search of the perfect plan, or at least a plan much better than the course they are on. They become disappointed with one approach after another always searching, never finding! They often fall prey to the promises of the next con man promising a golden key. My guess is that 20% to 30% of Factor members fall into this category. If this describes you, I wish you well on your journey. Jumping from one approach to the next is the same thing as not having a trading plan at all. 1

There is a third way and that is to admit to yourself there is no perfect trading approach and begin to develop a plan that will keep you in the game with the idea of improving it incrementally over

2 There is a third way and that is to admit to yourself there is no perfect trading approach and begin to develop a plan that will keep you in the game with the idea of improving it incrementally over time. This is the path I have taken and it is the path taken universally by successful market operators. I readily admit that my approach is far from perfect it cannot be anything else because perfection does not exist in market speculation. There are two primary methods of trading systematic and discretionary. Systems trading approaches are completely mechanical and are typically computerized all the way down to risk management and order entry. All the rules are built into the front end of the approach. Discretionary traders allow judgement calls to influence individual trading decisions, although many discretionary traders rely on detailed trading rules. I believe in and practice rules-based trading only to the extent that the rules are based on broad guidelines and the guidelines are based on over-arching principles. I would define myself as a guidelines-based discretionary trader. The discretionary part of my trading comes into play in market analysis and trade identification the basis of which is subjective pattern recognition. Once I identify a trading situation I become 80% rules based. I do not want the novice and aspiring traders among you to miss these next points because they are the most important points in this random ramblings. Every component of my trading plan is right sometimes, wrong sometimes. I am ok with this fact. Hey, that s life and trading is just a part of life. But every component is the thoughtful product of 40 years of trading evolution. I accept the imperfection of my trading rules and guidelines. Imperfect trading rules trump no rules or a constant search for perfect rules. I do not believe trading rules can be optimized any more than numeric indicators can be optimized. I want to illustrate aspects of my trading guidelines and rules as they pertain to some recent trades. If these illustrations are useful for you, great! If not, I am ok with that as well. You may want to print off the last page of this Update as you review the trades cited. USD/SGD The dominant pattern was a 3+ year symmetrical triangle on the weekly chart. I distrust a breakout of a diagonal boundary of a symmetrical triangle the key breakout for me was the violation of the last intermediate high within the triangle. Thus, the penetration of the Jan 2014 high at 1.28xx in late Oct was the entry signal for me, as shown on the weekly graph. This pattern established a profit target of 1.37xx. 2

Notice on the daily graph that the breakout on Oct 31 was with a WBB. As is often the case with the completion of a massive pattern, the close on the breakout day was not challenged.

The target was reached on Mar 6, but even at this level I elected to stay with the trade until the market did something to give me pause.

3 Notice on the daily graph that the breakout on Oct 31 was with a WBB. As is often the case with the completion of a massive pattern, the close on the breakout day was not challenged. In fact, a purchase made on the close on Oct 31 was NEVER at a loss. At no point during the ensuing eight months did a pattern top appear and the moving average line trended higher without hesitation. The target was reached on Mar 6, but even at this level I elected to stay with the trade until the market did something to give me pause. The advance on Mar 10 penetrated the upper boundary of the trading channel that defined the entire bull trend. This type of price behavior can lead to an acceleration of the trend but a stalling of the acceleration is a warning sign. I reset my trade management relative to the channel. The decline back into the channel on Mar 12 was my sign to exit the trade. I did not need to think about what I was going to do with this position from day to day. I simply followed my trading rules. There was one instance when my trading guidelines could have kicked me out of the trade. On Jan 28 the market reached the 70% mark of the expected move. Guideline G (the 3-day trailing stop rule) became applicable. Under this rule the decline on Feb 26 was an exit signal (marked Trigger day). Yet, I use guidelines, not absolute rules. I realized on Feb 26 that a trigger day was in motion, but rather than exiting the trade during the session I waited for the closing price. The market ended up recovering, and I reset my stop to just below the Feb 26 low. USD/JPY The USD/SGD trade is an example of a trade that really worked. Such was not the case in a recent USD/JPY trade. The advance on Mar 6 completed a 3-month rectangle. The market immediately faltered, placing me on high alert. I do not mind giving a profitable trade some room to move, but I do not like it when a trade has its hand in my pockets. The market experienced a hard retest on Mar 12. I then set my stop below the Mar 12 low and the decline on Mar 18 stopped me out. Refer to Guideline C on the last page. 3

Actually, I entered the market prematurely on the close of Mar 18 and immediately recognized I had jumped the gun.

4 FTSE 100 As I had it drawn, the dominant development was the Mar 20 completion on of a 22- month rectangle on the weekly and daily graphs. Actually, I entered the market prematurely on the close of Mar 18 and immediately recognized I had jumped the gun. Initially my stop was placed below the Mar 18 low, but I was not comfortable with the risk level involved. Based on Rule B on the last page I moved my stop on Mar 25 to just below the Mar 20 low and I was stopped out on Mar 26. 4

The market never put my entry into doubt, so I stayed with the trade throughout the consolidation. The sign of strength on Mar 11 allowed me to move my stop to just below 37.72, the Mar 6 low. At 43.

5 PHB The dominant technical development in this stock was the Feb 5 completion of a 19-month continuation H&S pattern on the weekly chart. I missed the breakout event, was alerted to it by a Factor member, and bought the stock on Feb 10. Based on my rules there was never a reason for me to exit the trade. The market never put my entry into doubt, so I stayed with the trade throughout the consolidation. The sign of strength on Mar 11 allowed me to move my stop to just below 37.72, the Mar 6 low. At the stock will have reached 70% of its expected move and I will employ the 3-day trailing stop rule. I would also exit the trade if the daily chart completes a recognizable top or the moving average and price turns lower. My point is this I do not need to wonder from day to day how I will manage my long position in PHB. My trading guidelines will make this decision for me. 5

EuroSTOXX The market reached 70% of its expected target. The 3-day trailing stop rule was activated on Mar 26, stopping me out of my remaining long position.

6 EuroSTOXX The market reached 70% of its expected target. The 3-day trailing stop rule was activated on Mar 26, stopping me out of my remaining long position. Does it bother me to give back some profits? Of course it does, I am a human being after all. But I need to remind myself always that my approach is not intended to catch the top day. I want to play the game between the 30 yard lines, not in the red zone. [Note to all the Factor members in Asia the red zone is a phrase used in U.S. football.] 6

7 Factor Trading Rules and Guidelines Pertaining to Trades Identified as Factor Moves A Factor Move occurs when a market decisively completes a clearly (no-doubt-about-it) recognizable classical chart configuration at least 12 weeks in duration. Such patterns have been the foundation of trading operations for Factor s proprietary account since While Factor will engage in other shorter-term trading maneuvers (typically with Swing Units), Factor Moves will be identified as such in Factor communications. The completion of a recognizable pattern must occur on a closing price basis, preferably by a wide-range trading day, defined as a Wide Bodied Bar (WBB). An intraday penetration or marginal completion of a chart configuration is not a qualifying event for a Factor Move. Factor places far more emphasis on the completion of horizontal chart configurations such as Head and Shoulders tops and bottoms, right-angle triangles, horns and rectangles. Factor places little to no importance on the penetration of a diagonal trendline or boundary of a symmetrical triangle or wedge pattern. The symmetrical triangle can qualify as a Factor Move when the last intermediate high or low within the triangle is penetrated Factor Moves remain in effect until one of the conditions below are met: A. The Last Day Rule (LDR) is violated on a closing basis. A description of the LDR can be found in Diary. B. A breakout falters, in which case Factor will attempt to minimize adverse market movement by advancing stops quickly. C. A hard retest of the completed pattern occurs and is then subsequently violated the retest failure is also described in Diary. D. A 3-week trailing stop rule is activated (this is a variation of the 3-day rule as defined in Diary, but with weekly bars) E. A clear chart pattern with opposing implications is completed. The subsequent failure of such an intervening pattern might reinstate the Factor Move. F. The moving average (MA) selected for the Factor Moves turns against the expected trend, confirmed by prices violating the MA line. As a general rule, Factor uses a 14-day MA for moves launched by a pattern less than 14 or weeks and a 21-day MA for moves launched by multi-quarter moves. G. A 3-day trailing stop rule is generated once prices have reached 70% of the expected move H. The target of the trade is reached The Factor is not a proponent of profit-based trailing stops (e.g., a $500 trailing stop). However, the Factor may advance a protective stop in reaction to a sharp break followed by a new high in the case of a bull trend or a sharp rally followed by a new low in the case of a bear trend. The above exit-now mechanisms have evolved over 40 years of trading and represent guidelines in Factor s actual proprietary trading endeavors. Factor LLC is a discretionary trading firm and will periodically override these guidelines based on input too nuanced for discussion herein. There are periods when overriding a guideline will be advantageous to profitability and periods when overriding guidelines will be disadvantageous. Most Commodity Trading Advisors (CTAs) benchmark to the S&Ps and the Barclay Hedge CTA Index. Factor LLC believes such a practice is unwise and can cause the deterioration of performance overtime. The above trade management protocols apply to those positions Factor LLC intends to hold for the longest time frame. Factor also trades some positions in shorter time frames, and these positions are subject to equally specific guidelines. plb ### 7

reasonable consistency meets up with longevity

reasonable consistency meets up with longevity Learning from trades that do not work 06/10/2015 I am assuming that most of you have subscribed to services that went out of their way to crow about their big winners. XYZ -- up 74% in 6 weeks ZYX -- up