Saturday, November 12, 2011

Timeframes and Asset allocation

Am I day trading or swing trading?

I suggest you to first read this post , reread that post, understand it because it will help you understand my trading methodology in the long term if you are following my blog. Read Introduction also before you proceed.

Time frames:

Often my clients are confused, so do I see confusion among blog readers. We need to step back and analyze different time frames first. I am breaking each time frame on the basis of my charts.

  1. Monthly, quarterly, yearly charts. When I use these charts, it is for the very long term/ VLT.
  2. I use weekly charts for the Long term. Long term/ LT
  3. I use daily charts for the Intermediate term. Intermediate Term/ IT
  4. I use 4 hourly or hourly charts for the short term and very short term. ST/ VST.
  5. ST/ VST positions are often closed on good profits, not waiting for the reverse signal. For IT/ LT, I use scaling in and scaling out technique. I do not trade VLT positions, as they are only traded based on signals.
  6. Regardless of the timeframe, follow risk/ reward and market discipline. More on that below...
Asset allocation:

On any timeframe, if you are trading an individual stock, use 5000$ as position size if your capital is 100,000$ which will be 5%. Often times, there are small investors whose capital is only 5,000$. Should your position size be 5%? Unfortunately, if your position size is 5% of 5,000$, I must say that will not yield any good results on an individual item. You have to trade atleast 5,000$ on an individual issue to make any profit. 

If you are using SPY (as an example), I can recommend using 100% of your capital provided you follow rules. I use SPY mostly, so most of my rules are centered around that. 
  1.  Follow your instinct. If you are not comfortable, step aside, think and then come back.
  2. If you want to follow someone's advice, fine but take your time to think. Follow rule # 1 in this case also.
  3. If you are trading SPY, use 2% as stop for the short term. Use 5% as stop for the Intermediate term and long term. If SPY gaps  more than 2% or 5% (which are not common) against your position, close the position. Reassess and then enter again.  Both of them are not common, but comparing both, I would say 2% gap downs are more than 2% gap ups. 5% gap downs are rarity, 5% gap up? Good luck searching for that. No 2nd discussion on stops, it will help you in the long run even if you miss 1 or 2 opportunities.
  4. If you are on a vacation or in a place where you are not able to monitor your position, avoid trading. If you have to invest, you must still follow rule # 3.
  5. I already covered Leveraged ETFs in the link above.
  6. Options: I trade them at my own risk. I don't recommend options. If I trade options and you admire or follow that, it is your own risk as well.
  7. Using 100% of your capital may make your nervous. I developed my proprietary systems, on all terms in such a way that you will not lose money in the long run. Whipsaws, stops and loss trades may occur but if you follow my system for more than 3 months, you will be in a profit. You can papertrade (without using real money) for 2 months to see if I am correct or wrong on VST trades. On ST trades, you can evaluate for 6 months. I can post my backtest results, but since you are skeptical, it will not help in anyway. Following the system for sometime will be the only thing that comes close to truth.
  8. Entry: For very short term, I post my entries and stops. If you are late by 0.5% on the very short term trade, your chances of profiting may reduce by 50%. Nevertheless, you may still profit. On a short term basis, entering more than 1 day late or 2% above my buy/sell may reduce your chances of profiting. I trade SPY based on /ES which means I often enter or exit in after hours trading. Read the link above for after hours trading.
  9. Exits: This is the most important part. I enter positions based on my signal. If a signal reverses, I follow the signal or 2% stop whichever comes first. In case of profits, I scale out of the position. I am advocating using 100% of your capital as entry, if your trading vehicle is SPY. For VST trades, closing 25%-50% of your capital size on a 1% profit will ensure that will keep your profits intact.  For the remaining position, you can use your open price or 0.5% below (in case of long position) or 0.5% above (in case of short position) that price as your stop. If SPY gaps more than that, close that position. You can take profits all along the way if SPY continues above. In recent history, the longest time my VST system was on a buy signal was from 10/5 - 10/17 during which time SPX went from 1125 to 1206. To maximize the gains in that period, you could have taken 1% profit on 1st 25%, then reduced the position size for every 1% profit. You could have had no position at SPX 1200 or above, more on that in the rule 10 below. Even if you closed your entire position for a 1% rule 10 below For ST trades, you take 25% position size off on a 2% profit. You can then wait for my get out of my long/ short signal or if you hit the 5% stop first, follow it. Lock profits as you see them, taking profits at any point never hurts - don't stare at your screen. You must grind this statement in your brain before you even start trading.
  10. My VST system gives enough signals in a year that your profits can be well above 40% for the year. It is based on very short term trading, repetitive, high probability but terminal signals. Because of the high probability and many signals you get, you can close your entire or partial trade for a 1% profit as you see them. I know you will feel hurt when you take 1% profit and SPX goes from 1122 to 1206, don't feel bad because this system is based on scalping. You cannot foresee your profits or losses, I may say. You may ask how can scalping be a good technique? Because you take profits all along the year. If you invested in year 2000 and you are buy and hold, your returns on SPX are 0%. If you invested in 2010 at the same time, your returns are 0%. You may say, if you invested in March 2009, your profits are now 80%. But, how do you know when to take the profits? You never know. Many people got stopped out during many violent turns of the market as early as within 1 month of March 2009 while some of them are still invested completely. Some out of the latter may not close their positions even if SPX goes back to 666. I don't know. I view trading capital markets as a journey. You must know when to get on the bus and when to get down. If you take the bus at SPX 666 and got down at SPX 750, you may feel bad looking at the market today at SPX 1264. Don't feel bad. You always have the chance to get on the bus at any time and get down. The markets will be open tomorrow, next week, next month and next year. Don't worry about having been left out of the market any time, follow your system and take your profits. Is the VST system for daytrading? Not necessarily true. I have had my VST signal remain on the same signal for anywhere ranging from 1 day to several days. I don't trade on time or price targets. I take it from signal to signal but take profits in between. I let me decide my price profit targets based on my methodology. My ST system gives you enough signals for your profits to be above 20 - 25% annually using nothing but SPY. Usually my ST signals last more than 20 days but there are whipsaws during which you will be stopped out.
  11. If you are not comfortable following the rules, please stay out of my system.
  12. Regardless of whether you follow my rules and system, you can always follow my general market calls and stock recommendations that I post on this blog. You can develop your own risks and methodology following my market calls but you will maximize the returns in the long run if you follow my system. If you follow your own market discipline, make sure you create a good method.
  13. Signals: In my VST system, I have entry signals only. Entry signals are buy (go long) and sell (go short). In VST, I get the signals based on terminal moves and hence, be quick to take profits. Exits are based on the methodology above (profits or stops), and no signals. In my ST system, I have entry and exit signals. Entry signals are buy (go long) or sell (go short). Exits are close out longs, close out short signals. Entry signals are slightly delayed. Exit signals are more sensitive and are quick. In ST system, entry signals are delayed but not terminal. They are in the beginning phase of the move. In both VST and ST systems, there are whipsaws. You must follow my system for certain time to see profits for that exact reason. You should remember that when the ST system is in buy/ sell and VST system gives the opposite signal, you should be quick to take profits on the opposite signal. Right now, on 11/12/2011, the ST system is still on a buy - so any VST system sell signal should be considered as counter trend trade and you should be quick to take profits while leaving some on the table just in case the ST system also turns to sell. On the other hand, if ST system is on a buy, and VST system gives you a buy signal, you can be relaxed a bit - nevertheless stick to the profit/ stop taking methodology.
In this blogpost, I posted about
1, Timeframes
2, Entry, exits, stops, profits
3, My VST and ST systems.

Subscribe here and follow by Email