Friday, November 19, 2010
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Risk Management
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3C Quick Start
Many of the charts you see here at WOWS are my proprietary indicator 3C which reveals underlying institutional money movements and often contradicts price. To understand the annotations made on charts, you must first understand that 3C has no numerical value, it is a pure divergence indicator. Positive divergences represent accumulation by smart money, negative divergences represent distribution by smart money and when 3C trades with price, that is trend confirmation.
The chart annotation system is simple; white arrows represent relative positive divergences, red arrows represent relative negative divergences and green arrows represent trend confirmation. When 3C is in a white or red box, that represents a leading positive or negative divergence, leading divergences are the most powerful.
We analyse 3C in multiple timeframes, the longer the timeframe the stronger the accumulation. 1-2 min timeframes represent intraday moves, a 5 min timeframe can represent a day or two and 15 min timeframes average trends of a swing trade nature. 30 and 60 min charts can move the market for a month or more and daily charts can be over a year.
You'll get use to seeing the charts and understanding how the multiple timeframe analysis works and works well.
Welcome to Wolf on Wall Street.
The trades featured here are meant to maximize returns with the least risk and highest probabilities. Unless otherwise mentioned, all trades are meant to be executed at market. I prefer long-term trending trades which perform well in rising markets, but really stand out in declining markets. However, we get occasional one day gifts 30,40,60% 1-day gains. I'd urge you to consider taking some or all off the table in such cases, the markets don't give gifts like that often or for very long. Most of the returns that make the system outperform so well come in short-entry trades. If you are opposed to short trades, this is not the system for you, unless you are ok with buying an inverse ETF. If you would like more information about the truth about shorting stocks, just email me.
Risk management. I recommend a specific and consistent risk management approach to all positions. In most cases we try for 2% risk money (2% of portfolio) unless such a position size exceeds 15-20% of overall portfolio in actual position size. Each trader is different and each has a different allowance of open trades. I like to keep the overall money in the trade around 10-15% of portfolio per position in case of gaps against you. Stops are generally executed at the end of day and I personally never place a stop order, all my stops are mental; remember, the middle man gets to see everyone's cards. When you are not in tune with the market or opportunities just aren't that spectacular, I take my risk per position down to 1% or even half a percent of portfolio value.
Each trader is different and must determine their own level of comfort with risk. I do have a channel stop which I provide to TeleChart/StockFinder users for automated stops, I appreciate you using my links to sign up if you do. The Trend Channel catches trends and works well as it automatically adjusts for each stock's volatility. Arbitrary exits based on nervousness about the markets WILL decrease the portfolio performance dramatically. This system will not ever get you in at market bottoms or tops. The recent 1 year performance against the Russell 2k buy and hold had the system beating it by 3:1. Ultimately it is up to you as to how you proceed, but I'm always available to help you determine what might work best for you.
Risk management. I recommend a specific and consistent risk management approach to all positions. In most cases we try for 2% risk money (2% of portfolio) unless such a position size exceeds 15-20% of overall portfolio in actual position size. Each trader is different and each has a different allowance of open trades. I like to keep the overall money in the trade around 10-15% of portfolio per position in case of gaps against you. Stops are generally executed at the end of day and I personally never place a stop order, all my stops are mental; remember, the middle man gets to see everyone's cards. When you are not in tune with the market or opportunities just aren't that spectacular, I take my risk per position down to 1% or even half a percent of portfolio value.
Each trader is different and must determine their own level of comfort with risk. I do have a channel stop which I provide to TeleChart/StockFinder users for automated stops, I appreciate you using my links to sign up if you do. The Trend Channel catches trends and works well as it automatically adjusts for each stock's volatility. Arbitrary exits based on nervousness about the markets WILL decrease the portfolio performance dramatically. This system will not ever get you in at market bottoms or tops. The recent 1 year performance against the Russell 2k buy and hold had the system beating it by 3:1. Ultimately it is up to you as to how you proceed, but I'm always available to help you determine what might work best for you.
I do use other scans and systems when market conditions warrant their use and may change strategy with market conditions.
The MOST IMPORTANT tool you have to bring you long term success is RISK MANAGEMENT. There are plenty of articles linked at Trade-Guild.net on Risk Management. We can be wrong 75% of the time and still outperform the market with solid, consistent risk management.
Position Sizing
The position sizes noted in the positions @ 2% risk of portfolio are based on a $20,000 portfolio-adjust as needed. Due to tight stops, there is the possibility, even probability that one position could take up the entire portfolio. You need to decide how many positions you want to trade and reduce the position size according to that. For instance, if you want to trade 5 positions in a $20,000 portfolio, no one position should be valued at more than $4,000-not risk money or 2% rule, but share price entry x shares.
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Futures Update BR-EXIT Edition - So the conventional wisdom couldn't have been more wrong. Those chasing risk and closing hedges couldn't be in a worse place right now. I would still remin...7 years ago
15 comments:
Brandt,
So, the daily SPY chart is in a leading negative divergence 'pointing' to the same level it was at the start of September (before the huge run up we've had). That would suggest one hell of a big sell off is upon us, no?
If it closes that way, yes it suggests there has been a lot of distribution. Usually when all the shares are distributed, (they may also go short as well), it leaves retail to push the market up, which they usually never can. GM is an excellent Micro-economic example. 3C showed strong negative divergence yesterday. Nearly the entire float was traded in a single day. I assume that mens most of the institutional owners at $33 unloaded to the public. With a majority of shares in the public's hands, GM could not move up and fell. Institutions (as 3C showed today and as the ZH article confirmed) stepped in to protect the $33 support. Like I said, it's an excellent micro-economic example. In the real market there are too many variables that effect timing and such, GM has few variables to be concerned with in comparison.
Brandt,
So, that "1 min Divergences Worsen" post you made earlier.
http://wolfonwallstreet.blogspot.com/2010/11/1-min-divergences-worsen.html
Well, all the averages have finished strongly at todays highs. What do you have to say about that?
VIX now at 7 month lows again.
"Well, all the averages have finished strongly at todays highs. What do you have to say about that?"
Antagonistic nitpicking. The SPy/DIA since 2 closed .002% higher, the Q's finished lower. The negative divergence seen is still on in the DIA and QQQQ except worse.
Wow you got me on that .002% climb
Brandt,
You posted the "1 min divergences worsen" when the DIA was at
111.69:
http://1.bp.blogspot.com/_gGhyx-JKKA8/TObI4fWHVGI/AAAAAAAAHvE/w5z_fFEeFtE/s1600/dia+1+min.png
The 3C chart points negatively to DIA 111.30. Yet, the market finished up at highs of 112.06. It' equivalent to 30+ DOW points from 111.69 (when the call was made) to 112.06 (the finishing points).
Clearly 3C got this wrong, and it's not really a small margin either. Like i said before, if 3C gets these 'small' daily calls frequently wrong, how can we trust it to act on it, and how can we trust that the 'bigger time scale' calls will be correct?
You're clear to sing 3C's praises when it 'appears' to make a good call, but when it can clearly be seen to make a bad call, it is dismissed and continue on as nothing wrong has happened.
Your hopes for Monday's action? Open higher or lower than the closing price today?
BRANDT. This is why I keep asking you to use the ***(DAILY SPY)*** chart for LONG term ACCUM/DIST.
You need to post a PICTURE of the ***(DAILY SPY)*** chart EVERY DAY. Thank you BRANDT.
Why the obsession with shorting? Anyone looking at those charts anyone would see its much easier to be long. IMO shorting is too risky.
Option Trading,
Shorting is too risky? As far as i remember, it was the May flash crash that knocked 1000 points of the DOW in 10 minutes, not added 1000 points in ten minutes...
... and not too mention the numerous single stock flash crashes we see a number of times per week.
This market is sick. And is only being held up by a single corrupt privately owned institution (the FED) that has a history of being 100% wrong on future events.
Keep telling yourself that. 12k Dow doesn't lie. You can have all the theories and links you want but you guys are constantly on the WRONG side of the market. I quit reading Internet garbage and listing to the fools and I've made a killing.
Rule #1 don't fight the trend
Rule #2 don't fight the fed
I've been trading since 1996 and shorting is one of the most difficult things to do consistently and profitably. I prefer to sit in cash and buy good stocks on oversold conditions.
Example i picked up JKS at the open today.
mee, I have been posting the daily SP chart everyday since you asked.
OT-There's good trades bot ways, this is not an ideal market for shorting as it's still stage 3, but stage 4 it will be and that's when the mutual funds get killed. I've run 1000's of backtests and it's very difficult to "really" outperform a strong bull market consistently, but where your return goes up against the market significantly is being short during stage 4. While the market itself is not stage 4, there are a to of stocks that are. This is one aspect why Hedge funds generally outperform mutuals by a wide margin and as I said, backtesting confirms this.
That being said, I'm not knocking your style, everyone has to find what works for them best, it's when you deviate from what you are comfortable with that you really get killed. Finding what suits you is a multi-year process and takes a lot of self-honesty and reflection.
Also with regard to oversold conditions, one of my most succesful trading systems ever tested only bought "overbought stocks" and only shorted oversold stocks. There's no real objectivity in oversold or overbought. Q3 of 2008 proved that on the short side and most of 2009 proved that on the long side.
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