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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...8 years ago
15 comments:
Brandt,
How can the...
1. SPY 3C 1 min be pointing at 118.50.
2. SPY 3C 5 min be pointing at 119.50.
3. SPY 3C daily be pointing at 106.00
If the 1 min feeds into the 5 min and the 5 min feeds into the daily then surely the 5min should be pointing lower than the 1 minute as we've seen nothing but negative 1 minute divergences for weeks.
Any updates on some of your picks from the other day, like FAZ, TMV, and DRV? TMV looks very good today, do you think there will be follow through?
ADBE as well?
DVGWEB -with the volume up on TMV as it is, I'd say there's a good chance for follow through. Tomorrow ECB statements though can be a wild card. These are all meant to be "bigger picture trades" DRV looks especially good to me in the consolidation flag. It is showing some very positive activity. Just be sure to use a stop, I would choose to give t more room on the stop through less shares, then increase the shares as it breaks out of the flag.
Pink, the numbers are not important, relative divergences between two relative points are what are important and the reason there's such a difference in the numbers is because of scaling. 1 min data is only stored for 2 days. Daily data is stored throughout history. It's a matter of scaling in intraday data.
Brandt,
So, just to confirm, based on the SPY daily 3C you're basically saying that 'the smart money' now holds less SPY than they did at the start of the September rally? Meaning they have fully distributed all the shares they had before the rally and are now most likely short, and that this should lead to a sell-off soon where we should see the SPY below the level seen at the start of september?
Pink, here is an example for you.
http://www.flickr.com/photos/54219262@N05/5224064893/
http://www.flickr.com/photos/54219262@N05/5224064833/
In the first chart, the zoom factor is closer, it has nothing to do with the actual Q's price of $53.10, but I need to zoom in to show you the negative divergence between the two tests of resistance, the second had a negative divergence and price dropped.
You wouldn't be able to see that clearly on a longer zoomed out chart like chart #2 which corelates with the Q's price of <$52. However, the longer zoom chart shows that price is higher and 3C is lower.
3C is a cumulative acc/dist line so it looks at lets call them packets, of acc/or distribution. So when you see a chart like the second, it means there is less accumulation or you could say distribution even though prices are at higher levels. This is interpreted by looking at two points on the chart, usually highs or lows. So what it is telling us is there is selling institutionally into the higher prices.
I hope this clears up the #/zoom issue
Can you still answer my question about the SPY daily?
And, also, what is so significant in terms of 'leading' divergences.
I posted the SPY daily for you, it's at the bottom of the last market update-above.
A leading divergence is more significant then a relative divergence because it is a cumulative effect
Brandt,
I mean this question regarding the SPY daily:
"So, just to confirm, based on the SPY daily 3C you're basically saying that 'the smart money' now holds less SPY than they did at the start of the September rally? Meaning they have fully distributed all the shares they had before the rally and are now most likely short, and that this should lead to a sell-off soon where we should see the SPY below the level seen at the start of september?"
The first sentence of your question would be very difficult to quantify for a number of reasons, but the premise of the rest of your question is on track. IF there was even confirmation of the trend, 3C should be near the highs in price. The fact it is so much lower is a leading negative divergence, which is the worst kind and this is one of the biggest I've seen since the 2007-2008 period.
Brandt,
I think i speak for most of here when i say, we need to have some idea of 'when'. You say that the SPY daily 3C is one of the worst you've seen since 2007-2008. Can you post comparable daily 3C SPY charts so we can gauge the last time this happened how long it was before the 'market sold off' as the 3C daily chart suggested. I thank you.
also last night and several updates yesterday I mentioned the possibility of a bounce (tweezer bottom, support holding, and later, the overwhelming price/volume relationship that can create a one day oversold condition).
Today the character, meaning the underlying tone of the trade/3C did not show accumulation into the bounce, it did not show confirmation of the bounce, it showed negative divergences, so my opinion is that (and I mentioned this last night as well), the rectangle pattern is popular with the pattern recognition black box systems) all taken together a bounce looked probable, but the tone of it looks to me as if there was heavy selling into it. Also as I mentioned last night, even in strong trends, there can be 2-3 week corrections, but they are just that and the trend continues. The message I'm trying to get across is not to get too caught up in gyrations of the market.
Yeah, i'm putting something together now,
Mr.Pink, I think I found a pretty good comparison. I just posted it.
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