Saturday, February 25, 2012

Goodbye partial positions.

Starting in March the system will be either all in or all out. No longer will there be 50% positions and/or opportunities to improve the dollar cost average of a position. (There will be 1 exception which I will discuss later).

What this means is more risk but also more reward. Bad months will probably be even worse, but winning months will, in theory, outweigh the bad simply because for every losing month there are nearly 3 winning months. Assuming the model continues to perform well, and I have high confidence that it will, the system returns should have no problem hitting 100% on an annual basis. This month alone is up 29% using a 100%, all-in strategy. January would've resulted in a 5.07% loss rather than a 2.79% loss.

Why do I have this much confidence? In my 2011 Stats post (link in upper right corner of page), I discussed results using an all in/all out strategy and they were phenomenal. Even with the killer loss in August, the system was up 268% for the year. Had the stop loss rules been in place to prevent such a disaster, it would've been up 387%. Obviously I do not expect these kinds of returns, but I do believe 100% is possible and reasonable.

I said in that post also that I would give the 50% strategy a few more months before I reassess. That time has come. We are up ~13% this year, but would be up 22.50% with a 100% strategy. I see no reason to continue the current strategy. We are continuing to leave gains on the table which bothers me.

The downside of course is more risk, more stress on us as traders, and for me, a bit more pressure since I am responsible for this system. There will be bigger account swings in both directions and when times are good everyone will be merry, but when the system is getting kicked around I'm sure there will be moaning on here. I am prepared for that. I have been doing really well this year being a "robot" trader. Making the trade on the close and forgetting about stocks until the close the next day. My research has dwindled to almost nil (besides messing around with the CCI signals). It's been really great. I highly recommend it.

Might I also suggest since risk is increased that you only trade a comfortable amount of your account. Designate a certain amount with which you will follow my system to the letter and DO NOT EVER deviate or increase the amount of capital to average down on a position. You will definitely want to use any gains toward future trades, so hopefully the amount of capital you're using will increase naturally over time. Don't just take $10K (for example) and keep making $10K worth of trades over and over. If we make 10% on a trade, use exactly $11K for the next trade and so on.

Another way to deal with the increased risk of 100% positions is decreasing your leverage. The 1x leveraged ETFs IWM and RWM are great choices for decreasing risk. We've all witnessed how large, continuous moves in 1 direction have caused dramatic decay in TNA/TZA. Exhibit A is TNA in 2011. While the RUT has recovered all of the losses from the summer, TNA is not even close. TZA suffers from even more decay issues. 2x leveraged ETF's may provide a nice compromise such as UWM and TWM. There are others as well.

As I mentioned earlier, there will be 1 scenario where we will carry a partial (50%) position. That will only occur after hitting a half stop loss. The stop loss rules I follow dictate that half the position is closed at 4pm on the day in which the market flips modes, and that flip is against our position. (We are long and the market flips to "unhealthy" or vice versa). The other half of the position will ride, as there are many times when the market will move in our favor immediately after modes have flipped.

Sorry for the length, but I have 1 more thing to show just for fun/FYI. Below is a quick monthly breakdown of returns since Jan 2011. In the middle column are actual returns with 50% positions. On the right are the hypothetical returns had we been using 100% positions.

Jan11 | +4.33% | +15.78%
Feb11 | +6.60% | +4.67%
Mar11 | +8.75% | + 6.76%
Apr11 | -3.83% | -1.67%
May11 | +12.89% | +14.30%
Jun11 | +2.89% | +5.88%
Jul11 | +11.83% | +25.84%
Aug11 | -29.44% | -11.82%
Sep11 | -0.81% | -1.62%
Oct11 | +19.67% | +50.01%
Nov11 | +7.35% | +16.27%
Dec11 | +11.40% | +25.58%
Jan12 | -2.79% | -5.07%
Feb12 | +17.06% | +29.09%

One thing that stands out is August. There were so many awesome trades after the one that cost -45% that the month finished down only -11.82%. If stop losses were in place, that number increases to a gain of +16.70% for August. The system thrived on the volatility with 100% positions making huge gain after huge gain. Another stand-out month was October at 50%! Of the 14 months listed, 4 of them returned over 20%. If this trend continues we should have another 2 or 3 months this year return over 20%, not counting Feb. That is encouraging.

Last but not least, I will say I'm excited to start this new strategy if for no other reason than it's simplicity. Not only will it eliminate all math of having to calculate 50% positions, but also I won't have to worry about 2nd signals for averaging down. I will fall into an even deeper mental state of "trade it and forget it".

Ok, thanks for sticking with me. I'm usually not this long winded... Comments are always welcome. Remember, all-in trades start in March. If we get a signal these last few days of Feb, they will still be 50%. Alright, take care!


  1. I want to urge followers of this blog to take J's advice to heart. Basically, either follow his system, using his compounding advice, or don't. Either the system is brillilant, or it will fall apart. Either way, J has done his bit and he's done it out of a sincere sense of generosity to the public. If the system makes you rich, well, there you have it. But if the system stops working, or if it has a number of bad trades, I urge you not to grouse. The responsibility for our trades is ours. Complaining, or whining, is of absolutely no help. And, I also urge you not to second guess the system. To do so would be to engage in discretionary trading. Follow the system as it is, or don't, but don't mix the two.

    I, for one, wish to thank J for his hard work and his selflessness no matter how the system continues to perform.

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  3. Yes, thank you J. After many months of following, I am jumping in with an account dedicated to trading this system. We are responsible for our own trades. J has come up with a system that works, and is our choice to follow or not. I try to use a snowball analogy; we start small, but keep rolling and it gets bigger. Sometimes a chunk will fall off, but just keep rolling and let it grow.

  4. J, thank you for the blog

    one questions i have is:

    does your system only enter/exist trades at the end of day?


    1. Yes, the system was calibrated using closing day prices, so if you don't have a chance to trade at 4pm, there are 3 good options.

      1) Trade TNA/TZA after-hours using a limit order set for closing price.

      2) Trade small cap futures. Or less preferably ES (SPX) futures.

      3) Use limit orders (set at the closing price) on the open the following trading day. Again, TNA/TZA will offer the best results.

  5. J's advice about "robot" trading is important. Set it and forget it. Checking the market all day and letting emotions take control is a recipe for disaster - believe me I know.

  6. FWIW, the Nasdaq E-mini is NQ and the S&P 600 is SMC.

  7. Excellent points about leverage, J. Here's a suggestion. Might it be possible to track the system with a 1X ETF instead of TNA. That way, the "official" stats are 1X and people can choose to use leverage if they see fit.

    However, if the system has been developed with TNA in mind, such a strategy obviously wouldn't work, and you can, with my blessing, ignore this comment.

  8. J thanks for the detailed analysis.
    Always appreciate it when you let your statistics do the "talking".

  9. Let me add that I really appreciate your continued work on the system, J. Even if it weren't more profitable, the all-in method certainly makes things simpler. And, in my experience, the simpler an investment philosophy, the more likely one is to follow it. Again, thanks for all that you do.

  10. J, how does this new model handle settlement?

    1. Sorry, it doesn't. My trading account does not suffer from the 3 day settlement requirements. You may want to continue the 50% strategy. I will still post 2nd signals even though they will be irrelevant to me...

  11. Settlement shouldn't be an issue unless your're maxed out on your margin; but, then again, no one should be trading one model with that much leverage anyway.

    Another alternative, which I've mentioned before, is to trade futures. Lots of leverage and very little maintenance capital required. But, to repeat, we're talking about a lot of leverage: big profits, yes, but an account can also be wiped out with a couple of bad trades.

    1. For those of us who are trading our retirement accounts, settlement IS an issue. Once we buy/sell, we have to wait 3 days to buy/sell again.
      When we were doing 50% positions it was rarely an issue.
      Now it will be, constantly

    2. No it shouldn't. Just ignore this entire post and continue with what u've been doing. All signals will be the same. I will just be using a different money management strategy than u.

    3. J, I also use an investment account (much smaller), but I have settlement in that account too.
      How do you get around that?

    4. I trade a margin account, not a cash account. No settlement requirements between trades.

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