The Trading Digest

Nicely done if I do say so myself (pat pat). System goes back to cash and waits for the next pop back below 20 on the T2108.

I also include a chart of interest for breakout players.

Those ETF’s I threw out yesterday that were part of the whole T2108 trade I designed, really popped up yesterday.

IAI was up from the open 2.3%. (profit target at 40.92)
PGJ hit the 3% profit target during the afternoon surge.

The t2108 indicator jumped all the way into the 30’s so we won’t be buying anything this morning based upon this system.

Have a Great Day!

Dave Johnson

The T2108 indicator has once again moved below the 20 level. This allows us to add up to 2 positions per day while below this level. I have a dentist appointment this morning so I will just add the symbols for you to do your own due diligence on. Seems the Fed has thrown more paper at the “crisis” and the futures are popped up which is not the best open to buy but the system is a system.

Ok the ETF buys are

IAI and PGJ —Broker/Dealers and China

Ok I am off now. If you wish to search for previous posts on this system use this link to search for “T2108″. You can find the full parameters of this excellent system.

Have a Great Day!

Dave Johnson

I wanted to present another system that presents an opportunity to buy fear in a weak market. This particular system has quite a good track record and thought I would mention it because it could trigger on tomorrows close. The system is quite simple. It first requires 4 consecutive red candles. Meaning four consecutive days where the close is lower that the open.

I ran some tests on the SP500 tracking ETF to give you an idea how powerful this setup is. Your job as a trader, based upon the data I present would be to “frame” the trade. Maybe you like the historical data - maybe not. But if you decide to take the trade you must use proper risk management. What percentage of your portfolio do you allocate? That would have to based on many factors I can not see for anyone but myself. Each trader needs to do his/her own analysis.
Ok, so here is what you looking for if you decide to watch/trade this. We have had 3 consecutive red candle days - and tomorrow would need to close below the open. Oh yes and the close needs to be a down day as well. Keep in mind we will most likely gap down based off the CSCO news and we would need to close below that open. If we do you’ll need to buy the closing price of the SPY.

The exit is quite simple:

• a 3% profit target
• holding for 7 days

Whichever triggers first. That is it. Simple.

Now I shall present the data of this setup since the beginning of the SPY in 1988. It is actually quite good. Many systems of this nature tend to have good win percentages but it is at the expense of having losers a bit larger that winners. That is not the case with this system over the past 25 years. I have included a link to a spreadsheet showing all the trades below. And a graphic showing some visual stats.

spreadsheet-of-all-trades.xls

Basically we have seen 71% winners - with winners averaging about 2.27% and losers about 1.24%. Quite impressive. Maybe a red candle is not always such a bad thing.

Have a Great Night!

Dave Johnson

Now that the T2108 UO system has gone all to cash after the exit of IEO I can review the trades for you. Here is a graphic showing entries and exits. I also included a graphic showing the T2108 plunges below 20 where we were looking to go long with ETF’s that crossed below 30 on the Ultimate Oscillator.

Remember from the very first day we defined the parameters of the setup. This included:

• entry condition (T2108 under 20 and UO crossed below 3o)
• exit condition (3% Profit Target or UO crossing 50)
• number of holding the system will take (8 in this example)

So in an 8 position portfolio a 3% gain contributes 0.38% to the whole system performance (3.0 /8). The next component that would be up to the individual trader would be how much of your overall equity would this particular system represent? That would be entirely based on how aggressive you may be. I would not be incredibly aggressive but 25% sounds about right to me. Based upon this information the system returned 0.55% and if the system were only 25% of the total portfolio then you would divide that by 4.

This may seem small but remember the market fell over 10% since that first trade was triggered. We had 6 trades and 5 were winners. The larger loser EWS was larger than what backtesting showed but that was more raw luck of selection versus what we saw if we looked at every symbol that triggered. Overall this is a great way for you to see how you can begin to piece systems together. The trading blogospere is littered with recent blow ups that occured because people want to bet rather than trade. Here is the secret…..Position size is critical. Using leverage can cause large losses. And large gains. That is the allure. But the betters that risk their precious capital on a single concept rarely win in the long run. Preservation of capital is critical.

People want 200% gains with minimal drawdown. Yet to attain those gains consistently you would be constantly putting the overall portfolio in the risk of ruin position over and over. I am sure you have seen people that advertise tremendous returns with options strategies. But if that strategy returned 250% annually (unlikely) could you use your whole portfolio to trade that system? or would maybe 5% seem more reasonable based upon the obvious risk of losing 50-100% of total capital? Setting realistic goals is critical to not only your success as an investor but in reality your long term staying power as a trader. People scoff at 20% annual returns but at that rate your money will double every 3.5 years approximately. Meaning that a $50,000 account would grow like this:

In 3.5 years 100k

In 7 years 200k

in 10.5 years 400k

in 14 years 800k

in 17.5 years 1.6 mil

Preservation of capital and the application of small edges over the long term are what drive account values upward in the long term. Betting your account on the hopes that the market will bounce when you feel it should is an absolute recipe for disaster. If you click on the archive from mid December until now you can follow all the posts related to this system.

Have Great Weekend!

Dave Johnson

The T2108 ETF system goes all cash tomorrow. The last exits of open positions are IEO which we entered at yesterdays open and exited today’s open as it hit the 3% profit target. EWS which was entered 12/18/07 has crossed above the 50 level on the Ultimate Oscillator and that signals an exit for tomorrows open. Once we know that closing price we can put together some stats and compare that to my backtest data this weekend.

I saw a comment on one of the recent posts that mentioned that their data showed the UO not below 30. Guys if your data source is off by a smidge on any open or close in the past couple weeks the corresponding indicator will be off. Do you really think it mattered if I bought DIA SPY EWY EWG IEO EWS …..BLAH BLAH BLAH. ……They are correlated. Look at the charts. You needed to increase equity exposure. I really didn’t care which one. You just had to have some exposure. Stop looking at the pine needles on the forest floor and THINK what just happened these past couple days (ie the forest). Do you really think it mattered if the UO was 28 or 32?

Dave Johnson

This recent foray below 20 was met with an extremely emotionally charged market action. We are above 20 again so the system waits for the next plunge below. Yesterday EWG (Germany) nailed the 3% profit target right away in the morning. The other holding IEO (US Oil and Gas) came withing 3 cents of our profit target but the Ultimate Oscillator crossed above 50 so it is an exit at today’s open. The other holding we are carrying from the last punch below 20 is EWS (Singapore) pushed right to the cusp of a 50 cross as well. My data shows no cross so we’ll see where it is after the close today.

I think (hope) that the past 2 days succinctly pointed to the need to develop some sort of strategy that will try to do something in these fear/panic market environment to the long side. Again and this is the key, remember position size. That is the piece of the puzzle that you must put together. Based on my risk how much of my portfolio would a system like this be allocated 20% 50% 10% ?? That is only a question you can answer. One thing we should note though is the this “system” never had more than 3 holdings in a 8 position portfolio. We played and set it up conservatively. I did that intentionally in order to try to highlight the fact as the trader/developer I test and design these things in ways I feel comfortable based on historical backtests taking into account that things in the past can always overwhelmed by a worse current situation. I wanted to show readers that although these trades seem aggressive it is really a matter of how much equity you allocate to the idea. I tried to show you it could be done in a very conservative way.

After the last position closes I will review all the trades and we’ll assess how we did and use this realtime trade information so that we can maybe apply some of that knowledge in the next poke through 20.

On a side note the 2 stocks I mentioned also hit the respective 5% profit targets that individual equities use.

Have a Great Day!

Dave Johnson

You can’t make this stuff up guys. EWG hits the 3% profit target right out of the box.

I will update tonight.

Have a Great Day!

Dave Johnson

Because we remain under 20 onn t2108 I scanned for ETF’s that crossed below the 30 level with the Ultimate Oscillator. Only one met my liquidity requirement but I will let the other one slide in because our exposure is so low for the system with only one holding.

I am going to select EWG and IEO be the new entries for tomorrow open.

This morning was absolute panic/fear and not many blogs or financial sites recommended a trade like I did today. I knew through testing that risk was actually less in those emotionally tense moments before the open. Contrary to what the trading community believes. Either way there are no guarantees in trading only probabilities and it’s understanding these probabilities that allows me to “frame” a trade into a set of rules that define entry and exit - unemotionally. Within a 15 minutes our first target was hit one the XLE and in another hour the DIA target was hit.

Think about that…an index moving 3% in such a short period of time- an index. In system design and backtesting I see this quality in a metric called “profit per bar”. Meaning as I evaluate all of the trades over the data set, they are the systems that tend to produce outsized gains in short time periods. Those types of trades tend to happen near emotionally charged and fast moving downward markets. It happens over and over and over. In every decade, yet I will implore readers or colleagues and friends to take the trade and they almost invariably prefer to “wait and see”. And of course they miss the trade. They fear open ended risk yet they allow their index funds in their retirement funds to be in stocks. If you can not clearly define risk then the trade must remain small - a very simple rule. But whatever you do don’t pass up the trade. The longer you follow this trading game the better you will be able to sense that panic opportunity yourself.

This morning the lemmings froze at the wrong time.

Have a Great Night!

Dave Johnson

Not bad having both our entries from this morning hit our 3% targets in short order. Excellent. I hope some of you profited from those trades.

Have a Great Day!

Dave Johnson

Man that was a quick in and out on XLE. Maybe DIA will get the 3% as well?

Have a Great Day!

Dave Johnson

Well as many of you have probably guessed I was waiting patiently for the market to reach the under 20 level on the T2108. For those who have not followed along in the past this indicator represents the percentage of stocks above their 40 day moving average. A reading below 20 has tended to mark the areas of extreme deviations than can lead to small or even large snap back rally’s.

The last time we crossed this level I described a simple system that would allow you to trade to the long side with a portion of your portfolio that may be in cash now. I set it up as a system that would only buy ETF’s that have crossed below the 30 level on the Ultimate Oscillator when T2108 is below 20.

The system can hold a maximum of 8 holding and can only add 2 holdings per day. Our last foray below T2108 we added VNQ which hit it’s 3% profit target and EWS which has not hit an exit yet. It is down about 11% from entry so the system is overall down about 1% since I highlighted the system, certainly way outperforming the market in this wretched time for long equities. Having met all the conditions on Friday I am going to add DIA and XLE on Mondays open. This will bring the portfolio to 3 out of a possible 8 holdings. Remember a system does not have to represent your whole portfolio. You could have a series of systems each with their own percentage of equity of the entire portfolio.

If we remain below 20 on the T2108 after Mondays close we will look to add more ETF exposure if we remain below that 20 level. I had also mentioned in the original post that you could use individual stocks with this method. A couple more liquid stocks that were below a reading of 25 on the Ultimate Oscillator now and may participate in any snapback are:

ADBE

GNTX

The exit is a cross of 50 on the UO or a 3% profit target on ETF’s and 5% on stocks. Whichever comes first. But for the sake of record keeping I will stick to tracking the ETF portfolio for you. Let’s hope futures gap down Monday and not up huge.

Have a Great Week!

Dave Johnson

It has been about 12 trading days since I first highlighted a system to trade extremely oversold conditions in the overall market using the T2108 indicator. Based on the last foray below the reading of 20 on that indicator we picked up 2 positions, VNQ and EWS. Remember we only add 2 positions per day and we only spent 1 day below that 20 level. VNQ had quickly hit it’s profit target of 3% and EWS stands -4.7% below it’s entry level. So our 8 position portfolio using this system has a return of -0.2% over the past 12 trading days. Not too bad considering the nature of the market since then. Basically it has sat in 75% cash waiting for another poke below the 20 level or have a current holding hit a profit target. Or cross above the 50 level on the Ultimate Oscillator as the other exit rule.

The current market weakness has now pushed T2108 to a reading of around 30.

So maybe with some bad market days we can get that sub 20 reading. If so maybe the system will have an opportunity to add some exposure.

Speaking of exposure, as I have mentioned in the past where do you think the trend component, on daily bars, of equity correlated stocks would be invested now? That is right. Cash. So in very negative type market environments it is a good idea to have opposing systems each with their own segment of the overall portfolio. In the ETF oversold type system it could potentially add a few positions. But would that system be 100% of the overall portfolio. No it represents a portion of a collection of systems. A collection of systems with positive expectancies can lead to less volatile returns as well avoiding large drawdowns. What do you think a trend system of non-equity type ETF’s based upon daily bars would be invested in now. That is right all that commodity based stuff that has been on a huge run. Look at the charts below. Blue dots are entries. Red are exits. John has discussed this trend following system in the past he named Fuzzy.

I want diversification of timeframe, investment class, and trading systems (good post explaining system diversification). With the whole portfolio being a proper balance of systems that best enhance and complement each other. This is in my opinion the most difficult part to piece together as it really takes some walk forward in real life to see how the systems react together. Having seen many of these market waves up and down in the 20 years I have followed the markets on a very close basis it has helped me to piece systems together that make logical fits. Over time these have evolved and will continue to evolve as I find new ideas and concepts that I believe may have a role in the overall living breathing portfolio.Have a Great Week!

Dave Johnson

From out original list of ETF’s that triggered 6 days ago another one has triggered an exit. The difference with this one is that it is exiting on the Ultimate Oscillator crossing 50. Remember the exit was one of two scenarios. Whichever triggered first. In this case it was the Ultimate Oscillator crossing 50 before nailing the 3% profit target like the first few exits. It is presently up  1.67% and would be sold at tomorrows open.

Have a Great Night!

Dave Johnson

It has been 4 days since I mentioned a simple trade setup using the T2108 and the Ultimate Oscillator. I wanted to show you what that list of ETF’s have done since then with a screenshot:

(click to enlarge)

As you can see from the original 7 symbols mentioned 2 have hit their profit target of 3% (FXI and HHH) and of remaining 5 we have a spattering of small moves and one down 3.47%. Of course that is one of the ones I randomly picked to mention to you for this example. A big part of trading is accepting responsibility for you trades and in this case I will clearly pass the buck to my wife. You see when I wish to randomize my entry signals with no bias I usually yell from the office to my wife “honey pick 2 of the these…VTV EWS EWJ VNQ XLY HHH FXI” , well she picked EWS and VNQ. So this lag is clearly her fault and I wipe my hands clean of all responsibility. But seriously I suspect these exits to begin to trigger over the next few days and weeks.

I hope all the readers have a great holiday and maybe in some small way this blog has helped you to look at the markets in a slightly different way. And ultimately that may help you and I in our quest for positive returns.

Have a Great Holiday!

Dave Johnson

Just a quick follow up on my post last night about the T2108 and Ultimate Oscillator System. The T2108 indicator popped back above the 20 level so we will not have any new entries tomorrow. As I noted last night the entries were to be EWS and VNQ at the open this morning.

EWS was entered at $13.84 with a 3% profit target at $14.25

VNQ was entered at $61.87 with a 3% profit target at $63.73

also if the Ultimate Oscillator were to close above a reading of 50  this would also trigger an exit.

Walking the readers through an example like this zeros in on the critical component of exposure. Before the trade we determined the number of entries the system can hold and how many can enter per day. If the market were to have a big up day tomorrow and trigger the 3% profit target my exposure would have only been 2 out of 8 potential holdings, or 25% exposure. Yet if I had taken all of the entries that triggered I could have 7 holdings as that was the number of buy signals we created yesterday. In portfolio level backtesting this component is so important to define. If you use the same entry criteria at all times your exposure could soar on some waves and on others it will be light. That is reality- real trading. You can’t just keep buying beyond your levels of equity or comfort. Yet if you are too conservative you may end up always having to little exposure. The key is through backtesting finding a happy medium.

Yet if I were not to explain this component and just throw out signals, and they happen to all win….what did that tell you? How much did the system move up? Without knowing how many positions the system can hold there is absolutely no way to say. Next time you see a trade thrown out by another market commentator make sure you know how much of the particular systems equity it represents and how much equity that system makes up of the total portfolio. Otherwise the value of such advice is quite limited.

Have a Great Night!

Dave Johnson

John and I have in the past showed you how the T2108 indicator can be used to pinpoint extreme pessimism and with that a potential for a snap back upward in the swing timeframe on daily bars. The T2108 indicator is part of the Worden Telecharts package and plats the percentage of stocks below the 40 day moving average. I have used it in various systems that I have developed to filter the fear/pessimism environments.

One of the systems I recently tested was stumbled upon the last time the T2108 crossed below the level of 20 in mid November. This also coincided with a period that I was testing the Ultimate Oscillator as another tool to trigger oversold conditions in ETF’s and individual stocks. The knowledge of edges in each of these indicators allowed me to combine them into a system for trading stocks and ETF’s.

Seeing a chart with the 2108 indicator on it during bull and bear markets may help you visualize what these periods look like. In both these charts I used the SPY to represent the SP-500 and noted a period in the last bear market as well as the most recent bullish period we have just gone through. The blue buy dots you see are only showing a period when the indicator went to single digits which we discussed back in August. I circled the clusters of days where the indicator was below 20.

Bear Chart (click to enlarge)

Bull Chart (click to enlarge)

The system I created will only begin to trigger buys when T2108 is below 20, which closed at 19.93 today after the selloff into the close. Now that the condition is turned “on” I can now look for the trigger with the individual stock or ETF. With ETF’s I want the Ultimate Oscillator to close below a reading of 30 and on individual stocks a close under 25. Today 7 ETF’s closed below 30 from my list of about 100 very liquid ETF’s. They are:

EWJ
EWS
FXI
HHH
VNQ
VTV
XLY

With this system any of these would be considered a buy. But as with any system we need to determine how much capital to deploy and how to enter the positions based on past drops. My testing has shown using a 8-10 position portfolio where on each day no more that 2-3 entries is triggered is about the best. So lets say we are going to use 8 holdings and we can add 2 new holdings on any one day while older positions are open. So if tomorrow is still below 20 on the T2108 we will look and see if any ETF’s are still below 30 on the Ultimate Oscillator. The exit for the system is like any system and is hard coded. It is either a 3% profit target or a cross above 50 on the Ultimate Oscillator indicator- which ever comes first. The 3% target can trigger intraday. A time out exit also comes into play beyond a 40 day holding period. That is it. Really quite simple,

For my portfolio I will be buying EWS and VNQ. Tomorrow we’ll see what other setups are brought to us. Oh yes the entry is at the open the day following the condition triggering. So my entry will be at tomorrows open. Here are those charts:

This system is truly a standout in terms of winning percentage, drawdown, and profit factor. In the last 8 years a total of 116 buys have triggered and 88% of them were winners. The average winner was 3% and the average loser was about 2.3%. I have tested beyond this period but I don’t want to go too deep into the past for now because we would have to confront some backtesting challenges and I want tokeep it simple for the blog. Needless to say the period beyond 8 years is just as good and provides validity to the most recent data.

Each wave that dips into these areas are unique and it would not be unusual to see a foray into these areas that are not profitable so as always allocate a reasonable percentage of the portfolio to a system like this and follow it to the letter.

Oh yes I mentioned the individual stocks portion of the system. Today from the Nasdaq 100 I have only SBUX triggering. So I will keep an eye on that one as well.

Have a Great Night!

Dave Johnson

I received some questions today if todays big up move confirms the long entry in the SP-500. It does not. Remember the entry is an up day with volume greater than the previous 21 days. We had an up day but volume was not even close.

Could be tough in the short term to overcome that big volume bar from 4 days ago. But hey who knows.

Have a Great Night!

Dave Johnson

With the recent protracted slide in the financial sector many market observers have noted how this could be a sign of worse things to come for the limping market. In last weeks post I noted how a slide on the magnitude of 16% in the course of only 20 days pointed to a wild ride ahead.

The sector has slid more this week and I wanted to update the stats and present you with a trade that I think is setting up. We now have that same S&P Banking Index down 18% in 24 days as of the close on Wednesday. This has only happened on only 6 other occasions since 1983. Truly a noteworthy occurrence. As I reviewed the charts of the periods that triggered this condition I noticed that at times the SP-500 was in sync with the weakness in the Banking Index and at times only mildly so. One thing that generally happened fairly soon after this big drop in the Bank Index was a high volume reversal in the SP-500. I defined the high volume as the highest volume in the previous month and happening on a positive closing day.

If I were to test this condition (highest volume up day) on its own the resulting pop tends to be quite unimpressive but if this high volume pop up is preceded by the large banking drop the results are huge.

As I had mentioned an 18% drop in 24 days has only occurred on 6 separate dates that I have listed below.

The dates listed are the day after a close below the 18% level. If after this date we begin to look at the SP-500 chart and look for a reversal as defined by an up day on volume greater than all days in the previous month (21 days we’ll use) we would look to go long the next day at the market on the SP-500. We are going to look for a target in the 4-5% range.

Below you will find all of the charts of the SP-500 with the trigger date listed, the reversal day noted, and the profit target area were looking to hit. In each of these cases the target was hit very quickly even after entering after the large up move. The second entry date listed in 1998 actually happened while waiting for the earlier date to trigger a buy so we will only see 1 historical chart below for the 1998 entry.

This chart above of the 1998 entry shows our exit hitting in less than 2 weeks.

______________________________________________

______________________________________________

Again the entry in 1999 above hits our target in only 11 trading days.

______________________________________________

______________________________________________

The 2001 trade above hit out target in just over a week.

______________________________________________

______________________________________________

In this the first of two 2002 entries our target is attained in only 2-3 days.

______________________________________________

______________________________________________

In this second entry of 2002 we again hit our target area in just a few days.

_______________________________________________________

_______________________________________________________

On average we see the large volume reversal entry day within 12 days after the large drop condition triggers. 1999 was the one that took much longer. All the others happened very quickly.

On average, our target area is hit in about 5-6 trading days. Think about that a 4-5% upside move in the SP-500 in 5 days.

Based upon this analysis I will be on the lookout for the high volume upward punch that will catch the shorts covering and those with limited equity exposure trying to catch the ride. As for me it is a trade. Nothing more. After my exit the markets can tank all they want. All I am doing here is trying to frame a trade. In terms of a stop - based on this historical snapshot I’d say a stop in the 7% area should allow enough room for the trade to work.

Keep your eyes peeled because if we get it. I won’t miss it.

Have a Great Weekend!

Dave Johnson

The compelling trade I noted last night ended up positive on the day and will not trigger an exit until T2108 crosses the value of 12 - were at 10.79 as you see below.

Have a Great Night!

Dave Johnson

Last week I had thrown out to you a swing trade that had triggered in my swing trading system. This system is throughly backtested and has clear entry and exit rules. The trade in ETFC is a good example of some key trading concepts that cannot be stressed enough when system trading as well as discretionary trading.

As you can see noted with the red arrow we are presently below that entry price. The exit for this trade is Thursday’s open.  No ifs, ands, or buts. An exit in system trading is an exit. PERIOD. Most traders do not seem to grasp the concept of closing a position before it goes profitable. What you must understand is that I have hundreds of thousands of trade examples in my backtest data and I certainly am not able to assimilate all of this information on a trade by trade basis by eye. In the end 65-70% of all trades close profitably. The data speaks for itself. The exit I have passed along to you for this trade is quite simple. Exit when price closes above the high of the previous 2 bars. Keep an eye on those in any timeframe you may monitor.

Another broad concept I want to convey that maybe you had missed. This trade had occurred during weakness in both the major market indexes as well the stock itself, ETFC in this example. These are even higher probability swing plays when looking for the when and what to swing trade. I know this flies in the face of conventional swing trading wisdom - but again I can prove it outperforms those conventional methods by far based on my extensive backtesing in all of the various market conditions.

So in the end I passed along a trade that had about a 85% chance of winning. But dang if it didn’t (well maybe it will gap up tomorrow). Which leads me to the last lesson. No matter how much data, backtesting, and confidence you have in a trade - it is NOT a sure thing. Based on this knowledge you must spread your trades and risk across various systems and market positions. This is absolutely critical to have enough ammunition for the next fight.

In that same post I had also posted the SP500 chart noting its consolidating pattern , where you had a confluence of a few patterns of a bullish and possibly bearish look. What ultimately happened was what I thought was the most likely occurrence. A run through the previous wave low and taking out stops of the players looking for a high risk/reward trade. Classic. (Compare chart to previous post)

Let’s see if that upper trend line and a general resistance area slow things down this week and next.

And for those who have asked when my live futures trades are coming again all I can say is soon

Have a Great Night!

Dave Johnson

ETFC has been coming up on my mean reversion scan. The system itself is a swing trading system in that it has a full set of definable entries and exit rules and holds from 1-10 days. The exit for this trade will be a close above the highs of the previous 2 bars. A stop loss will not be used so this trade would need to be part of an overall portfolio - not 100% of the portfolio.

With an obvious double top/head and shoulders and a potential stop harvesting low below us on the SP500 - this should be an interesting week. Oh yes throw in FED stuff this week. Very interesting indeed. Wait if we go up from here is that an inverted head and shoulders

Have a Great Day!

Dave Johnson

I just wanted to give you the official update on the SP-500 swing long trade. McClellan (T2106) closed above the zero reading. This was the exit I was looking for. The exit is Mondays open. 40+ SP points as of todays close.

Let’s look at how backtesting can give you an edge.

• gave me an idea of historical after entry drawdown
• gave me an idea of the average holding period
• gave me an idea of the types of return to expect

Let’s look at the graphic I posted last week with the original trade recommendation:

Let’s see what this trade looks like:

+2.83% Return

6 Bars Held

MAE = -0.22

Kind of an average trade eh? THAT is the power of backtesting in a crystal clear example. A historical edge was demonstrated with a clear and concise picture of past trades. This time it worked out in my favor. I hope it did for you too. Let me know how you played the trade.

Have a Great Night!

Dave Johnson

As a follow up to my post on the -200 reading on the T2106 indicator and the backtest I ran, it looks like we’ll be adding another winning trade to the list of past winners. The indicator more than likely will have a closing value above zero at the close today which was the exit we used in the backtest. Intraday it is above that value. We nailed that bottom perfectly and are up 44 SP points. Nice.

For some reason this particular buy signal seemed to really rub some people the other way. I received quite a few emails/IM’s that said I was stupid/crazy/perma bull - all I can say is making statistically probable trades is rarely easy. It’s always during some crisis. This time it was surging bond yields. My point is it was not the time to be short based upon our historical backtest. For those that were - my brokerage account thanks you.

I will do a follow up tonight to make sure we get the zero cross for a closing value.

Have a Great Day!

Dave Johnson

The long setup I had proposed for Tuesdays open in the SMH would be an exit today. I ask you. Would you have been stopped out of this trade? Maybe we can get into Market Myth 2- STOPS - maybe this weekend.

Dave Johnson

I would be looking to enter the SMH (semiconductor ETF) Monday with an exit being a close above the high of 2 days prior. That is at the close of subsequent days, look back at the high of 2 days prior. If your higher - exit next day at the market. It’s an exit that is used quite frequently in our backtested systems and is also very simple to see visually.

A pop up in the semis would most likely be in conjunction with the market as a whole - so it’s possible the recent weakness in the Semis point to a upward pop in the market.

Does anyone have a clue as to what the entry criteria is for the QQQQ KISS trading system John had posted last week? Look at the number of entries. Look at the returns. Remember it can take 8 potential entries - so each entry is 1/8 th of portfolio size and the exit is as I descibed above (wait did he reveal that yet?). No one has guessed it yet and I am so surprised. At least guess!

Anyway think about it. It’s really so simple as to blow the mind.

Have a Great Rest of your Holiday!

Dave Johnson

In my post a month ago, I chronicled how I had received a second entry in my ETF trend following system for USO. Now that the position has had some time to develop, I wanted to post a followup. Here is the daily chart showing my initial entry, my second entry, the max positive excursion and max adverse excursion:

As you can see, after the second entry, USO continued down for a few more days and at one point, the first position was ~5% negative and the 2nd was almost 4% negative. Then the Iranian’s captured the British sailors causing a quick rally in oil. At it’s peak, the two positions were up 9.3% and 8.3% respectively. USO has since pulled back and the positions currently sit at +4% and +3%.  The system has not triggered an exit yet, so I’ll be holding until it does and will be sure to make a post when I do exit so we can evaluate how successful the trade was.

What is important about this is not the actual numbers, but becoming familiar with exactly how a system trades to allow you to execute it properly. In the past 30 days, these positions have had an almost 15% swing from low to high, which is to be expected for a commodity as volatile as oil. It’s also important to remember that the average winner in this system is 14% while the average loser is 4%.  These are the numbers that should drive your position sizing.  Look through all the trades the system generated.  What was the worst loser?  Take that value and double it.  Now multiply that loss by the percent of your portfolio you plan to allocate to each trade to determine how much the individual trade impacted your overall portfolio.  Is that a number your comfortable with?  If not, reduce position size until you are comfortable.  I use a relatively small position size (~2% of my portfolio) on each entry.  In the case of USO that has the max of 2 entries, I have a 4% exposure.  If USO were to gap down 25%, I’d be looking at a 1% loss of my portfolio overall (4 * .25), which is a number I can live with.

- John

I decided I better hurry up and make a post else people would start thinking this was only Dave’s blog. Although he has been doing most of the posting so far, now that I’ve got the site complete on the technical side I will be contributing more.

The first symbol I want to talk about is USO, the Oil ETF. I have a trend following system I wrote in Wealth-Lab called “fuzzyma”. The name comes from the entry logic which uses a MA crossover type with a twist to help avoid whipsaws (hence the fuzzy part). It also allows one follow on entry, so any symbol can have a maximum of 2 entries. I trade this system on a list of 30 high volume ETFs containing most of the individual foreign markets (EWJ, EWC, EWY, etc) , the large US inidices (QQQQ, IWM) and any commodity ETFs I can find (USO, SLV, GLD, etc).

This system has triggered a 2nd entry on USO for Monday. My original entry was 2/9/07 @ 50.05. Looking at the chart below, you can see how the first entry was based on what could be the beginning of a new uptrend and the second entry (tomorrow) is taking advantage of the recent consolodation.