Monday, July 22, 2013

Analytical time-span

When a symbol gives a bull or bear signal, my initial screening begins by calculating past odds of a profitable trade in the direction of the breakout during the present long-term trend.

A nice sentiment, but it lands me square in the middle of a swamp of ambiguity: What's a trend? What's long term?

Any trader who has ever looked seriously at a chart knows that any given moment in the markets embodies a multitude of trends, ranging from the quantum leaps of the tick chart to the jitterbugging of the five-minute chart up to the slow Buddhist chant of the weekly and monthly charts.

The trend depends upon where I focus my view.

"Long term", of course, faces similar ambiguities. Long-term to me is anything longer than three months, since my positions generally last 30 to 60 days. Warren Buffett would consider three months to be short-madness. My day trader friends would find three months to be so large a span that it would be invisible to them, much as an elephant is beyond the ken of a gnat.

I need some precision, and have over the past few months implemented a more precise definition, which I've codified in my trading rules, as follows.

First, two addition to the "Definitions" section:
  • Current Primary wave: An upward correction in the S&P 500 that began Oct. 4, 2011 from 1074.77. (See the “Elliott wave system of counting” definition, below.)
And then a modification to the third graf of the "Entry" section:
For all such breakouts, I calculate the number of times each symbol has broken out in the same direction during the current trend, defined as the current Primary wave of the S&P 500 under the Elliott wave system of counting, and the number of those breakouts that produced a profit.
The full text of my Trading Rules can be found here as a Google doc.

I rely on Elliott Wave International in determining the start of the current Primary wave, or trend, and its nature. EWI is one of two outside services that I use in my trading. The other is Zacks, whose database of covered stocks provides me with the bulk of my analytical universe of symbols.

Both EWI and Zacks are tools I need for my system to function, but neither figures in my trading decisions. Those are based entirely on my version of the Turtle trading method, which is described in my Trading Rules.

And neither is irreplaceable. I had identified the Oct. 4, 2011 low as the start of the current trend long before I fit it in with Elliott waves. I've used other methods for obtaining an analytical universe, such as screening for a certain minimum volume.

However, they are beneficial tools. Using the Elliott wave count as the start of my analytical period means that there is a certain consensus that the date I use has meaning in the history of the markets, and that brings stability to the process. Zacks gives me a degree of certainty that the stocks I'm analyzing are interesting, because Zacks has taken an interest.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment