Monday, November 3, 2014

Trading rules changes: 12-month moving average and Discretion

I've made some changes to my longer-term rules and shorter-term trading rules.

I'm changing the hedge entry and exit signals for my longer-term trades, which are intended to last at a minimum one year. Previously, the hedging signal was a move below the 55-day price channel. I'm changing that to a close at the end of the month below the 12-month simple moving average.

The reverse is true for exiting a hedge. A monthly close above the 12-month simple moving average gives the exit signal.

This change will allow me to avoid the greater part of the losses from a downtrend while minimizing the need to hedge and, therefore, the fees associated with hedging.

In an essay last year I posted an essay on using the 12-month moving average as a signaling method. See the "I hate stocks trading plan", posted Oct. 10, 2013.

In the shorter-term trades rule set, for trades that typically last a month or several, I'm adding an element of discretion to the entry and exit signals, and also returning the price-channel exit signal for holdings to transversal of the 10-day price channel boundary opposite the direction of the trade. The latter change eliminates the floating stop/loss point that I have been using since March.

I'm making the change because since September, I've run into a number of price-channel exit signals that differ from my Elliott wave analysis. They've been triggered by a relatively low-level breakout within a larger contrary pattern. By using discretion to use resistance levels, identified through Elliott wave analysis, in selecting the signal, I can cut down on the number of false signals.

Trading those signals flies in the face of common sense. Rather than evading the rules, I prefer to modify them in order to match ground truth.

There is, however, danger in discretion. It's fine to counsel a trader to use common sense, but discretion opens the door to wishful thinking, and such thinking is a plague set upon profit.

So "discretion" must be taken also in the sense of its close relative "discrete". It cannot be a reason to hang on foolishly when the market reverses, clinging to false hope of a turn-around.

But there is a precedent. I have been using discretion, under my rules, in the late stages of analysis when selecting trades. A symbol that gives a signal while clearly below resistance doesn't make it to the full analysis stage. My using of the Elliott wave analysis when doing a complete work-up involves applying discretion in framing the chart, and in making the final trading decision.

So we know how to do this, we regular followers of Private Trader. We've been doing it upon entry for quite some time. This change simply takes that same discretion and applies to to exits, rolls and the Watchlist.

For specific changes, see the new entry "Discretion" in the Definitions section, as well as changes to the Entry, Exits, Rolls and Watchlist sections.

-- Tim Bovee, Portland, Oregon, Nov. 3, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

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 decisions for his or her own account, and take responsibility for the consequences.

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