Keeping in mind that CTP is, as far as I can tell, my own trading style as I haven't seen it anywhere yet and I have read a lot technical blogs, sites and as much as I could glean from services and books while browsing. It is a combination of styles that I have seen though. I find some swing trading, position trading, some level of buy and hold, trading for targets....maybe some others along the lines of technical trading with indicators and patterns. I liked the idea of mixing it up to come up with one general strategy that can work in all market conditions from a select number of stocks.
I went over my goals for this particular strategy.
1) not lose money overall
2) make some target profits
3) be in a really good position when the price breaks in your favour
1 leads to 2 which leads to 3.
Counter Trend Positioning broken down.
Consider that a trend can be one of four types...keeping it simple.
1) the uptrend, everyone's favourite, price is moving up
2) the downtrend, everyone's bane, I like them though...it's the whole basis for CTP
3) the consolidation...mostly horizontal, there are a few styles but that doesn't matter right now
4) the "churn", no real trend the price seems to follow no real pattern at all
Consider also the old mantra "buy low and sell high".
So, the best place to be is buying a stock when it's price is the lowest. That would mean buying a stock at the very end of a downtrend. So how do you tell when a stock is at it's lowest or the trend is reversing? The easy answer is that you can't with any real accuracy. This is where CTP comes into play.
THE DOWNTREND (over simplified)
I've marked the chart as follows: (now that I look at it it looks like a kid's drawing with crayons...track ball drawing is fun.)
black squiggly line - the price over time
blue lines - trend upper and lower boundaries
red circles - buy zone
green circles - short sell zone
So the plan would go something like this.
1 = short after the peak
2 = cover near the bottom then buy after the bottom bounces (this is the Counter trend part)
3 = sell after the peak using a stop as an exit strategy (the after is critical...more on that another time) then short after the peak
4 = cover near the bottom then buy after the bottom bounces
5 = sell after the peak again, followed by another short sell
6 = Cover near the bottom then buy after the bottom
The price passes the upper trend line at BRK (= break) and planning on selling AFTER this possible peak IF the price had dropped leaves me in the stock as it breaks the trend up and does not drop back yet.
7 = this peak establishes one of the first points of the upper new trend line I will do nothing as I want to stay in
8 = buy more shares here...margin may be used here under certain circumstances.
The period between 6, 7 and 8 is where all the fun is and it can take a number of forms. This rough example is a clean break and determining where #8 is going to be is a whole other topic. Suffice it so say that the gains realized from 1 to 6 should result in a good cash position where the risk tolerance can be increased in order to give the price movement more room to help the break play stick.
Keep in mind that 1 to 8 might take a year so there isn't a lot of trading going on until there are a few stocks in the portfolio that are being managed.
This is the Positioning part of CTP. I have effectively met all of my three primary goals without having to try to time the trend reversal by just being there each time a trend change could occur. From the example and a bit from my actual trading:
1) not lose money overall
This is only one stock example as the overall is really aimed at the entire portfolio, but if half of the stocks do this good a loss isn't in the books. The startup is the risky part while things get going and I am trying to establish excess cash from the initial target trades. Small loss allowances, tight stop loss settings and small sized trades. I set some quantitative goals which I don't really expect to be met in the first few months...but it gives me something to aim for. My first trades were mis-aimed as I jumped the gun on the final plan by a few weeks...but I still learned and I am still ahead so I am satisfied.
2) make some target profits
In the example I have made money with the short/cover buy/sell trades along the way, (the individual initial targets). In m ytrading I have made some and lost some but I am ahead overall and every time a stock gets sold for a small loss or profit I replace it with another and put the recently traded stock back in my watch list for the next cycle...it doesn't get dropped only because I may have set my stop wrong.
3) be in a really good position when the price breaks in your favour
Well, in the example, the price broke and the next steps would be to continue buying as each new low is made in the new trend thereby adding to the position and increasing the rate of gains after each new addition. At this point the strategy is to remain in the stock as long as the trend up continues. If the stock pays dividends, bonus money, if the stock splits, even better. This leads to the comfortable situation of being able to let the stop ride considerably lower than the new lower trend line which leaves the stock price lots of room to swing and continue moving up while buying at each low. My stop will sell the stock automatically when it breaks the trend and heads back down.
Then you can start the process all over again to catch the next bottom.
JD.
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