Profitable, but with a lot of work unless a good set of rules were established to govern the trade management.
This is an example of a very simple trade entry plan using some basic trade management rules to provide a profitable, even if not a stellar, outcome.
I used the NYSE McClellan Oscillator (ratio adjusted version) and applied it to SPY to provide a very simple trade indication. The oscillator represents the rate at which stocks are becoming overbought or oversold. To be honest I am only interested in the easily seen correlation between the overbought value and the corresponding price moves in SPY, not the math behind the oscillator itself..
The green box on the oscillator chart below (3 years, daily) is the sweet spot where the more extreme oversold indication has some validity on placing high probability trades, values of -80 or lower.
Here is the SPY chart in the corresponding 3 year period.
As the oscillator line hits -80 I note the price candle of SPY for that day, green arrows. On the next day if the opening price falls within the range of the previous day's candle body or lower, buy at the open price or lower. Although using a lower price can easily be done it is a rather subjective decision and requires more rules to govern the trade entry. Therefore, in order to simplify the process there can be no exceptions to the simple entry rule and the opening price is always used.
I started out using a staged exit strategy but found that it was not only not necessary, it also hindered the profit potential by providing smaller, incremental profits. While these incremental profits serve to make me feel good that there are profits early on, they reduce the overall effectiveness and simplicity of the plan by 10% or more.
A brief outline of the management plan sounds something like this:
Each trade is opened and treated as a single position throughout.
An initial stop order is immediately established based on the opening trade price, this is a static order.
Particular staggered targets are established for the purposes of adjusting the trade exit.
As the first target is met, a VTSO is placed and set based on this target price.
As the second target is met, the VTSO is tightened based on this value.
As the third target is met, the VTSO is reset again but loosened by a small percentage, this is optional.
At this point the trade is running solely on the VTSO for exiting.
At any time that the price reaches the VTSO value the position is closed, profit or loss.
The advantages of the plan:
Using a VTSO allows for the stop to automatically be raised as the price climbs and allows the price to continue to climb dragging the trailing stop with it. Having multiple staged and fixed targets provides some intermediate adjustments of the trade to reduce the risk once the price starts to move in a favourable direction. This particular setup is simple as it allows a wider margin initially while tightening up the stop progressively without getting stopped out of a trade prematurely.
The draw back of this plan lies in the case where the price drops immediately following the initial entry position as this can produce the largest loss and is very disheartening if the plan is not adhered to thereafter.
I think that I would allow for further targets to provide for more adjustments of the VTSO along the way and perhaps a target, fairly large if hit, to close half of the position.
Having said that, a lot of time is spent sitting on cash between trades so I certainly don't suggest this as any core trading strategy, just a little moneymaker on the side.
Easy in and easy out.
Jeff.
