So, on to my next endeavour.
I don't know what to call this but it involves trend trading, sort of seeing trading with a slight twist.
I am plotting a few indicators and overlays that I have been comfortable with for the last while. On the chart below I left the legends on so just click on it for a larger view.
The solid lines are the typical simple moving averages. The dotted lines are 100 day simple moving average envelopes which I was using a while ago to determine entry and stops for trades. I never really used them but they certainly help visualize stops while the price is in the channel.
The oscillators are both Williams %R which is just an over sold and over bought oscillator similar to Stochastics. I am using the 14 and 5 day for comparing two timeframes without plotting two charts.
The bottom indicator is the Bollinger Band,a volatility indicator. I was going to use a standard deviation but it is identical to this.
Here is a stock that I am currently trading using options. It was a trade based on the service that I just recently cancelled as they were providing one trade per week and I didn't feel that they did much more than watch for chart activity. It is worth noting that I bought long options on September 14th...according to this chart it was the wrong time to go long but I still have some time to go before expiry so I will see where it heads next.
ININ - Interactive Intelligence Inc.
I plotted green and red vertical lines to represent buy and sell indications. As the %R in both the 5 and 14 day period dip to -80 the next day the stock is bought at the opening price, that makes it simple but lower limit orders could be used. Seeing as the stock is trending nicely I could have easily just bought when the price came within a certain range of the 50 SMA, a typical swing trade move. I will plot this over other stocks in varying trends to see how it holds later.
The exit is as important, or even more important, than the entry. Seeing as I am using options I plan on buying options with strikes close to the stock price at the time, estimate the timeframe to determine expiry dates for the price move and not use stops. The total trade cost will not exceed my maximum loss allowance at the time. If I were using stop loss orders instead I would use one of the 100 SMA envelope lines or the 50 sma.
The key is when to take profits and this is where this strategy helps as it takes the subjectivity out of the process.
Initial stops are easy enough, use the SMA that closely corresponds to the Maximum Loss Allowance or an unbroken SMA that forms a trendline and move them with the SMA chosen. The stop will move up slowly. As long as the price does not move too far off the lower trend line (no straight lines here, just the SMAS) there is no need to do anything other than adjust the stop every day or two.
Once the price moves then there are two methods of exit:
1)$3 target (or any price of choice)
a) with stop loss exit
b) with limit order exit
2) %R short term dip
The first is easy enough. Using the entry method I believe that a tighter stop than the profit target can be used. In the ININ example a $1 stop could be used initially and a $3 profit target provides a 3:1 profit to loss ratio, acceptable. Once the price moves in my favour I continue to move the stop loss with the SMA.
Option a) has me move the stop loss up to the $3 target as soon as, or very soon after the stock price passes this price. Exit will be by market order once the price touches the stop. The advantage to this is that the stop can be moved up tight with the price in order to secure greater profits should the price move higher. The disadvantage would be the possibility of the price gapping down through the stop.
Option b) has me placing a limit order and getting the $3 profit, or better if the price is higher at the time of the order placement. The advantage is that once the price is above $3 I am pretty much guaranteed that profit. The disadvantage is if the price continues to move up I miss some additional profits.
Option 2) has the exit order place the day following a dip below -80 on the 5 day %R.
There is a third exit, if the price moves slowly up then the SMA stop keeps moving and either gets hit along the way or just keeps following the trend. The loss slowly reduces along the way and may turn into a small paper profit position.
ININ
Three trades plotted in the last six months profit using:
1)$3 target (or any price of choice)
a) with stop loss exit = $12 (trailing by $1 raised in 50 cent increments)
b) with limit order exit = $9 or slightly better
2) %R short term dip = $9.15
No matter the method there were profits to be had, and that is the important part.
I won't go into the possible option strategies here but suffice it to say that options for this stock could be had for a fraction of the cost of the stock.
One thing that I see mentioned about trading with any type of automatic or mechanical style is that they are prone to curve fitting. I think that the problem with washing any strategy as curve fitted, making the indicators work due to the stock price activity, is that it works historically for a stock and that pattern can be used to identify other stocks that are in similar early stages of the fitted strategy. So why not use the fitted strategy and in turn fit the stock by pattern fitting? I have a successful short list of stocks for my P & F strategy using this idea. Therein lies the key, stock selection to match the strategy employed and not trying to make a strategy that works for a few stocks work for every stock or even ones that I may like to trade.
I think that almost any strategy, if proven for some stocks, can be made work in this way. The second key is in recognizing when the fit is no longer good. This is accomplished by keeping records and tracking performance in order to see when the overall strategy no longer works for a particular stock or group of stocks.
Jeff.
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