The VTSO trade for SPY, active

If you read my last post it briefly outlined trade ideas based on the McClellan oscillator as a trigger and the chart indicated a trade to open on November 15th.

Here is the oscillator:

...and here is the current SPY daily chart:

Today the adjusted VTSO has the stop at $134.76. While this price is still below the entry price of $135.98 the loss, should the stop be triggered now, is not very great.

I toyed around with the idea of taking profits at 4%, 6% and 8% gains along the way but found that just leaving the VTSO run and adjusting it at those particular points in the trade is more profitable by about 10% overall. While the smaller realized gains serve to give the feeling of success, they are not necessary. Having said that, a target exit of 6 % has the best bang for the buck if I decided to go that route for a smaller sidebar trade.

Jeff.

The VTSO as a trade management tool for SPY profits

I have toyed around with all sorts of indicators in the past and found some nice correlations that could have turned into decent trading plans. The only downside, usually, was that there were a high number of trades indicated with a large tendency to get whipsawed right out of the trades.

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.

ABB Stock Market Trading continued, Proper comparison

Rather than add to one of the previous posts, here is a note on comparing one trade size to another followed by a bit about account size and trade determination.

My initial simple trading plan included trading at least one lot (100 shares) of a stock. This produced a particular return, profit or loss.

Adding levels of complexity that introduces additional concurrent trades or splits up the initial trade make it a little bit more complicated to compare one against the other. At least on a dollar for dollar basis.

In the first plan I trade one lot, 100 shares bought, 100 shares sold at target or at stop loss. In the second plan it is the same entry but the first 50 shares get sold at target and the second get the VTSO treatment, or the whole lot stops out and is sold for my Maximum Loss Allowance (MLA) for that trade.

Easy enough.

In the subsequent alterations the entry trades go from the above guide to one entry at the initial target, perhaps a second and perhaps a third at subsequent targets. The farther along in the sequence the more shares traded due to the second and third possible trades. Cutting the altered trade sizing to 1/3 lots or tripling the initial plan isn't a fair comparison as many of the second entries do not set up and even fewer of the thirds. Then again, counting three trades with a combined size of 300 shares is not fair to the initial plan only using 100 shares.

It boils down to a subjective assessment of the win rates and returns that fit a particular account size and applying appropriate money management rules to determine which style fits both the account and the risk tolerance of the individual. This should be completed up front and in writing in order to have a guide to stick to. Making these up and the fly is not a great idea and can lead to problems later on, although not necessarily with a successful and profitable plan.

Here are two particular examples for an attempt at comparison, ABB at around $14 in the middle of 2009.

Simple trade plan, 100 shares in and all out at targets.Typical initial target is for $1.50 but how much of that is aimed for depends upon the price movement following the entry.

Buy at $14, sell at $15. $1 per share = $100 gain (7.1%)

VTSO applied with $1.50 trailing stop, 100 shares in, 50 shares out at target, 50 shares to trail.

Buy at $14, sell 50 at $15 and sell 50 at $17.50. $1 ps + $3.50 ps = $225 gain (16.1%)

Multiple entries and exits according to the final plan setup.

Buy at $14, sell 50 at $15 and sell 50 at $17.50. $1 ps + $3.50 ps = $225 gain (16.1%)
Buy at $13.50, sell 50 at $15 and sell 50 at $17.50. $1.50 ps + $4 ps = $275 gain (20.4%)
Buy at $13.00, sell 50 at $15 and sell 50 at $17.50. $2 ps + $4.50 ps = $325 gain (25%)
Total gain = $825 (20.3%)

Worst case loss for the respective plans:

Simple trade plan, 100 shares in and all out at stop loss.

Buy at $14, stop loss at $12.50. $1.50 per share = $150 loss (10.7%)

VTSO applied does not matter as the initial stop is always $1.50 on this priced stock, same loss.

Multiple entries and respective stops assuming the worst case according to the final plan setup.

Buy at $14, stop at $12.50. $1.50 per share = $150 loss (10.7%)
Buy at $13.50, stop at $12. $1.50 per share = $150 loss (11.1%)
Buy at $13.00, stop $11.5. $1.50 per share = $150 loss (11.5%)
Total loss = $450 (11.1%)

Keeping the worst case scenario in mind and using the typical account loss allowance of no more than 2% Maximum Loss Allowance on any single trade, this trade alone would require an account balance of $22,500 even though the trade only used $4050 in capital. Going with the smaller 100 share trades and keeping to the simpler single entry and VTSO half trade exit, the account could be $7,500.Of course these assume that this is the only trade on the map.

I'm breaking this into another post, again due to the length and this is a good place to break as the topic is shifting a bit.

Based on the numbers that I am looking at now, I think that the best comparison may just be no direct comparison and to consider the account and go from there. Starting with a small account may mean restriction to initial entries only and perhaps targeting lower priced stocks. Adding more stocks to the mix as the account grows then adding the second trade setups and thirds will allow the account and methods used to grow accordingly.

The win rate and overall returns will govern where I think the money is best applied which leads me into the more complex trades. Ideally taking every trade setup as it appears and making every trade at every level is the best overall action for this trading plan, it just may not work for everyone.

Jeff.

ABB Stock Market Trading continued, Short Sell

My last post gave a brief overview of some of the results of my past studies applied on a current trading plan using only long trades, buying then selling.

This time I want to look at the short selling of the same stock.

I have run into the odd time when I was forced to cover a short position due to the broker's requirements but those are few and far between enough that I don't think I'll worry about it happening that much. Worst case, if a particular stock is difficult to short, I will drop that facet of the plan for that particular stock.

Short selling is basically you borrowing stock from the broker in order to sell it to someone else. The value of the stock at the time of "borrowing" will be the same value that your buyer purchases it at. The purchase transaction is held by the broker until the stock is returned. The idea is that if the price goes down, it is bought back by you (covered) at the now lower price and is returned to the broker. Technically you have managed to borrow an expensive item, sell it only to buy it back for cheaper. You get to keep the difference. This difference is deposited to your account once the transaction is completed.

The old adage of buying low and selling high remains the same except that it is also true to say that you can sell high and buy low.

The reason nobody likes to do this, less than 2% of traders ever short sell a stock, is that the implication is that if the price goes up, the difference now comes out of your account. While buying a stock the value could drop to zero and you lose 100% of the investment, shorting has no limit on the loss, in theory. Once it is short sold, the price has no technical limit and the loss could be greater than 100% of the value of the stock.

Of course this is why stop loss orders are used and adhered to.

The other side of the argument is that typically price moves down are much faster than moves up and a short sale tends to be a much shorter duration trade than the long. This means that the price moving against you is not likely to get away very fast.

On to ABB and the application of the newer methodology.

I'll use the same ideas as the long trading plan but I'll skip all the proving of single entries vs staged entries and fixed profit targets vs VTSO partial exits from the last post. Suffice it to say that trading with the trend, multiple entrys, VTSO exits all work whether the price is going up for a profit or going down for a profit.

With a win rate of slightly higher than 80% and a return of $7.13 per share The idea of short selling a stock certainly makes it worth considering. Compared to the 162% ROI from the long side, 142%, is nothing to ignore particularly when the combined return is $15.26 per share or 305%.

Off to apply this same methodology to all of my other data charts to see, hypothetically, what my returns could have been.

Jeff.

ABB Stock Market Trading

I've been playing around with one of my old trading plans for the last couple of weeks and pulled out my tracking chart for ABB. They happen to be a power and automation company (robots and power converters) but that really has no bearing on why I was following them as I had to look them up in order to find out what they really were.

Basically I feel that the charts tell the whole story and the price reflects that story. The issue I have always had with fundamental or value investing is that you must try to discern the story ahead of time. While some of the company's fundamental data will reflect it's overall health, it does not indicate what will happen tomorrow and certainly does not predict the future price. Although some make out well with this style of investing I just don't have the patience to sit on something long enough to find out that I was wrong in my assumptions.

If you look at Apple (AAPL), everyone thought that with the demise of Steve Jobs, Apple stock would drop. While it did for a short period, it certainly was only a blip in the price as it quickly surpassed the price that it had reached during Steve's reign. I sometimes give my butt a little kick for not buying it when I first looked at it, around $85. Meanwhile, it is not one of the stocks that I follow for the purpose of trading, the price is too high for my style of trading and account size.

Back to ABB.

This has been one of my worst performing selections so I figured what better one to choose for setting up my spreadsheet to re-run the old numbers through my improved simplified plan. Performance is relative to the plan implemented afterall. Of course I expected an overall loss based on the look of the historical chart and my previous simplified plan. Something like a $9.50 loss per share over a 10 year period while only trading long and running every setup. With a win rate of 37.5%, no wonder.

In almost all of my studies, trading with the trend has a better win rate. Simple trend determination just using a couple of simple moving averages and their cross overs. It doesn't need to be complicated as these are not trade indicators, just a quick guide to remove the subjective decision of whether or not a trend is up or down.

Switching to simple trend following, this loss drops to $2 per share with a 54.6% win rate.

Adding more trades using varied or staged entry targets bumps the total returns to $3.50 per share.

Part of the higher profitability of this version of the plan has to do with taking more trades overall with the idea that if the first trade stops out for a loss, the remaining individual trades based on the same trigger may not. This creates a greater edge, 14% greater as the new win rate is 68.6%. There are 72% more trades so in order to better compare them, the average return per trade was a $0.17 loss vs an $0.18 profit per trade.

Next, using the same plan but implementing a half trade trailing profit stop. A Virtual Trailing Stop Order (VTSO) will work well in this particular application. This could be applied a few ways but I would choose to enter the trades using the same method as above with the VTSO applied to half of the total trade. If the price proceeds to run up past the initial profit target, the VTSO will capture more profits than otherwise might be had. The very worst case once the initial profit target is hit is that the remaining half of the trade could stop out at break even, it will never turn into a loss at that point. Of course in all cases where the initial target is not hit, the entire trade stops out for a loss. The upside potential is greater than the downside which makes this style of trade worth the added complexity.

VTSO partial profit stop, $8.13 per share profit with the same win rate of 68.6%. Same trades, just managed differently.

Seeing as the stock started out around $5 when this plan starts, the overall Return On Investment... if you want to call this an investment... is over 162%. That, over 10 years, is certainly worth the effort.

It is worth mentioning that all of my results are based on nice even price numbers, 25, 50 cent increment or $1 depending upon the value of the stock at the time of the trade. Using the VTSO provides that the profit may be at a price relative to the penny increment moves of the price but will be above break even in all cases when the initial target is attained. This puts the real VTSO at a non-zero profit value almost immediately. Entries and exits are subject to a certain amount of slippage and variations in opening prices can affect the entries, although this, like the VTSO, would be in my favour as I use limit orders to enter and exit at targets. The real odd factor might be the overnight gap in price. Those occur but can go in either direction so they are tough to try factor in ahead of time. I figure that the odds are, while trading with a trend, better that the gap be in my favour but will concede a 50/50 shot at getting them right.

Next up, the short sell. This post is already too long.

Jeff.

Questrade, Customer Service

I've been meaning to call Questrade in order to reset my passwords and re-establish access as I haven't even looked at my accounts in quite a while now. I still receive the various client notices via email and that at least has kept me up to date with some of the new things that Questrade are doing.

New Inactivity Fee

One that had me a little concerned was the original idea of charging clients a $10 monthly inactivity fee unless there was at least one $4.95 commissionable transaction per month. That was to have been put into effect in July. They have since rescinded that idea and changed it to a quarterly fee of $20 and quarterly transaction requirement which doesn't kick in until until October.

All of this is moot if there is over $5,000 in combined assets in a client's accounts.

Due to my procrastination in calling, they called me. I got someone who knew what they were doing and looked after everything I needed as well as answered some basic questions regarding the new platforms and data fees. All in all they get a good grade for pro-active customer service.

I am looking forward to playing with the new IQ trading platform and browsing some of the new information that they have available.

Jeff.

Consistent High Win Rates in Active Trading

I've lost count of how many times I have started this post only to lose sight of what I was trying to convey. So I started over with the same basic idea, just a slightly different direction and frame of mind and removed all the technical crap.

I pulled out my most promising trading strategy a few weeks ago for some reviewing, which was the gist of what I was trying to get at. I used the same list of stocks that I had selected then, about two years ago, and reviewed all of the entry and exit ideas with updated charts to reflect current activity. Not much has changed. The performance of the strategy has remained relatively steady with win rates that are not only consistent, but quite respectable. I am not surprised as the strategy is simple enough that it eliminates the subjective decision making and turns the trading into a strictly cold, hard, rules based operation. In fact, the older trades that I looked back on were easily duplicated without any reference to the annotated charts and without any real thought or tough analysis.

I succumbed to the lure of instant gratification as I overlooked many of my trading plans, from the simple to the overly complicated, in favour of the faster moving day trading. I have taken a break from trading directly and have managed to refocus on what my goals are with a view to a longer timeline for trading.

Over the next few posts I will post some of the comparative results of my updated studies. I am even going to use some random stock selections and put my plan to the test to see how versatile it can be overall. I doubt that I will outline my entire plan as, like so many other ideas available online, they are not likely to be taken too seriously anyway. In the same vein as the rest of my blog, this is aimed mainly at tracking my own learning curve.

Jeff.

BMO Chart Followup

Here is a chart of Bank of Montreal (BMO) for the period that I wrote about in my last blog entry.

I bought my first share, as I mentioned, in January, 2008. Since then the price took a bit of a dive but has stabilized nicely.

If I were actively trading this one I would probably be sitting aside, but seeing as it is a DRIP there is no selling. Also, DRIP investment uses far less charting, in fact almost none, other than to do some tracking. Even then most people don't follow the prices of the stocks in any way other than to determine how much to send in for the OCP.

In the case of BMO, it was a no-brainer first choice. Right from their own investor dividend page:

"BMO Financial Group is the longest-running dividend-paying company in Canada. BMO’s policy is to pay out 45% to 55% of its earnings in dividends to shareholders over time."


This is one of the primary indicators to buy into a DRIP, longevity in dividend payments and stability in the fact that they have been around for a long time. Another factor is a history of increasing dividend amounts over time and a discount to buy shares with the re-invested dividends, 2% in BMO's case and they allow for up to 5% in the prospectus..


I'll get into my other holdings later.

Jeff.

BMO DRIP, the Real Deal

When I go into a book store to buy a book, or just to browse, I have a tendency to end up buying the first book that I pick up. As often as not, it ends up being the book that I seemed to need at the time even if it was not the book I went in for.

As it turns out, my trading plans could have been handled in the same manner. Although unlike books, where I know what the other books have to offer, trading plans are not so predictable... I just had to try them all.

My original was the Dividend Re-Investment Plan plan. I had charted long term growth potential based on a few presumptions, forecast best and worst case scenarios and plotted everything for over 30 year periods. The goal was not to create a profit through capital gains, although that would be nice as well, but to produce an income stream based on dividends and eventually through incremental dissolution of the shares if needed. This requires patience and a dogged determination to continually contribute to the plan as it is a long term retirement strategy.

I still have my original holdings for all of the DRIPs that I started, the first being Bank of Montreal, (BMO). In January of 2008 I bought my initial share and promptly sent in my first Optional Cash Payment (OCP) cheque for $300 and registered for the DRIP.

Now that I have some data from this DRIP I can go back and do a performance comparison, which I will do for all of my companies eventually.

My rules were simple. Contribute $300 per month into at least one of the company DRIP plans. Usually the company will purchase shares on my behalf once per month, but plans vary in when this is done. In all cases they use a particular closing figure for the cost and in some cases they may discount re-investment purchases by as much as 5%, (BMO is currently 2%). In order to produce a best and worst case scenario I took the monthly share prices and applied them to my purchase spreadsheet twice. Once was to use only the low values and the other was to use only the high values.

Keep in mind that an active trading plan involves buying and selling where the worst case assumes buying high and selling low which produces a loss right away... even buying and selling at break even eventually erodes the trading account due to arbitrage and commissions. There must be many trades that profit either more frequently than loose or profit much larger than the losing trades. It's not easy to stick to a plan in those cases.

Here is a chart showing the effectiveness of both the best and worst case scenarios for BMO over the last four years.

In an active trading plan the worst case is that all the initial money is lost. In the case of this DRIP, the worst case is a 10% variance in the un-realized gain of the plan overall. This gain is not the primary goal. The real difference is in the regular recurring dividend payments or yield. The overall difference in yields vary by less than 3% (21.4% difference in yields) and the current payment varies by 0.25% (18.1% difference in yields).

It would be reasonably safe to assume that the result would be somewhere in between these two results.

Considering the long term span of this sort of plan it isn't difficult to extrapolate 30 years of similar data. Assuming worst case from above and the current payment of $204 per quarter that is generated after 4 years and applying some simple linear math, the payment could easily be $1,500  per quarter ($6,000 per year). The thing is that this is not a simple continuance as the shares, OCPs and re-investments build on themselves in a non-linear fashion.

Jeff.

Another case for DRIPping

I went back and set up a screen to choose a small handful of stocks with a tight enough set of criteria that only 28 made the list. The main items were that they had a 5% dividend yield or higher and a few other price, volume minimums. I did look for stocks that had their 50SMA higher than their 200SMA and the price had to be above the 200SMA. These were really just to get a small list rather than looking specifically for any performance, I could have just as easily reversed the technical items and and come up with a list that worked just as well.

A good number of the candidates were of the AAPL, BIP and D variety, trending up since early 2009 but some were not. I chose the very first one that bucked the trend and that had over three years of history... Exelon Corp (EXC).

Here is the chart:

Using the same $1,000 per quarter investment and just going with buying based on the last trading day of the month before the record date, the vertical green lines.

If there were no dividend this would be not so great, total ROI is in the red by 3.25%, which is better than it was in 2010 but the timing of when I might need my money might correspond with a down time, and that would suck. This is the main issue that I initially had with DRIPs.

With dividends included and re-investment applied as per the DRIP, the results are as follows:


Adjusted Cost Base (ACB) = $42.44
Total invested  = $12,000 (302 shares)
Current price = $41.11
Total value = $12,431
Total gains (on paper) = $431or 3.6%
Final dividend payout = $145.04

Dividend Re-Investment Plans are for long term investing with no real eye toward selling. As much as this goes against my desire to continue with an active trading plan, I definitely see the advantage in this lethargic style of investing. The only investments that I have right now are of this type, which says a lot for DRIPs in the first place. It was the first investment strategy that I investigated and, while it may not be the last, it certainly will stand the test of longevity in my books as i don;t plan on closing out my DRIPs. In hindsight I do see that I could have benefited by shutting down my trading at it's peak and shifted my cash into these instead. Of course, the peak is not always attained in any trade or plan, hindsight as it is.

Being that I am in Canada, I suppose that I should do this same study with Canadian stocks, or at least those that have a Canadian stock offering. The tax implications are easier to handle as is the acquisition of the starter stocks for the DRIP... which I haven't even mentioned here. There just aren't as many offerings in Canada as in the US.

Jeff.

BIP, Other Stocks Trending, the DRIP still shines

I am making a little point in that the AAPL was no "one hit wonder" and there are many more stocks that did the exact same thing. In that case choosing trades was fairly easy as any decent company was hitting a trend around the same time, which makes for a great trading environment as long as the total account is positioned with the possibility of a change in the trend being covered.

Brookfield Infrastructure Partners, (BIP)

I annotated the chart and it pretty much says it all:

Buying and selling according to the chart without regard to any dividends using $1,000 trade sizes yields a 21.2% profit, about $843.

Back to dividend re-investment I noted the next chart two ways, one for straight timed buying to be just ahead of the record dates and opportunity buying. Opportunity buying consists of considering buying anytime in the 30 days prior to the record dates if the price is under the 50 or 200 SMA lines.

Timed buying:                                                          Opportunity Buying:


Adjusted Cost Base (ACB) = $17.60
Total invested  = $10,000 (590 shares)                    614 shares
Current price = $28.17
Total value = $16,640                                              $17,305
Capital gains (on paper) = $6,640or 66.4%              $7,305 or 73%
Final dividend payout = $71.22                                 $73.79

Basically, either method works well so I might split the difference between them. The thing about opportunity buying is that sending in a cheque to buy through the DRIP leaves the timing up to the processing department at the transfer agent... which means timing is not great. There is some return lost as a result of true timing using a broker as there are commissions and even share purchases with a synthetic DRIP (no partial shares counted).

Jeff.

Another Example with Dividends Added, Dominion Resources (D)

In my last couple of posts I covered Apple as a trade subject. While that may smack of what the trading community calls "curve fitting", making the trade work according to the chart, I like to select a plan that would be flexible enough to work over any circumstance and do some quick analysis of the period preceding the trade period to see if my plan would have been executable and supported through the continuance. Basically, determine if the trades would have been taken based on my rules.

The Apple trades were based on the 50SMA crossing over the 200SMA and using that as a guide for the following trend. Not much curve fitting there, just straight trend trading. Recognizing the initial trend early may be key but acting on the information is even more critical as is sticking to the plan.

Here's another example of a very similar setup and follow through. I won't get into various methodologies of the trades but it is pretty obvious that using a similar trade plan as I outlined for AAPL would have worked here. $1,000 incremental buys based on a simple trend following strategy that sets up after the crossover.

Dominion Resources Inc. (D)

The short analysis result:

Adjusted Cost Base (ACB) = $38.86
Total invested  = $7887.90 (203 shares)
Current price = $53.08
Total value = $10,775.24
Capital gains (on paper) = $2,887.34 or 36.6%


While a little more sedate than the Apple run up it is still a pretty good return based solely on capital appreciation.

Then add the dividends and the results get a slight tweak of about 6.5% or $506.

Their next dividend should be $0.4925 and they have a full DRIP which leads me to the real topic of this post.

Assuming that I just send in a regular quarterly cheque for $1,000 and buy the stocks directly shortly before the ex-dividend date (the date that they count the shares as mine for dividend payment for that quarter) and assuming that the dividends are just re-invested.


Adjusted Cost Base (ACB) = $39.38 (slightly higher than the $38.86 above)
Total invested  = $10,000 (269 shares with re-investments, up from the previous  count of 203 shares)
Current price = $53.08
Total value = $14,313 (again, up from $10,775.24)
Total gains (on paper) = $4,313 or 43.1% (compared to $2,887.34 or 36.6%)
Current dividend payout = $121.72

Keep in mind that the current dividend payout that would be re-invested is up to $121.72 per quarter, a far cry from an income level payout but certainly a solid start for a two and a half year investment. I've done some extrapolations based on 30 year investments and smaller contributions with wildly fluctuating prices and the long term numbers, even if the stock tanks, are often very good due to the dividend creating a sort of residual income.

Jeff.

AAPL with an investment twist

In my previous post regarding Apple, I briefly outlined two simple strategies for trading or investing in the stock. I have traded the options on Apple a few times, profitably, but they are more complicated and not for the faint of heart... at least given the short term trading that I did with them, so I'll skip that particular route.

My current "default" trading is more investment oriented as I am in a few Dividend Re-Investment Plans (DRIPs) so I thought I might spin this a little differently. While there are no dividends with Apple (and I don't blame them as they don't need the dividend spin to push stock any more) the capital appreciation has been substantial on it's own. With dividends the goal is long term dividend growth and re-investment, not so here. With no dividends this means that holding for the long long term may not be the best idea so an exit strategy is necessary. In this case I use a trailing stop order, manually adjusted based on the activity of both the price and  my trading.

Here is the newly annotated chart showing the entry trades with green arrows. Stops are initially set at the short horizontal red lines and moved up as the price moves up and the 200SMA continues trending.

The plan is to scale into the trade in increments. Each time the price nears the 200SMA a new purchase is made. This serves to reduce the risk of getting completely into a trade and having it go South in a hurry. The small entry with a tight stop is built upon gradually. In this case, for use as an example, I figured the valuations based on maximum purchases of $1,000.

Trade entries were made as follows:

8 shares at $120, stop set at $110 (stop loss $80)
5 shares at $200, stop moved to $180 (stop gain $380)
4 shares at $240, stop moved to $220 (stop gain $820)
3 shares at $320, stop moved to $310 (stop gain $2,320)
2 shares at $355, stop moved to $340 (stop gain $2,890)

Note that the stops are only there to catch should the price plummet right after the additional shares were purchased. As soon as the second trade is placed the stop is actually in the money as well, therefore it becomes a profit protection more than a stop loss. 

Adjusted Cost Base (ACB - AKA average price per share) = $208.64
Total invested  = $4,590 (22 shares)
Current price = $402.64
Total value = $8,858.08
Capital gains (on paper) = $4,268.08 or 93%

Here is a two year chart showing the current trend line (green) with the consolidation periods noted with the red lines.

Using the long term trend line as the bottom of each of the triangles, the opportunities for smaller shorter term trades shows up as does the current possible change in trend. Note that the 200SMA has broken the trend line, the consolidation is more pronounced and has it's own lower trend line that coincides with the long term one.In all of the previous trades short selling was not considered as the trend was so obviously up. Now, however, given the change in the pattern I would look at the possibility of short selling as a good short term Counter Trend Position trade assuming that I either sold off the entire long position or had not been trading long term in the first place. You are not allowed to hold long and short trades simultaneously anyway.

Over the next few months I would look for some horizontal price action and perhaps even a shift to a horizontal trading channel to be established. This would have me bring the stop order up to just under the 200SMA or the trend line.

Side note: I toyed with the  idea of "side betting" in just buying a fixed number of additional shares at each purchase point and selling them when the price came within $10 of the upper trend line just to grab a  few extra dollars here and there. Doing this, according to strict rules, produced a little over $600 over the course of the period.

Keeping in mind that this is a small part of any trading plan and not really aimed at producing an income now the overall returns are very good. Of course there could easily be another stock in the portfolio that might not work out so well. Choosing established companies with good records of previous trending can be pretty easy to do. Mix in some dividend producers, short selling and varying the industry mix according to some other interesting plans makes up for the potential for losers.

Jeff.

AAPL, short chart analysis

I've taken a break from all things stock related for a while, I'll be back here and there in the future I expect as I can't help but play about with the charts. Less or no day trading, all longer term activity.

I received, and completed, a survey from Apple regarding the recent purchase of my iPhone.

Another email contained a stock chart for Google indicating a high price and that "they" have been long GOOG since whenever. I checked "their" stats and they are wrong more often than they are right.

The two emails spurred me to look at the Apple stock chart and see what is up. It's one of those stocks that is followed by, "I wish I had bought when....", but I could have bought and didn't for any number of reasons. The prime one was underestimating the product loyalty of the Apple crowd.

Here is the AAPL chart for the last three years with my notations according to a typical trend trading plan that I have used in the past. Of course this one could be played a few ways and I noted an alternate to the buy and hold plan with the green and red arrows, explanation follows.

At the point where the 50 day Simple Moving Average (SMA) crosses above the 200 day SMA, the stock is trending up and can be bought with a few plans in mind. Obviously buying and just holding would work, but seldom is that known so early on.

The alternate is to buy and set a tightish trailing stop (below the 50SMA), then plot the mean for the trend once it establishes placing the stop below the 200SMA which makes the trade profitable even if it stops out. The upper trend line can be plotted equidistant from the mean on the top side of the price at this point. Effectively, this is a mean reversion channel with a non-standard standard deviation of somewhere greater than 1 and creates a very wide trading channel or a safety stop for buy and hold.

Buy and hold:

Buy at $120 in May, 2009
Value now at over $400 or $280 paper profit, 233% ROI

Trend trading using the channel, ideal trades and only long, no shorting and no buy/sell optimization:

Trade 1 = $120 to $200
Trade 3 = $200 to $270
Trade 4 = $240 to $310
Trade 5 = $320 to $400
Trade 7 = $360 to $420
Realized profit = $360, 300% ROI

Other trades that MAY have been taken (circled in green):

Trade 2 = $190 to $270
Trade 6 = $360 to $410
Realized profit = $150, 125% additional ROI

I'll post a separate entry for an option for those who might like buy and hold with an investment twist.

Jeff.