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

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.

Forced Short Covering

Well, what a pain.

I just received a call from my broker telling me that I have to cover my SFG position because they have a buyer and they are short short inventory...at least they called instead of just closing my trade. I have heard of that happening in the past with other brokers.

This is the first time I have run into any issue with selling short and I had done a fair amount of it a while back, in fact it has been my favorite trade type.

So I have until 1400h to cover my 50 share position...at some loss.

I just placed a VTSO for 10 cents which gets me a better price than the high today at least.

I will track it as if I held the trade through...actually, they mentioned 1400h when I asked what the deadline was...perhaps they will just cover it at that time regardless of what I do. If that is the case I am best to leave the VTSO run and just let it go. I probably won't though as if I close it myself I might get an extra $5 on the trade...no big deal really but a buck is a buck better in my pocket.

This brings into question the efficacy of short selling as a trading strategy for some stocks. Obviously SFG is off my list for shorting now. I would have preferred had they bounced my initial short sell though... I would have just selected another stock to trade instead of SFG.

I think there may be a list ora method of finding out how thick the inventory is for shorting for future reference. I didn't think to ask the CSR at the time, I was just trying to wrap my head around having to cover a trade in a negative position...I was even giving some thought to adding to the position in the vein of the scaling in method earlier... glad I didn't do that.

Jeff.

Stop loss, VTSO and the US market.

Well, I did some playing today in the NYSE after some morning trading in the TSX.

Stop Loss Orders.

I can place the much desired stop loss order with a market execution...I have a position right now in DZZ which Deutsche Bank Gold Double Short ETN...as close to equivalent to HGD as I found easily. I have a stop loss placed so I can walk away and feel reasonably comfortable leaving it. I was not really analyzing this one for a good entry, just a decent entry to try out the stops with a 50/50 chance of being right. Limit order to get in, stop loss to hold my losses to $10. The rising 200sma is above my stop so if the price drops past that point I want out anyway.

Virtual Trailing Stop Orders (VTSO)

Seeing as the stop loss issue was a TSX restriction I figured I would also try this out as a VTSO is basically a trailing stop loss executed as a market order once triggered...and market orders are not allowed so....

VTSO works just fine. I have not had one executed yet but I am pretty much going to plan on switching over completely to NYSE issues now. I only have to deal with the dollar conversion for my trading allowance. At least I know that I can hold USD in all of my accounts.

I need to do some research to select the proper stocks and ETFs...and ETNs I guess.

The easy ones would be AEM.TO, YRI.TO and ABX.TO as they have US equivalents, AEM, AUY and ABX respectively. Major banks are all traded on both as well so financial issues are fine as well.

More on this later I am sure.

VTSO and stop order executions

The Stop Order

(In order to keep some of these older posts current I will comment on the VTSO and stop loss orders here. I have found out that the stop loss and VTSO are no longer available on the TSX market, this has nothing to do with the broker as the exchange just does not support these orders. I had, in the past, placed and had VTSOs work fine so I am not sure at what point this changed.)

(from a previous post)

A Stop order is an order to sell a stock when its' price hits a preset price to lock in a profit (profit protection) or to limit a loss (stop loss) when the price drops. The reverse is true for a short position.

Once the order is triggered it becomes a market order which is an order to sell the stock at whatever price it will go for. The only problem with this is that it COULD sell for less than anticipated due to market conditions...I have had it happen once or twice when the difference was more than just a few cents. There are other concerns but they are less of a concern than not setting a stop at all.

While this is true, generally, I will clarify a few things.

Quotes vs price for market orders.

The price a stock has traded at is history as soon as the trade is made. This means that the price you just saw on the chart may not be the price you will trade at. The quotes, on the other hand, indicate what traders are willing to pay (bid), or accept (ask), for the number of shares indicated.


This is the uncertain future.


Any automatic stop order uses the quotes to determine when the order gets triggered, not the price. So a stop order to close a long position set at $34.00 will trigger and become a market order when the bid hits $34.00 or less. The last traded price could still be well above the $34.00 mark but the market order will likely execute at $34.00 or perhaps less.



This is what the stop order does, it goes by the quotes not by the last traded price.


Virtual Trailing Stop Order (VTSO)


This can be a handy device if used properly. I have tried a number of methods to employ the VTSO and really have found none to be very good mainly due to me having a very tight loss stop in mind. Basically, I was not really using then properly even though they worked reasonably well and I was able to make some decent profits with them. I'll mention the profitable uses later.


In the VTSO you set the price difference you are looking for when you place the order and it adjusts the stop based on the last traded price. Other than this ratcheting of the order price it is the same as a stop order.


For example, you are in a long position and the price is at $34.00 and you determine that you want to sell if the price drops 50 cents. In Questrade's Questrader Pro you select the VTSO box and enter 0.50, it will set the stop at $33.50 immediately and you will see the order in the account box to sell at $33.50. The first time I did this I had to call to verify that is how it worked as I did not want to accidentally sell my position for 50 cents, that would have been a real bummer to find out the hard way.

Interestingly the stop order does not appear with the correct price until a trade has occured.


Now when the price moves up to $34.50 the stop price automatically ratchets up to $34.00 and will not go back down. This continues as long as the bids never drop to 50 cents below the highest price since the order was placed.


Keep in mind that the stop is set by the price but triggered by the bids. This can be a problem at the opening of the market, especially now with the volatility that we are seeing. The bids can be way off of the actual first trade price. Today on a stock that is around $50 I saw the bids over $2 higher than the actual open price...it can be lower just as easily and if the market opens and that low bid stands for the first second you will become the first trade of the day as the VTSO is hit, passed and executed at the fastest possible price.

I have had stops and VTSO's in place overnight and had to either cancel or change them to allow for a huge gap between the price and the quotes for fear of having my position closed prematurely.

It is worth noting that pros in the market, big players, will intentionally drive the price down to a point where most safe traders might have placed stops in order to have those stops executed. This is actually a strategy to "clean out the stops" and garners a better price for them from the flood of market orders that get executed as a result. When this is obvious it makes a very good point for a daytrader to jump in with a long position trade to catch the resulting rebound of the price.

There are good technical stop positions that are sort of "traditional" to watch for. I have learned to place a stop then adjust it a bit farther out from where I first considered it as my stops often get nailed to the penny and I miss out on further gains.

For the record, this is partly why I have migrated to daytrading as there is no stop order in place, or at least not one that is likely lto get hit unless I want out of the trade at that price. I should be placing a worst case stop for each trade opened just in case my connection fails but I am lazy as it takes and extra step and I would rather watch the price move along and exit quickly than have another step between me and a clean exit, even though it can only be one click to cancel.

The profitable applications of the VTSO for me were the longer day trades. I have not used them recently though. What I did was forecast a move of a stock price early in the day, place the order to buy then place the VTSO at a certain distance from the price. If my stop was hit then I was wrong and wanted out anyway, if the price moved up then my stop moved along with it. I might use a 20 to 50 cent VTSO for these. I would set these and shut down my platform and go for lunch or do what ever I might do in the afternoon. then check them at the end of the day. Depending on my confidence I might let them go overnight. I got lucky doing that once with a $6 gap up in price the next moring...I actually thought that there was a problem and could not figure out why my account balance jumped so high. As soon as I did I dumped the stock as it should not have been so high, I was right. That was when I realised how easily I could have been on the wrong side of the gap and lost as much as I gained, at least on paper, until I sold.

I now consider these to catch some of the afternoon runs that take hours to resolve,
I have yet to try them again though. One of my primary tenents is to remove emotion from the trade, that was the main reason I used the VTSO, that and time management.


Final Comment:

I don't recall if this option is available in the basic browser platfomr or the Webtrader, it may not be. I do know that they will not allow limit or VTSO's in anything other than even lots of 100 shares...it's been a while but limit orders might also not be allowed for odd lots either. In any case this is something that you should check with your broker about as some even charge different commissions based on the order type.

I will be considering stepping up to the Questrader Elite in February as it gives some more automation and alerts that might be nice to have as well as for different methods of entering trades right form the quotes.

Jeff.

Questrade and customer service, my take.

First off, I am not affiliated in any way with Questrade other than I am client.

I have no experience with any of the other brokers at all so I have nothing to compare against. I see a lot of people asking about brokers and services and what to look for and what to watch out for so I thought I might clear up a few things with regards to my experience with Questrade.

The first criteria I had when I was looking to get started trading were low commissions, low balance requirements and easy direct access to the market.

A secondary consideration, actually it was hardly a consideration at the time, might have been customer support...I hesitate to call it customer service as I do not need service, just the odd question or clarification. Service is a value added thing to me. I was not looking for value, just troubleshooting if needed.

I set out to try everything and see how it worked, then ask questions as I needed along the way. I even have options setup in my account but have no desire to actually try them out now, no need.

I found the different browser and downloadable platforms easy enough to use, I liked the no additional fees, the free services with certain quantities of trades, reasonable numbers given the services rendered, generous margin allowance, online chat help.

I also like the CDN and US combined account. I have traded US stocks by mistake though, my bad, but the transactions were completely transparent as the account buying power is displayed in US and CDN funds at the same time...so i don't think there is an conversion fees.

I have had opportunity to place calls twice, both times I was answered in a reasonable timeframe and my questions answered well enough. I have used the online chat help often and, except for one case, received timely information as well. Email help is slow but there, I would call or chat first though as it takes days to get a response and they are pretty much regurgitating what is already on the site when the answer does come.

They offer no frills direct online trading. Executions are quick and slippage is minimal. Connections are mostly pretty solid. I have made mention of technical difficulties the odd time but I believe most of them have been ISP or internal LAN issues, mostly.

So, the bottom line, if you need coddling and advise, go elsewhere. If you are a "do it yourself" trader or want a clutter free experience, then give them a try. If you are a DRIPPer and are looking for a broker to get certificates through, try elsewhere as the certificate fee is very steep.

From the odd comments I have heard about other brokers I have been surprised at some of the fees levied and some of the commissions for what little service is actually provided, it's a jungle out there.

There is still this nagging VTO issue though...I am afraid that I have not taken the time to try it out or to call to see what is up, if anything. To be honest I could see them being dropped as the market is so volatile that I think they would be a liability to any new trader out there, I know they didn't do me any favours and I was not playing in this market action.

The gap fade

Today was a great day to play the longer term day trade, in fact I thought it might be best to just place a short at the earliest peak and let it run... but I don't have the patience for that right now. It certainly would have been a good application for some sort of moving stop but probably not a VTSO as that would have gotten hit pretty early in the day.

The setup was classic. I entered my pivot points, 15 minutes, checked the trading price of gold in other markets, 45 seconds and decided that the day was going to be a huge gap up and run or a fade...given the size of the gap and the trading of late I was putting my money on the fade.

This is an example of why I like the day trading arena. Time spent researching...45 seconds... as the pivot point setup is a technical tool. I know of traders who get up early, 4AM, to research the markets, check out scans to determine what stocks they are going to trade, set those stocks up in their platforms, then wait anxiously until the market opens and hope that all that time spent is worth it.

Most, in fact the vast majority of those traders are not trading right now either because the market is not reacting as they think it normally should (whatever normal is) or they have lost a lot of money and cannot stomach it anymore. A percentage I keep stumbling across is 3% of all traders ever make it consistently. With the influx of online traders right now that makes a lot of easy money available for those 3% that know how to pull it out of the market.

I feel that the research adds a bias to the idea where the price is going to go.

Consider that it can only really do one of two things, in the big picture. It can go up, it can go down, it can wallow around and churn while not really going anywhere. So all the research and watching for a slightly better then one in three guess is not my idea of a good time.

If I am wrong off the start, I lose a few bucks then change my plan. I have not invested a lot of time in deciding which way it is going to go so I won't get caught in the trap of wishing and wanting it to go my way, I have no way, I just follow the price action.

For the record, the gap up was a guaranteed move, there was next to a zero percent chance of it not jumping at least $2 off the start given the price of gold, and it went over $3. The aftermath was just a hunch and best guess. I would put a 70% or better chance of an overall fade in the current market for such a jump. Had it gapped down I would have put a similar chance of the gap NOT fading and the price continuing down, under similar market circumstances.

Back to the day.

The gap started a quick momentum move in the direction of the gap which quickly peaked and fell, the first short entry ...which I hesitated on and missed...no big deal (which is one of the other reasons I like day trading, the next setup is only minutes away, not days).

Truth be told I fumbled the first couple of prime entries, the first short, the resulting long for the rally, then the very next short...I need to close my door so nobody can chatter at me while I watch these setups but mainly I need to tailor my limit order entries to not be quite sot tight as I try to squeeze every penny out of the starting price. I refuse to chase the price, I want it to come to me, so I miss a few and usually by pennies.

I ended up 1.07% net gain, still meeting my goal but missed at least that much off the start.

Shorting the top would have me closer to 2% after just riding it until sometime after lunch. The day is not done yet but I doubt that I will trade any more as the action is slow and unpredictable now...although it may still drop to fill the morning gap, just not for sure.

I won't speculate as to how much I really might have made had I hit the trades that I setup initially as I just didn't make them.

Just another fun day in the market.

BTW, I was done by about 1030h. Another reason I don't like the typical DTing "idea". I make my money or take my losses for the day early and get the heck out, I have other stuff to do for the day... although I would love to hit a really nice day for letting trades run and sit it out to make some serious cash...another time though.

Jeff.

VTSO or mental stop order

I still have not gotten around to testing the viability of a VTSO in day trading yet. I feel that the volatility would have me out of trades too often but I like the idea of a safety in case I had to walk away from a trade.

I used VTSO's extensively when applying my CTP plan earlier in the year and found that they were too quirky. One steep day (this was medium term trading) and the VTSO is brought up too tight to the price and an exit was inevitable.

Alternately I can set a stop order as a safety, and just modify the order as needed to follow the price. I do this mentally and execute a market order to close the trade so using a stop will do the exact same thing and give me the security of knowing that I have an order in place should I have a glitch in my platform which makes exiting impossible, it has happened on occasion.

Normally I choose a price to exit based on the quotes, not the actual trading price, and often I will exit a trade immediately upon seeing a certain indication of a turn. This would mean having to cancel the order in place and placing a market order to close. I have had cancel requests take a long time, in the scale of DTing 10 seconds can seem like an eternity and can make the difference of giving up as much as 60 cents per share of gains. This means there is a chance that I cannot place a market order right at the moment that I want it... I will have to experiment and see if this is an issue of more concern than the possibility of getting stuck in a trade. Usually I see these points approaching so cancelling the order ahead of time should not be an issue in most cases...modifying the order might be quicker than cancelling it too.

Testing needs to be done.

Jeff

Questrade and VTSO

I notice a lot of people ending up in my blog after searching for Questrade and VTSO.

(This is an update from April 2009, VTSOs are not available for TSX and Venture Candian exchanges, this has nothing to do with Questrade as VTSO and regular stop loss orders work fine in the Amercan exchanges. I was advised earlier that the problem had to do with some technical difficulties with the operating platform.)

I think I referenced that a little while ago. I either chalked it up to a change in the VTSO function of perhaps just an influx of new traders. If anyone ends up here on a search for answers regarding VTSO or any Questrade issue I don't mind trying to answer any questions. You can to send an email or add a comment, I'll respond. I have tried almost everything that can be done with regular stock trading, and a few things that they didn't like too.

I didn't notice any changes to the VTSO use on their site when I checked quickly a couple of weeks ago. I haven't tried using one since the platform update a while back, they did not work then and they mentioned it was related to the update. I may try one just to see what is up this week. I know there was an issue with how it needed to be entered for it to work though, something to do with Canadian trading regs.

Jeff.