Does your Entry Method Reflect in your Performance
Entry Techniques based on buying weakness.
Below is a list of entry techniques that are all based on getting the lowest price.
The lower down the list you go the harder it is to achieve positive expectancy and the harder the psychology of holding these trades becomes. Also the lower down you go the bigger your winners need to be.
Note all views are based on buying shares, also note there are many combinations of all the techniques below that could give random results and although some people can make money trading one of the most risky techniques, they are a very rare breed. Also remember someone with a short term record of positive expectancy can still blow up tomorrow using some of the high risk examples.
The first thing to be clear on is that nothing works consistently all of the time. If you have a few different techniques of extracting profits through different market cycles from different market areas you will be ahead of the game. Trying to force one method on the market when the conditions are terrible for that method can send you in circles. Its usually better to be late spotting the next trend than to be trying to find something that isn’t there yet.
One thing worth noting as you read the examples below is that nearly everyone is trying to do the same thing and nearly everyone is losing. You need to think differently to join the 10% of winners and you need to put the work in that those same 10% of people put in. The closer you get to honing your techniques the easier the work gets.
Thinking differently for me is only buying breakouts above two previous highs or adding to winners as price moves above a previous overbought level. Buying things that are actually rising.
Buying The Dip & Adding to Winners (Uptrend)
This will work in a strong trending market until it doesn’t work.
When it stops working you will give back some of your previous gains from when it did work. If you added to winners while this was working in the market uptrend and used bomb proof risk management you will be ahead of the game. Obviously bomb proof risk management would include stops.
Blow Up Rating – Low
Expectancy Rating – Medium to High
Buying The Dip (Uptrend)
This will work in a strong trending market until it doesn’t work.
When it stops working you will give back some of your previous gains from when it did work. If you don’t use a stop you will give back all your previous gains and more.
Blow Up Rating – Medium
Expectancy Rating – Medium
Buying Magazine & Guru Tips
This is basically the same as closing your eyes and sticking a pin in the listings.
You are basically taking a 50/50 bet. Take out the trading costs and you will lose.
Blow Up Rating – High
Expectancy Rating – Negative
Buying The Dip (Down Trends)
Once in a blue moon you might catch the bottom BUT that one winner needs to pay for all the losers and make a profit on top. This is negative expectancy trading at its finest. At best this method is probably right under 30% of the time so you need to make 2.5R on your winners just to break even and that’s if you use a stop loss. People who use this method don’t use a stop loss because they get stopped out of all their trades so without a stop the break even point is hard to judge but lets just say its very unlikely anyone achieves it long term. Its almost a certainty they don’t outperform the market so what’s the point?
Blow Up Rating – High To Extreme
Buying The Dip then Averaging Down on your loser (Down Trends)
This is by far the worst possible thing to do. These people don’t use stops. The trouble with averaging losers is your compounding a trade against yourself. The extreme opposite of what you should be doing. This is your classic investor technique. Sometimes they save bad trades this way and get out for a small profit. This means risking everything to make slightly over nothing. When they average down on a big holding that eventually collapses on them they all of a sudden vanish from the game never to be heard of again. What really gets to me about these investors is they can spout off value ratio’s all day long but the simple math of expectancy is totally lost on them. How can you understand everything about the fundamentals of a company and then refuse to accept the simple math of expectancy is beyond me.
Blow Up Rating – Extreme
Now there are people who can trade some of the riskiest strategies and make it work for them. I know a couple of people myself who do. I’m not saying its not possible. I’m just saying for the majority of successful people who trade shares, they are a very small percentage of the 10% who are profitable.
If your going to try one of the high risk areas of trading like micro caps regardless of the huge odds against you, the best way to do this would be to split your account into two or three parts. It’s a long shot that you can achieve profitability in a high risk area but not impossible. You have to have a very strong stomach when it comes to riding profits up and down to achieve the big winners needed.
Before we move on to the examples I will note I don’t blindly buy weakness. I do enter after a pullback and add to winners in a bull market like the first example with the best expectancy but only after a reversal is in place, never blindly.
I split my account into three parts. Growth using my trading bases method. Swing trading of which I have a few methods and micro’s which I use one of the base or swing methods to enter. The percentages can vary a bit depending on where the best trades are but the micro’s always have the smallest heat on the account and the safest trading bases method has the most.
Part 1 is used for compounding the account. Maybe 73% of the account is allocated to the slow boring trend following style that works year in year out forever. compounding an account at 15% will double your account every five years.
Another way to explain this is if you take 30 trades and 15 are winners at 2 x risk (2R) and 15 are losers at 1 x risk (1R) you end the year with a 15% profit which will double the account every five years and make you rich the safe way.
15% might not sound much but the truth is you could have worse years but you will also have great years. My own account has compounded at over 22% for the last two years giving a 50% gain on the total account as we speak and 26.7% of that is from this year.
A year when the markets got well and truly spanked. The boring risk 1% per trade really is more powerful that it would seem at first glance. Another point I will make that might sound unbelievable is that I paid the highest price on everything I bought. I bought 52 week highs and outperformed the market by using boring risk management.
Part 2 is used for more active swing trading methods and 20% of the account is usually enough for these with the use of spread betting accounts.
My swing trading account is what I survive on and can be very profitable when the markets are in a sweet spot but hard work in a choppy market environment. I need to step on the gas in the good times but also recognize the bad times using an index trend filter.
Part 3 is my smallest slice for the riskiest arena. 7% for the micro caps.
I tend to compound the profit from these back into the main account.
My losers are always 1R and my winners can be many multiples of that.
Out of 10 trades this year I had a +4R and a +17R and the rest of the trades cancelled each other out. I also have a few free trades running where I take out my original investment at +100% and let the rest ride. 7% sounds small but its 7 trades at 1% risk and to be honest, finding 7 good micro’s is tough in any market.
Remember you need to prove you can make money at any style of trading and the quickest way to prove this is to trade small. If you cannot hold your nerve to get the big winners in the micro arena your losers will eclipse your profits, micros have big spreads and big moves so the winners need to be huge to continually move your account to new highs. It takes a very strong stomach that only the few people who survived the learning curve possess. were talking white rhino’s here. At some point the size of the winners account reaches a level where they just can’t move it any higher due to the psychological brick wall that comes into play.
Where Do You Find Big Winners?
What characteristics do all the biggest winners share?
Below are a few screen ideas that I run daily to find idea’s.
52 week new high’s / All Time High’s
All of the biggest winners will at some point trade at 52 week new highs. All of them.
Does your entry method let you buy the biggest winners?
Think of it like fishing, you can randomly drop your line anywhere in the sea or you can drop your line over a reef where the big fish visit for their dinner.
Gap Up (Pro Gaps)
Pro Gaps on guidance upgrades or earnings beats.
Are you screening out the big winners?
Many of the biggest winners don’t pullback early in the move.
Many of the biggest winners have high pe ratio’s. (The market is foreword looking)
Many of the biggest winners will not pass a value screen.
Many of the biggest winners start there big move from an overbought reading.
I have two filters my idea’s must pass before entering. Vertical & Horizontal.
Vertical Filters are the price action filters described below
Horizontal Filters are a couple of moving averages in the time frame I’m trading. If I’m entering a long term position I usually wait for the rising long term trend to catch up with price. This would mean filtering results by making sure the moving averages are rising and are supporting price.
below are a few idea’s I base my own entries on. I prefer to strip my idea’s back to pure price action as it has no lag. I ask myself what happens in every successful trade.
If you trade pullbacks what happens in every successful pullback entry?
1, Price will close above the top of the lowest bar in the pullback
2, Price will reach overbought on an oscillator of some sort on the timeframe your
entering. e.g. 15 min stochastic reaches overbought on every successful swing trade.
If it cannot reach overbought it is still going down. You need to think differently.
I will add that nearly all my biggest winners have been overbought when I bought them and stayed overbought for a long time afterwards. Indicators don’t work on all the best trades. Stop relying on things that will never make you money. If they worked then 90% of people would be making money, not losing money.
Price Action Reversal
What happens in every reversal and is visible on the time frame your trading?
1, V bottom straight to new highs – Rare, 2 in a row would be very rare.
2, Double Bottom followed by a Higher High – Quite Common.
3, Higher Low followed by a Higher High – Very Common. Nearly every reversal has
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