I’m traveling , so I’m going to have to make this week’s report pretty short.
RSI Reversal Strategy
All 2-day and 5-day RSI reversal positions closed above RSI 50 on Friday, so the portfolio is 100% in cash again. To me, that’s the best thing about this strategy. You’re only exposed to market risk for a few days at a time time. So, in my opinion, compared to other investment and trading strategies it’s not very risky.
And yet performance has been excellent. After closing out the latest round of trades the portfolio is up 46.07% in about 16 months. The winning percentage has been 81.40% (Over time, I expect that to settle down to between 75 and 80 percent). And the average number of calender days in a trade has been 5.47 days.
It’s important to emphasis that these performance figures do not consider transaction costs. Transaction costs include “slippage” and commissions.
Slippage is the difference between the expected price of a trade and the price that the trade is actually filled. For example, I post as the entry and exit price either the official opening price or the official closing price. If the closing price is, say, 30.50 and on an order to sell you’re filled at 30.47 you have 0.03 of slippage.
However, it’s been my experience (I make many of these trades personally) that slippage has not been a problem. I’m just as likely to get filled better than the official opening or closing price than worse. And, yes, I do often place market orders.
Commissions are a predetermined cost of trading. The good news is that nowadays commission rates are dirt cheap. You should certainly not being paying more than $10 a transaction. And if you use a broker like TradeKing you’ll only pay $4.95 per trade. By the way, I have no affiliation with TradeKing. I don’t even have an account with them. I just know they have low commission rates and they seem to be pretty highly rated.
But if you’re trading a small account even commission rates of about $5 can be a significant issue with the RSI Reversal Strategy that relies on lots of small profits over a short period of time. The average profit per trade of 5.22%. The average loser is a loss 3.31%. The average winner and loser combined is a profit of 3.63% per trade.
For example, let’s say you’re trading a $10,000 account. With the position sizing model I’m using right now — (2% of equity risk divided by 3 times ATR) times the entry price — you may get a position size of about 8% of equity (depending on the volatility of the ETF).
8% of equity is only $800. A 3.63% profit expectancy (winners and losers combined) is only $29 (3.63% of $800). If you’re paying a $10 round trip commission you’ve just reduced your profit to $19 ($29 minus $10). You’re sill making money. You’re still growing your account. But your broker is making over half as much money as you are.
So what’s the solution? The truth of the matter is that the smaller your account the more you have to size your positions if you want to increase profit in relation to transactions costs. In other words, you have to accept greater drawdowns of equity and accept more risk.
One way to do that is to reduce the ATR multiple in our position sizing model. Let’s take a recent trade as an example. On Friday we closed out TZA with a profit of 14.44% in two days. The position size based on a multiple of 3 times ATR was 7.16%. You could use a multiple of 1.5 times ATR and get a position size of 14.32%.
Yes, you’ll increase the volatility of equity in your account. And, yes, you’ve doubled your risk per trade. But, if you’re comfortable with it, I don’t think the risk is unreasonable.
By the way, I’ll probably gradually increase the position sizing in our model anyway. The reason is that drawdowns in equity over 16 months and 129 trades have been negligible. So we’re building some significant history. And the more history we have the more we can learn about what works and what doesn’t work. That’s why I’m always tweaking the strategy. And I think it’s time to try to increase profitability by increasing the position size.
More on that within the next few days.
ATR Trading
This is my experimental strategy. The model we’re using right now I know will work. We’re buying stocks that are in an uptrend as measured by the price in relation to the Ichimoku cloud. And we’re buying them when they’re oversold as measured by the 2-day RSI indicator. And we’re selling them on a rally. And we’re sizing positions based on a multiple of ATR.
That works. In fact, it’s basically the same model we use with the RSI Reversal Strategy. It’s just that it’s over a longer time frame.
So getting it right is just a matter of experimenting with position sizing, targets and stops. The only way to do that is to make trades and look for opportunities for improvement. And that’s what I’m doing.
COT Strategy
The portfolio is 100% invested so there is nothing to do at the moment.
In looking at the latest Blees numbers (100 on both the S&P and the Nasdaq 100 mini) I’m not ready to get all that bearish on the stock market right now. It looks to me that the smart money may think that stocks are fairly cheap.
Long Term Timing
Everything is above its 10-month moving average. But we’ll see where it is at the end of the month.
Gold/XAU Ratio
You know the drill. A 7.13 gold/xau ratio means that mining stocks are cheap. If you’re just now tuning in here’s a post explaining how to use this ratio.
Have a prosperous week,
Larry
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