Good lesson in sticking with a trade from this one. On July 8th, I recommended taking positions in XLE, XOP and/or XES. On July 9th, I took those position but was quickly shaken out of them. But what I realize is that I was trading with too tight a stop. So while I didn’t do too badly, I could have been doing a lot better if I had just ridden out the drawdown. Actually, what probably would have made more sense would have been half position on the 8th, half-position on the 9th. Anyway, let’s take a look at how they done since that post:
- XLE: 0.54%
- XES: 3.22%
- XOP: 1.79%
So not bad returns. Here was the real problem – I didn’t really define for myself when I would be out of the trades. No plan, no trade.
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I got shaken out of XLE too.
On the other hand, perhaps you should comment on your recomendation on June 10 for XHB. Nearly 20 % down ! !
Happy to – this one had a stop in place and also had additional outs. I was out of the trade on close of June 19 at 18.78. Having entered at the open at 18.75 on June 11th (the day after the call), I made a “huge” 3 cents on the trade which just barely offset commissions. I apologize for not “closing the trade” – I went on vacation and just forgot to post about it. Thanks for the reminder.
This was a mean-reversion trade, so I have multiple outs on it, including: time-stop, a profit target, an indicator, and a stop loss. The stop loss and profit target are carried good-till-canceled so I can trade it and forget it.
Let me know if I can clear up any other trades.
Thanks for the clarification, I was not aware of the stops in place.
That said, you made an intriguing comment (at least for me): you said that you want to hace multiple outs for mean reversion trades. I have never came across this idea. Would you comment on it ? Why the exit methodology in a mean reversion trade should be different from, say, a trending trade.
Intuitively, I think I like the idea, but I fail to make a rational demonstration of it.
Thanks
I’ll endeavor to make these points clearer in the future – I think you rightly point out that I should AT LEAST be doing that for others following the trade. I’m afraid that during that week I just didn’t have a lot of time to write – so, in the future, if I don’t have time to write out EXACTLY what the trade is I won’t write it. Seems like a good discipline anyway.
Anyway, on to your comment. The argument multiple exits, from an intuitive standpoint, is that mean reversion trades are looking for a short-term change in the direction of a stock, based on the idea that they are oversold or overbought. In studying the market, I have found that typically the reaction to these oversold conditions, as an effect, lasts only a small amount of time – say 10 days.
So to test that, I started backtesting against historic data and found that you can expect a trade to work out in about 10 days (that’s the time stop), go against you an average of about 8-9% (so that’s the stop loss at 10%), and, on average, to produce an average winning trade of around 7-8% (that’s the profit target). Now you will notice that the losses are larger than the gains – that’s to be expected based on the winning percentage – around 68-72%. So, in the MR1 system I’m counting on more winners than losers, and that my winners will be smaller than my losers, but I will have more winners.
Contrast this with a trend based system. Most trend systems have winning percentages in the 40-50% range. Also, most of the winners come from longer holding times. Longer holding times make a bigger stop generally necessary. Most trend systems do not use a profit target because the systems count on a few big winners to make up for a bunch of smaller losers. So, you use a different stop methodology for a trend system. For instance, I might say that I’ll use a trailing stop based on ATR * some multiple such that if the stock moves against me by more than that amount, I’ll decide the trend has changed.
All this said, there’s nothing to say a trend system can’t have a profit target (and might be successful doing so), and there’s nothing to say that you can’t have any other idea for a stop – say a cross of the MACD.
It’s all about testing – using testing I reach probabilities about the success of the approach. Note that I didn’t say predictions – I make no predictions. I also know that assumptions made based on past data may prove to be wrong in the future – so risk control is very important.
Whew – that was long winded – sorry about that. Let me know if I didn’t, in the middle of all that mess, actually answer your question.
No, no, it was absolutely not long winded. I found it extremely interesting, and I thank you for taking the time to explain it so clearly.
I am very sure that your methods of countertrading are quite different from mine (it would be an astonishing coincidence, otherwise). However, it is interesting that the numbers you mention come so very close to my own actual results.
And, on top of this, I believe you tend to use ETFs, while I trade individual stocks.
Again, the similarity of the numbers is remarkable. Makes one wonder about those stories about “natural frequencies” in markets, etc. I am not saying I belive in them, just pointing to an interesting experimental result.
Thanks again for your very interesting web site and congratulations.
eb
I’d love to hear about your trading system – obviously only what you want to share. Counter-trading is definitely an area that supports many approaches!
In regard to your TREND1 & MOMO1 strategies, are any of the ETFs Healthcare or Bio related?
I ask because looking at weekly and daily charts of a handful of such ETFs, they look pretty good.
Any thoughts?
Also, you mentioned that you got shaken out of XLE, XOP and XES recently. But, looking at weekly and daily charts of those ETFs, you jumped off at the right time. Yes, it’s easy to say this ex-post, but I don’t think you would’ve felt shaken out (or perhaps regret?)
In cases you feel that you exited prematurely, do you review charts at all just to get a different perspective?
Thanks and you’ve got a great site!
Test comment
ahspin – sorry about the delay in getting a reply to you – I just realized your comment ended up in spam folder….so I’m making sure that doesn’t happen again.
So – to answer your now 4 week old questions:
1. IBB, BBH and XLV are represented and, indeed, there were buys in TREND1 and MOMO1.
2. XLE, XOP and XES were short-term, mean-reversion plays. So, I wouldn’t even look at a weekly chart. I review the charts in the context of the trade for both daily and weekly charts. As an example, I’m looking at modifying the system to deal better with bear market conditions like we’re in.
Thanks for the comments and again, my apology for the spam issue.