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Pavilion103's LIVE ASX Momentum Setup Trading Thread

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Sorry but the attached above didn't seem to come our very big or readable so I'll attach Spreadsheet
 

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I wrote: Table 1 contains the trade with the high price trade you prefer, the $60 stock with a $0.60 iSL, so a Stop Loss @ $59.60
My apologies to all, the above line should say a Stop Loss @ $59.40. I do have it right in the spreadsheet so no big drama really.
 
Hi Debtfree – I just wanted to give kudos to you for thinking about a risk that the fixed fractional position size does not necessarily address.

What is risk?

Is the ‘capital at risk’ and ‘portfolio at risk’ being measured here actually risk? Depends on your answer to what is risk!

My definition of risk is something ‘unexpected’ happening. Therefore to me the above two categorisations are not ‘risk’ but ‘managed exposure’ Portfolio heat is the downside exposure I except in order to maintain exposure to upside. Potentially realising the down side is not an unexpected event – it is a part of managing the business for the numbers I require to be profitable and realising that lose will eventuate many times as normal part of a profitable strategy. IMO the risk is the potential to lose more than I expect in managing my downside because of things like price gaps during overnight holds or trading halts.

So how do you manage gap risk? A % of portfolio limit in any one stock? Maybe but if this position size restriction tends to pushes you towards low cap stocks where there is a larger likelihood that a 50M company will gap more than a 50B company. All that is really happening is that you are increasing your earning potential by taking on more gap risk – a contradiction of what you are trying to achieve by putting in the portfolio % limit in the first place.

Sorry - no answers here just more questions.

..................................................
Peter

Is there a difference between capital at risk and total portfolio risk? or is the difference only a mental construct that realised profits are more important than unrealised?

If you were to have a discipline of closing every position once a day and immediately restabilising those that warrant – there would be no difference in the two categories. With this mental exercise – managing heat becomes paramount – the capital designation becomes a duplication.

Perhaps the capital designation is mentally important to give heat the room it needs to run?
 
Craft: I agree that the term "managed downside exposure" is a better label than managed risk. Even the term "managed" might imply that there is more control than there actually is. Controlling risk is a commonly used oxymoron.

If all the managed exposure is downside then what is the importance of using the terms capital at risk and portfolio risk? For me the importance of monitoring the capital at risk happens at the commencement of the construction of the portfolio. Most trend following systems have a draw down of approx 20% (range 17 - 25%). In order to manage a trend following portfolio with the intention of avoiding this normal sized draw down one has to do something different. Placing a limit on the capital exposure limits the number of trades at the commencement of the portfolio. It also forces the portfolio manager to wait until one or more of the initial trades is profitable before starting new trades. Once there are unrealised gains in the portfolio, managing portfolio risk (or exposure) becomes more important wrt avoiding the max draw down. A mature portfolio should have no need to manage the capital exposure as most of the portfolio exposure is unrealised gains.

Thank you for the opportunity to make me think about what I've been doing for years.

The capital exposure limit reduces the risk of a disaster (max DD) at the commencement of the portfolio.
 
Peter

I don't know if this helps but my discussion with PAV about commencement of a portfolio
I made mention that one trade should be around 10% of a portfolio's initial equity.

I tend to work on 7-14% for best bang for buck and least exposure to a single or couple of stock portfolio risk.
If a trade didn't fit in there then Id cull it from consideration.Risking 1%
the only time I go higher is if I get a second signal in the same stock while trading it. Ill also cut a worst performer to take up a pyramid opportunity.

I also set PAV toward a universe of $5 max again best for bang for buck.

Coupled with aggressive stop and movement of stop to diminish Risk V Reward once the trade got going---in particular to B/E---has served us well.
 
Hi Peter,

Firstly, thank you for taking this on. Your input is greatly appreciated. It's interesting to see how you take on Pav's exercise from a different angle.

One thing that sparks my interest so far is your use of a profit target. The more common approach from what I've seen is to let it ride until your trail stop is hit, hoping to catch the big multi R runner. As Tech indicated above, he and Pav use an aggressive stop with an open-ended profit and would even add more if the opportunity presented itself. Whereas you seem to be taking the option of securing the profit and moving on to a new setup.

Could you briefly explain your thoughts here? You mentioned you wanted to ensure you get the numbers you need to be profitable. Is this simply your way of skewing the win/loss rate and amount in your favor? Or is it something else, for example - Your setups identify short term momentum, therefore your targets should also be short term?
 
Lone Wolf: Thanks for your interest.

This thread is about capturing short term price movements and doing it again and again consistently. Past traders would probably consider momentum trading as swing trading. IMO there is a difference between trading a trend and a price swing. A trend trader must let price pull back to make a HL before resuming the trend up. A trend trader must be prepared to give significant unrealised profits in order to remain in an anticipated larger movement. A momentum trade is over once price movement pauses and a tight TS prevents losing significant profits. We never know how long these price swings will last but past price swings have shown to pause/end/reverse at prior levels of resistance such as old highs, round numbers and when the overall market pauses/ends/reverses. Taking profits at these targets, provided the R/R is above average helps create the profitable edge. Yes, the average holding time for a momentum trade is much shorter than the average trend trade.

I took the profit on API at +4R level, knowing that this is twice the average result. I also did it because the portfolio was accumulating more losses than profits as the market paused and turned down.

Every aspect of the trading system contributes to the edge.

If this thread was about trend trading or investing then I would get each trade to BE, become fully invested with BE trades and wait for the either the daily or weekly or monthly trend to end. Simple.
 
Trading update:

CNU: Bought break-out of range (2.87). Very concerned by thin market depth, but this is an educational thread.
AGF: Raised TS to 1.17
WOR: Raised TS to 9.30. Trade converted to cfd trade to stay under our salary cap.
 
Hi Craft, Thank you ... I was not ignoring you, just had a couple of busy days.

Sometimes I'm a visual person, that's why I went for the spreadsheet and I know it doesn't lie to me. Once I see it in that format the penny drops and it sticks with me better, plus I have it forever. Not much more from me at this stage to say in regards to different areas of risk and others have covered it a bit anyway, so I'll leave it there for the time being.

Thanks Tech/a for your thoughts and strategy, always good to hear.

Peter: I'm getting there slowly, I have added 3 columns to my records (Trend of XAO) - (Types of Setups) & (Initial S/L %) so thanks for the push to keep track of these for future reference. Very good.

Also, thanks for the updates of late, I've got a few to catch up on and then a search of all the Stock Threads searching for your hidden trades.

Cheers ... Debtfree
 
Thanks for the detailed response Peter. Much appreciated.

I like the idea of trading momentum in the way you describe. Transaction cost would be higher than for a standard trend trader. But I like that you aren't risking open profit in the hope that a strong trend will develop. It's probably more consistent in flat market conditions, since even if there aren't many big trends occurring there should still be shorter runs to take advantage of.

I haven't tested it, but I wouldn't expect performance to be hurt too bad by missing out on the occasional big move since the money you took out of that stock isn't sitting in cash, it's probably put straight back into another rising candidate.

Opportunity cost might be better this way too, where a trend trader will hold through fairly large periods of flat/corrective movement, a momentum trader would move on to a better looking candidate.

Not having a go at trend traders. And most reading this thread such as Tech don't actually trade like the standard trend traders I'm thinking of either. They say the trend is your friend, and I agree. But it's not a very good friend, it never seems to be around when I need it most.
 
To Lone Wolf, debtfree and others reading this thread thinking that this is the way to trade. Momentum trading seems to be the new name for swing trading. The trader is attempting to get a major portion of a price swing and is not hanging around for a larger trend. Sounds sexy, great fun and fast profits. Wrong, it's fun but it's also hard work as it's a much move active trading style than trend trading.

Beginning traders should probably not try this style as it requires almost perfect discipline (>95%). Traders must keep their losses small and there will be a lot of them when the market turns on your open portfolio. Letting a loss get bigger than it should will ruin your results very quickly. If you can't sell exactly when you should every time, don't trade this style. You'll probably also find that we sell too soon too often. If you worry about the profits that got away, then you're not focusing on the next opportunity.

Buying and selling at the correct times every time is hard and I'm only 95%. When my performance drops to 90% I notice that the profitable edge starts to reduce at at 85% performance the edge is gone. Every mistake costs money and erodes the edge.

Having said all that, that most difficult thing for new traders to appreciate is the need for patience. Like right now, the portfolio is fully invested and we have to wait for the prices to move before there is something to do. I'm sure there are some readers that think that there hasn't been much trading action so far. Well, we've done all that we can up to this point. We've got nine open trades and now it's time for patience.

(Posting this reminds me to be patient also. I can't create profits without price movement.)
 
Thanks Peter, I'm fully aware and understand the importance of the points you are making in your post above and it sure is valid to make sure others are aware and understand as well, so once again thanks for thinking to bring it to our attention.

I heard it from somewhere: If you haven't got the discipline to stick to your plan, you're haven't got a plan!

Yes it's nice to have that wind behind your back when trading (short, med or long term) but when it disappears you do need patience as you say.
 
Thanks for your efforts so far PETER, some good insights .....hope the extra posting is not too taxing.Its great to get different views--every one sees things a little differently.I know its off topic--but, do you still trade FX??
 
Thanks, but it's not too taxing. I love this business. There are so many things to do that I lose focus sometimes on the important things. My Fx trading has waned due to the extra efforts in managing several ASX equity portfolios and my intra-day index trading. Its impossible to be in sync with every market and I haven't yet specialised on one market type (equities, fx, futures) even though I'd probably do better if I did.

There are times in every market when the prices don't move or there is a contraction in volatility. I don't mind as I can find another market that is moving. If I had my way I'd change this ASX momentum thread into a general momentum thread and be trading the drop in oil, cotton, coffee and buy the rising DAX. Instead I'm managing trades in NAN, SEN, CAJ, AGF, WOR, APN, SYR, PAN, CNU and waiting for them to move. Ha, what did I just say about patience, Peter!
 
While we sit on our hands there is a recent case study that is worth mentioning to show the risks of this trading style. I know, all I hear is "show me the money" but I'm in favour of showing you the realities.

Had I been managing this portfolio one week earlier it's very likely that I would have started a trade in SRX. Last week there was a great little ascending triangle pattern in a strong trend. The buy price 36.00 with a iSL at 34.00, giving us a 2.00 risk. Price burst higher and we move our TS to 36.00 (BE). Nice, feeling good, this is easy. Then comes news of the trading halt. Oh. Then the news, wtf? Then the market opens !!!

At the open (15.00) we are losing 21/2 = -10.5R that's -10% of our account -$5250.
Even with SRX at $20 we lose 16/2 = -8R (-$4000).

That's the business you want to be part of? This is going to happen to every one at some time.

 
It's good to be aware of what can happen Peter and sure enough there is one trade right before us.

I put the figures into my Stop Loss spreadsheet to view and I also wanted to see what the results would be if I had a 1% iSL away from the buy price. The bottom table is what you described with the share value dropping 58.33% to reflect that opening price of $15 and as you say, 10.5 units of risk was lost. I then put the same 58.33% drop in the top table but with a iSL of only 1% away from the $36 buy price and we would have lost 58.33 units of risk.

Yes simple maths I agree, if you use a 1% iSL and it drop 58.33% in price, naturally you lose 58.33 units of risk. If you use a 5.56% iSL just divide 58.33 by 5.56 and that gives you 10.5 units of risk you would lose in this case.

A good exercise for me anyway Peter, viewing it in this way has really opened my eyes to what risks I'm exposed to with my iSL and also if a sudden drop in price arrives at my doorstep. Seeing it in a picture in front of me has really helped my understanding of these 2 risk areas (tight iSL and sudden price drops). Sometimes I'd see a really tight pattern/consolidation and say you beauty but now I say hang and think about this a little.

Anyway that's enough from me .... thanks Peter
 

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Trading is risky, no doubt...

On the other hand with SRX this stock was fairly stretched already judging by such measures as the break above the trading channel and by even taking a casual look at the MACD.

My trading style will have me tend to shy away from an extremely overbought stock even with a strong continuation signal.
 

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Hey pete, some great stuff going on here. Can you elaborate on why you do a 'delayed' stop loss rather than a regular one?
 
I use the delayed sell stop due to the thin market depth on many of the mid-cap stocks I trade. It's too easy for a cashed up insto to push the price below an obvious stop loss level and trigger the conditional sell orders in the market and buy them up. [Good buy signal.]

I can now use round numbers as triggers rather than a tick or two below.

In the past (pre-GFC) when the market depth was thick I could place my sell stop in the market below a round number level of support and it would be a reasonable place. Not anymore.

Another benefit is that in a public forum everyone knows the closing price of the trade will be the next open after the exit is triggered. I won't be sneaking out before the close and before posting the exit nor will I select the day's highest price to close the trade.

I also prefer to see price open below and move through my buy stop. I tend to buy in the last hour of trading and many times in the closing auction.

ps: Massive whinge at the ASX mgt for letting this happen on their watch.

--------------------------

debtfree: It would be very risky to use a 1% SL on SRX when the daily ATR(10) was 1.40 (3.9%) at the time. Using a iSL size that is inside the average daily price movement has a high risk of being triggered the next day.

A safer option is >2ATR(10) away from current price.
 
Thanks Gordon7, that's a good picture to illustrate your points of view. It made me think about individual shares .... when do most price shocks/drops occur, you know the ones that hurt the most? Is it when traders climb onto a stock after it has been pushed upwards to stretched levels (high volatility) like you have shown on your chart?

I've heard it before but Peter repeated it the other day to me "The best low risk entry is when volatility is low and we plan for a price rise with expanding volatility." By the looks of things that's roughly what you look for and it made me look at the chart SRX with just Bollinger bands on it to see the last low volatility where the BBands came close together. The charts below shows low volatility areas which is much the same as yours with the GMMAs coming together.



If I had of made a trade in this area (Low Volatility) I probably would have brought at 28.31 with a iSL at 26.06, that's a iSL of 7.98% and if I was still in the trade when this price drop happened I would have lost 47% from my buy price of 28.31. Now this would have still been a loss of nearly 6 units of risk but better than 10.5 units of risk . Yes I know all in hindsight but it's good to give it some thought anyway and I'm fully aware you must put some risk onto the table to give yourself the chance of some profit. Is this another way of reducing our risk and keeping us away from price shocks/drops? Interesting and once again thanks G7 it has given me something to think about for sure and I know it comes back to, what suits you.

Cheers ... Debtfree
 

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