Introductions Who you are Where you’re from What you trade

Introductions Who you are Where you’re from What you trade
Why you are here What you want One fun thing

Finding Your Sweetspot
Self Market Stay aligned System Self System Market Get aligned

Alignment in Action Passion Results Purpose Values Beliefs Actions
Self System Market Results Passion Purpose Values Beliefs Actions identity feelings thoughts behavior

Trading body of knowledge
Long term investing Blended Monthly Rebalancing Monthly rebalancing Quarterly rebalancing Annual rebalancing Swing trading Channeling Overreaction Triple screen 551w Washout MaxPain Range Compression Autoframing Intraday trading Frog (3) RFA RLCO SQC Core & turbo Core & turbo Techniques & concepts Technical analysis Statistics Market classification Position sizing Trade framing Core & Turbo Green, Yellow, Red zones Stalking and re-entry Rangestat, slope stat, volstat SQN and TQN Systems Strategies Techniques Tips

(Psychology, learning style, objectives, skills, risk)
Material framework Techniques & Tips Market Core Swing Day Self (Psychology, learning style, objectives, skills, risk)

Can be a screen or set-up for System A !
Growing the trade System A Monthly RB % 2-10 days System B Overreaction 5DD Max Pain Triple screen Washout Channeling System B Can be a screen or set-up for System A ! %

Beliefs about Self

Beliefs about Self: “quickwrite”
Identity Purpose Strengths & Weaknesses Goals & Objectives Strategy

Bias Overconfidence, Optimism bias Hindsight bias Self-attribution
Confirmation bias Knowledge illusion Illusion of Validity Illusion of control Illusory correlation Illusory trends & patterns Sample size Biased 2d hand knowledge Representativeness heuristic bias

The inside of my head is a busy place
CEO Trading Cust Svc R&D Prototype Accting Benchmark Chief of Staff Staff Call Production System A System B1 System B2 System B3 System B4 System B4

CFA Institute's Top 12 Investor Mistakes
The Problems CFA Institute's Top 12 Investor Mistakes Investing without a strategy (time, risk, amount, goals) Individual stocks rather than a diversified portfolio Investing in stocks rather than companies Buy high Sell low Churning their investments Act on "tips" and "sound bites" Too much in fees and commissions Make decisions based on tax avoidance Unrealistic expectations Neglect Risk tolerance

Systems Beliefs

The Trading System & Plan
Executive summary Business description Industry overview Competition Self Knowledge Trading Strategy Beliefs, alliances, coaching Trading edges Financial Info Contingency planning Trading Systems Market filter Setup conditions Entry signal Protective Stop Re-entry strategy Exit strategy Position sizing algorithm

Beliefs about Systems A group of components organized to seek a goal in an environment
Input Process Output Purpose (Objectives) Whole > Sum of parts Input-Process-Output Interactive, Integrative, Iterative Feedback loops and learning: Relationships Reinforcing and counterbalancing Boundaries and durations: Scope Non-linear, dynamic relationships Modeling and describing is learning Hard, Soft, Evolutionary systems The Map is not the territory, but it can help

Be careful what you ask for
Objectives Be careful what you ask for Beat the market Highest return within risk tolerance Achieve required return at the lowest risk Unit of return vs unit of risk Longevity vs shortest time to achieve goal Be small when wrong, large when right Feel professional (BE PROFESSIONAL)

Monthly review questions
What worked for my trading this past month? What did not work? What do the metrics tell me - in what instruments did I make money? In which did I lose? Is there a pattern? Did I keep to my exercise and meditation schedules? Was there a correlation between my trading and how I felt for that day? Did I monitor the Ebb & Flow position sizing or did I persist with too large or too small a size even after market conditions changed? What were my greatest challenges/lessons? Of what am I most proud? What do I most regret? What attitudes and actions will I take with me into the new month? What lessons have I learned this month? What limiting beliefs did I shift? What negative emotions did I shift? How did I grow, improve, and expand myself?

Decision making systems

Oh! The Choices you’ll make!
Time Frames Risks Objectives Trading systems Trading strategies Trading vehicles Risk management

Market Beliefs

What’s the nature of the market?
Description Dynamic? Process Strategy Value Different situations need different responses, strategies, approaches Boundaries, indicators, volatility? What about the market? Closed, linear Static Instinct Training Analysis Speed, precision Closed, linear Static Rational Engineering Analysis Control (Closed), network Dynamic Systems Adaptive Modeling Learning Open, (network) Dynamic Morphing Metaphorical Balance Sense-making Probabilistic Uncertain Statistical Analytical Calibration Discipline Simple Random Chaotic Complex Complicated

Performance Math Market Sector Stock 25% 25% 50%

Market Classification
1/6 2/3 1/6

Market classification strategy
Notes: SPY = mkt 13 years, daily data Bull vs Sideways vs Bear Volatile vs Normal vs Quiet Examine each axis Combine into 3x3 matrix Examine slope of 50d MA too Very interesting results quiet normal volatile

Market condition Volatile Normal Quiet Bull Sideways Bear

Market condition Volatile Normal Quiet Bull Sideways Bear ETF2 ETF C
ETF O Bull 5DD & 5DDC WO & WOC Triple Screen 551w screen 5DD & 5DDC WO & WOC Sideways 551w screen 5DD & 5DDC & 5DDF WO & WOC & WO Failure Bear ETF O Triple Screen

Mental Models

Sector Analysis The Morningstar Cube Value Blend Growth Large Medium
Small

Efficiency of Hierarchy
Top-Down Approach Equity Mkt Mkt Major Indices Dow S&P NAS Sectors Companies V B G L M S "Morningstar Cube"

Efficiency of Hierarchy
Top-Down Approach Equity Mkt Mkt Major Indices Dow S&P NAS Sectors Investor Companies V B G L M S "Morningstar Cube" Management Lens/Filter (provided by fund managers)

World Market Model Liquid US Index ETFs: Can be shorted on a downtick
Value Blend Growth Large DIA SPY QQQ Mid IJJ MDY IJK IJS IJR IJT Small Liquid US Index ETFs: Can be shorted on a downtick

Stormy Weather Results Losing Streaks Experts Advertising Media
Self-doubt Emotions Success Guilt Equities Beliefs Real Estate Business Diversity: Assets in all 4 areas Protection against changing market conditions Each domain has its own rules, cycles, dynamics Equity Investing Not much upfront money Very liquid market Individuals have advantages Moments of extreme volatility Minimum time requirement Great place to start Business A lot of money up front Specialized knowledge required Must have an edge Franchises can be effective startpoint Not a liquid market Real Estate Labor intensive Inefficient market Slow appreciation

Statistics

Traffic lighting with statistics
+1 St Dev Average -1 StDev Adaptive Time period matters Current state Changing state Time series

Extremes

Getting on the bandwagon
5 Innovators Early adopters Early mass adopters Late mass adopters “Grumpy old men” 1 4 2 3 3 2 4 1 5 0% 100% 50%

Systems

Systems and timeframes

Example of Green & Yellow Zone
Standard frame Profit target for the swing trade I want to be long in the swing trade position Green zone Mechanical entry for the swing trade I can try to front run a green zone trade if I can see to the one inside yesterdays range Yellow zone Initial stop for the swing trade I am out of the swing trade or I am going short, because it’s failing Red zone When the swing trade pattern fired

Green zone & Yellow zone trading
Green Zone Trading: mechanical trading once Price moves above yesterday’s range Use scans & systems to find high probability/high payoff swing trade candidates Any of the Tortoise swing trade systems, patterns, preferences Frame the trades that meet 2:1 reward:risk ratios on a re-test of the 10day High Enter the trades when price > yesterday’s high +.05 Initial risk: .05 below yesterday’s low (or 1x ATR if you prefer) Once in the trade, use a trailing stop of the initial risk or adjust to .05 below yesterday’s low Think of the Green Zone as the Core position with overnight/Swing trade levels of risk

intraday opportunity trading on a mechanical trade, with tactical momentum Start with any Green Zone trade frame that gives 2:1 Look for opportunities when you can see 2:1 reward:risk, using the mechanical entry as your profit target Tighten up your stop and prepare to take profits if it stalls near the mechanical entry Consider adding another position at the mechanical entry, or simply accept the current trade as your mechanical Green Zone trade, but with an improved entry, and let it become your swing trade If you have a successful Yellow Zone trade AND a Green Zone trade, take the Yellow Zone trade off before the close, so you only carry the swing trade risk overnight, then seek to get back in the following day with another Yellow Zone trade Think of the Yellow Zone as the “Turbo” position with intraday trade levels of risk

How to think about trading the “Gap fail” tHOD Rangestat tLOD Any swing pattern can get us here 1 6 2 3 4 5

“I got 3% return, is that any good?”

Indexing comparing a range of performance comparing apples and oranges
"normalizes" data, helps trendspotting (x-min) 100 * (max-min) 3- (-5) 100* = 40 15- (-5) 3- (-12) 100* = 75 8- (-12)

ETF 2.0 summary Top Down analysis Calculations Reports Goals
Market Condition ETFs Regions Calculations Strength Consistency Quality Asset allocation Goals Consistency Discipline Routine Simplicity Reports Benchmarking ETF "stars" Regions ETF swing trading

ETF 2.0 = Strength Average Quality Consistency +
Strength: calculate RS (blended 3 & 6 month performance) STR Consistency: indexed, 10 week weighted average of Relative Strength CON Quality: indexed, 40 week “Quality rating” (Avg%Gain) / (StDev) QUAL Average: the average of STR + CON + QUAL AVG

ETF 2.0 assessment (2005-2007) Ruleset observations
Outperforms SPY buy and hold Outperforms SPY timed buy & sell Timing adds value Selection adds value dB finds every trend, long and short, supports opportunity trading as well as weekly positioning Exits 10% stops are good for starting, but could be tightened on winners and in Bear markets Strong argument for 3-4R winner as a Good Win to protect Stronger argument for 5R winners as Exceptional win Avg loss: 5% 1R = 5%

ETF 2.0 assessment (adds 2008-2010)
Avg loss: 5% 1R = 5% Ruleset observations Outperforms SPY buy and hold, timed buy and sell Timing, selection adds value dB finds every trend, long and short, supports opportunity trading as well as weekly positioning Replace Tortoise Index with 6 month RS (easier) Max drawdown -8% in 2 bear markets (SPY -43%) Exits 10% stops are good for starting, but could be tightened on winners and in Bear markets Strong argument for 3-4R winner as a Good Win to protect Stronger argument for 5R winners as Exceptional win

Index Overreaction

Index Overreaction Strategy: Main indexes only
Trade only with the long term trend Significant short term move away from the trend. Short term trade to capture the snap back Key Concepts: ATR % defines significant move 200d MA = long term trend 10d MA = short term trend Volatile move away from the short term trend Snap back to short term trend usually "over-corrects"

Index overreaction Profitable every year from 1994 to 2004
SPY, QQQQ, MDY, IWM, SMH Made money in both bull and bear markets Simple to trade and easy to learn mechanical system Consistent money maker on long & short side Outperformed buy and hold A few simple rules, 5 minutes a day or less to implement Statistics based entry, based on volatility (dynamic) Concept: the market corrects after a significant overreaction away from the trend

Overreaction: Buys # Rule Comment 1 2 3 4 5 6
Today's close >200d SMA Trade with dominant LT trend 2 Today's High < 10d SMA Pullback from main trend 3 Today's Close 1x ATR%< 10d SMA Strong move beyond normal volatility levels 4 Buy at the close (or tomorrow's opening) Close is preferred 5 Buy another unit if setup conditions repeat while you are in the trade 6 Exit at today's close when yesterday's close is > 10d SMA Catches the overreaction snapback ATR%(14) = a measure of short term volatility

Overreaction System Rules: Sells
# Rule Comment 1 Today's close <200d SMA Trade with dominant LT trend 2 Today's High >10d SMA Pullback from main trend 3 Today's Close is at least 1x ATR% >10d SMA Strong move beyond normal volatility levels 4 Sell at the close (or tomorrow's opening) Close is preferred 5 Sell another unit if setup conditions repeat while you are in the trade 6 Exit at today's close when yesterday's close is < 10d SMA Catches the overreaction snapback

Index Overreaction System summary
Comments Don’t need to monitor all day Takes advantage of long and short sides Cash is not tied up Can calmly enter the market in the currect direction in emotionally challenging markets Mechanical signals don't require discretionary judgement High percentage of winning trades Application Trade a basket of ETFs Keep it simple and emotion free: apply the rules Paper trade until you are comfortable Trade small position sizes

Index Channeling

Channeling: Buys # Rule Comment 1 2 3 4 5
Today's close >200d SMA Trade with dominant LT trend 2 Today's Close < -80 Williams%R (10) Pullback from main trend 3 Buy at the close (or tomorrow's opening) Close is preferred 4 Buy another unit if setup conditions repeat while you are in the trade 5 Exit at today's close when today's close is > -30 Williams%R Catches the overreaction snapback Williams%R (10) = a measure of short term overbought/oversold

Overreaction/Channelling Stops
Considerations: 3% trailing stop for broad US indices 5% trailing stop for IGW + international broad indices

5 days down (5DD)

5DD concept

“551w”…where do ideas come from?
Mastermind effect Day 2, morning break…Ken & Leo Willert (in between talking about drumming) Component analysis: 5 weeks up is favorable… 5 days down is favorable… 1 day up is favorable … Universal Entry (consistency, risk mgt) Williams %R <-50 (profitable swing)

Use the “framing” structure
“551w” Draw a concept diagram Use the “framing” structure

“551w” concept diagram

“551w” concept diagram: a way

Washout

Washout Pattern What if everything you knew was wrong?
“It’s not what you don’t know, it’s what you know that ain’t so” -Harry Truman

You trade your beliefs What would this look like? What If?
Avoid the trend Weakest sectors Weakest stocks Pick bottoms Buy them when no one cares Be afraid of your convictions Focus on large caps Conventional Wisdom Ride the trend Strongest sectors Strongest stocks You can’t pick bottoms Buy them when they hate them Have the courage of your convictions Small caps outperform What would this look like?

Assertions Buy large cap, weak stocks when nobody cares
When everyone who was going to sell has sold When there is price evidence of short term improvement Buy them when the market is going up Buy them when they are going up and the market is going down Plan for the recent swing high Maintain 2:1 reward:risk ratio Cut at the first sign of hesitation Watch for signs of institutional interest

Operationalize the beliefs
OEX stocks (S&P 100) (institutional $, risk mgt) Oversold on an annual basis (W%R(260) <-80) Long term sellers have sold Oversold on a short term basis (W%R(10) <-80) Short term sellers have sold -20 -50 -80 -100

Price patterns Setup day 1 (S1) Higher low Close > open
The Big Sell Setup day 1 (S1) Higher low Close > open Close > yesterday’s high Entry Entry day On Price > S1 (High) EntryDay Exit Setup Day The swing low

Reward: Risk W%R(260) > -80 Institutional confidence Swing High
Trailing stop Entry ATR Exit

Slightly lower reliability
Lower average R win, SQN More opportunities per week Still tight risk controlled

variation on Dr Alexander Elder's system
Triple Screen System Triple Screen System variation on Dr Alexander Elder's system

Triple Screen Overview
Trading For A Living, by Dr Alexander Elder combines 3 time frames to remove disadvantages of each combines the use of trend-following and oscillating indicators Each time frame relates to the next by a factor of 5 (per Elder) You can round off the time periods Example: if the middle time period is daily, the short term period can be hourly, not 1hr and 12 min (6 market hours divided by 5) Screen 1 uses the longest time frame, Screen 3 the shortest Screen 1 Screen 2 Screen 3 Market Movement Long term Intermediate Short term Type trend Strong trend Counter trend Breakout Timeframe example Monthly Weekly Weekly Daily Daily Hourly Indicator example ADX > (25) or MACD Hist uptick 20 dMA or Williams %R Candlestick breakout

Triple Screen Concept Screen 2: Intermediate Movement Screen 1:
Major Movement Screen 3: Timing Find strong trends Apply an oscillator to daily chart Use daily declines suring weekly uptrends to find buying opportunities Use daily rallies during weekly downtrends to find shorting opportunities

Triple Screen Strategy Summary
Weekly trend Daily Trend Action Order Up Up Wait None Up Down Go long Trailing buy stop Down Down Wait None Down Up Go short Trailing sell stop Screen 2: Intermediate Movement Screen 1: Major Movement Screen 3: Timing

Triple Screen Concept Thought experiment: if the pullback to the 20dMA = 10%, and Buffet suggests 5% per year in equities is good, then a 50% retracement = a 5% move in a few days, Is that enough? for a short term system? 0% 100% 50%

Triple Screen Concept Pullback to 20d MA or <-80 on Wlliams%R
ADX > 25, +DI > -DI or MACD-Hist uptick Breakout higher high on hourly candlestick Min 2:1 risk/reward Stop: low of entry day or previous day's low, whichever is lower Ratchet the trailing stop to breakeven as soon as possible Preserve 70% of profits of a 3R winner or, manage exits with candlesticks

Daily ETF “Triple Screen” screen

Mastermind Insights

Supertrader Summit Insights
Chatroom Mastermind effect Feed the bulldog every day Where do beliefs come from? Connectivism & The Market Mosaic Trader Quality Number Your system is what you do Double loop learning & learning styles, auditory learning “That coal won’t shovel itself” Tell the Universe All your preparation is for… Phase transitions and critical states Zeno stop Trade framing Snapping turtle 551w “.25R improvement on every trade” Zero state Ready - Fire - Aim You are ALWAYS trading

Trade Index Analysis

The LeBeau Stop Quality Index
From the Systems seminar 1996: Time in trade = t Find best price in time = 2t Your exit / Best Possible exit A number between 0 and 1 .5 is really good My refinement: consider time value of money Spreadsheet implementation with XLQ

Trade Index Analysis Best Possible Exit Exit Entry Time (t) Procedure:
Calculate the length of your trade (t) Find the best possible exit during time period (2t) Divide Actual/Best Possible to find Exit Efficiency Scale: 0 <-> 1.0 Entry Time (t) Exit Actual Gain (g) Best Possible Exit Best Possible Gain (b) Lebeau Exit Efficiency = Actual Gain / Best Possible Gain Notes: Can only examine Wins vs wins Must do separate calc for comparing efficiency of Losing trades Does not consider time value of money (gain/time)

Trade Index Analysis Notes:
Entry Time (t) Exit Actual Gain (g) Best Possible Exit #1 Best Possible Gain (b) Lebeau Exit Efficiency = Actual Gain / Best Possible Gain Best Possible Exit #2 Notes: By inspection you can see that the actual exit is very good compared to Best Possible Exit #1 Best Possible Exit #2, though is best of all because you get maximum gain AND your money available quickly for the next opportunity Gain/Time may matter if you have a system with relatively short holding periods and many opportunities

A complex adaptive system
Trade Index Analysis Thought experiment: Think of your ruleset for filters, screens and entries as a lens that waits to see the market in a certain condition that you have determined is favorable for a trading system Suppose you have developed an exit strategy that results in a positive expectancy system, and that through a combination of backtesting, prototyping with small position size, and finally trading with normal risk, you are satisfied that the system is robust How can you determine if your rule set is “in tune” with the market condition? How will you make sure you are not missing other, easier opportunities? Note: this is hard to do especially if your system has a positive expectancy! Market A complex adaptive system ruleset entry exit stalking trade stalking

Trade Index Analysis Procedure:
For each trade, calculate the time in the trade as (t) Find the Highest High and Lowest Low in time period 2t Index the distance between Highest High and Lowest Low on a scale of 0-100 For each trade, calculate and Entry Index, Exit Index, and Trade Index Calculate an Average for the Entry Index, Exit Index and Trade Index If the Average Entry Index >70, the Average easier, larger opportunity is to the short side (even though you may have a positive expectancy system going long) 100 100 Highest High exit trade Trade Index entry 1R Lowest Low Time period (t) Time period (t)

For each trade, calculate the time in the trade as (t) Find the Highest High and Lowest Low in time period 2t Index the distance between Highest High and Lowest Low on a scale of 0-100 For each trade, calculate and Entry Index, Exit Index, and Trade Index Calculate an Average for the Entry Index, Exit Index and Trade Index If the Average Entry Index >70, the Average easier, larger opportunity is to the short side (even though you may have a positive expectancy system going long) 100 100 Highest High exit Average trade Trade Index entry 1R Opportunity!? Lowest Low Time period (t) Time period (t)

For each trade, calculate the time in the trade as (t) Find the Highest High and Lowest Low in time period 2t Index the distance between Highest High and Lowest Low on a scale of 0-100 For each trade, calculate and Entry Index, Exit Index, and Trade Index Calculate an Average for the Entry Index, Exit Index and Trade Index If the Average Entry Index >70, the Average easier, larger opportunity is to the short side (even though you may have a positive expectancy system going long) 100 100 Highest High 70 Washout 54 48 5DD 44 Lowest Low Time period (t) Time period (t)

Applying Exit Efficiency

Technique

5 day Slope of the 50d MA A trend in transition Notes: 50day MA slope
SPY = mkt; 13 years, daily data All great bull mkts began when slope of 50d MA was flat or positive Sometimes positive slope was false Takes 3-4 weeks after a Bear to get slope back to flat How to measure? Very interesting results 50day MA slope

System Quality Number application
Apply the concept of System Quality number to the daily output of “black boxes” called stocks and ETFs My implementation: 10 x (AvgGain%(t))/(StDev(t)) Uses: Q40 for NLNTF funds: t= 50 weeks ETFs/large caps: t = 30,60,90,200 days “A way” to quantify “efficiency & effectiveness”

The Universal Entry 1 2 6 4 3 7 5 The Universal Entry The Big Sell Day(s) The Swing Low Day The Setup Day The Entry Day The Successful Trade Day(s) The Sell Day The Continuation Entry Day After a successful trade, whose exit was triggered by selling, I look for a re-entry using the Universal Entry (UE) After the sell day which triggered the exit, buy today if: Open inside yesterday’s real body Price 5 cents higher than yesterday’s high Use a stop loss of: 5 cents below yesterday’s low, ½ ATR, trailing (more aggressive) In a Washout Continuation pattern, this will often convert to a long term trend following trade, with an initial profit target of the 200d MA, and then beyond

Risk Management

Risk management Diversification Position sizing Portfolio heat
Benchmarking System trading Objectives Risk tolerance Expectancy MA of equity 20 trade MA of expectancy Fundamentals Extreme value Assume you are wrong until the mkt proves you right Debriefing Trading plan Business plan After action reviews System of systems

Market Assessment

Position Sizing Profit target? Exit Set-up Entry Stalking Initial exit
How do you decide? Profit preservation How much of the portfolio? $/share Reward Set-up Stalking Entry Risk $/share Initial exit How do you decide? Capital preservation

Exercises

How do you feel about these charts?
Like/dislike? Long vs Short vs Stand Aside? What will it do next?

1 2 3 4

Which system would you trade?
Long term trend following system Returns 30% per year, 1 opportunity/yr A Swing trading system 60% winners, averaging 2 R 40% losers, averaging -1R Trades last a week, on average 3 trading opportunities per week B At what risk level does A = B? (bonus)

Range Stat

AA case study example of rangestat

Intraday moves Max 12.36% +1SD 5.28% Avg 3.50% -1SD 1.71% Min 1.20%
AA intraday range stats Intraday moves Max 12.36% +1SD 5.28% Avg 3.50% -1SD 1.71% Min 1.20% StDev 1.79% close open +6% +4% +2% close -2% -4% -6% Yesterday’s candle

AA intraday range stats
close open Normal moves will range between 2 and 6% intraday +6% +4% +2% close -2% -4% -6% Yesterday’s candle

close open Normal moves will range between 2 and 6%intraday +6% +4% +2% close -2% -4% -6% Yesterday’s candle

AA: trading at $ % = $0.25, 4% = .5, 6% = .75 If you can manage a .1 iStop, the normal intraday move = 5R close open Normal moves will range between 2 and 6%intraday +6% +4% +2% close -2% -4% -6% Hypothetical trade frame Yesterday’s candle

AA: trading at $ % = $0.25, 4% = .5, 6% = .75 If you can manage a .1 iStop, the normal intraday move = 5R close open Normal moves will range between 2% and 6% intraday +6% +4% +2% close -2% -4% -6% Know your target Know the potential Know what’s normal Control your risk Be surprised into catastrophic success Yesterday’s candle

Who are you? What are you trading today? Finalize your trading plan Brief overview of your strategy for the day Use your trade log, document trades Take screen shots of frames/entries/decisions/exits (case study) 1 member of the group monitor SPY//try to trade SPY (virtually) “Attention on Deck” if you see something or have an observation Every 30 minutes we will summarize

Logic chain i start with SPY to assess mkt conditions from the open and during the day i compare the vertical column above and below for intraday relative strength comparisons of indices and sectors to SPY if a sector looks very good or very bad i then go east and west to find an even better target for easy trading to include looking all the way to the right for stocks outperforming their peers in an outperforming sector, going in the same up direcition as mkt if mkt failing i find worst sector ETF and trade the double inverse "long“ the stocks and ETFs on there are often the result of swing trade patterns which are favorable for the next couple days so i have extra protection when trading them intraday the end

Research Program

Multivariate world market correlation model
Information: Fundamentals Technical Seasonality Productivity Employment Consumption Policy Business cycle Theories Results Memory Actors & agents Liquidity Time horizons Required returns Risk tolerance Psychology Analysis Feedback Strategies %return %variation Market competition Questions What’s working? What was working? What’s starting to work? What’s starting to lose? What’s the context? Frequency & amplitude? Best heuristics now? Confidence? Underlying causal model “competitive themes” “hidden dynamic order” Geographic US Japan Europe Asia EAFE (not US) Latin Am Emerging Mkt Business sector US sectors (SPDR list) Global sectors (list) Style Value Blend Growth Independent Market Cap Large Medium Small Micro Asset class Equities Real estate Bond/income Commodities Currency USD Euro Yen Themes & dimensions Notes: The themes compete to be the dominant driver of world market returns (a mix at any moment) The dimensions compete within each theme for dominance (a mix at any moment) There is a time component for dominance that may vary by theme and dimension There is an “expected” duration and strength of dominance unique to each theme and dimension Successful strategies could include the right mix of themes and dimensions in the portfolio Monitoring “state” and context permits “planting” and “harvesting” according to the season

Forecasting model committee
Questions What’s working? What was working? What’s starting to work? What’s starting to lose? What’s the context? Frequency & amplitude? Best heuristics now? Confidence? Each decision cycle Statistics Multivariate Principle Components Ebbs and Flows Dynamic Model base Tortoise 2.0 Short term RS & volatility 8-10 winners Sector, region limits Business forecast Internal model base Data pattern driven Algorithm selection Competition winner Monte Carlo 10 year, monthly % Mean reversion Performance Volatility Rules based Hybrid, short term Linear regression Market condition Regional focus Neural Network Monthly prediction Weekly prediction “Black Box” Expert architecture CART Classification Regression Tree Non-linear Explanatory power Momentum Fama 12 month rules ST momentum IT momentum LT momentum Annual Rebalance 10 sectors January rebalance No timing Long only Buy & Hold Total Market Index Baseline Model Predictions Historical Performance Analysis Assessment Strategy Selection Strategy Lessons Learned Price based Model-specific time frame Model forecasts Model preferences Compare & contrast Agreement, disagreement Rules for combining Rules for weighting %return & %variation Of Models & System Evaluate System rules Apply learning Rules & decisions Model performance

World Market Model: Directed Acyclic Graph (DAG) Diagram
Currency US Sector Mkt Cap Region %return %variation Global sector Style Asset Class Geographic US Japan Europe Asia EAFE (not US) Latin Am Emerging Mkt Business sector US sectors (SPDR list) Global sectors (list) Style Value Blend Growth Independent Market Cap Large Medium Small Micro Asset class Equities Real estate Bond/income Commodities Currency USD Euro Yen Themes & dimensions

ETF components VTI Global Business sector Currencies Asset classes
Regions US Business sector VTI Total Mkt Index Style Capitalization

Live Trading Stats

Live Feb 2011, day 1

Live Trading Prep

Example of Green & Yellow Zone
Standard frame Profit target for the swing trade I want to be long in the swing trade position Green zone Mechanical entry for the swing trade I can try to front run a green zone trade if I can see to the one inside yesterdays range Yellow zone Initial stop for the swing trade I am out of the swing trade or I am going short, because it’s failing Red zone When the swing trade pattern fired

Daily Trading Plan Notes (a way)

Daily: Plan-Prepare-Execute

Max(future) Max(ever) Max(x) Avg+1SD(x) Avg(x) Avg-1SD(x) Min(x)
Min(ever) Min(future) Max(future) Max(x) Min(x) Avg(x) Avg+1SD(x) Avg-1SD(x) 30 days of data Calculate daily Ranges Calculate statistics: Max Min Avg SD Avg +1SD Avg -1SD Calculate Rstat / SD Select targets Stalk entry Wait 30 min SD HOD Range Stat LOD SD

XLI SMN XME CAT CLF XLB AA HD DBA XLE DVN CVX DBC BAC AXP JPM SKF XLF GLD GDX GDXJ ZSL SLV AGQ SLW CSCO HPQ QID QQQQ QLD MSFT SPY TLT WMT AAPL MZZ MDY MVV VOT TWM IWM UWM NFLX EPP EWM EFU EFA IEV ILF EWZ EEV EEM FXP FXI

Logic chain i start with SPY to assess mkt conditions from the open and during the day i compare the vertical column above and below for intraday relative strength comparisons of indices and sectors to SPY if a sector looks very good or very bad i then go east and west to find an even better target for easy trading to include looking all the way to the right for stocks outperforming their peers in an outperforming sector, going in the same up direcition as mkt if mkt failing i find worst sector ETF and trade the double inverse "long“ the stocks and ETFs on there are often the result of swing trade patterns which are favorable for the next couple days so i have extra protection when trading them intraday the end

The Curve

Consider the curve What do you see? What questions do you ask?

Consider the curve What do you see? What else could it be?
Is this a belief or a prediction? How else could you draw the curve? What draws the curve? Once drawn, is it static? Where are you on the curve? Where is the market?

Fair value On Average: Where are you buying? Where are you selling?

Slope? Slope? Time period? Normal? Trend? Duration?
Frequency & amplitude?

Fair value Slope? Variation? Stretch? Normal? Boundary of normal?

Market classification
Sideways? Bull? Bear? Bear? Sideways? What are your measures? What’s the time period? How do you adapt? Is there a larger time period slope at work? Boundary conditions?

Market : Systems Sideways? Bull? Bear? Bear? Sideways?
ETF2 Triple Screen Sideways? Triple Screen ETF2 5DD 5DDC Bull? Bear? 5DD 5DDC WO WOC Bear? ETF O Triple Screen ETF O ETF C Sideways? 5DD 5DDC WO WOC Where on the curve do your systems thrive? Do you have systems for all regions on the curve? Specialized systems vs general purpose systems?

Attitude Checks

Attitude The analysts are crooks.
The market makers were fishing for stops. I was on the phone and it collapsed on me. My neighbor gave me a bad tip. The message boards caused this one to pump and dump. The specialists are playing games. It is my fault. I traded this position too large for my account size. It is my fault. I didn't stick to my own risk parameters. It is my fault. I allowed my emotions to dictate my trades. It is my fault. I was not disciplined in my trades. It is my fault. I knew there was a risk in holding this trade into earnings, and I didn't fully comprehend them when I took this trade.

Covey’s 7 Habits…for traders?!
“Sharpen the saw” Be proactive Begin with the end in mind Do first things first Think “Win/Win” Understand, then seek to be understood Synergize Continuous improvement

What is your totem animal?
What does it mean to trade like a _______? What qualities does __________? What emotions? What are the risks? Where does it come from? What does it represent? How useful?

Stalking Not predicting Knowing your prey Identifying the patterns
Knowing the odds Setting the conditions Taking the shot

Bears go fishing

Lions await the herd

“YOU DON’T KNOW NOTHING”

Professional feelings
Calmness Relaxation a gentle pleasant humming in the background (Bach-like fugues) crystal clarity on risk reward and my betting strategy instant recognition of my strategy given my starting cards an effortless ability to fold without regret satisfaction with playing correctly when i call or raise and lose the hand based on pot odds and strength of hand there is an interesting feeling when i go all in for the right reason (based o the odds and percent portfolio risk) there is the same feeling (it feels like an octave lower, but still very satisfying) when i make the right bet and the right play but for less than all in it is satisfying to have the feeling and the realization that i am in it for the long haul, and that i know i will endure by applying my rules, while acknowledging that sometimes you dont get the cards, but also knowing that risk management/position sizing will keep me in the game.

Let the course pick your club
Master your tools Pack your bag Groove your swing Know the course Keep good score Hit buckets of balls Play your game Breathe deeply Enjoy the game Leave it on the course

Technical Analysis

Traffic lighting with statistics
+1 St Dev Average -1 StDev Adaptive Time period matters Current state Changing state Time series

Extremes

Technical Analysis Review
Average Directional Index (ADX) Average True Range (ATR) Moving Average Convergence/Divergence (MACD) Williams %R “NDX” (an improved Williams %R) Candlestick Charting 200day MA “Stretch” % Slope of the 30d regression line Gap Stat Range Stat

Getting on the bandwagon
5 Innovators Early adopters Early mass adopters Late mass adopters “Grumpy old men” 1 4 2 3 3 2 4 1 5 0% 100% 50%

Average Directional Index (ADX)
(strength of trend) Invented by Welles Wilder measures strength of trend simple but complex calculations measured on a scale of 0 – 100 low ADX value (generally less than 20) can indicate a non-trending market with low volumes a cross above 20 may indicate the start of a trend (either up or down). If the ADX is over 40 and begins to fall, it can indicate the slowdown of a current trend. Can also be used to identify non-trending markets or a deterioration of an ongoing trend. Although market direction is important in its calculation, the ADX is not a directional indicator.

ADX (continued) Normal calculation: 14 day period with end of day data
ADX >30 indicates there is a strong trend Momentum precedes price. When using ADX in your studies, note that when ADX forms a top and begins to turn down, you should look for a retracement that causes the price to move toward it’s 20 day moving average (SMA). In an up trending market, the technician will buy when the price falls to or near the 20 unit SMA, and in a down trending market, one should look to sell when the price rises to or near its 20 unit SMA. ADX does not function well as a trigger. Prices will always move faster than the Average Directional Index, as there is too much of a smoothing factor, which causes it to lag the price movement. If ADX goes below both DI lines, stop using trend following systems, as the market is choppy ADX has been used in trading systems using +DI and -DI crossovers

ADX Caution “Imagine that we have a nice long base. We jump on board when ADX starts rising from a low level. We successfully carry this trade all the way up to a high ADX level, somewhere above 30, and then the market turns down. The ADX will start to decline showing an absence of trending direction, but the price does not have an absence of direction, it is moving down!” - Chuck LeBeau

ADX: the Formula Calculating ADX is a two-step process. First, the difference of +DI and -DI is divided by the sum of +DI and -DI, and the quotient is multiplied by 100; the result is known as DX. Second, ADX is calculated by taking a modified moving average of DX. Formula: DX = [ ABS( (+DI) - (-DI) ) ] / ( (+DI) + (-DI) ) ADX = modified moving average of DX Where: n = number of periods +DI = current positive directional index -DI = current negative directional index DX = current DX

ADX calculation +DI14 minus -DI14 +DI14 plus -DI14 DI difference
+DM Zero DM C C C B B -DM B Various applications of ADX 1. Trade crossovers. If +DI crosses above -DI, buy; if +DI crosses below -DI, sell. 2. Take only long positions when +DI is above -DI; take only short positions when -DI is above +DI. 3. A rising ADX indicates the trend - up or down - is strengthening; use a trend-following system. A declining ADX indicates a market with less direction; do not take trend-following signals. 4. When ADX is below both directional lines and moves up, it suggests a new trend may be beginning - an uptrend if +DM is on top and a downtrend if -DM is the top line. 5. When ADX is above both directional lines and starts to drop, it indicates the trend is beginning to fall apart and is time for a trend-following system to take profits. Rising mkt Outside day Inside day +DI14 minus -DI14 +DI14 plus -DI14 DI difference DI sum x 100 DX = x 100 ADX = Simple moving average of DX (14 = normal)

Trendspotting with ADX

Average True Range (ATR) (measuring volatility)
Average True Range ("ATR") is a measure of volatility. Introduced by Wilder in New Concepts in Technical Trading Systems Common component of many indicators and trading systems. Interpretation High ATR values often occur at market bottoms following a "panic" sell-off. Low Average True Range values are often found during extended sideways periods, such as those found at tops and after consolidation periods

ATR calculation The True Range indicator is the greatest of the following: The distance from today's high to today's low. ABS(A-B) The distance from yesterday's close to today's high.ABS (A-C) The distance from yesterday's close to today's low. ABS (C-B) The Average True Range is a moving average (typically 14-days) of the True Ranges. A A A C C C B B B inside day Rising mkt outside day

(Moving Average Convergence Divergence)
MACD (Moving Average Convergence Divergence) The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. The MACD proves most effective in wide-swinging trading markets. 3 popular ways to use MACD Crossovers: Basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. Overbought/Oversold Conditions When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. Divergences A indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

The 4 seasons of MACD-Histogram

(a measure of overbought/oversold)
Williams %R (a measure of overbought/oversold) Commonly performed on a 10 day period Scale: 0 to minus 100 (can ignore the minus sign) 0 to 20 considered overbought 80 to 100 considered oversold Must wait for price confirmation: a better setup than trigger Uncanny in its ability to anticipate turning points Formula: Highest High(n) - Close Highest High(n)- Lowest Low (n) x 100

Williams%R in action

10 NDX vs Williams %R Williams %R 10 NDX 100 -20 80 20 -80 -100
100 -20 80 20 -80 -100 uses previous 10 days of data readings are intuitive extreme moves today are highlighted uses current day data and previous 9 readings are not intuitive

Candlesticks Quicklook
Visually display much more info than bar charts Quicker to identify important patterns than bars Should be used in conjunction with Western technicals Should not be used on their own for entries or stand alone systems Do not give price targets Reveal market psychology Tug of war between bulls and bears Can signal change of trend or market pauses "Windows" or "gaps" are very powerful signals Long shadows can identify support or resistance when taken in combination Work in multiple time frames Generally well suited for intermediate and short term timeperiods Pay attention to Doji

Candlestick example The highest price (upper shadow)
The opening or closing price, whichever is greater The center ("real body") Candlestick Bakground In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation. Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don't involve any calculations. Each candlestick represents one period (e.g., day) of data. The opening or close, whichever is less The lowest price (lower shadow)

Candlestick examples 3 soldiers marching Triple cloud cover
Long shadows (support) Hammer Gravestone Doji: indecision Evening star Engulfing

Stretch above the 200d MA Price Where is it now? 200d MA
Positive stretch Negative stretch Where is it now? What’s the most? How does today compare?

200dMA % slope

200dMA stretch%: All indices

30day Regression line slope

Gap Stat

Range Stat

Introductions Who you are Where you’re from What you trade

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