Response to Comment by Thomas Rac:
“as you are using a technical exit signal only to exit a stock what is your interpretation of that valid signal? bear in mind that any particular stock might go temporary for a breather even 10 or more percent but you still would not know the outcome and sustained a huge loss if it was the beginning of a downturn.”
To read the full comment click here.
Firstly, using a mechanical system is done to eliminate interpretation. I do this because I acknowledge and accept with every part of my being that human interpretation is done through a biased spectrum that is also not able to comprehend all the variables that interplay with any stock’s price in the markets. Therefore, I can never know what will happen in the future. In fact, “anything can happen.”
Secondly, you must allow a stock price room to breathe. A technical stop allows it room to breathe based on its individual price characteristics and not on your portfolio or risk profile, both of which have no influence on the market and are not determined by the market.
Each and every situation is unique therefore how much it needs to “breath” for each situation will be unique and hence different. This means that you will never know with certainty in real time whether a retracement of any kind is just the trend unfolding or whether it is the beginning of a reversal of a trend. You will know many weeks or months later with the benefit of hindsight.
What is important is that you use a logical concept, research it, and ensure that it provides an edge when combined with the entry criteria. Then execute that logical concept flawlessly knowing and accepting that it will not be right every time but that over a large sample, you will be way ahead by adhering to it.
To find two examples where a 2% TSL would not have worked well I looked at the two biggest profit trades that we have done in the SPA3 public portfolio in recent times. These are EXT (Extract Resources) and LNC (Linc Energy), 231% and 199% profit trades, inclusive of brokerage, respectively. EXT added $20,097 and LNC added $22,945 to the portfolio.
Using a 2% TSL the EXT trade would have been stopped out with a 5% profit trade or just $436 absolute profit. The LNC trade would have been stopped with a 7.34% profit trade or just $845 absolute profit.
Both these trades traded below their 2% TSL for 4 trading days before continuing their trend.
For an example of a 2% ISL, the 4th biggest trade in our public portfolio, MMX, could have been stopped out depending on the entry price into the trade (on a large range day) between $1.70 & $1.57. We use the close which was $1.595 but an entry at or above $1.62 would have resulted in exiting the day after the entry at a -13% loss or -$1,000. In any case, a 2% TSL would have limited this eventual 195% (or $24,973 absolute) profit trade to just 28% profit.
For the record, the biggest % mover, 291%, over the 8 years from the SPA3 public portfolio, AUM (now CDU), could also have been stopped out at a loss the day after entry if entry had been at 61c to 62c instead of 60.5c.
There are plenty more examples. It’s been years since I did this research and spending a few hours looking at many recent examples in up and down markets has re-confirmed my views. Thank you for the opportunity through your posting.
IMHO the 2% rule is too close for medium-term trading however this is a useless statement unless you have an alternative arrived at through research. Having said that, it’s far better to use it than nothing at all.
Regards
Gary
Response to Comment by Leigh:
“If a stock is allowed to drop an exceptionally large amount (the size of the % drop is, of course, subjective), then it has already proved itself a pretty poor choice if not a “loser” and hanging on to it is “living in hope” that one might miss it’s possible turnaround.”
To read the full comment click here.
I absolutely agree with your statement. It is natural for a stock to retrace and by how much should not be determined using a subjective method. Having an unambiguous exit strategy is not living in hope, it is trading objectively.
Every stock will behave differently and every stock’s future is unique. With SPA3, a fall in price will always trigger a technical exit at some stage, at which time you look for other opportunities.
“For example SPA 1 portfolio (I stand to be corrected if I am wrong) had 8 stocks losing more than 30%, the largest loss being PVA @ 47.83%.”
You are correct, there have been 8 trades in the SPA3 public portfolio that have lost more than 30%. To put that into perspective, this is 8 from 831 which is 0.96% (i.e. less than 1%) of all closed trades. A poor system designer might introduce a rule to eliminate 30% or worse loss trades but I can guarantee you that the same introduced rule would also eliminate a whole lot of profit trades that the system would otherwise have achieved.
There have been 2 that have lost more than 40%, PVA and BKN (I did the BKN trade in my Super portfolio but also did the next one which was a profitable trade). PVA was suspended for a few days and dropped on the open after suspension and BKN opened down over 40% on an overnight announcement from an up trend. Neither of these could have been prevented with an intraday financial stop.
As I keep saying, “anything can happen” and there are too many variables to eliminate all bad outcomes.
“I don’t know what would generally be regarded as an acceptable max % loss by others, but I guess I would be feeling uncomfortable at anything greater than 25% and perhaps comfortable at 20% as an overriding exit to technical analysis stops.
Convince me I’m wrong!”
I can only use research to try to convince you that you may be heading down the wrong track. You see, by introducing any rule to your trading system you can’t focus on the positives that it will bring to the system without measuring what the negative effect to the system will be.
Let’s first see what you are trying to avoid. There have been 21 trades in the SPA3 public portfolio worse than a 25% loss, that is, 2.5% or all the 831 trades, and 50 worse than a 20% loss, or 6.02% of all 831 trades.
Of the trades mentioned above LNC, MMX, and AUM would have been stopped out well before the SPA3 exits (LNC early in the trend) with 20% trailing stops. These are only a few of the trades that form part of the profit side of the system. Out of the 831 closed trades, 89 have had greater than 20% return, 38 greater than 50% return, 13 greater than 100% return, and 2 greater than 200% return. How many of these would have been stopped out with a TSL?
The above discussion really is redundant because the SPA3 edge proves that with the existing entry and exit mechanisms, risk management and money management rules it massively outperforms the market, managed funds, and portfolio managers.
Losing is a natural part of trading and it must be accepted.
Regards
Gary
7 Responses
I know it’s gonna take up some space in the blog comments, but can you give a run through of the last 20 SPA trades using charts for us please?
Vic
Thank you for your helpful and educational comments. One question. Does your system not allow for re-entry if appropriate after being stopped out…or is that the finish of trading that particular instrument for a time. Thanking you.
I know I should have specified ‘completed trades’
Hi Gary
I understand your concepts with not wanting to use financial stops, but am wondering why technical stops like using an ATR multiple is not a valid way to approach this.
I know we have had this discussion before, Gary, and you proved to me that 3ATR(15) appeared to be outperformed by the SPA edge. Why not increase the multiplier to say 3.5 or even 4? Both would have worked better than SPA on this occasion, with 3.5 getting me out around $4.34 and 4 getting me out around $4.23. Even 4.5 equated to an exit around $4.08.
To my mind, using 3.5ATR(15) as an example would have kept you in the trade to the day of the big drop and got you out at a slightly better level. In fact, had the trade been taken as a CFD with a GSLO, the trade would actually have been exited at $4.34, as opposed to the $3.96 exit in SPA. Granted, due to MR and SR being HIGH, a CFD may not have been appropriate, though this depends on your trading plan, but in normal circumstances, a CFD would have been more beneficial.
Still, having set a 3.5ATR(15) stop at entry time would have got you out within 2% of the stop price. Since it is set as a fluid stop, moving up with subsequewnt higher closes, I would have trailed it up to the HHC of 7 April of $5.30 and would have been stopped out within 2% of the stop set at $4.34. CBS guarantees the 2% unless a stock gaps dramatically past your stop, which this did not. It opened at $5, went up to $5.15, down to $3.78 and closed at $3.95. As it hit $4.34 and continued, we would have been stopped out at no less than $4.25.
Gary, I assume the DS1.1 Lighten was ignored as the trade was already lightened at open due to MR + SR being HIGH. I am wondering why the WONB4+DB pyramid signal was not taken in the trade on 2 Feb 2009, though. Was that also due to MR + SR still being HIGH?
Cheers Gary. I know you swear by the SPA exits, but I am still using ATR exits where they occur prior to a SPA exit. In almost all cases, they have been followed by a SPA exit. Now that I have adjusted the multiplier, I am happy.
Regards
Shane
In reply to Lyndon
Comment from: Lyndon [Visitor]
Thank you for your helpful and educational comments. One question. Does your system not allow for re-entry if appropriate after being stopped out…or is that the finish of trading that particular instrument for a time. Thanking you.
If the exit is due to excess volatility a special re-entry signal may be given soon after. However, generally a new entry will only be given when the indicators give another buy signal. This could be days, weeks or never. There are another 2200 odd stocks to scan so opportunities are always plentiful.
Cheers
David
In reply to Vic
Comment from: Vic [Visitor]
I know it’s gonna take up some space in the blog comments, but can you give a run through of the last 20 SPA trades using charts for us please? Vic
This would take us considerable time and would only prove what the SPA portfolio curve has already done. However, here are the last 10 odd CLOSED trades from the SPA portfolio. Everyone can do the TSL exercise themselves and prove how financial TSLs would have damaged the SPA returns.
First Buy Last Sell Code Total Buys Total Sells Costs Net Profit Profit %21/05/2009 1/06/2009 WOW $30,545.97 $29,692.60 $99.39 -$952.76 -3.12%
2/03/2009 26/05/2009 UMC $13,984.91 $19,620.62 $59.87 $5,575.84 39.87%
25/03/2009 26/05/2009 COF $8,902.58 $10,565.11 $55.00 $1,607.53 18.06%
30/03/2009 20/05/2009 MCU $18,278.47 $21,635.74 $65.86 $3,291.41 18.01%
9/12/2008 19/05/2009 AFI $34,882.41 $39,227.50 $147.23 $4,197.86 12.03%
5/01/2009 15/05/2009 IVC $15,293.20 $15,146.15 $55.00 -$202.05 -1.32%
6/03/2009 12/05/2009 CPU $26,384.60 $31,002.80 $94.68 $4,523.52 17.14%
23/02/2009 28/04/2009 MRM $25,608.69 $30,980.84 $106.12 $5,266.03 20.56%
16/03/2009 28/04/2009 NAB $26,497.40 $30,728.32 $94.42 $4,136.50 15.61%
16/03/2009 20/04/2009 RHC $17,677.14 $15,974.14 $56.67 -$1,759.67 -9.95%
3/02/2009 15/04/2009 IAU $9,978.55 $11,280.10 $55.00 $1,246.55 12.49%
29/12/2008 14/04/2009 EXT $11,527.44 $38,305.49 $98.74 $26,679.31 231.44%
17/03/2009 7/04/2009 DOM $20,847.75 $19,894.71 $67.23 -$1,020.27 -4.89%
There are many great trades that are still open but we don’t know when they will exit. Only the price action will tell us when. Here are the open trades:
Date Code Qty Avg Price Allocated Current Price Market Value Profit Profit %16/03/2009 MOS 148675 $0.09 $13,826.78 $0.16 $23,788.00 $9,933.73 71.84%
16/03/2009 PDN 4376 $3.16 $13,828.16 $5.43 $23,761.68 $9,906.02 71.64%
30/03/2009 CTX 2270 $9.75 $22,132.50 $13.27 $30,122.90 $7,953.88 35.94%
16/03/2009 SOL 3809 $8.43 $32,091.37 $10.12 $38,547.08 $6,384.46 19.89%
6/02/2009 PMC 27196 $1.22 $33,187.43 $1.46 $39,570.18 $6,272.75 18.90%
16/03/2009 MLT 2645 $13.28 $35,131.25 $14.73 $38,960.85 $3,758.37 10.70%
21/04/2009 SHL 1448 $11.02 $15,956.96 $11.96 $17,318.08 $1,333.62 8.36%
13/03/2009 NHC 7094 $4.21 $29,883.72 $4.57 $32,419.58 $2,464.61 8.25%
19/05/2009 BKW 3652 $11.39 $41,583.70 $12.25 $44,737.00 $3,075.58 7.40%
12/01/2009 SEVPC 383 $80.68 $30,902.04 $86.65 $33,186.95 $2,202.41 7.13%
4/05/2009 MQG 688 $34.02 $23,405.76 $36.30 $24,974.40 $1,530.02 6.54%
29/05/2009 HGG 18150 $1.71 $31,036.50 $1.80 $32,579.25 $1,491.54 4.81%
15/05/2009 UGL 1959 $9.78 $19,159.02 $10.00 $19,590.00 $399.37 2.08%
1/06/2009 COE 26414 $0.44 $11,622.16 $0.45 $11,754.23 $104.57 0.90%
15/04/2009 RMS 24519 $0.62 $15,201.78 $0.62 $15,201.78 -$27.50 -0.18%
17/04/2009 TRS 1454 $11.05 $16,066.70 $10.90 $15,848.60 -$245.60 -1.53%
21/05/2009 AGF 17937 $1.17 $20,986.29 $1.15 $20,627.55 -$393.37 -1.87%
14/04/2009 RIC 16676 $0.81 $13,507.56 $0.80 $13,257.42 -$277.64 -2.06%
29/04/2009 ILU 8796 $3.35 $29,466.60 $3.26 $28,674.96 -$840.26 -2.85%
1/06/2009 EXM 899500 $0.02 $16,191.00 $0.02 $15,291.50 -$927.00 -5.73%
Cheers,
David
Response to Comment by Shane.
“I know we have had this discussion before, Gary, and you proved to me that 3ATR(15) appeared to be outperformed by the SPA edge. Why not increase the multiplier to say 3.5 or even 4? Both would have worked better than SPA on this occasion, with 3.5 getting me out around $4.34 and 4 getting me out around $4.23. Even 4.5 equated to an exit around $4.08.”
The ATR Stop is discussed in more detail in the blog posting date 11th June 2009.
In response to this comment: deciding which multiplier to use for each trade in advance can introduce discretion, confusion and indecision. Unless you have a mechanical method of determining when to use the ATR Stop and at what multiplier.
SPA3 actually does this. As you know SPA3 only uses the ATR Stop when stocks have a volatility greater than 5% at the time of entry.
“Cheers Gary. I know you swear by the SPA exits, but I am still using ATR exits where they occur prior to a SPA exit. In almost all cases, they have been followed by a SPA exit. Now that I have adjusted the multiplier, I am happy.”
I only swear by the SPA3 exits because the research shows them to work better for medium term mechanical trading than anything other concept that I have been able to find through research. This may change in the future as I continue to do research. My knowledge is not universal.
Having said that, SPA3 is not perfect. There will always be samples of a few that will be better than SPA3 and there will always be samples of a few where SPA3 will be better than what was better than SPA3 in the other samples. The idea is not to chop and change, the aim is to be consistent and objective.
I have researched ATR Stops in detail which is why SPA3 uses them for the more volatile stocks. However, there are plenty of times that I have been stopped out by a SPA3 High Volatility ATR Stop where the stock has continued rising and a SPA3 Low Volatility exit did not occur meaning that I could have extracted far more profit from the trade.
A good example is a recent trade in VPE that is graphed below, just to take a sample of one. A SPA3 trader would have exited this trade on 14 January using the SPA3 ATR Stop high volatility exit rules. The stock dropped further to a low on 27 January. At this stage the trader would be happy with their exit unaware of what the future holds. Any reasonable ATR multiple would have generated an exit, intraday or otherwise at some stage of the retracement between 5 January and 27 January, yet the medium term trend was still in tact.
This stock continued it’s up trend. On such occasions a SPA3 VS+DB re-entry signal occurs (on 5 March – green tri-angle) but the trader may have been in another trade at that stage and hence will leave money on the table with this particular trade.
If the SPA3 trader had not been trading according to the SPA3 High Volatility rules (not recommended but discussed here for illustration) the trade would have been a juicy profit trade rather than a loss trade, in this single sample.
However, the rules should not be changed based on this one sample because there are infinite permutations of price action. Over a large sample of thousands of trades it is far better to use the SPA3 High Volatility exit rules which are ATR based ONLY for stocks that are highly volatile. This is what the research shows so that is what I go with knowing full well that on individual trades outcomes could be improved. However, you have to keep believing in your researched edge otherwise you will chop and change your rules and become inconsistent, hesitant and indecisive which will result in you underperforming and/or losing money.
We could continue swapping examples forever that favour one method or another. This is what makes a market, all the variables (of which you and I are each one) having different objectives and opinions. However, no single method will always be better than another over a common timeframe. What each active investor needs to do is trade according to a set of rules that have an edge and that ensures consistent and objective decision making in the markets in the timeframe in which they wish to engage the markets.
Regards
Gary