Highlights (Saturday, October 28, 2023)
- The system account is 0.8% below ATH while market has retraced 10%.
- New-logic system is short, but I am holding cash during a transition period.
- I am looking for a long signal and it can take some time.
- The bigger the fish is, the bigger our patience is.
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Hosted by David Lee (Twitter ID: SimpleMoneyZone).
Live Trading System: hosted by David Lee (Twitter ID: SimpleMoneyZone).
Trading System Review:
Copied from last week’s report:
“This week, our trading activities were influenced by several key events, including FED speeches and earnings reports. Firstly, we exited our full-size long position in $SPY on 10/18/2023, a position established on 10/05/2023, booking a profit of +1.35%. Secondly, on 10/8/2023, we entered a half short position, allocating 50% size in $SH. We currently hold this position, marking an unrealized gain of +1.1% as it is half of our account size. By consistently adhering to our trading guidelines, our account has been achieving new record highs on a weekly basis. This success underscores our adaptability and tenacity, particularly in the face of the complex challenges presented by the current market landscape.”
What’s happening this week:
During the week, system covered our 50% short position, transitioning to a 100% long (Type-A oversold long) position on 10/24/2023 at the close of market. Yet, by the following morning, 15 minutes post the market’s opening on 10/25/2023, I urgently exited the long position.
The decision to transition to a long position the previous day was in full alignment with our existing rules and was justifiably made based on the market’s closing price. However, there was an anomaly. A sub-feature surfaced, one which we hadn’t encountered before. It pertains to the unusual occurrence of a Type-A oversold long in a distinctly bearish trend, without the trending parameters indicating an upward movement. This new data point doesn’t influence our backtesting methods unless we’re certain, in the future, that this sub-feature would result in an unsuccessful trade. Given the unique circumstances, I utilized my expertise to deduce that this sub-feature warranted our immediate attention. I hypothesized that our oversold long might have been overly ambitious for the existing market conditions.
Subsequent market developments, characterized by a drastic downturn, validated my assumptions and underscored the prudence of our exit from the long position at the start of 10/25/2023. Navigating such transitional phases is inherently complex, especially when faced with the dichotomy of the old system advocating a long position, while the newly proposed system indicates a short position. In light of the market’s significant decline, I ratified the transition to the new logic, recognizing its efficacy. Nevertheless, pursuing a short position after such a dramatic market shift wouldn’t have been judicious.
In summary, we’ve opted for a conservative stance, holding onto our cash reserves, and are on the lookout for a potential long signal that aligns with our revised system in the future.
System Status and Market Outlook:
Copied from last week’s report:
“The timing model remains short, thereby allowing the maintenance of our current short position. I anticipate exiting this short position when the system enters an oversold state. Based on my observations, I anticipate an oversold condition to emerge early next week. This will likely be followed by a brief market rebound, after which another downturn is expected. Upon reaching an oversold state, I’ll close out the current short position and then watch for an opportunity to re-enter a short position post-bounce.
My ongoing assessment leads me to theorize that the market might find its bottom this year in the 3900-4100 range. This speculation is rooted in two primary observations: the significant trading volumes evident at the 4150 and 3900 levels, which serve as substantial support zones. Any levels above these are perceived as relatively fragile. If this plays out, it will mean that 2023 will close with only modest gains year-to-date – a scenario that could disillusion the bulls and embolden the bears. This dynamic would position the market favorably for reaching a mid-term bottom, possibly around the Thanksgiving to Christmas timeframe. Such a situation could instill enough fear in the market, thereby presenting a ripe buying opportunity amid the prevailing apprehension. I’m forecasting a pronounced rally within this period. However, it’s crucial to understand that these are merely my personal speculations. Ultimately, our trading actions will be dictated by the system’s guidelines. In essence, I’ll be letting the trading system lead the way, and any other sentiments expressed are speculative in nature.”
What I anticipate for the coming week:
Currently, our position is in cash, as we await a clear Type-A long signal. With the prevailing market trend skewing bearish, our system has adjusted to bear market rules. This adaptation implies that both sell and short signals will be more readily triggered. However, this could undergo a shift should the market find stability in the future.
For the activation of a Type-A long signal, we essentially require just a single day where the market displays stability and all cautionary indicators are resolved. Yet, the market’s current demeanor leans towards panic, making the prospect of stabilization somewhat uncertain.
On a more optimistic note, I’ve observed that we are edging closer to a pivotal support level in the range of 3900-4100. I’ve been forecasting this level over the past weeks as a potential point for the market to experience a meaningful bounce. Still, the timing model remains bearish for November or even December, indicating continued challenges in the immediate future.
In essence, our position is twofold:
- We stand ready to trigger a Type-A long signal as soon as the market shows signs of recovering from its oversold state and all cautionary alerts are neutralized.
- Simultaneously, I am still thinking of the continued bearish prediction, which could result in approximately a 4% decline and a bearish trend persisting for a few more weeks.
Given these conditions, my assessment is that we are on the cusp of a long signal, which might be closely succeeded by a short signal in the ensuing month or so.
Wishing everyone a great weekend!
The Psychology of Our Live Trading:
This week, our focus was on identifying a potential sell signal. I previously mentioned that triggering a sell signal this week would be relatively easier compared to the previous week. The positive news is that the bullish momentum carried forward, aligning with our Type-A (oversold) long trading signal. So, after all, we are still holding our long position without triggering any sell signal.
At present, it appears even more feasible to initiate a sell signal next week compared to the current week. Let me clarify this point further. If the bullish trend persists in the upcoming week and gains more traction, the situation could become more intricate. This scenario might lead to an even more straightforward sell signal. Concurrently, we might also encounter a Type-B (breakout) long signal. The intricacy of trading emerges from these nuanced shifts between bullish and bearish trends, each offering optimal risk-reward ratios.
To sum up, our focus remains on identifying increasingly feasible sell signals. However, if such a signal fails to materialize or occurs later than anticipated, the overarching trend could turn even more bullish. If we eventually trigger the Type-B long signal, it could be short-lived, potentially marking the final peak before transitioning back to cash. I hope this clarifies the situation for you.
It’s important to emphasize that no trade is inherently easy. At times, a seemingly tough trade can turn out to be straightforward. If you are a paid subscriber and find challenges in executing these trades effectively, please feel free to contact me for a Zoom meeting. We can discuss strategies to overcome these challenges and delve deeper into understanding the trading system by examining its intricacies together.
Trading System Backtesting Statistics
- I just reviewed the backtesting statistics of the system and found that it holds cash for about 25% of the time, with 60% of the time allocated to long positions and 15% of the time allocated to short positions. This is a low-frequency swing trading system that averages about 2 trades per month. Over the past decade, the system has generated a simple interest return of approximately 400%, with the potential for even higher compound interest returns.
- The win/loss ratio for long positions is around 4:1, while for short positions, it’s around 2:1. This suggests that the system may hold cash for roughly one week per month. As such, patience and confidence in the system are key to long-term success. The overall win rate for the system is around 80%, with a 75% win rate for long positions and an 85% win rate for short positions. It’s worth noting that the maximum drawdown for the long position is around 5%, while for short positions, it’s 7.5%. Therefore, to avoid significant drawdowns and potential damage to your trading psychology, it may be beneficial going long using 100% $SPY and going short using 50% $SH.
- Regarding holding periods, the long position for Type-A (oversold) lasts around 8 trading days, while Type-B (breakout) long positions last around 16 trading days. Short positions typically last around 5 trading days. Therefore, patience and discipline are critical in achieving long-term returns. However, it’s important to note that these time periods do not take into account stop-out cases.
- Overall, the system has been performing well in recent months, but it’s important to continue monitoring its performance in real-time.
How to follow the Trading System:
- It is very user friendly and time friendly to follow our Trading System.
- Live Trading Signals are sent as soon as they are confirmed.
- Trade changes occur only at market closing price or shortly after, if the signals cannot be confirmed until market closing price.
- This ensures that everyone has the same entry and exit price.
- I am using MOC order myself (TOS or Fidelty has it)
- I also have extended hours trading available.
- Stops are set in advance. Intra-day stop out alerts may not be sent.
- Stops are updated every night if necessary.
I have been reading Sun Tzu’s “The Art of War” and would like to emphasize its three core ideas: 1) use strength to defeat weakness, which means taking easy trades over difficult ones, 2) be patient and wait for the right moment to strike, and 3) calculate potential losses and avoid failure.
The job of the system is to find the easiest way to make money once the market shows its hand. My job is to take all the trades as long as the system gives a signal. Your job is to acknowledge that we only have an 70%-80% win rate and 2~3:1 win/loss ratio based on backtesting only and be responsible for your own trade once the signal is triggered by the system. We won’t have a 100% win rate forever, that’s for sure. But I have the courage to take all the trades 100% as they come, and I will be responsible for my own trades 100% as they come, whether they result in a win or not.
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Disclaimer: Trading stocks involves high risks, and you can lose money. You are responsible for your own investment decisions.
Live Trading System: hosted by David Lee (Twitter ID: SimpleMoneyZone).