Both signals from yesterday evening, [[SDS]] and [[DUG]] did very well.
RSI(2) on DUG closed over 80, triggering a sell of the position on Friday’s open.
RSI(2) on SDS did not quite make it to 80. It closed at 77.58, to be exact. If one follows the rules, then this position should be held. This is where the psychology of system trading begins to have an impact. It is this very type of situation that I intend to highlight in these posts.
If I had this position on, it would be very hard for me not to sell SDS in the morning. RSI(2) is so close to 80. With the bailout bill up for vote tomorrow, my suspicions are that the indexes firm up, or even rally.
However, what if the indexes do not rally, and SDS is sold in the morning, and the trade sacrifices another 4% gain? Based on the backtesting, this trade would be allowed to either stop out, or get sold with RSI(2) greater than 80. Not allowing this trade to be closed out according to the identified strategy is a modification of the strategy. Will this tiny modification improve, or weaken the performance of the system? How many tiny modifications does a system trader have to make before the expected results are not similar to the backtested results? And finally, isn’t mechanical system trading supposed to remove this sort of psycho-analytical self-talk, and make trading more easy?
This is all food for thought.
This trade will be left to run its natural course.
No new entry signals for tomorrow.
Wood,
Look at the Weekly QQQQ RSI(2). It’s .30
The Daily QQQQ RSI(2) is not as low 11.15, but also look at the RSI(2) Daily on Sep 8. It was almost “zero” and not much of a tradable bounce.
Looking at previous bounces on the Weekly chart — what do you think? I’ve been slowly nibbling at QLD (and taking some hits) but there looks to be a good bounce coming somtime soon (perhaps wishful thinking?)
Akebono, I have never tested a weekly RSI2 setting for an edge. What evidence I have is anecdotal.
With the weekly RSI2, yeah, it looks like a bounce is due. However, its been my experience that RSI2 functions best when it dips below the signal line, and then quickly rebounds. When it just stays depressed, it should be a huge warning/caution sign that there is intense selling pressure, that is likely to overwhelm the “buy on weakness” mentality.
I would not nibble on QLD until the RSI2 is less than 10.
I guess my gut feeling is that we are equally as likely to bounce as we are to crash. Were the Armageddon trade off the table (its not), I would buy some QLD below RSI2 of 10.
Don’t let my thinking influence yours though. Stick with your convictions.
Woodshedder:
These posts on your etf system are terrific, clean, easy to understand…please continue. Maybe I can stop flying around like a pinball.
Thanks.
Pinball, I’m glad you enjoy them. About 1.5 years ago, I was in the same place as you. I know exactly how it feels. I distinctly remember The Fly saying I was trading like a crackhead, looking for my next rock. It was that feeling that forced me to reduce discretionary trading and start developing systems.
System trading is not easy, but it certainly can reduce the pinball syndrome.
Hey Wood,
As I peruse the literature out there on the RSI(2) (daily), I am seeing that it’s edge is most acute when trading at extremes (i.e. going long when it gets below 5, short when over 95). I see with this system, that your signals come at over 70 and under 30. Any thoughts on using the RSI(2) at the extremes?
Woodshedder:
Thanks, I see what you mean. I’ve struggled with some trades in the past when the RSI(2) stayed low, so I understand what you are saying. I appreciate your posts and am trying to get better at trading. I was up about 12% this year on my “trading account” and these last few weeks have taken a hit — trying to recover — rationally. As the FLy says: Odd, no?
Wood-
Went long DIG at $53 today. In respect to your DUG sell…would you go long DIG expecting a bounce?
Woodshedder, Thanks for the heads up bra.Fox Im with you,Long Dig.
Junk, I have written extensively about RSI2. Under categories, start with “RSI2 ETF System” and go through the next four categories, ending with “system trading.” RSI2, with volume and MACD are really the only indicators I use for my TA.
The first ETF system I trade is named the Power Double Dip, but is referred to on my blog as the “RSI2 ETF System.” There have been modifications to the strategy and I don’t write about it anymore because I am actively trading it.
This system, the one I’m writing about now, is the “New ETF System.” I will consider any and all suggestions for a better name, lol. The New ETF System has an entry signal that_is_not_based_on_RSI2 or any derivative of it. RSI2 in the New ETF system provides only the exit signal.
I’d say the fact that one system uses an RSI signal as an entry and exit and an other one that uses it for an exit should tell you my thoughts about it at extremes.
Wood,
Which stock screener are you using to find the results for these etf’s? I’m using Finviz and getting close to your results, but after I put in my parameters I get a lot of results. I can’t seem to get the longs out of the screener. If you could throw a bone my way I’m sure I could outperform the FLY!!!!!!!!!!!!!!!!!!!!!!
Woodie,
“I’d say the fact that one system uses an RSI signal as an entry and exit and an other one that uses it for an exit should tell you my thoughts about it at extremes.”
Well said…
Woodshedder,
Pinball trader nailed it. Not only have you provided a wealth of information with these posts, your writing style has made it comprehendible even to a F-ing Loser like me.
I especially like how you share your observations and then pose questions for your reader’s consideration. While I am pretty clueless as to the answers, you have got my thought processes headed in the right direction, thank you.
One observation of note. I followed SDS throughout the day since I have traded this ETF extensively in the past. I would have exited the trade leaving more than half of today’s gain still on the table. This in itself has me intrigued as to what mechanical systems may have to offer over discretionary trading.
Thank you for your time and effort, it is greatly appreciated.
The Fox, DIG likely has an entry edge at tomorrow’s open. However, the edge is better when RSI2 closes beneath 10.
Terry G, I use Stockfetcher as a screener.
With regards to your statement, “I can’t seem to get the longs out of the screener,” I’m not sure what you mean. This system uses both double long and double short ETFs as vehicles.
What results are you looking for?
F-ing Loser, I’m glad you all are enjoying the posts. I’m enjoying finally tracking a live, (but paper traded) system on iBC. This has been one of my goals, for a long time.
Its fun to watch the system go, but the real learning experience should be the psychology that develops in the mind of a system trader, and how that psychology can affect his ability to trade the system to as it has been designed to be traded.
Woodrow, psychologically, I (and many others) will feel a lot better, if this works and we make some money rather than being “pinballed” around or are you looking for something deeper?
buylo, I’m not trading this system. I may trade it in the future. I do not know yet. It is a very interesting system, and we are still generating statistics from backtesting this evening. All of that will be published.
All we all want to make is money. I’m not doing this for the fame (I’m anonymous). I’m doing it for the fortune. Do not think for a second that I would spend this much time on a system if I didn’t think it stood the possibility of making me rich (coupled of course with 4-5 other good systems).
As for looking for something deeper, the system is only as good as the trader trading it. A great system will not be profitable for every trader, as each trader’s psychology will govern what modifications he or she makes to the system. IMO, there are many free, publicly available systems out there, that work. That tells me that is because we can’t trade systems that do not fit well with our goals, our lives, our risk aversion, and our psychology.
buylo, or the easy answer is, if you are considering trading this system, wait until it hits a losing streak. Then reconsider.
WS, I know your reluctant to share about the entry process of this system, but even a smidgen more about it from you would be awesome. I have read your last 4 posts 3 times and I’m eager to get more on the entry
GWAR, I’m not sure why the particular entry has had such an edge YTD. It is just nailing this market. I am considering disclosing it in the future, but I definitely want the testing to be finished, and I want to understand why it is working so well, before disclosing it. Understand that if I begin to think that this system has longer term potential, I may never disclose the entry, as this is about me getting filthy rich, ultimately. However, I will continue to provide the entry signals, every night.
The sad truth is that this system may never again work as well as it has this year, and then everyone will care-less what the entry was.
My last comment sounded snobbish. I didn’t mean it to be. None of the tabbed bloggers know the entry either, not that they would want to.
I look at trading as a business. No self-respecting business man would give away the trade secrets of his business if he thought it would materially impact his business.
I figured you would respond that way. We will just have to make our own assumptions based on the diETFs your system countinues to select
“”My last comment sounded snobbish. I didn’t mean it to be. None of the tabbed bloggers know the entry either, not that they would want to.
I look at trading as a business. No self-respecting business man would give away the trade secrets of his business if he thought it would materially impact his business.””
Damn right…I don’t blame you a bit. People need to formulate their own “system”. Mine has worked great this year (up about 22%), but it fits my personality. It might fail miserably for someone else. Its the difference between The Fly and other traders on this thread- he never uses options (nor do I) and others use them all the time. Different systems- both can “win”.
Non Farm Payrolls down -159,000
Hey Wood, check out the MACD on SMN daily. Damn!
Wow…I had a buy order of a few thousand shares of DIG at the open and it never executed…now I’m really not inclined to chase. Very depressing.
Dr. Incognito, were you using a limit order? I think that a friend ran a test, where when purchasing a diETF on an RSI2 signal, and limit orders were placed instead of market orders. The results showed that market orders worked better, even with the slippage, because limit orders sometimes failed to trigger and huge moves were missed.
It was definitly a market order, but I will keep that in mind in the future. Thanks
Wow, that really really stinks, Dr.
I don’t understand, how can a market order not get filled? can someone explain. i thought a market order is the price you pay at the time you hit the buy button, ie, the ask price.
Buylo, I was not filled on a market order to sell twice in one day. It was fast market. In these circumstances, there is not really much one can do. In my situation, there was a time-stamp from when I hit the sell button. Even though the shares didn’t sell, I was able to convince Scottrade to fill my order, after the market closed, at the bid price of the time stamp. It took a lot of threatening and perseverance. Basically, if you keep people on the phone long enough, they will do whatever you want.
Wood,
thanks for the reply. I know about 2x etf’s and 2x inverse etf’s. I can take the volitility with ease. My only problem is with the finviz stockscreener not having a way of dropping 1x etf’s.. I could careless about them. But since you don’t use Finviz, I’ll have to figure out a way to have only the 2x pop up on the screen.
About your system, you have a lot of the same ideas Van Tharp espouses. Come up with a system which matches your style, whether it be the Turtles, Canslim, or a monkey with a dart board. Once you find a system that is comfortable for you then exploit it for all the potential it can give you. Don’t be afraid to fail at different systems. It gives you an idea that that particular system isn’t right for you. But if something in that system catches you eye.
For my system I use the turtles for entry sizing, canslim for the best stocks available (when the market is going up), and 2x etf’s for timing entry points into stocks(along with The New Day Traders Index screener).
Thanks for the help
Terry, I understand. I’ve never used Finviz, so I won’t be much help. I don’t know how much Finviz costs, but Stockfetcher is a steal for 16 bucks a month.
Van Tharp’s book “Trade Your Way to Financial Freedom” had a big impact on me.
If you ever get the bug to write more about your system, or trading systems, sign up for the Peanut Gallery and tell us more about your trading. Or, feel free to post stuff in the comments section.
“As for looking for something deeper, the system is only as good as the trader trading it. A great system will not be profitable for every trader, as each trader’s psychology will govern what modifications he or she makes to the system. IMO, there are many free, publicly available systems out there, that work. That tells me that is because we can’t trade systems that do not fit well with our goals, our lives, our risk aversion, and our psychology.”
I couldn’t agree more. Even if you have a great system, sometimes its hard to make the trades due to trading psychology. No matter how long you paper trade something it will never give you that confidence you think you require to take every trade the system says to take. Emotions will cause you to modify and rationalize.
Your emotions will kill every good trade from every good system everyday of the week if you don’t have control over them.
I’ve done extensive research using RSI(2) and is a piece as to why I’m long today.