Big Bamboo Update

I should have updated the blog on Monday, as [[EFU]] stopped out just 46 cents from the low of the day. Instead, I spent the better part of the evening planning my revenge on the @#^& Pacific Exchange lowlife who filled my purchase of EFU at $163.92. 

Had EFU not stopped out, the position would be getting closed out tomorrow, as the RSI(2) closed today well above 80. The gain would have been approximately $2,000. If anyone out there took this trade and is still in it, be careful with any market order to sell on the open. My advice would be to try a limit order, or to wait a minute or two after the open, while closely watching the bid/ask spread.

The bright side of this trade was that I stayed in it, even after my egregiously bad fill. If I can sell the position tomorrow at a price close to this evening’s close, I will still pocket 14 points. Not bad for a trade that went against me by 15 points on the first day.

I will make the final decision over the weekend, but I am leaning heavily towards making all future trades of the Big Bamboo with an 8% stop and 2% risk. The 4% stop is too tight, even when on the right side of the trade from the get-go.

Special Note: Try out the new Disqus comments format. I plan to put up a poll in the near future to see if you all like it better, or not.

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This system has been stopping out of many trades over the past month. These trades would have been profitable had a looser stop been applied. BHH suggested that the best stop should be developed independently of the equity curve. Once the optimum stop has been identified, position-sizing would then be used to create the equity curve that is consistent with one’s goals, psychology, and tolerance for risk.

The above stats compare the basic system, which uses a 4% stop with 1% risk per trade against an 8% stop and 2% risked per trade. When using a percent-risk formula for position-sizing, a larger stop means a smaller position. We know that a larger stop is needed to adapt to the increased volatility. The 8% stop with 2% risk accomplishes the goal of increasing the win percentage while maintaing a nice equity curve.

I included commissions of 1 penny per share, and .2% slippage on each trade. The 8%/2% model increased the win percentage to 76%, which is a significant improvement over the 4%/1% model. The drawdown increased minimally. CAGR climbed to a phenomenal 131%.

Note that the statistics above cover only 1 year of data.

The equity curve shows that both models track very similarly until volatlity increases. Once the increased volatility takes hold, the 8% stop continues to perform well while the 4% stop model begins to suffer.

 

Draw Down Percentage from Highest Equity is also promising. While the 8%/2% model has a larger draw down between trades 58 and 66, note that the 8% stop has completely avoided the draw down in which the 4% stop is currently languishing.

I’m seriously considering changing the Big Bamboo System to an 8%/2% model, but I have a strong feeling that as soon as I do, volatility will taper off, and the change will have been unnecessary. If any changes are going to be made, I will likely decide after this week.

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I got a great fill this morning in [[EFU]] . Not actually. Some $%^& at the Pacific Exchange filled my order and 5 others at $163.92, or better than 8 points above the listed open.

I have to say that was not how I intended to hedge my longs.

I think that the Big Bamboo has racked up another loser, as it appears that EFU stopped out, having surpassed the 4% stop by about half a point.

For those of you who took this trade and didn’t get screwed by the market makers, It looks good going into tomorrow.

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I’d rather be wrong once, than wrong twice. And that kind of sums up my thoughts about getting long Friday. I’ll explain more about what I mean by that a little later. But first, I want to talk about this spreadsheet.

This sheet is similar to one that I use to analyze my long or short positions. The equity represented is not the equity represented in my account, although the relationship between the positions, sizes, and stops is accurate. The point is to understand how a percent-risk method operates. These positions were purchased using 1% risk and a 1.25ATR(10) stop. That means for each position, $500 is being risked, and the stock will be allowed to move .25 more than its average daily range before it stops out.

Looking at the Cost column shows that the more volatile issues, such as Dollar Tree, Inc. [[DLTR]] and Bucyrus International, Inc. [[BUCY]] , were purchased in smaller amounts. As DLTR moved over 4% against me, a smaller position helped to mitigate the pain. The most important thing I see is that 4 of 5 positions still have a ways to fall before they will stop out. It makes sense to let them trade for another day.

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Trying to guess the direction of the markets can be a foolish pastime. I started some long trades Friday, after believing Thursday’s action was bullish. I was guessing that the bullishness would follow-through. And I was wrong. So what am I going to do? Nothing at this point.

If I override my stops, or close the positions out, then I am guessing again that the markets will continue down. That could compound my first error doubly, if I am wrong.

All of the charts of the stocks I bought are still bullish. My stops are set (see spreadsheet). If every position stops out (5*.5%), I am out 2.5% of total equity, as I am only risking .5% of total equity on each position (the spreadsheet shows a risk of 1%). It makes sense to give these positions some time, and not make another emotional trade.

The other alternative to re-adjusting the longs is to hedge. And that is exactly I want to do by taking the latest Big Bamboo System pick. My hedge position will be about half the size of my long positions. As the system pick is a diETF, it does not need to be as large as the combined long positions.

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Highlighted in a pleasing green hue is the Big Bamboo selection for Monday. I have included some recent studies below, for review.

Big Bamboo, Analysis of Trade Drawdowns

Big Bamboo, Refining Stop Strategies

Big Bamboo: The Esoteric Art of ATR Stops

In light of recent studies, the Big Bamboo will continue to use a 4% stop. However, I have a new study completed which shows the equity curve using 8% stops with 2% risk per trade vs. the 4% stops with 1% risk. It is very interesting. I’ll have it published soon.

As I have some long exposure that I would like to hedge, I will be taking this trade tomorrow.

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It has been months since the last time I published The Daily Breakout.

My gut reaction about today says that we have seen the first day of the best rally since the March-May rally. Since my systems are not giving any signals here, I’m going to have to make some discretionary purchases.

The following stocks are some of the ones I’ll be taking positions in. You might notice there are a variety of bottom, breakout, and pullback plays.

Technically speaking, across the indexes, today was beautiful. I feel strongly that today was a very powerful reversal.  If you want a good look at why the reversal today has me so excited, take a look at the work WeeklyTA is doing over in the Peanut Gallery.

Apollo Group, Inc. [[APOL]]

ATR% 6.00

Bucyrus International, Inc. [[BUCY]]

ATR% 14.4

Dollar Tree, Inc. [[DLTR]]

ATR% 6.00

Hawaiian Electric Industries, Inc. [[HE]] This one is for Gio!

ATR% 4.1

LHC Group, Inc. [[LHCG]] One of my systems picked this one last night, as well as Almost Family, Inc. [[AFAM]] . It seemed like sure death to buy these on the open, so I didn’t. You win some and you lose some.

ATR% 6.5

[[TBT]]

ATR% 3.5

I have listed the ATR% after each chart. This percentage is the volatility normalized so that each security can be compared to the other, in terms of volatility. To use this percentage, think about it this way. Buying 10K of BUCY and 10K and TBT is not equal, in terms of volatility. BUCY is more than 4x as volatile as TBT. If I want to keep my risk on each position to a certain percentage of equity, then I will have to set a larger stop on the more volatile issues. Therefore I would be buying fewer shares of BUCY in order to give it more room to move while still risking the same amount as on the other positions.

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Believe it or not, there are still some great short setups out there. In order to find these, do not look in sectors that have been beaten down for the last 9 months. Instead, look to a sector such as Oil and Gas, which has recently rolled over, to find some stocks with some good downside juice left to be squeezed.

Petrohawk Energy Corporation [[HK]] is one such stock. Note the interaction between the peaks and the major moving averages. Also note how the stock is in a downward channel.

Getting short 3 days ago, at the 3rd failed attempt to regain the 50 day moving average, would have been about as perfect an entry as one could hope for. There is a divergence in the MACD, Stochastics had already rolled over, and volume has been weak as the stock tried to come off the bottom.

The criteria above make for a very reliable way to profit from shorting stocks. If one is patient, and searches charts of recently beaten down sectors, he will find that these setups appear frequently.

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