Joined Nov 11, 2007
1,458 Blog Posts

Momentum? What Is That?

Although the volatility has been good to me, I’m getting rather worn out from this past year’s market conditions. It seems that I’ve never checked the futures in the middle of the night, like I have over the past six months. Everyday could bring another market crash. Everything we read is negative. In the heart of America, real people are hurting more and more all the time. 

Frankly, I miss the days when it was easy to make a buck by playing momentum. Stocks that were going up, kept going up. One could take a position and not worry night and day about having it blow up in his face.

With that in mind, I thought it might lift my spirits to post a couple of charts I might consider playing if the world was not going to hell in a handbasket. Ahh…for a little momo…a little post earnings annoucement drift…

American Science & Engineering, Inc. [[ASEI]] reported on Monday, November 10th. Q2 profit grew 63%. Volume swelled today, and the stock had a huge percentage gain. This would be an excellent candidate for a PEAD play, should the markets firm up.

Optimer Pharmaceuticals, Inc. [[OPTR]] is a biotech, so all the usual caveats apply. OPTR just released results for their new C. Difficile drug, which had better results than the ViroPharma Incorporated [[VPHM]] gold standard, Vancocin. Volume, and the 100% gain on this one should put it on radar screens, assuming the Dow not see 1,000. That’s right, I said 1,000.


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One Year Anniversary Post: The Esoteric Art of ATR Stops

The most prolific discussions generated by the tracking of the Big Bamboo Trading System have concerned the use of stops. We have discussed using larger percentage stops, Average True Range stops, and no stops at all. (Regarding the use of no stops at all: That is like not wearing underwear. It works well, until you get caught with your pants down.)

The recent work by BHH which compared varying percentage and ATR stop levels was very instructive. The relationship between stop levels and profits cannot be ignored. As the 1.25ATR stop looked as if it performed well in B’s tests, I decided to go back and run all of Bamboo’s real-time trades as if they had been positioned using a 1.25ATR stop rather than the 4% stop.

I think the results are very interesting.

Below is the Big Bamboo tracking spreadsheet with the standard 4% stop.

The next spreadsheet is the Big Bamboo using a 1.25ATR stop.

Highlights of the differences between the 4% and 1.25ATR stops

  • Total profit on 4% stop is almost double that of the 1.25ATR stop: $8,817 vs. $4,817
  • 4% Return is 17.64% vs. 1.25ATR Return of 9.63%
  • Avg. Trade is $735 vs. $401
  • Positions are much smaller for the ATR stops, getting even smaller as volatility ramps up in October
  • ATR stops have 91% win rate vs. 50% for the 4% stops
  • Some of the stops are greater than 20% from the entry, giving the positions freedom to gyrate

BHH’s tests contained much more data than is represented in these 12 trades. Remember that ATR stops will allow for bigger position sizes than what is calculated with these trades, as soon as volatility tails off. This example then is really showing the extreme results of using ATR stops, as the volatility in October was extremely high.

Perhaps the best result of using ATR stops was that during an extremely difficult month, the system had only 1 losing trade. This shows the ability of the system to generate profits, with smaller positions, during very difficult market conditions.

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Big Bamboo: Refining Stop Strategies

BHH over at his blog IBDindex has published some graphs of what happens when various percentage and ATR stops are used with the Big Bamboo system.

The study demonstrates how percentage and Average True Range stops affect Net Profit, Win%, Average Trade, and Profit Factor.

B’s post is here: Big Bamboo Stop Study

The value of using a multiple of ATR for a stop is that the stop will constantly adjust itself for volatility,  and win percentage will theoretically improve. The drawback to this method is that during periods of high volatility, position sizes will be smaller than with a fixed percentage stop, which will mean profits will be smaller on winning trades.

In many ways, the ATR stop vs. Percentage stop is as much about the trader as it is about the system. If one has a large appetite for risk, and does not need to be right more than 50-60% of the time, he would probably rather have the large profits associated with percentage stops. However, if one is more comfortable with the odds of winning 70% of the time, and can accept smaller average winning trades, an ATR stop may be more appropriate.

Finally, Damian from over at Skill Analytics reminded me that traders can get hit with larger than expected losses when using ATR stops. This would occur when volatility has died down, which would cause the ATR stop to get tighter and tighter. If a system is using a percent-risk formula for position-sizing, as the stop gets tigher, it is buying bigger and bigger positions. If volatility suddenly returns, the system may experience some large losses, until the ATR stop has time to catch up with the market volatility.

Sometime this week I will be running hindsight trades on the Big Bamboo to see what the current results would have been if it were using ATR stops.

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Quick Analysis of Losing Trade Drawdowns: Big Bamboo

Above are the 6 most recent losing trades from the Big Bamboo system. I’ve included the maximum drawdown incurred for each trade.

As I mentioned in a previous post, with volatility more than doubling in October, the stops that worked well in backtesting should probably be doubled as well. This would take our optimum 4% stop and increase it to 8%.

Indeed, an 8% stop would have changed 3 of the six losing trades into winners (I’m not going to count EFU since it was so close to 8%).

As I know that some of you are taking at least some of these signals, I would recommend that you do not use the 4% stop until volatility decreases. I have not decided yet whether I will alter the system to use an 8% stop in tracking future trades.

After examining these trades, I feel even better about the system. I am likely going to start trading it for real, by the rules, soon. If I do, I am leaning towards using a 10% stop.

Side note: Some of the entries listed above are different from the entries used in the Big Bamboo tracking spreadsheet. The opening prices used in tonight’s post came from a different data vendor. I left them unchanged, not matching all of the prices used in the tracking spreadsheet, to emphasize that in backtesting, having bomb-proof data with absolutely no errors is crucial. With the exception of EFU (off by almost 2 points, our listed open being $151.09), the difference was usually not more than .20 cents. The discrepancies were not great enough to render tonight’s analysis invalid.


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Nothing New for the Big Bamboo

Wow, looking back over my recent posts, there has been a surprising lack of charts. I promise that I will try and post more technical analysis of charts, in the future. In the meantime, Weekly TA has been doing a good job with his analysis as King of the Peanut Gallery.

Lately, I’ve been focused on my strategy trades and development of new strategies. With the markets being so difficult for most traders to be successful, it has seemed useless to scan for setups, the way I used to do. I would rather focus on more productive activities, until the markets stabilize and volatility levels off.

As for today’s activity, it should not have been much of a surprise to anyone. For what its worth, I’m still bullish. I will be looking to exit from my short positions soon and begin looking long again.

I have no new signals tonight, on any of the systems I trade, including the Big Bamboo


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You People Are Making Me Angry

What the hell? What’s all the excitement about? Since the close on October 27th, the S&P 500 has moved up 15.5%, in 6 days. You people who are hanging around here, buying everything up at these levels, with money burning a hole in your pockets, are making me angry. Get over yourselves. I’m trying to be scientific, ovah heah, and you people are just buying up anything that is not bankrupt, which is causing some dislocation in my tea leaves.

Don’t get me wrong, I thoroughly enjoyed the first 12% of the move up, when I was long. However, the last 3% has started to vex me.

Lucky for me, my initial purchases in the diETFs were position-sized with a worst-case scenario in mind. This scenario is that the indexes take a trip all the way to the 50 day average, without zigging and zagging.

Tomorrow I will get some [[QID]] , and more [[TWM]] and [[MZZ]] . I’m still long [[SMN]] , but will not add to it.

One thing I feel certain of is that this is no time to let yourself become complacent.


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The Big Bam Poo

Well, this is what I wanted to happen. I wanted the readers of the blog to experience the psychology of a drawdown and losing streak in real time (but hopefully not in their real accounts).

This morning [[TWM]] gapped down beneath the stop, so I closed the position out at the listed open. This unfortunate circumstance is a very real threat to anyone using stops that are left on overnight. The gap beyond the stop caused the system to experience its biggest loss on a single trade, equal to rougly 1.25% of equity.

[[SRS]] was also stopped out, but did not gap beneath the stop on the open.

But back to the drawdown. 6 losers in a row is the longest losing streak the system has ever experienced, in the two year history available for the ETFs it trades. The win/loss percentage is now beneath the 2 year average of 60%. Perhaps this is a good time to consider trading the system, formally, by the book. I will be sure to note here on the blog should I do so.

My fear is that the Big Bamboo switches to the long side, just in time for the next leg down. If it does, it won’t stay that way for long, but it would be tough on the psychology to catch the wrong side of a move, twice in a row. Should that happen, the hypothetical 20 losses in a row may become a reality.

For now, the Big Bamboo is still looking short.

No New Entries for Wednesday

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