Joined Nov 11, 2007
1,458 Blog Posts

Triangles Developing on the Indexes

As the formation of triangles is typically considered to be a continuation/consolidation pattern, the easy assumption is that these will be resolved to the downside. However, my gut is bullish, and so I’m hoping they will breakout to the upside.


Note the MACD trying to cross, and the volume decreasing as the pattern develops. A break above the triangle with a run to the 50 day average would yield a healthy profit for a long trade.

[[SPY]] Same analysis as on the Diamonds.

Some technicians may choose to draw their support and resistance lines through the real bodies of the candles rather than just the tails. This would produce a tighter triangle. When drawing these lines, I prefer to stay consistent, and so I almost always draw then through the intraday highs and lows.


The Qs have not formed a very discernable triangle. The MACD has crossed above the zero line.

All these charts show that should a rally finally take hold, there is an easy 10 points worth of profit before resistance becomes an issue.

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Big Bamboo Tuesday Update

The 4% stop on [[SCC]] was hit today. Both SCC and EFU (stopped out yesterday) reversed today for large gains. You win some; you lose some.

BHH built a new spreadsheet, from my poorly designed sheet. The losses from SCC and EFU are recorded, and the open positions of QID and SDS are marked-to-market. Should QID and SDS stop out, (which could be a real possibility after the Apple Inc. [[AAPL]] earnings), the system will be holding realized gains of approximately $2,500.00

Keep in mind that the QID and SDS trades are still open, so this equity curve will change.


I want to now take a look at yesterday’s theoretical entry into SCC.

I’ve circled the opening 3 minutes from Monday, 10/20/08. The data window shows that the opening bar traded 2629 shares, with most of them being sold. The next two bars traded 365 and 265 shares, respectively. After that, the price jumped above the opening price, on 400 shares, and then proceeded to trade up to 6 points higher than the open.

As I did not watch SCC trade, I can only trust Susan from the comments section that the spreads were huge. I want to believe that since the Big Bamboo would have been buying 103 shares, into a falling ask, that the system would have gotten a decent fill on the opening bar. It is all conjecture, and we will never know. What is certain is that there was very little liquidity. I intend to look back at the historical trades this system has made, and see how many times SCC has been traded. It may have created unrealistic results, and SCC might be excluded from future system trades.

No New Entry Signals for Wednesday.

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Big Bamboo Monday Update

[[EFU]] stopped out at $145.05, after entering at $151.09 this morning, for a loss of $575.72

[[SCC]] did not stop out after an entry (theoretical) of $138.88, although it came close.

In the comments section of the last post on this system, it was noted that the spreads on SCC were huge. This was confirmed by plotting a 1-minute chart in Tradestation. I hope to have more time tomorrow evening to post how uneven the trades were. This throws a huge monkey wrench into the system. It may be that we ignore selections unless they have twice or triple the volume of SCC. It is useless to rely on backtested results if the results do not have a realistic possibility of being replicated. It seems that SCC may be too illiquid to provide consistent results using market orders on the open.

Of course, the other two open positions [[SDS]] and [[QID]] continue to erode. These two positions can also stop out and the system will still show a positive gain since its short inception period.

This is where we want to carefully observe the performance of the system. We know it will hit losers, but as long as the losers are fewer in number and smaller in dollar terms than the winners, the system will remain an overall winner. Frankly, I am glad it may be getting ready to hit a losing streak, as this means it is an excellent time to start trading the system with real money. After four to six losing trades, I will be looking to dive in. More on that later.

I will update the blog tomorrow evening with a new spreadsheet for the Big Bamboo System. Right now it is too late to delve into the math and I am likely to make errors, so it will have to be put off until tomorrow

No New Entry Signals For Tuesday.

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Reversal Patterns: 15 Charts

I started out screening only for Island Reversals. However, I found some that were not true Island Reversals, but still looked very bullish. Here are 15 of my favorites, listed in reverse alphabetical order, of course.

Most of these have a MACD that is getting ready to cross the zero line. That would certainly be very bullish.

Universal Health Services, Inc. [[UHS]]

Synopsys, Inc. [[SNPS]]

Cohen & Steers Quality Income Realty Inc Cohen & Steers Quality Income Realty Inc [[RQI]]

Provident Energy Trust (USA) [[PVX]] Huge dividend.

Pengrowth Energy Trust (USA) [[PGH]] Huge dividend

ONEOK, Inc. [[OKE]]

NYSE Euronext [[NYX]]

Merck & Co., Inc. Merck & Co., Inc. [[MRK]]

Motorola, Inc. [[MOT]]

Mirant Corporation [[MIR]]

McKesson Corporation [[MCK]]

Danaher Corporation [[DHR]]

CMS Energy Corporation [[CMS]]

Allied Waste Industries, Inc. [[AW]]


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Big Bamboo: 2 New Entry Signals for Monday

Sticking to the rules while trading a system can be difficult. The system stayed long [[QID]] and [[SDS]] despite getting very very close to meeting the exit criteria. Staying long has drawn-down the account 5% from the YTD high.

SDS and QID were marked-to-market (yellow highlighted cells) at Friday’s close. Stop losses have been updated to reflect a loss of 4% from the entry price. One might be tempted to move stops up to breakeven, but the system was not backtested with that variable.

New Entry Signals

On Monday’s open, the system will enter [[EFU]] and [[SCC]] . The spreadsheet has been updated to reflect Friday’s closing prices, for EFU and SCC, the estimated 4% stop on the new positions, and the estimated cost (in the blue cells).

This will be the first time the system as been all in, and it will be all on the short side.

Note that I’ve added a Cash calculation, and that the estimated costs of the new positions will be more than the cash the system has. This is due to using the percent-risk method for determining position-size and the marked-to-market open positions being used in the total equity calculation.

As this system will not use margin, on Monday it will only purchase the number of shares it can afford. Keep in mind that this is still not going to be perfect. It is entirely likely that the diETFs will open higher than Friday’s close, so margin may still be used, inadvertently. Having a marginable account becomes a necessity for real-world trading.

For more conservative risk managment, the best calculation to use when setting the final two positions is to figure the proceeds of both open positions QID and SDS, at a 4% loss. Doing so will ensure adherence to the 1% risk per trade. If one uses un-realized gains when calculating future position sizes, he should be aware his actual risk is increased to greater than 1%.

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Another Big Day

Another big day for the mechanical system. Honestly, I’m looking at these returns, and I’m asking myself why I’m not trading it yet. This thing is just killing it. Amidst all the failures of indicators and oscillators, this system seems to be getting even better.

[[QID]] closed with an RSI2 of 75.34 and [[SDS]] with an RSI2 of 74.27.

Without a doubt, had I not sold my QID this morning, (at $68.81, which is 6 pennies of slippage from the listed open) and were I actually trading this, I would be selling tomorrow. Look at these last two trades, marked-to-market at today’s closing price (highlighted in yellow). The total P/L is now ~13K, which equals a 26.15% return, in just six trades. The system has never had more than $550.00 at risk on any trade, and has been at least 40% in cash since inception. Keeping 1% risk per trade, the system could now theoretically hit 10 losers in a row, and still be up ~$8K, or 16%.

I am amazed.

Despite all this, despite the success, there is still the desire to override it. And that is why profitable systems can still be traded unprofitably.

SDS and QID will be left open tomorrow and will not be closed until the exit criteria is met.

No New Entry Signals for Tomorrow.

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Big Bamboo System Update

This morning, the Big Bamboo system purchased shares of [[QID]] and [[SDS]] at the open. The large gap-up on the indices was exactly what we wanted to see, as mentioned last night in the comments section. The setup was so sweet that I went ahead and bought some QID on the open, where I received a 5 penny price improvement from Scottrade versus the listed open. I note that as there has been some discussion about slippage and liquidity with these diETFs.

I want to continue with the theme of explaining this system (and system trading) from the inside out. Note the red squares on the spreadsheet. These squares show that had a 4% stop been set based on last night’s close, the diETF would have gapped down below the stop, and the trade would have either not triggered, or  would have been instantly stopped out. While volatility is elevated, it will be very important to use a professional platform for order entries, to enable the stop to immediately be offset from the entry. The only other choice is to wait to receive the entry price, and then set the stop. As this system is designed to be traded by people who work, that is not always going to be a viable alternative.

While the diETF gapped down hard, that sort of action is ideal for this system. Even with a tight 4% stop, the price never was in any danger of stopping out the trade.

Also note that we are now risking $547.00 per trade. As the system makes more and more money, or loses more and more, we will be trading larger, or lesser size.

The stops are now offset 4% beneath the entries listed in the spreadsheet.

To Exit, or Not to Exit. That is the Question.

The exit for this trade is signaled when RSI2 closes above 80. While I will allow the paper-traded system to stay in the trade, I want to talk about why I may close out my QID tomorrow.

Pay careful attention to the RSI2 level, above. While SDS closed up ~8 points from the open, RSI2 barely budged. I’m not sure if this is because of the extreme volatility of late. It may be that today’s move, in comparison to the moves of the past 7 days, is small. Regardless, it makes me a tad worried about using RSI2 for an exit here, until we get a few more days of data to even things out.

Also note the huge ATR(10) of $11.96. Such huge daily swings make setting effective stops very difficult. One almost has to be on the right side of these trades, with well-timed entries, in order to be successful. In order to manage the volatility, one might choose to use stops based on a multiple of ATR(10). I hope to do a post on this topic in the future.

Again, the RSI2 on QID was more responsive than SDS, but not as much as I expected. I am going to have to look at the formula for RSI to determine the reason for this.

But back to the meat of the issue. Do you over-ride the system, and sell? Were I trading this system formally, I would not. However, while I am liking the Big Bamboo more and more, today’s trade was born more out of boredom, due to not having any trades over the past couple of weeks, than a desire to start trading the system. Therefore, I will likely wimp out, and sell the open. I hope that momentum carries through to the downside, and that I also get a price improvement upon closing out the position.

Not to muddy the water, but as BHH and I have been testing a variety of exits, we’ve found another one that is effective, but the jury is still out as to whether it is better than the RSI2 exit. This experimental/alternative indicator is signaling a exit for tomorrow. Maybe I’ll be better able to rationalize my early exit with this new information.

No New Entry Signals for Tomorrow

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