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36 posts
msg #28923
Ignore AntNet
9/27/2003 6:53:09 PM

Of late, there seems to be a lot of discussion on the forum about "what filter" performs best and "who" is right or wrong in their approach. Honestly I enjoy most of those posts for there "SPY vs. SPY" entertainment value rather than trading contribution. In this post I'd like to come off the sideline and share some thoughts about :


1. Always remember SF is a TOOL.
(A tool is an instrument that, when properly employed, is useful in achieving a desired and anticipated outcome.)
A rock, hammer and nail gun are all tools that can be uses to get the same results. But, having the best tool is not in and of itself a guarantee of success. Knowing how and when to use it may be as or even more important.

2. Use SF based on personal observations of "REOCCURRING" characteristics or those creditably observed and explained by others. (In the following example I will develop a trading method based on a "Bullish Inside Bar".)

3. Understand and DOCUMENT WHY each action or condition is necessary toward the end result desired. (This becomes critical when doing an evaluation.)

4. Through back testing, verify the results.
(Back testing requires charting tools that allow you to see the results or programming skills that will express data in a predefined way.)

5. Refine the method but "KEEP IT SIMPLE" !!!
(Remember there is NO absolute perfect method. Over tweaking only results in curve fitting based on PAST data.)

6. Establish money management and trading parameters based on your individual RISK TOLERANCE and the equity being traded.

(If the proper effort has been taken prior to this step, the results should be rewarding.) Do NOT deviate from your plan once entered into a trade. Only adjust a plan after completing a trade and before entering a new trade. And ONLY after repeating the previous six steps.

8. Abandon losing methods.
(Learn from mistakes and especially learn not to repeat them.)
Losses are part of trading don't be afraid of them, just control them.

The following example is meant to be a guide for the application of the preceding steps.

Using the SF natural language filter writing tool (step 1.) I want to determine if profitable trades can be engaged after observing (step 2.) a "Bullish Inside Day".

A Bullish Inside Day (BnD) is defined as :
Close above Open and Low above Low yesterday and High below High yesterday.

Traditionally most technical analysts agree that generally an "Inside Day" reflects indecision and therefore contraction or consolidation in the equity being observed. This condition is usually followed by a larger move (possibly a significant breakout) higher or lower. By selecting an UP / Bullish day the focus is being placed on an anticipated higher move.
(Initially, as indicated above, step 3. outlines the reason SF is being employed.)

The Quick 10% Filter :

[line 01] set{buy,High yesterday plus 0.01}
[line 02] set{stop,Low minus 0.02}
[line 03] set{alta,Low plus low yesterday}
[line 04] set{altb,alta divided by 2}
[line 05] set{alt,altb minus 0.01}
[line 06] set{10%t,buy multiplied by 1.11}
[line 07] Price is between 0.21 and 1.01
[line 08] and Average Volume(10) is above 200,000
[line 09] and Volume is above 250,000
[line 10] and Low is above Low yesterday
[line 11] and Close is above Close yesterday
[line 12] and High is below High yesterday
[line 13] and add column buy{buy}
[line 14] and add column stop{stop}
[line 15] and add column alt{alt}
[line 16] and add column 10%t{10%t}

(Step 3. continued)
The SF "set" condition should always precede other filter parameters. (Know how to use the tools available.)
Why Lines 01 - 06 ???
To establish some variable names and define their values based on initial chart observations, filter testing and revised parameters.
Why Line 07 ???
To specify the minimum / maximum price of anticipated trades based on individual criteria. (This is also a consideration of step 6.)
Why Line 08 ???
To require some minimum degree of trading liquidity.
Why Line 09 ???
To identify the existence of some above average interest in the equity.
Why Lines 10 - 12 ???
To define the BnD condition.
Why Lines 13 - 16 ???
To have SF list entry, stop and exit (variable) values with filter results.
Entry = buy. Stop = stop or alt (per risk tolerance consideration of step 6.). Exit = 10%t (10% target based on individual criteria.)

Now that a SF filter has been derived, its results MUST be CRITICALLY evaluated (step 4.) by LOOKING AT THE CHARTS. It's NOT enough to ONLY look at the SF "Performance" results to determine if a filter works. SF is an excellent TOOL to help develop filter criteria in order to identify POTENTIAL TRADABLE CANDIDATES. SF Performance can NOT, at this time anyway, accurately report on the effectiveness of a trading system / method / approach because it looks exclusively at Close to Close "EOD" values between two dates. (Know the tool.)

By using the SF "Offset" feature it is possible to observe past / historical results. For each potential trade identified, use a charting program (another tool) to draw horizontal lines representing the buy, stop and target levels on the price chart. Document each chart observation to help clarify a tradable method and begin developing the components needed for a trading plan.

(Note: I tried to use "and draw buy" etc. to get SF charts to enter lines / levels but it did not work.)

In this example, notice that when price moves up from below the buy level and then crosses it, a continuation to the target and beyond is more likely than if price gaps to or above the buy at the open. From this observation it is reasonable to expect that the potential trades identified by SF should be entered with a "BUY STOP LIMIT ORDER" initiated when price is below the buy level.

Chart review also shows that exceeding the 10%t level is common, therefore the potential exists for greater than 10% gains with properly managed trailing stops to close a position.

(Note: Initially other buy, stop and target values were evaluated. Repeated refinements, Step 5., brought about the parameters used in this example.)

Before trading the potential candidates, establish individual money management criteria (Step 6.).
A.) Determine what equity categories will or will not be traded based on market (maybe only NASDAQ will be considered or exclude OTCBB stocks), type (exclude funds), sector or industry (maybe only high tech medical software is of interest). By learning the characteristics of certain stocks it becomes easier to recognize high probability patterns on a reoccurring basis. This will help when selecting between candidate with limited funds in a portfolio.
B.) Trade size (only round lots of 100 shares or partial lots) based on a maximum total dollar amount per equity investment or maximum share limit. i.e. Round lots to a maximum of $500.00 and never more than 1000 shares.
C.) Design the trade based on the real time available to monitor the trade.
D.) Decide how long to wait for an entry and how long to stay in a trade. Both waiting and staying requires a commitment of funds that might otherwise be used for another trading opportunity.
E.) Write down the money management parameters and stick to them! Again, Do NOT deviate from your plan once entered into a trade. Only adjust a plan after completing a trade and before entering a new trade. And ONLY after repeating an evaluation process. Be sure there is a good reason to make a change. "Let's just see what happens...." on its own is not a good enough reason.

Plan the trade :
When an acceptable candidate is identified, BUY only 100 share round lots spending NO MORE than $500.00 on any single stock and NEVER purchase more than 1000 shares of any stock even if the $500.00 limit would allow for additional lots.

Place a GTC BUY STOP LIMIT order to open a position ONLY when the price is below the predetermined entry level.

Cancel an Open Order if not filled within X number of days or if within X days the same stock emerges again as a candidate with more favorable entry parameters.

Check for position fills on a regular basis. Whenever possible, arrange for immediate notification of a fill.

When filled, IMMEDIATELY enter the "predetermined" Stop Loss Order and the Sell Order at the target price IF "One Cancels Other" (OCO) orders are allowed by the broker and you are unable to comfortably monitor the open position. Alternatively, when able to monitor an open position, use and EXECUTE a mental predetermined Stop Loss Order, and use and Execute a mental trailing stop beyond the target price.

Trade the Plan!
Develop a PHYSICAL check list to keep on track and enjoy stress free trading. If trading is not stress free, then revise the plan until it is! If you are not comfortable trading, DON'T Trade.

When adopting a disciplined, well defined trading method it is not uncommon to become BORED with the routine and start to make "on the fly" changes. Avoid the temptation to make changes to a preplanned trade while in the trade. The only exception is to get out of a trade early when personal circumstances prevent the proper execution of an established plan.

Keep in mind, would'a could'a should'a is not a plan for success.
I hope this helps, good trading, I'll be watching....

60 posts
msg #28926
Ignore deprez
9/28/2003 12:17:53 PM

Excellent. Well thought out.

One observation:
[line 08] and Average Volume(10) is above 200,000
[line 09] and Volume is above 250,000
LINE 09 : To identify the existence of some above average interest in the equity.

I think line 9 should be
[line 09] and Volume is above Average Volume(10)
[line 09] and Volume is XX percent above Average Volume(10)


6,373 posts
msg #28930
Ignore TheRumpledOne
9/28/2003 1:17:16 PM

Thank you AntNet.



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