From another thread RTharp briefly mentioned his trading methodology and I was wondering if RTharp could share more info on his trading strategy with some more indepth step by step proceedures that he uses in his trading.
The following is what appeared in another thread:
Rtharp writes:
I used to trade a momentum system that did swing trades but it doesn't work anymore in this market, like the old bull market months back.
I noticed that the biggest point gainers at the end of the day were also the biggest point gainers in the morning. I'd buy a few minutes after the open with a close stop. My figuring if this stock has this big of a gap, something is going on and it might continue for awhile. MY stop was a few points, which I adjusted after the close by the same amount. These trades could last for a few days. I had a few really big trades from trading this system. During this market I put this system on the shelf and now just daytrade on news,
trade a tight channel on MSFT during the slow hours, and trade serious support resistance breakouts on high volatile stocks.
If you understand stops, R multiples, position sizing, and your expectancy it doesn't matter what timeframe you trade. In fact the expectancy of my daytrading systems are a lot less than the swing trading/ position trading systems I use. A book that explain this was written by my trading coach Dr. Van Tharp one of the famous Market Wizards called Trade Your Way to Financial Freedom (yes I'm related to him). It tends to sell out in book stores so I would try Amazon or Traders Press.
Another book that might interest you is coming out in a week or 2. Financial Freedom from Electronic Daytrading by Brian June and Dr. Tharp. They are both coaching my trading currently.
Rtharp, any info you could share concerning your personal trading strategies plus how you personally use stops, R multiples, position sizing and expectancy in your own trading would be greatly appreciated.
I have a few minutes so I'll start on this thread. The first thing I need to do is define my risk when I trade. My risk is always my stop price as I put one in. I classify my risk as R. The next factor to calculate in is your # of shares. This is a multiplier of risk.
Risk per trade = ( Entry price- your stop price)* by the # of shares you buy. I try to keep this always around 1%.
Let me give a few examples. A lot of accounts require $50,000 to trade so I'll use that figure.
example of risk:
I'm going to buy MSFT at a price of 50. I decide my stop is going to be 47 or I'm risking 3 points. Now with $50,000 of capital 1% of that is $500. I can buy 165 shares to have my risk for this trade at $495 or almost 1%. If I'm wrong I lose $495 but if I'm right I'll adjust my stop and let it go.
If I'm daytrading I use a smaller timeframe. Say 1/4 point stop. So I'm buying MSFT at 50 with 1/4 point stop. So my risk is $0.25. I can buy 2000 shares and with a stop of 1/4 my risk is equal to $500. or 1% again. This also tops my account out with margin as 2000 shares of a 50 dollar stock with cost $100,000.
This is my risk per trade. I try to have losses for all my timeframes of 1R. or only losing 1 x 's my risk. SOmetimes slippage comes into play so I'll lose 2R or a huge gap and maybe 4R losses.
My wins though when I trail my stops can produce winners that are 50R where I made 50 times what I risked. These are the trades that can make my year. On my swing trading and position trading I find that I'm usually wrong about 60% of the time. My losses are usually very small and don't do much for my account. The winners come the other 40% of the time but a lot of them make 5R , 10R or every now and then 50R. This is how I do returns of over 300% in a year. My long term system for breakouts is very similiar to Catalite who I interviewed on my website.
http://communities.msn.com/rtharpsland look under the interviews section and click on the name Catalite. I tend to trade breakouts for my position trading. I'll look for a nice base to form, wait for it to break out of it's base with more than average volume and get long with a close stop. During a bull market I make a killing do this. Breakouts fail now more often than not due to money flowing out of market.
My swing trading I use a few different systems. One of my favorites that is super easy to follow is the idea that the biggest point gainers at the end of the day are also the biggest point gainers by the end of the day. (sometimes they just keep going) I used to buy the biggest point gainers 2 or 3 minutes in the morning when the market opened heavily positive. Depending on the price of the stock I would place my stop accordingly. I wouldn't buy anything under $60 as you get what you pay for. 60 3 point stop, 70-4 point stop, 90 -5point, 110-6 points, 130-7 point stop, 160-8 point stop, with more increments depending on the price. I would then adjust my winners witha stop below the closing price of the stock if it worked in my favor. I rode JDSU, INSP, QCOM, and a few others up heavily with this technique during the bull market rally.
Daytrading I use a few different strategies which I'll explain later. I short climax runs with a small stop and a dayhold meaning I am either stopped out or close out the position at the end of the day. THis can equal some huge winners. I play channel trader, buying MSFT, DELL, INTC, or CSCO the big names. I wait for the slow hours of the market and no real trend for the overall market which is about 80% of the time. I then buy the lows in the channel and sell the highs 30 or 40 times a day. THis equals being right about 60% of the time. I make 1R losses and about half of that 60% is 1R gains the other 30% is about 2R gains.
I also play a system with EMLX, SDLI and a few other mo-mo stocks waiting till they get absolutely outrageous #'s of bids or offers on LEVEL 2 and grab a ride. This signal is good once only 3 or 4 months but is almost guaranteed.
I'll talk more on expectancy later and post more about some of my other strategies when I have some free time, which should be when I return home.
Add all of your trades R multiples for a day if you are a daytrader, or month trades for longer term then divide by the # of trades. This average is your average expectancy. It's the # you can expect to make per $1.00 risk over a long term time frame. My channel trading that I do daytrading, of buying low and selling high of a high volume stock during the middle of the day has only a expectancy of around .20 But I can do this trade 30-50 times a day so it has a lot of frequency.
My swing trading has an expectancy of over 3.00 per trade. THis means that on average with every dollar I risk I make back my dollar and an additional $3.00 per trade, but the frequency is a lot less than daytrading.
When you trade you must have a positive expectancy system. A lot of traders concentrate on being right. I know traders who are right 95% of the time but that 5% they give back all of their gains and then some. This is a negative expectancy system. I don't gamble. I want the odds in my favor over the long term. The house at Vegas has the odds in it's favor. As a trade you should also. My breakout system is only right about 40% of the time. My losses are 1 times what I risked because I used stops to limit them while some of my winners make me 50% return on my equity, which I got by finding a trend, and trailing my stop.
