2005-05-09, Monday - Update TASR Target Price ($10.72) reached on TASR at 3:21 PM. Volume Levels on TASR indicate actual volume has exceeded calculated FRV Levels prior to EOD. As a result, I continue to hold TASR overnight and plan to monitor volume and price throughout the day tomorrow. Should price begin to drop from today's closing price and begin to slide back toward our initial target price, I may choose to break with convention, and exit early, rather than hold for the next 4 days. - Spydertrader
I appreciate your efforts made to the thread in my absence. Your answers indicated an extensive knowledge of Jack Hershey's methods and theory behind the methodology. Keep up the great work. Good Trading to you as you begin to test the system via simulator. I look forward to reading your results. Yes, I have moved the latest iteration out of the testing phase and into the live trading phase. As the current methods have been based on the successful execution of "The Test Culling Methodology" employed by Ross, I knew many were already using these methods to trade profitably. Although we have discussed various iterations of the Hershey methodology within the confines of this Journal, an important point needs to be made. While each iteration alters the methodology slightly, and automation has reduced the time required, the underlying premise behind each of these methods has remained the same. While me may have somewhat altered our techniques, we continue to base the ever changing trading methods on The Hershey Equities System using as our goal meeting or exceeding the profitability experienced by Jack Hershey himself. To that end, I still continue to test several other variations throughout the trading day. Use of these newest methods should provide additional possible trade signals, and as a result, provide an increased opportunity for profit. However, we also increase the opportunity for "Failed / False Breakout" (fbo). Although the increased occurrence of fbo slightly increases or risk parameters, the amount of risk added in reference to the increased opportunity remains small and well within my comfort zone. Nice gains thus far on your trades above. Money and Risk Management plays a central role any any trading methodology, and The Jack Hershey Equities System is no exception. Although I employ a relatively strict 2% of equity risk parameter, each trader needs to choose the correct approach to Money and Risk Management best suited to their trading style and comfort. Whether by use of trailing stops, stop offset method, altering your targets based on price and volatility as you have done, or any other method, the correct application of money and risk management often makes the difference between a profitable trader, and a losing one. Keep up the great work. While I anticipate additional price improvement tomorrow with TASR, I don't plan to allow for much wiggle room with respect to giving away unrealized gains. As I indicated in my previous post, I plan to monitor this stock quite closely tomorrow. Since I am currently playing with "The Casino's Money" (with price currently above our initial target), should I feel uncomfortable with my current position, I plan to break with convention and exit accordingly. - Spydertrader
That TASR trade worked out great.. nice one. But your position sizing is absolutely on the extreme level. Regardless what Hershey says.. or what anyone will tell u.. positioning over half your account with one stock overnight.. is a bomb waiting to explode. ALthough this probably will work out... but thing about what happens if you do it 1000 times.. more than likely... u can hit a %10-20 drawdown overnight.. especially since you play alot of the smaller cap stocks.
Thank-you for the kind words regarding the TASR trade, and I appreciate your comments regarding risk and position sizing. While I understand your comments related to holding a position representing "half of one's total account" overnight, I'm not quite sure if I have correctly explained my methods of risk assessment. Allow me to clarify: Based on an initial purchase price of $9.74 USD and current position size of 2900 shares, my cost basis is $28246.00 USD. This represents 40.4% of the capital used to trade The Jack Hershey Equities System. Jack Hershey recommends dividing the account into four or more "streams" and investing the amounts accordingly each trading day. Each stream represents the total dollar amount available for a single trade. Jack then trades each day using one of these "streams" and continues this method of capital utilization on each subsequent day - buying and selling on a daily basis. As I have yet to experience Jack's level of profitability, I use a 2% risk of total capital (used to trade this methodology). Using a small risk calculator (posted near the beginning of the Journal), I calculate the maximum share size based on the 5% equity price loss equally 2% of the available capital. In other words, If the price of TASR were to fall to $9.27 USD, I would experience a loss of $1363.00 USD on my position size of 2900 shares. This loss (if realized) represents 1.953% of the current capital applied to the system. Based on the current price of TASR, we would need a gap DOWN of $1.73 per share in order to trigger such a loss. A gap down of this magnitude represents 15.72% of the current price of TASR. While not outside the realm of possibility, such occurrences remain unlikely. Again, if this hypothetical situation did manifest itself, such a loss would only represent less than 2% of the capital currently applied to this system. If the hypothetical situation described above were to occur, I would most surely find myself experiencing a high level of disappointment, but I would not experience a "10% to 20% account drawdown." In order for the account to undergo a "10% to 20% drawdown overnight," we would need to experience a $6900 to $13,800 dollar loss. Based on our purchase price of $9.74 USD and position size of 2900 shares, we would need to see an opening price of between $7.37 and $4.98 a share (10% drawdown vs 20% drawdown). These numbers represent a gap DOWN of 33% and 55% respectively when compared to the current price of TASR. Again, not impossible, but certainly not a regular event. Lastly, while I appreciate your comments above, I noticed you failed to provide an alternate strategy. Feel free to post your money and risk management methodology in order for the rest of us to learn from your expertise. - Spydertrader
Its a bad practice to hold such huge size relative to account overnight in one stock. There is always a possibility that something can happen... if you place 1000 trades a year.. a few of them are bound to hit you hard and can level your account significatnly. I have been swing trading for many years.. and this has happened to me and many other swing traders i know. What you should is calculate the % risk per a trade on one front.. then calculate the % stock allocation relative to account size. Limit the % risk to no more than 3% of your acccount and the % allocation to %25. So basically.. assuming that ABC is trading at $100 and you have $50k in your account. THe most you can lose on the trade will be 3% which is $1500. Also the most shares you can buy is $12,500 worth= 125 shares. From here you decide what you are willing to lose on the trade or what the stop loss should be and position size accordingly. Assuming we use a %5 fixed stop loss on ABC .. which would put the stop at $95. Assuming the max i allow for trade $ loss is 3% of $50k... which is $1500... position size would be 300 shares @ 100 which equals $30k which is 60% of account. With my proposed method.. the most we can risk would be 125 shares= 1.25% of account at $625.. which means 25% account allocation to ABC trade.
Hi Trend Fader, Have you (or anyone) ever done a statistical evaluation of your risk method? In other words, let's say that you are right and 1 in 1000 trades ends up with a 30% (as an example) gap down in price overnight. Does the decrease in risk from taking smaller positions compensate for the loss of expected capital appreciation when taking larger positions (assuming you are profitable)? I realize this is rather subjective... the 30% drawdown could be 50% or 20%, the chances of this happening could be 1 in 100 or 1 in 20,000, etc. I also realize that for each trader's method, his risk/reward and/or win/loss ratio (vs. win %/loss %) is different.... But can the data could be normalized for comparison per each trader... or is this just not feasible. Since you have been swing trading for so long, I would appreciate you insight. Or if you can steer us to a good risk management book, that would be helpful as well. Thanks for contributing to the thread, I have a lot to learn. smtrader
Has anyone tried or read about anyone trying a weekly version of Jack's basic strategy? Stocks fluctuate in cycles on many different levels that Jack calls fractals in his writings. There are a number fairly consistent weekly cycles as well as the daily cycle Jack has identified. I wonder if using daily data as a form of "intraweek" data would work for a weekly FRV similar to using pro-rata intraday stats to determine if daily FRV is met. I realize the profits would be less due to less money velocity and a longer investment - say 6 weeks rather than 6 days - but it seems like it might be a valid concept. I suppose a number of parameters would have to be identified for the "qualifying" weekly stocks in terms of cycles. Anyone know if that's been attempted? I'm curious because my day job prevents me from monitoring the market as closely as I would like to. Incidentally I've attached an *.IFF file that does a good job of using MSNBC's stock screener in finding the good quality stocks that Hershey Equities method demands. If you don't have it yet you'll need to download the Deluxe screener. Its a very good screener and easy to use. To get the 100+/- stocks you can tweak the 2nd through 3rd lines (earnings growth numbers and RS). It comes up with fairly similar stocks as StockTables.com, but its free here MSNBC Deluxe Screener
When I previewed the post it seems to have blown the attached screen away. It should be attached here. I had to zip it as ET wouldn't let me upload it as an .IFF file.
If I understand your methods correctly, you allow for a 12% risk on your total account (4 overnight holds at 3% risk per trade). Although you diversify your risk across 4 different equities, you expose your entire portfolio to significant risk - significantly greater than the methods I described. While 40% of available capital resides in a single stock (TASR), my total risk remains at 2%. Now, should the number of tradeable signals increase beyond the current one per week average, I would definitely divide the available capital and reapportion my risk parameters. Again using your parameters, a 15% gap DOWN occurring on your ABC example equity would result in a loss of $15.00 USD per share or $1875 USD in total losses ($15.00 x 125 shares = $1875.00 USD). Whereas, the same 15% gap down on TASR (based on a current price of $11.00 USD) results in a total loss of $1363.00 USD on our 2900 shares (See above post for the math). Because we have already experienced significant unrealized profits with TASR, our "envelope of error" has significantly widened. As a result, the methods you posted fail to improve one's risk parameters until you get beyond the 18% to 20% gap DOWN in price. Again, not impossible, but do the odds of such an occurrence outweigh the potential costs associated with smaller position size? As smtrader pointed out, failing to take the maximum position size may not compensate for the loss of expected capital appreciation when taking larger positions. In other words, even if an event were to occur causing a 50% gap DOWN in price once every 10 trades, are we better off by taking the maximum size each trade, or do we (as you suggest) plan for such occurrences and only apportion 25% maximum capital? Let's look at two mythical accounts. Account One has $50,000 initial capital, uses a 2% total account risk parameter and purchases the maximum shares allowed. Account Two has $50,000 initial capital, uses a 25% equity allocation formula and purchases the maximum shares allowed. Both accounts trade Stock ABC @ $10.00 USD per share. Both accounts use a 10% price appreciation target ($11.00 USD). In order to make the math easier for everyone, both accounts purchase the maximum shares based on the initial capital and do not increase position size as profits enter the account. Each account makes ten trades: Account One: Using a 2% risk parameter on Total Account Equity, Account One buys 2000 shares (5% stop loss and 2% equal risk) of ABC at $10.00 USD per share. Account A holds for a period of 4 days and experiences a $1.00 per share profit. Account A repeats this procedure for a total of 9 trades. Profits are as follows: 2000 shares x $1.00 x 9 trades = $18,000 USD gross profit. Account Two: Using 25% of Total Account Equity, Account Two purchases the maximum shares ($50,000 x .25 / $10.00 per share) for 1250 shares @ $10.00 USD per share. Account Two holds for a period of 4 days and experiences a $1.00 USD profit per share. Account Two repeats this procedure for a total of 9 trades. Profits are as follows: 1250 shares x 9 trades x $1.00 profit = $11,250 USD gross profit. Both Account One and Account Two experience a a gap open loss of 50% of the purchase price of stock ABC during their 10th trade. Account One: losses total 2000 shares x $5.00 USD per share = $10,000 USD. Account Two: losses total 1250 shares x $5.00 USD per share = $6250 USD. After ten trades (9 profitable and 1 catastrophic loss): Account One: $18,000 - $10,000 = $8000 USD in profits Account Two: $11,250 - $6250 = $5000 USD in profits Now admittedly, I have oversimplified the position sizing in order to keep everyone on the same page. To compensate, I created an artificially high rate of "Black Swan" occurrence resulting in a 50% loss every ten trades. Even if the catastrophic event caused the stock price to hit zero, the resulting consequences would have a net effect of a Total Account loss of $2000 USD on Account One and a $1250 Total Account Loss for Account Two. The above example does not prove one method's superiority over another. Rather, the example shows that based on varying events, one method shows superior results. Based on another set of circumstances a second method yields superior results. The point I have tried to make is that one needs to effectively quantify the type and amount of risk one wishes to protect against and plan accordingly. The correct use of money management does indeed prevent risk of ruin. However, improper use of money management and risk assessment retard profit growth. A multitude of methods exist and each trader should examine all to determine for themselves which methods provide the best results for their own style of trading. I recommend the following reading: http://members.aon.at/tips/moneyMan10.htm I hope you find the above information useful. - Spydertrader
On paper what you are saying makes sense. But in reality simply positioning %40 of your account on one stock holding overnight on an intial entry is very risky. Look at what you are doing.. you are betting almost half your account on stock like TASR that is one of the most volatile stocks in the market. THe only time I think one should have such a big position is when they are pyramding up and are already at a substantial profit. To have such a big intial entry is dangerous and reckless. It all comes down to how smooth you want your equity curve to be. Understand that you are trading very volatile small cap stocks and if you want to make a living trading you have to respect risk. No professional trader would put an intial entry at half their account size and hold overnight on a single stock... you are playing with fire. Just ask any professional trader if they would do that.