Tear apart my (book's) swing trading system

Discussion in 'Strategy Building' started by AshanD, Aug 6, 2005.

  1. AshanD


    Hey guys, a fellow ETer recommended I buy the book "Trading Day by Day" to learn how to swing trade. It is an excellent book packed with actual trading knowledge rather than the typcial fluff you see in many books.

    Well the method looks very solid but I just can't seem to apply it profitably. (on a paper account) I know a large part of the reason is because I really limit my trading hours, by the time I'm up and ready to trade there are about 3 hours left before close.

    But perhaps a larger problem is my own inability to apply the system correctly. I thought I'd share the system to see what you guys had to say about it, like what you agree with, what you don't, what you would do differently. It's a long read so I really appreciate anyone who's willing to take their time to comment.

    This is a few days - few weeks discretionary trend trading system. Buying is done usually at the open at market or with a limit order. Exits are discretionary based on profit margin and chart patterns indicating the end of a trend or indecisiveness. Wide stop losses are also used tightening up as the trend takes off. System is followed using EOD closing data, watching the market intraday is optional for precision stops.

    The author's first rule is you do not try to compete on "natural talent, information, knowledge, or computer expertise" There are too many specialists that will run over you if you attempt to compete on these levels. (Do you agree)

    The way he trades is strictly price action coupled with a few MAs. He says trading this way levels the field and gives us a chance to compete. The indicators used are the trend line (10 week SMA) short line (difference between 3 day SMA and 10 day SMA) and middle line. (16 day average of short line)

    These lines are used to spot price energy flows on different time periods. The ideal situation is the trend line and middle line strongly pointing in the same direction. When these 2 lines are going together the equity is in "concurrent mode" and there is a trend. the short line is much less reliable than the first 2 and must be intrepreted more. When it's strongly positive it may be because short term price is rising quickly with the trend, or it may be because the short term price action is running out of steam. A very negative short line may mean the price is plummeting or building energy for a strong rally with a positive trend.

    When the price gets shaky you look at the lines to determine when to exit. of the equity goes sideways for too long it's time to exit. Exits are also based off profit targets. For futures when 50%-100% margin profit has been reached look for a reason to leave. If it becomes a huge gainer (200% or more) look for reasons to stay.

    That's the basic system, compare your 3 lines to anticipate the most likely direction for price. Exit when the stock looks shaky or a profit target has been hit.

    There are a couple other rules such as using at put/calls ratios to help confirm you to go the other way. (Because the author believes options traders are frequently wrong) His spike rule tells you to give more respect to price spikes that are not news relatedand vice versa for news related spikes.

    That's it. My experience so far has been disappointing, I can not anticipate price movements with any accuracy. I'm looking for the the trend line/middle line to go concurrent before I even consider a trade, once that happens I look at how strong the trend is and try to interpret what the short line is telling me about short term price movement. Frequently I will either misinterpret the short line and sell the stock as a a loser, other times the stock will do a little more sideways dancing causing me to exit, before taking off as anticipated. Sometimes I'll get in at just the right time and make a good trade but there aren't enough of these ones. If I make money it may be luck more than anything else. I'll end it here before I lose everyone, I look forward to your comments. :)
  2. cambs_tim


    I'm not much qualified to comment because I've never done any trading in my life, but I have just read this same book. I found it useful because it describes how a trader who has been/is successful works.

    One aspect of his technique struck me as odd. In the best trades of those he describes, he manages to pick good entry points, despite his lagging indicators (SMAs). He repeatedly mentions the need to anticipate the movement of the indicator for this to work well. Obviously we do not know the future price movement, but his anticipation is done by mentally removing the values at the trailing edge of his SMA (and presumably guessing the the current price will not change too far).

    This means that he is poised at the starting line, anticipating whether to enter or not, but the go/no-go decision will be based on price action ten weeks ago (for the trend) or 16 days ago (for the middle line).

    I also noticed that in his comments on trades he often mentions background knowledge from his many years in the markets. For example, he said at one point that he was expecting some particular action in gold because it tends to move together with the other precious metals; there are many other examples.

    I was left suspecting that his trading rules are almost a psychological prop or post-hoc justification for trades which are really being made using a highly discretionary approach based on skill and years of experience.

  3. kut2k2


    I haven't read the book but, for what it's worth, I'm always suspicious of "magic number" systems. Anytime somebody says "Always use the 10-day SMA" or anything similar, my BS detector starts creeping towards the redline. Securities trading isn't a cookie-cutter operation. Different markets have different idiosyncrasies, and what works extremely well for one usually can't be directly transferred to another without some tweaking.

    I'm not knocking MA systems, that's my own area of concentration. I'm just saying you have to be adaptive to the individual investment instruments and not trust much in "magic numbers" without a lot of performance data to back them up.

    Good trading,
  4. You'll have a difficult time making money with that. The system, the way you describe it, is basically a 10 bar MA with a 3,10,16 MACD cross/directional move. This is pretty much as simple as it gets, and those sorts of things rarely work well systematically.

    My advice, is not to put money (every) on such a simplistic (and widely known) method.
  5. AshanD


    Yes the 2 shorter lines are a 3, 10, 16 MACD usings SMAs. I forgot to mention that the author stressed many times you do not need to use these values. It's just what he uses but he says as long as you have "reasonably reliable" indicators of short, mid, and long term price flow you are good. But like the other guy suggested the author trades using a lot more information than that which somewhat contradicts the rules he presents in the book. (not to trade based on knowledge of the equity)

    I felt the same way. His idea of trading price based on short, middle and long term trend sounds solid but does not hold up on its own. I believe its a good foundation to further build a system around.
  6. The long one isn't a 10 bar, it is a 10 week, which is roughly a 50 bar moving average. One of the old standards. I believe he actually likes the 49 bar himself, but as mentioned, he says the exact number isn't what is important. I read this book fairly recently and I like the simplicity. However I do think it might take a decent level of experience in order to trade "between the lines" (my terminology, not his) of his system. He offers good rules, but all non-blackbox systems, requires judgement to make work. I use his suggested TA on my swing trade screens now and nothing else. I don't like them for intraday, but on daily bars I am net profitable since I started using just those indicators.
  7. Interesting, but not unusual. My friend has a very simple system for trading ES (but works well for ER2 as we checked it recently and perhaps for other markets as well) that consists of 4 moving averages and a band. The system has been profitable every month this year, is fully mechanical, and my friend used the setup entry successfully in a discretional way long before making it into a mechanical system, so the system is well tested. I too have been using it for a few months now and have been pleased with its simplicity and performance.

    I am trying to convince him to sell a limited number of copies to the public so that people could appreciate how simplicity can pay off. So far I have not been successful, not because he does want to share this stuff with others, but simply because he believes that most people tend to be drawn to a holy grail type of crap and convincing them that simple is better is beyond his patience.
  8. I have the book (I have most trading books) and found it interesting...

    I could never trade the way he trades, but the book is still recommended as a good read on the way someone else manages to make a living out of the markets...

    I do agree with a previous poster who suggested that the technicals act as some kind a crutch to his trading discretion... I don't think the author trades solely off the technicals he describes, but rather he uses the technicals to back-up his gut instinct...
  9. Volume goes with the trend. You should only enter the market when the volume is growing, otherwise you try trendfollowing during a correction.
  10. Thank you for this great TA tip.
    #10     Aug 17, 2005