Trading Rules

71Warhawk

Do any of you guys use "trading rules" as some authors of technical trading suggest? If so would you mind sharing a summary or your thoughts without giving up the recipe to your secret recipe?

Thanks,
Gary Bird

markd

Take a look at this link

https://stockcharts.com/school/doku.php?id=chart_school:overview


especially the Richard Rhodes article and the Donchian Trading Guide article. John Murphy's 10 Laws is also must reading.

Note "trading rules" are different from systems or methods - systems and methods should conform to the rules, but they are more specific about entries and exits. For instance, "trade with the trend" is a rule, "buy when the rising 5 MA crosses the 21 MA and prices are above the rising 200 MA; sell when price closes below the 21 MA" is (part of) a system.

lmkwin

I use the presence of a dynamic CSS pattern on the point and figure chart. There must be at least 3 consecutive sell signals (CSS) on the default PnF chart. After that, I look for a column of X's that is at least 7x's high. Or 2 columns of 6x's but the second column of 6xx must have a higher bottom than the first. This is an initial stalking pattern for me. It must have at least 3xCSS and then a column of 7xx or 2x6xx. The CSS is a sign of significant distribution or supply being in control. The presence of a 7xx column is a sign of significant accumulation.

After the dynamic CSS pattern is shown, I then review the month markers on the chart. The month markers are the numbers and letters you see on the PnF chart if you have don't check the Hide Months option in the PnF chart. A line connecting the last 2 month markers (MM) and the 7th X point (or the 6th X in the 2nd column of 6xx) should have the last point be even or higher than the 1st point or MM.

After that I review the 1 box reversal chart for signs of a fulcrum forming on the PnF chart. A fulcrum is a reversal pattern. The fulcrum pattern's significant features are a clear down channel. Sideways movement out of the down channel and a spike up out of the down channel. The 7xx column will appear differently on the 1 box reversal chart and may be the fulcrum spike.

After the fulcrum spike the stock should then test the bottom of the fulcrum column(s). Then an emergence completes the fulcrum pattern. An emergence is the breakout. There are some excellent texts on point and figure analysis. Asset Allocation Techniques and Financial Market Timing is an excellent under appreciated book. Jeremy DuPlessis also has some fantastic books on the subject. Clearly developed fulcrum patterns can take on at least 8 different types.

So basically looking for stocks in clear downtrends as evidenced signficant supply represented by the CSS, then significant demand entering the picture as evidenced by the 7xx or 2x6xx rising bottoms. Confirmation with the MM and a fulcrum pattern forming signs of reversal. It's actually quite a bit Wyckoffian in some respects. "Failure" and sale is shown by a simple sell signal below the low of the 7xx column.

The secret sauce is identifying a stock's DNA. I maintain a couple of shared portfolio at Dorsey Wright for stocks in the Naz100 as well as the SP600 and SP400 that meet these criteria. Actually dumber than these criteria. So a pool of approximately 1,100 stocks. The security only needs a 7xx sometime after the 3xCSS or greater. Entry is at the 7xx level. That portfolio is showing an average return of greater than 90% for stocks held over a year. >70% for stocks held 6 months or longer.

71Warhawk

Thankyou very much for sharing this information.That's an awesome plan and return on your portfolio. I am a vaguely familiar with Dorsey Wright and PnF. But when you say you maintain a couple of shared portfolio at DWA what does that mean exactly?

Sorry it took me so long in replying to your post, I have been sidetracked with family matters. I will see if I can somewhat try and mirror what you are doing.

lmkwin

At DWA you can create portfolios of stocks. It's similar to a chartlist at StockCharts. The exception is a portfolio can be built with paper dollar trades so historic returns are capable of being saved. If SC added a portfolio tool, then I would ditch my DWA membership. So I built a couple of "real time" portfolios and shared them with a group of interested CSS Strategy advocates to use for ideas and study. It's quite a remarkable strategy but it does take a bit of time and effort to learn new things, which are actually old things. I studied it for a full year before I took the plunge and implemented. Very happy with the results.

Anyway, similar to creating a Public Chartlist at SC, one can "share" portfolios at DWA with other members. I have two shared portfolios there. One is contains Dynamic CSS patterns in the Naz 100. The other contains Dynamic CSS patterns in the SP400 and SP600.

SCAlchemist

Is there a way to scan for three consecutive sell signals (CSS)?

lmkwin

Unfortunately, on StockCharts, there is no filter for 3 or more consecutive sell signals on a point and figure chart. A descending triple bottom would be 2 consecutive sell signals but not all multiple consecutive sell signals patterns will show a descending triple bottom. On Dorsey Wright, they have a filter in their query engine for multiple consecutive sell signals. You can set the number to whatever you'd like. 3x, 5x, 2x 10x.

I, instead, scan for the dynamic indications on StockCharts. A column of X's that is 7x's high. I actually look for the 6xx and then examine the charts. a 6xx combined with prior column of 6xx, rising bottoms, also is a dynamic accumulation in "my book" and you pick up the 7xx'ers in the scan. Doing it this way, only shows things that are experiencing the end result of what I'm looking for, and then I review the charts to see if they fit "the profile". I'm not really looking for the CSS filtering in this way. I'm looking for the dynamic movement that is shown on pretty much all big winning stocks. You will be hard pressed to find a big winner that hasn't shown at least one column of 7xx on it's point and figure chart.

Dynamic CSS patterns is not an easy row to hoe but it's got a lot of things that I've found to be beneficial. Sector rotation is inherent in the process as things move from supply to demand. A portfolio built on it will show a propensity to go up more and down less than the "market". All it takes is persistence and patience. Patience is the hardest part, but the most rewarding.

I have a public list of timely patterns I try to maintain. As StockCharts, is limited on public lists, I'm working on narrowing it down only to actionable level stocks. It's under the P&F section on public chartlists. If the lists were longer, I could show a fuller list showing the success and failure patterns instead of a cherry picked subset list.

SCAlchemist

Thanks!

An awesome strategy.

I'll give it a try and follow the P&F section on the SC public chartlist.

lmkwin

I must emphasis, that this is NOT a trading strategy. It's best to assemble the names, in a CSS ETF Portfolio of sorts. A good CSS name will allow a month or three for entry. Patience in stalking the names and understanding their DNA is a vital element. How many stocks in your CSS ETF? To get the full effect, as many as you can. You don't want to "manage" it so position size to not manage. I consider failure, aka stop, 2 boxes below the lowest point of the xx column.

StockCharts gives you a lot of tools to use in reviewing patterns. If you are a member at Dorsey Wright, I can share out the real time portfolios I maintain there for a group of CSS "students". I studied the process for a full year before implementing a several years ago. It required a lot of unlearning for me as it's not a trading strategy and all of the articles and books I read were usually written by traders.

I often find myself answering "after a dynamic CSS pattern", to the question "When would have been the best time to purchase this stock?" You can verify that by looking at the P&F charts for a majority of the glamour names. You will see that there were many CSS entries allowed over the years by the FANGs for example.

Good luck on your journey. Use the feedback option on the chart list to contact me off message board if you need any assistance in this study.

clarkj

I buy at the Triple Top Breakout buy signal with the stop at the 3 box reversal or as follows:
buy half my position on the 3 box reversal from the Triple Top with the stop at the Triple Bottom then:
buy the other half of the position on the completion of the Bullish Catapult with the stop at the new Double Bottom sell signal

lmkwin

When I first started learning to use PnF, that was my style. I used the Triple Top, often in conjunction with the change in trend (moving above traditional trendline). Buy half on breakout, fill on confirmed pullback (reversal to O and back to X on the smaller scale. So if it was a 1 point box, I'd look for the confirmation on the 0.50 box. Did pretty well with it, but after reading Dynamic Trendline Charting by Howard Prenzel, I developed my current practice.

Good on you. Bullish Catapult is a fun pattern.

clarkj

I use the Traditional 3 Box Reversal. For Example, if I were to buy half on the breakout at 26.00 I would then fill the order at 23.00. However, lmkwin you are suggesting that I confirm that pullback on a smaller scale. Why not just buy at 23.00? What would be a smaller scale from the 3 point box? I am trying to understand your strategy here and why you would want to see the reversal to O and back to X on the smaller scale. Thanks!

lmkwin

I'm suggesting that it makes sense to buy a pullback but only a confirmed pullback. I suggest that buying in O's on the traditional scale is good from a risk/reward standpoint but just because the price is cheaper doesn't make it a good value or prime target.

I suggest that one can look to the Wyckoff principles for guidance. He worked with PnF charts as well. Let's take the example of the triple top breakout at 26. That is a sign of strength. It is often followed by a pullback into the prior trading range. A 3 box reversal to O at 23 means that the stock printed below 23 but not below 22.

So... the stock pulled back 12-18% based on min and max levels of the boxes printed. I want to see that type of selling activity showing it has abated. How do I know it's showing signs that it stopped going down? On a PnF chart, a reversal to X is usually a pretty good sign. I actually will refer to the % trend charts for further analysis. I just mentioned reducing box size as an alternative for those that prefer the traditional scale. It all comes out close in the end result.

The Wyckoffian may refer to that reversal back to X as indicating a possible Last Point of Supply. It is AFTER that LPS that I prefer to do my stalking.

Why not just buy at 23? A lot of information can be gleaned from reviewing prior columns, particularly prior column lengths. If the history says that there is usually a 4 boxes of O's reversal then you may get a better opportunity. You may still end up buying at 23 but, in my opinion, it usually pays off to let the chart develop. Often that development is shown more clearly on a different scale.

I "find" my symbols to stalk using the traditional scale, and then refer to, usually, the 3%x2 up to 5%x2 for further review. Jeremy DuPlessis and Prashant Shah do their analysis using % trend charts. It just smooths out the prices a lot better, in my opinion. Smaller scales will tell a story for sure, but a 5%x2 will rarely lie to you.

Hope this helps? and just an FYI, if your system is working for you, and you understand it and can follow it, stay with it. I've learned over the years, that having the discipline to follow any system you embrace that provides desired results puts you on the path to successful investing. I use patterns, price and patience as the cornerstones of my strategy.

Inv334

Is the x at 23.16 a fulcrum?

lmkwin

Fulcrums usually:

Are only apparent in hindsight
Form off of a bottom or top
Change the look of the chart

A while ago I shared a Fulcrum "cheat sheet". Attached again below.

I'm not a fan of ATR scaling as it redraws the chart based on current data. So when ATR changes, the prior chart is changed. I know that Bruce Frasier uses it sometimes for counts, but I think the changing of the historic activity on the chart due to a change in current data isn't a positive for analysis purposes.

So, I'd say that could be a fulcrum forming on that chart.

clarkj

I only scan for Triple and Quadruple Top Breakouts. I don't include Spread or Ascending. I find that I get overwhelmed if I include too much in my scans. Is this strategy acceptable or am I short changing myself.

lmkwin

2% x 1 for another look

lmkwin

@clarkj

Just my opinion, The best methods and systems are things that work for you. Being overwhelmed is fine, if that works for you. But you may want to think about it differently. Of course you are "missing out" by not seeing the other patterns. But, if your methods and systems don't work with them well, then you are missing out on nothing.

A quote attributed to Bruce Lee said "I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times."

Some people scan the 52 week highs for ideas. They ignore the ones that just made new 20 week highs or 30 week highs until those reach the 52 week highs. Are they "missing out" by ignoring those others? Sure, but if they don't have a plan to work with those other situations, it becomes just noise to include them.

So, are you missing out? Absolutely. Does it matter? Only you can answer that.

I never would have followed the "patterns" that I use had I not invested time in reviewing patterns to find the ones that worked FOR ME.