A Wild Swing-Trade Ride with RDUS

A wild ride while swing-trading RDUS.
A wild ride while swing-trading RDUS.

A few weeks ago I came up with an interesting swing trading system. And no, I’m not ready to reveal the exact details of it just yet, but I’ll describe the general concept later in this post.

After fine-tuning the parameters, and sort of testing in-sample and out-of-sample data (I say sort of because I’m sure I’m not doing it up to standard), I ran it by a friend who knows a bunch more than I do. He gave it a thumbs up as well. So it looked pretty good. It had a 57% win rate and a CAR/MDD ratio of .73.

So I did some initial paper trading with it, and the results also looked good. So I executed my first trade: Radius Health Inc (RDUS). It met my system’s criteria, and I also did some fundamental analysis on it to make sure the stock had a decent chance of performing.

Enter position at $40.20/share. Exit at $46.08 for gain of 14.6%.


I entered the trade on January 15th, 2015 at $40.20/share. I have noticed that the buy day on this system is often a down day, but testing revealed that trying to buy at the close of a down day instead just buying the open degraded results. So I wan’t surprised to see the first day in the red.

But then it started drifting lower and lower. Just drifting, mind you.

And then on January 21st, Radius announced a secondary offering of shares, and the price started to plummet. In fact, the next day the stock actually dipped below my stop-loss point on intraday trading, before eventually recovering. Fortunately I don’t have a “hard stop” for this system, or I’d be out. Instead, the stops and profit targets are based on the close of the day, and action is taken on the open of the next day. Less stressful that way.

Then on the next day, it started heading up again. The stock made a 12% leap on the 27th, and a another sizable chunk yesterday (the 28th). As a result, it hit my profit target with one day to spare!* I closed out the position this morning at $46.08, for a pre-commission gain of 14.6%. Not bad for 9 days of trading!

So what is this swing system based on? Well, it occurred to me that stocks that perform well even while the general market is having a short-term pullback are likely to rocket upward when the market returns to positive territory. So I wait for the market to take a little stumble, and then find stocks that had a bump up during that time period. That bump often leads to a down day on the buy, as I mentioned, because people take profits on that day. But the next few weeks often show a steady trend upward. It’s almost like an idiot’s form of fundamental analysis. “If people will drive this stock’s price up even during a bad market, there must be something special about it.”

Now the fact that Radius had such a dramatic turnaround during my brief period of ownership has nothing to do with the swing trade system I came up with. That was just luck.

Or was it? 🙂

By the way, you should always check for imminent earnings reports when executing swing trades that typically last a couple of weeks or more. It’s one thing to intentionally trade based on earnings reports, and quite another to be surprised by it. You don’t want your swing trade to get caught in bad news. I did a spot check of this swing trade system over the past six months, and more than a few of the more dramatic losses were traded during an earnings report.


* This particular system has a profit target, stop loss AND a maximum duration. If it hasn’t hit the stops after 10 days, I close the position and count my money.


Revisiting my “short squeeze” trade (INSY)

The vertical line shows my exit, early in the day before it dropped for three days straight.
The vertical line shows my exit on Dec 19th 2014, early in the day. It continued to drop for three days straight.

About a month ago I was in a pickle: my swing trade of INSYS Therapeutics Inc (INSY) had met its profit target quite significantly. You can read about it here the night before, and here on the day I closed the position. Rather than just closing the trade at the open of December 19th as my rules dictated, I hesitated. The reason I hesitated is that INSY was the potential beneficiary of a “short squeeze” (see that first post for an explanation of what a short squeeze is).

In the end, I put in a tight stop-loss which was triggered almost immediately. So the end result – a gain of 15% – was not significantly different than if I’d just sold at the opening bell.

But look at that chart! Over the three days starting when I sold it, the stock dropped over 14%. Ouch! Can you imagine what I would have done if I’d decided to let it ride? Since I would have moved outside my ‘system’, I would have panicked at that first big drop and no doubt given up much of my gain during that big drop. Oh sure, I could have just waited it out and made even more money later. But I know myself well enough that that wouldn’t have happened.

My discipline has gotten better since then. 🙂 In fact I currently have a double-short oil ETF that I bought with the intention of a medium-term trade of a few months. Right now it keeps hovering above my trailing stop, and my wife keeps saying “sell! sell! You’ve made so much money!” But I’m sticking to the rules I established when I started that trade. Oil might go back up, but just as easily, oil prices could fall to $40/barrel before they’re done. I’d feel silly giving up the extra profit. But even more so, I’d feel silly having broken my own rules.

A part of me wishes it would finally drop below the stop, so a) I can write about it on this blog, b) oil will quite mucking with the overall market and c) I can move on to the next trade.

Stick to your rules. If you have an overwhelming, concrete reason to break your own rules, then do so. But if you just are getting itchy or second-guessing the market, then ignore those feelings. And stick to your rules.


5 Steps to Position Sizing (Your Capital ≠ Your Risk)

Don't ride that pony all the way into the ground.
Don’t ride that pony all the way into the ground.

Ok here’s something I didn’t understand when I first started getting serious about trading. Your “risk” is not the same thing as your capital, i.e. the money you throw at a stock.

If you’re a buy-and-hold investor, you’re used to thinking about risk as whatever money you have invested. That’s because you’re going to keep your money riding on that one pony until either a) you cash it out at retirement, or b) it cashes you out when the company goes bankrupt.

So when I started reading books that talked about portfolio management, I was really puzzled by how many of them used risk to determine position sizes. For example, you often hear a good rule of thumb is to have each position’s risk be no more than 2% of your account.

Well stupid me, I thought that meant no trade could be more than 2%.  I had started with about $5000 to play with, to test this new ‘active trading’ lifestyle. So I quickly did the math: 2% of $5000 is $100. I’d lose most of my money on commissions if all my trades were no larger than $100! So I just ignored this advice as something millionaires use as a rule. Because if you’re a buy-and-hope investor, everything is at risk.

But of course, this is not what your risk should be. At least when it comes to “expected risk” or “defined risk”. If you are using predefined stop-loss points – as you should! – then this risk amount is simply the amount you’re willing to lose on each transaction.

I know this is blindingly obvious to anyone who’s been trading for very long, but it was a crucial point of misunderstanding for me.

So a simplistic but practical way to calculate the size of your next trade is this:

1. Determine how much of your entire portfolio you want to risk on a trade. This should be a pretty constant percentage, not something you make up as you go along. The actual dollar amount will fluctuate with your account size. So let’s say 2% of your account is your maximum loss per trade

2. Pretend you have $10,000 when you add up all the current value of your stocks and the cash sitting in your account. 2% of that is $200. That’s the amount you are willing to lose on a trade before closing it and moving on to something else.

3. So you take a look at a stock, say for example Apple Computer (AAPL). As of this very second it’s trading around $107.62. How many shares should you trade? You need to address your stop loss before you can figure that out.

4. After looking at the chart, for whatever reason, you decide that anything below $97.93 is too low to continue with the trade. Perhaps you decided based on trend lines or Average True Range multiples, or you pick a simple percentage below your entry price. Or maybe your street address is 9793 Apple St. For the purpose of this discussion, it doesn’t matter HOW you came up with your stop loss. But you’ve picked $97.93 as a get-the-hell-out price.

5. $107.62 – $97.93 = $9.69/share you’re willing to lose. Great! So take your total amount your willing to lose, and divide it by the per-share loss you’ve come up with. 200/9.69=20.63983488132095. So let’s round down to be safe, and call it 20 shares. Now go buy ’em! *

Of course, this is expected risk. Nothing prevents the stock from gapping down 20% from one day to the next, and no amount of hopeful stop-loss planning can prevent that. But that’s “unexpected risk”. I’m sure finance majors have official jargon for these types of risk, but I can’t be bothered to look it up.

You can however mitigate against this by not having all your eggs in one basket. Don’t put too much of your capital into any one trade, and don’t put it all into one industry, sector or even market. Diversify! If you’re properly diversified in your investments, only an alien invasion will wipe you out.

Too bad you invested in gold. The aliens eat gold for breakfast….


P.S. I’ve spent the better part of the last eight years making my day-job website pretty with beautiful photos and compelling client-oriented text. Here I can use the stupidest graphics and swear all I want, because I’m not trying to sell you something. If you don’t like it, draw me an alien and send it to me.


*This is not a recommendation to buy or sell, as is true for everything on this site. As a disclaimer, I recommend you never follow my advice, ever. Or anyone elses. In fact, don’t ever invest. Oh wait, should you follow that advice? Damn, now I’m confused.

Exited WWAV for a loss…

wwav failed system

This morning I exited a WhiteWave Foods (WWAV) trade for a -2.8% loss. No, it didn’t hit my stop of 2*ATR. So was this a panicky exit? You’re wondering why I didn’t stick with my system, right?

That’s easy. This particular trading system was flawed. Ironically it was the best system I’d come up with using ProRealTime. However when I finally was able to test it more thoroughly using AmiBroker, it turned out to be a dog.

I was willing to let this trade ride as long as other factors were in its favor. But given the lower highs and lower lows it was generating, I decided enough was enough. If I’d stuck with it, I might have yielded a -5.4% loss instead. Time to throw my good money at some other stock!

In case you were interested, the system used a mean-reversion idea with a detrended price oscillator. Basically, when the price is extended a good distance from a slow moving average in one direction, then heads that same distance in the other direction, it should bounce back again by a similar amount.

Which works great, except for all the times it doesn’t.

Perhaps there’s something to the idea, but I did a lot of curve-fitting on AmiBroker and still never got the system to where I’d actually want to trade it.

I guess the lesson here is: stick with a system that you believe in. But if you don’t believe in the system, you don’t get any points for staying to the bitter end.


A New Swing Trade System Using Bollinger Bands

Of course I’m going to show you the best trade! EMKR on August 7th, 2000, for a gain of 32%.

So I was talking in a previous post about how Bollinger Bands have always intrigued me, and prices seem to very often bounce back and forth between the two bands. Of course this is obvious in hindsight, but there must be some system that could capture many of these trades.

The system I initially developed using ProRealTime showed profitability in backtesting, but with at least one major flaw: the stops were arbitrary, and were way too wide for a “one size fits all” approach. The flaw was there due to the nature of backtesting using ProRealTime…it’s difficult to get a sense of the drawdown and other vital issues. So I came up with another system, which has a vastly improved CAR/MDD (Compounded Annual Return divided by Maximum Drawdown).

But before I go on, a disclaimer: you’re guaranteed to make vast riches with this system!


Disclaimer: assume I don’t know what I’m doing. Do your own backtesting. Do your own forward-testing. This is not financial advice, just a fun little amusement. If one can call little snippets of computer code an amusement.

Anyhoo, you’ll notice this system has some things in common with the first attempt. Four bars in a row that have lows piercing the lower Bollinger band, followed by one that doesn’t. You buy at the open of the following day. You sell when it hits the upper Bollinger band, and then stops piercing it with the highs. Here are the details, the parameters of which have been thoroughly tested using AmiBroker.

• Go look at the S&P 500 index (or the SPY etf equivalent). Get a chart that shows moving averages with periods of 40 and 120 days. The 40-day curve should be above the 120-day curve. If it’s not, the market is sucky and you should be finding other things to do for awhile.

• This is a five-bar sequence. Your stock should have four consecutive days with lows that are lower than the low Bollinger band. Set your “B Bands” up with a period of 15 days, and 2 standard deviations (2 is usually the default). Note these don’t have to be “down days”, where the close is lower than the open. You’re just looking at the lows and the lower band for this part. In the example above, the last two bars are actually up days…just doesn’t matter.

• The most recent “piercing low” must be lower than the earliest one, otherwise it’s a vague and hazy sort of decline that likely won’t bounce back.

• The fifth “trigger” day in the sequence is a a bar with a low that does NOT pierce its B Band. For this trigger bar, it must be an up day (Close>Open) and volume for that day must be greater than the average volume of the past 20 days. So you’re going to need a moving average for your volume as well.

I did test to see if the system worked better with the trigger bar being a big percentage, or if volume needed to be very much higher than the average, but the best results were as stated above.

• BUY at the open following the trigger day. *

Then what? Wait for your riches to roll in! Wait patiently until the price moves upward.

• When the highs start piercing the upper Bollinger Band, you need to start paying close attention. Each day it pierces…yay! You’re potentially making more money. Look for the first day of this sequence of piercings that does NOT pierce the B Band. Sort of the inverse of the entry day. That’s your neon sign saying it’s time to get out.

• Sell at the open of the following day.

• Also set a stop loss! My stop losses are usually “soft”, i.e. I don’t set them with the broker. Instead I check the close of each day, and if it’s fallen below my stop point, I sell on the following open. This avoids any close calls where the low fell temporarily below the stop, but then recovered. Also it’s just easier so I don’t sit there watching the “tape” all day. Your stop loss should be 14% (i.e. multiply your entry price by .86 and there’s your get-out-of-town price). Yes I tested a range of stops between 30% and 3%, and 14% worked best.

Some other details:

• Only choose stocks that closed higher than $15, with a average volume greater than 100k shares. Smaller than that and you might buy an erratic, frisky stock that misbehaves like a drunken groom at a bachelor party.

• If you’ve got too many stocks to choose from on a particular day, set up an Average True Range indicator with a period of 10. Divide each stock’s ATR by the Close of the trigger day (ATR/Close, which will be a tiny decimal number), and pick the one with the highest number. This will give you the stock that is the most volatile, and thus the one that has the potential to give you more profit.

• Oh and do bother to check the stock out on various sites such as seekingalpha.com, finviz.com etc. Make sure that there isn’t any dreadful recent news or financial info that is going to ruin your day. With short-term plays like this, the fundamentals aren’t as important as for long term trades. But you still don’t want to buy a real dog…or at least you want to proceed with your eyes wide open.

And that’s it! Let me know if you have luck with it. If anyone wants the AmiBroker or ProRealTime code for this, just drop me a message here.

* UPDATE 02/15/15. After reading Jay Kaeppel’s book Seasonal Stock Market Trends, I took a look at some of my swing systems to see if they could be improved by only trading during certain times of the year. Sure enough, this swing system improves if you do NOT trade during the month of May. And it improves even more if you exit any trade that happens to overlap into the month of May. Why? No idea. Doesn’t matter, just avoid May for improved results.