Trading Strategies Used in My Portfolios

If you don’t have a lot of knowledge of the stock market, you may not find this section pertinent.  But for those of you who have tried your hand in the market, you might find this page to be very informative.  I’ve done years of back testing (all on one single ticker!) and can give you an idea of which strategies actually work and which don’t.

Keep in mind:  these strategies reference back tests done on the ES only.  Each ticker is a different animal.  What works for the ES may not work for other tickers.

 

Long and Short

The portfolios I created have both long strategies and short strategies.  So some of them are ones where we buy a futures contract and hope to sell it at a higher price (long), and some are ones where we sell a futures contract that we don’t own yet and hope to buy it back at a lower price (short).  If you’re not familiar with the concept of a short position, the general idea is that you benefit if the price goes down.  Don’t worry if it seems confusing.  Just let the automated system do its thing (or just follow my email alerts) and you’ll be fine.

I’ve found that it’s imperative to have both long and short algorithms in the portfolio for at least two reasons.

  • If you have a portfolio with only long positions and the market starts to tank, then you can have catastrophic setbacks. So the short positions, when strategically entered, can serve as a form of protection.  In fact, the way I set up the short and long strategies makes it very hard for the portfolio to every fully crash.  Here is an example:

(show this picture:  https://docs.google.com/drawings/d/10km9me0_67bp5Zg5cVgTlMXV-DXhFfZGAxEwesFAgxY/edit

Caption:  This is an example of a Long position that took a big loss.  From the time the transaction was entered, the price went down noticeably and it was eventually exited with a loss.

Then show this picture:  https://docs.google.com/drawings/d/1BNafIyomQdXF80xGD41Yq8h9oOnu9vM-SnnJ2N7AT6E/edit

Caption:  This shows how in the exact same time frame as the image above, there is a short position that gets entered at almost the exact same time and ends up turning in a big gain at the time that the long position generates a big loss.  If we only had long positions, our account could get decimated at a time like that.  So we include short positions to help provide balance and stability to the portfolio.)

  • We can play more strategies if we do short positions. Since short positions literally offset long positions, it gives us a wider scope of strategies that we can deploy at any given time, which equates to more opportunities to make money (since each strategy as a standalone generates solid profits in back tests).

Market Conditions

A critical element to the design of these portfolios, aside from any specific strategies, is defining market conditions.  A strategy that is designed to buy low and sell high may not work well in a bear market for example.  So one of the key ways to achieve success is to have protocols for defining the current market condition and to toggle strategies based on that market condition.  My automated systems automatically rotate strategies based on the existing market conditions.

(Show this image:  https://docs.google.com/drawings/d/16tqQV2fJXivQjdLWcOfvolbjyn5tPmhRrXQyFB--xwQ/edit

Caption:  My algorithms change depending on market conditions.  Buying low and selling high works well in some types of bull markets, but it wouldn’t be smart to use when the market is in a major downtrend.)

After you subscribe, you might notice that when we’re in a roaring bull market, there are certain strategies get deployed repeatedly by the automated system.  And then when that market shifts into something perhaps more volatile or maybe flat, then some of the old strategies take a rest and some new strategies become active regularly get deployed.  It’s because different strategies within the portfolio work well in different market conditions.

Another key thing to mention:  over the long term, the stock market has always gone up.  So the overall majority of the portfolio strategies have a lean toward the upside.

 

RSI

RSI stands for Relative Strength Index, and it is an indicator widely used by traders.  If the RSI value goes down really far, it could indicate there has been an excessive amount of selling pressure, which might pose an opportunity to “buy low”.

I always wondered whether it was actually effective to use as a trading signal or not, and after a back testing deep dive I found the answer is basically “yes”.  For example, in a lot of market conditions if the RSI value goes down far enough, there are consistent gains to be had by going long.  I’ve also found that in certain market conditions if the RSI value goes high enough, there are some gains to be had by going short.  And finally, when the RSI changes abruptly, that can signal an opportunity for profits that our portfolios take advantage of.

(possibly show image)

Moving Average Crosses

When you look at the prices for the ES on a day-to-day basis, you can take the average over different time frames.  Say you take one average from the last 3 days and one average from the last 8 days (or any two time frames you want).  You can then track those averages over time, and each average will move as the price moves.  They move at different rates since they are averaging different prices.  When these two averages cross, it is widely thought to be an indicator that the ES is changing direction.

I hear so many people talking about using moving average crosses as a basis for entering trades.  Seemingly countless services rely on it as an indicator.  All my data digging shows that using the moving average cross as a basis for entry does not perform consistently.  There are a couple of key exceptions, but for the most part if you use a moving average cross as a basis for entering a trade, then you may as well flip a coin to determine your outcome.  You might have a great victory or a terrible loss.

Bollinger Bands

Bollinger Bands are another type of stock market indicator.  It’s comprised of two bands whose values are calculated by the standard deviation of the moving average, so they help characterize volatility at any given time. 

In my back testing, I’ve found a lot of good ways that the Bollinger Bands can be used to make consistent profits.  We have one strategy where we “ride the Bollinger Band” if it’s changing quickly in certain market conditions.  Another strategy has an entry based on when the price comes “off” the Bollinger Band after having intersected with it.

(Pic with display)

Keltner Channels

I always think of Keltner Channels as being similar to Bollinger Bands since they have a measure of volatility in them and they use moving averages.  With Keltner Channels, the upper and lower bands are based on the recent average true ranges (which looks at the entire range of price the ES had each period over a given number of periods).

With all my back testing, I’ve found a lot of consistently profitable opportunities with Keltner Channels.  In particular, if the bands of the channel exhibit particular sloping characteristics and the ES price deviates from those, there are opportunities to profit from it.

ABCD

I learned the ABCD pattern in stock charts from a guy named Nathan Michaud, and then have since seen it referenced by a number of other people.  It’s when the price has gone up and reached a high and then kind of “pulls back” a little bit.  The idea is that there is an opportunity to go long at some point during the pull back because the price is about to go up again.  Nate does a great job explaining the market mechanics behind why the pricing would move that way.

(pic showing abcd)

I did a lot of back testing on this, and with this one as well I found a variety of different profiting opportunities.    It took me a lot of digging, but I found that certain market conditions in particular provide great “compounding fuel” with this strategy because they are consistent winners.

Breakouts

When the price reaches a new high or low over any given period, it can be referred to as a breakout.  A lot of times when a breakout happens, the common belief is that you should hop on the train and take a ride because it’s going to fire off like a cannon.  There are market mechanics with supply and demand that can help cause this to happen.

I put it to the test with back testing, and I found with the ES that there aren’t a lot of breakout opportunities that are consistently profitable, especially to the short side.  There are exceptions, and we capitalize on one, but for the most part our portfolios do not rely on breakout strategies.  Its one of the reasons why our portfolios don’t have explosive gains in years where the market is going straight up.  The breakout plays can pay you handsomely in those years, but in other years they can thrash your account.

Intraday Entries Versus Entries at Open

When a given strategy is triggered, there is a question of whether to enter the trade intraday (right at the moment it’s triggered) or to wait until the close, make sure the strategy is still triggered, and enter the trade at open the next day.

I’ve tested both a lot, and in the testing I’ve done for my particular strategies shows that it doesn’t make much difference in the end results.  So I choose to go with the super simple approach of only entering new plays at the open of any given day.  It makes my life really easy since I only have to check once a day to make sure entries took place properly, and I believe it will make it easier for you as well since my alerts for entries will always be around the same time of day.

So that gives you an idea of the types of strategies being used in the portfolios.  You’ll notice they’re diverse, which keeps the portfolio safe and which also helps make sure there are trades being initiated all the time.  One of the ways I’m able to get so much juice out of the portfolio is combining strategies that trigger at different times so that we can get every ounce of buying power that we can out of the portfolio.

If you have any questions about the strategies in the portfolios, contact me any time.