The end of the year and beginning of a new one is an excellent time to reflect on what we are doing and why. Where finance meets human behavior is a very interesting and often overlooked area of the human experience. And for all the work I do to build and maintain my wealth, I overlook this area myself. So in this post, I'm going to lay out my trading and investing plan for 2015 so here goes.
Objective
The overall objective of my trading plan is to deliver performance which achieves 75% of the annual return of the SP-500 with 50% or less of the peak-to-trough draw down. I also want to extract between 5% and 10% of the value of my account from the market each year as a result of active trading and opportunistic investing.
Rationale
You might read this and say – aren’t you underachieving? If you don’t want to beat the market why even bother to make a plan? Why not just put 100% of your cash into the SP-500 and let it ride? Isn’t that guaranteed to deliver a better result over time? The answer is yes – but with a higher risk. Recall that the market can and does go down. Back in 2008, the market was down 50% from the top. Back in 1929, the market was down about 90% from the top to the bottom. Since I have been trading and investing for many years – and I am well on the way to financial independence – the last thing I want to do is lose my hard-earned gains. And as a result, I am willing to sacrifice some upside to avoid the chances of a wipe out.
Asset Allocation
| Category | Allocation | Key Tickers | Over or Under |
| Broad US Stocks | 40% | DIA, SPY, IWN | -8% |
| Select US Sectors | 20% | XLE, XLU, XLB, USO | -7% |
| International | 10% | EEM, EFA | +3% |
| Active Trading and Trend Following | 20% | AAPL, FB, CME, CBOE | -10% |
| Cash | 20% | 10% | +12% |
Looking at this, I am underweight in every category except for cash. Its no wonder my performance is so ho-hum. So clearly I'm no market wizard, so what about active trading?
Back in my younger days, I believed that I could program my way to financial independence. So I got my hands on SuperCharts (predecessor to today's TradeStation) and tried to program just about every stock trading strategy I could imagine. After a lot of struggle and observation, I discovered this simple truth: The trading system being used doesn't matter nearly as much as the performance of the underlying asset.
Put another way, a buy and hold strategy on a top-performing asset beats just about any given trading system on any given chart. In other words, its doesn't matter so much what system you trade, but what symbol you trade it against. That doesn't mean I don't believe in specific setups, I do and I'll get to those below. What it does mean it that it makes sense to find the best performing stocks and stick with those. And here is how to find them:
- Stocks with excellent fundamentals and a reasonable valuation. My favorites are those where the 5 year earnings growth rate is greater than the PE.
- Stocks on the right side of a developing and ramping longer story
- Stocks with meet the above criteria and are breaking out to new all-time highs
You can find more on how to identify those stocks in my post New High, Low PE, High Growth. That screen criteria constitutes the bulk of my entries. Here are some specific setups I use to supplement that core strategy and bring in some extra cash:
Elephant Bar Breakout
This happens when a stock breaks out to a new all-time high on huge volume and typically along with some underlying fundamental or news development. Its best to enter these stocks late in the day (say between 3:30 and 4:00) on the day they break out . Don’t wait until 2-3 days after the break out, instead remember these key words from Jesse Livermore:
I become a buyer when a stock breaks out to a high in price action after having a normal reaction.
In other words, don't buy a stock after it has made 8 straight new all-time highs. Wait for the stock to clear resistance and move into all-time high territory then go long! For an example, see Cigna (CI) on 10/30/2014.
Post Earnings Crash and Gap Fill
This happens when a stock with excellent fundamentals and prospects comes out with earnings and gets severely punished for no good reason. Look at Qualcomm (QCOM) on 7/23/2014 and again on 11/5/2014. The stock got crushed for 3-5 days after earnings then retraces. These sell off's can be a good opportunity to buy some stock or sell puts. Take profits as the stock retraces.
Playing Defense
2014 has shown some great trading opportunities where the broad markets setup for a fall and get smashed. As the markets get increasingly traded by algorithms, its seems like the market has gotten more directional. I'm finding that it makes sense to hedge a certain part of the portfolio to extract alpha or minimize losses. I will buy short ETF’s (in my 401K Rollover) or just go “Short Against the Box” ETF’s in my taxable account. I do so because I don’t want to close out my longs and pay capital gains taxes. Instead, I want to just minimize the pain during the downdraft. I have more work to do on this category of trade and would like to develop some setups which can identified and traded using TradeStation.
Special Situations
These are hard to define and I can’t really quantify exactly what I’m talking about here. But I know them when I see them. What else can I say.
Selling Premium into Earnings
I have been doing these trades for the past 2 years in small (1-2) lots and I find them to be an overall reliable way to make money. For an explanation, see here. I also like these trades because the ones which fail often turn into excellent directional trades in the direction that they failed. You know I have been doing a lot of work on Fib lines. Where to they fit into the larger scheme of things? Recall that Fib Lines – or no other Technical Indicator constitutes a Holy Grail . Instead, they provide clues to where price action may pause at resistance on the way up, at support on the way down. I plan to release the Fib Lines – plus levels on key stocks and ETF’s in early January 2015. So stay tuned for that.
That's all for now, have a great 2015!
These are hard to define and I can’t really quantify exactly what I’m talking about here. But I know them when I see them. What else can I say.
Selling Premium into Earnings
I have been doing these trades for the past 2 years in small (1-2) lots and I find them to be an overall reliable way to make money. For an explanation, see here. I also like these trades because the ones which fail often turn into excellent directional trades in the direction that they failed. You know I have been doing a lot of work on Fib lines. Where to they fit into the larger scheme of things? Recall that Fib Lines – or no other Technical Indicator constitutes a Holy Grail . Instead, they provide clues to where price action may pause at resistance on the way up, at support on the way down. I plan to release the Fib Lines – plus levels on key stocks and ETF’s in early January 2015. So stay tuned for that.
That's all for now, have a great 2015!
No comments:
Post a Comment