The Golden Rule
Always get the best price.
Even the best investment programs can fail if the strategy does not account for what price is being paid and accepted during transactions. Strategy performance means nothing until it is made into real profits and losses in the process of trading.
The Goals
I am primarily interested in developing strategies for the following three aspects of trading and investing:
1) Return to Trend Trading
There is an ebb and flow to the movement of prices. Prices never move in one direction in a straight line. If they did, anyone could make money in the markets easily. By identifying the primary trend, one can look for opportunities presented when prices stray excessively from the primary trend. By trading in this way, one is more likely to respect the golden rule and get the best prices, as you are more likely to buy at extremes and sell after markets have moved away from such extremes.
2) ETF Trading
Exchange Traded Funds (ETFs) are great additions to the markets as they allow large bundles of stocks or non-equity assets to be traded like stocks. These investment vehicles give the consumer investor access to a much greater diversity of asset types than was traditionally possible. Considering ETFs can track assets that do not include stocks, they can be great options for trading assets that are less affected by the overall trend in stock prices. Using ETFs (or ETNs), one has access to international equity, commodities, bonds, leveraged, futures, and short selling stocks without needing margin accounts or brokerage accounts with access to the markets for these other asset types. Since they are trade like stocks, ETFs also lack many of the withdraw penalties for frequent trading that mutual funds have.
Due to their nature of being bundles of stocks and also managed by professionals, ETFs can provide instant diversification and a lower risk investment than buying any one stock. Therefore, ETFs are excellent tools in one's trading or wealth management arsenal.
I take advantage of trending ETFs and ETFs with strong relative strengths to capitalize on strong groups of stocks or alternative assets, taking advantage of their broad reach for my diversification needs.
3) Long-term Portfolio Management and Strategic Diversification
Enhancing a long-term portfolio with technical analysis can readily reduce draw downs and increase returns for long-term holdings. When the S&P can draw down 50% in times of panic, it is extremely valuable to know when to move funds into alternative investments or to cash in order to avoid these drawdowns and keep one's wealth growing as consistently as possible. Just look at the chart of consistent actual returns from a technical analysis fund by Chris Ciovacco: http://www.ciovaccocapital.com/sys-tmpl/aggressive/
Inspired by Chris Ciovacco at Ciovacco Capital Management, I develop long-term strategies suitable for both conservative holdings like 401k's and IRAs as well as highly aggressive and leveraged capital appreciation (growth) funds. Using pricing data, my models produce profitable portfolios that are actively updated to stay in step with current market conditions to avoid painful, and avoidable losses of capital. These strategies are crucial for preserving and growing those gains from the breakout growth strategies with a low volatility, high gain focus.
In the spirit of an investment bank, all cash should be “put to work” in the most attractive investments available as consistently as possible. A savings account certainly is not always the best place to park one's cash. If cash can be put to work to grow itself, then it should. If there are no other options, then cash is the best place to be. Thus, profitable, actively managed portfolios are efficient methods of keeping cash deployed where it should.
Note: Active management can be as hands on, or not, as you design it to be. Passive buy and hold strategies have historically been shown to be successful on the 15 year or long investment horizon. I have nothing against this way to manage money. However, rebalancing as well as adding and withdrawing funds is more common even with passive long term strategies. Therefore, it can be very helpful to actively manage passive investments by knowing when to rebalance to change funding.
The Background Principles
1) Don't Predict the Markets, Actively Adjust Strategy to Most Current Market Conditions
The market relishes the chance to prove prognosticators wrong as often as possible (not that most prognosticators make predictions for the sole purpose of being accurate). Since the market is often unpredictable, it is worthwhile to develop approaches that respect this uncertainty and that keep large heads and fortune-telling bugs in check. I really admire strategies like those at Wishing Wealth and Ciovacco Capital, which focus, not on predicting the markets, but technically diagnosing its present state to take advantage of what the market is doing in the immediate term. The market cannot transition to a new state without intermediate and often ambiguous steps along the way. Thus, as long as one can respect what the market is doing in the immediate term on a consistent basis, they will find themselves where they need to be when the winds of fortune change. Therefore, I will not attempt to predict the markets. At most, I commit to the current state which implies a prediction of sorts. Thus, if I am bullish, I am bullish based on the evidence presented today and expect things to remain bullish until market conditions change sufficiently, which includes by the next day.
Yes, this means I believe one can be profitable in the markets without any fundamental understanding of how any one asset is valued. You can profit from a decline in oil WITHOUT understanding the global economics of oil pricing. You can profit from stocks WITHOUT knowing exactly how much money company is making and who is the CEO. The value of your holdings, no matter what your fundamental theory of their value is solely based on price. Your assets are only worth what others will pay for them. No matter how much cash your prized company is making, no matter how much you think the threat of rising interest rates and the FED will cause long term bonds to fall, you will underachieve your investing goals unless someone will pay you for your thesis.
This is a highly democratic and accessible form of trading and investing. Anyone with a computer and access to price data can beat the market in the long term with proper study. This way of investing is not for everyone, but it can be very useful to be aware of many different perspectives on navigating the markets.
Don't speculate, observe. Don't gamble and guess, trade in the present and profit.
2) The Trend is Your Friend, Do Not Bet Against the Trend Until a Trend Change is Confirmed
While history has no necessary effect on future price performance, from a probabilistic standpoint, prices do have memories of their past movements. Support and resistance zones in price will often be respected and many stocks have price inertia (trending), or continue to move in one direction for an actionable amount of time.
This basic truth about prices is what allows trading to be successful in the first place. It is also the fact that allows technically managed portfolios to have great success during large draw downs in traditional assets. If price is going up, it will continue to go up until acted upon by an equal or opposite force (buying and selling pressure, supply and demand, etc) and vice versa.
While contrarian trading and investing can be very profitable and it is important to recognize when markets are too overheated or overcooled to anticipate trend changes, one should only act opposite the current trend when a new trend has formed (which is to say, practically, one should avoid trading opposite the trend).
Trends have many pullbacks, but only one reversal. This principle is related to IBD's advocacy of averaging up. While one can certainly play chicken with a stock, placing bets on a bottom being placed and averaging down, this strategy is particularly risky. Rather, buy a stock as it confirms your expectations for it, not as it denies it. Besides, why waste time playing chicken when there are thousands of other trading opportunities opening and closing if one is willing to look!
3) Utilize Proper Risk Management
Often the most challenging part of overcoming the risk-seeking of human behavior, controlling one's risk exposure is essential to long term success in the markets. No matter how good an idea you think you have, it is not ever worth betting the farm unless you are prepared to live homeless. There are always new opportunities and, thus, capital should be never be deployed in an all at once fashion. Therefore, the risks you are taking should ALWAYS match your risk-tolerance and your expectations for return.
4) Build on the Shoulders of Giants
Professionals, not limited to, but including, Dr. Wish, Chris Ciovacco, and Dr. Alexander Elder have been kind enough to share many of their opinions and expertise for the next generation of investors to learn from. My strategies and methods should and do owe their origins to the wealth of knowledge shared by other investors and traders who have extensive knowledge and experience in the markets. My methods have evolved from and are inspired by their teachings and while I cannot say I have 40 years of experience like Dr. Wish, I can say my own methods, while novel on the surface, have their roots deeply entwined in the efforts of those more experienced than me.
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