I haven't had time to check out the specifics yet but I thought I just heard on Bubblevision that several big name brokerage firms have raised their upside price targets for Intel (INTC). If that's not the kiss of death I don't know what is. And I'm only partially kidding.

Larry

Larry,
As unbeivable as it may sound I just saw a guest on CNBC talking about the fall effect and the possibility of the market losing 12-15%. Then right afterward Joe Kernan and Alexis Glick mentioned that their was a lot of talk on the floor of the exchange that Fridays action could very well be the begining of a downturn in the market. Thay cited weakness in the financil and health care sectors which make up a large portion of the S&P. Then I actually heard Joe Kernan say "it might be time to buy puts".

Gary

Yeah, I also heard the guy that reports from the floor talk about what I was writing about in the current SMR that went out over an hour ago. He was citing how some very good technical people were calling Friday a key reversal day.

But I don't like to hear that Bubblevision is getting bearish. I want them to be very bullish

Larry

Larry,
Do you have any theories why the COT is sometimes right on the money timing wise and sometimes they miss it by several months? It appears that those of us who use the COT could maximise profits by always using a trailing stop when the Cot report switches, we could also possibly elimanate the 1-2 week flips. Is there any other reason why using a trailing stop would not be a good idea?

Gary

I don't have any theories except to say that the commercials sell more when they think prices are relatively high and likely to go lower and they buy more when they think prices are relatively low and likely to go higher. They're not particularly worried about getting the timing right. So when it does work out that the market seems to respond the right way just when the commercials make their switch (like in March) it's just a coincidence.

I think using trailing stops is a great idea as long as you have a plan to re-enter the market when you get stopped out. My latest project is that I'm working on a system using the 5-day RSI to be able to profitably trade the market according to COT signals and yet avoid the great majority of adverse moves. I do my backtesting by hand. In other words, I don't use backtesting software. So it is a long and tedius process. Right now I'm up to 1997 and so far the results are very exciting. We will see how it works when I get to the tough year of 1998 and the bear years of 2000 to 2003.

Larry

Larry,
My plan was to just switch to what ever bias the commercials have once you get stopped out. Personally I'm trading the QQQ's and if I would have used a trailing stop I could have made a lot more profit on the Long side before getting stopped out at the end of July. It appears from looking at the charts in this weeks SMR that this method might have worked very well in some of the other cases where the COT was early. Maybe this method would make it easier to stay disiplined since you would be losing much less money while waiting for the reversal. Just a thought.

Gary

I understand, Gary , but my point is that what if for example you go short based on a bearish COT signal. You get stopped out either with a profit or loss. And the commercials stay net short for the next three years. How do you plan to re-enter on the short side?

Larry

Larry,
I don't think I'm making it clear what I'm proposing. Once I get stopped out I will switch to the commercial bias and I won't switch till the commercials switch. When they switch then I'll set my stops again and as soon as I get stopped out I will change over to match them again. Is that as clear as mud?

Gary

Larry,
Hopefully you understood my last post. What in your opinion would be be a good stop, change of 3%, crossing the 50 MA, etc. I will try to do some back testing to see if applying stops would have effected the total profits for the last 17 year period.

Gary

Gary,

I better make sure that I understand - let's say you were short right now because the commercials have a bearish bias. So far so good, right?

And you get stopped out of your position while the commercials still have a bearish bias. Am I still on track?

You're not going to do anything at all until the commercials flip to a bullish bias. And then you'll go long. Is that correct?

If that's what you're saying then you will have to be prepared to possibly be out of the market for several years at a time, because they can stay with a certain bias for a very long time.

I thought that's what you were saying at first, and then I thought, "Nah, that couldn't possibly be it."

Larry

I think what he is saying is once the Commercials flip their bias he will put stops in place to protect his position but at the same time keep them open. Just in case the market continues to trend unchanged for a week or two, or three...

Before the effect of the Commercials flipping their bias takes place. I think he wants to figure out how to maximize his position before he closes it and switches market directions???

I think that is it anyway???

You hit the nail on the head Matt. I got to thinking about it and it seems like an SAR parabolic stop might be in order. Is there a chart service available to test the SAR stops with historical data?

Gary

Gary,

You can backtest a Parabolic SAR stop through StockCharts.com. However, I think you must have at least a "Basic" membership to do so.

I've backtested it and the results are as good as using any other mechanical trailing stop method. But then we're right back to my original question about what my understanding of what you're trying to do. Once you get stopped out and the commercials haven't changed their bias, how do you get back into the market? I know this - you can't wait until they flip again to the other direction because that could be years.

Larry

So I guess the question is do you put in stops while following the COT? If so, then how do you get back in?

Dave

Dave,

That's right. I think using stops along with COT signals is a great idea for many of you and essential for some of you, but there also needs to be a strategy to re-enter the market after you get stopped out. There are many re-entry strategies that could be considered, but it has to be planned in advance.

Larry

I think that Gary might have an idea that could squeeze out a little more profit.

I believe his idea would work as follows. We are all short the market right now because the COT is net short. Gary intends to stay short until COT turns net long. Once the COT turns net long, Gary will use a trailing stop to time his exit from his short position. He will also use the trailing stop on his short position as an entry point for his long position. Gary would then remain long until the COT report turned net short, and then use a trailing stop to both exit his long position and enter his short position.

Sounds interesting.

Brian

Brian,

You are hereby appointed the official translater of the forum .

I think it's an interesting idea as well. In fact, I think it is so interesting that I've backtested it to death. There is probably a way to do it, but I can tell you that it won't work using something like a Parabolic SAR to both enter the market and exit it. You do just great in trending years like 1995 and 1996. But you get whipsawed to death in sideways years like 1993 and 1994. It's the same with moving averages.

But the priniciple is valid. As I mentioned in another post I'm working on an approach involving RSI that is the most promising one I've seen yet. But I have a few more years of backtesting to go (which should take me about another week.)

Larry

Larry wrote:

There are many re-entry strategies that could be considered, but it has to be planned in advance.

Where can one find a list of these techniques? Does Tharp cover that in his investing book?

I was in the Rydex fund RYVNX a few weeks back and had a 10 day ATR times 3 moving stop. I was stopped out with about a $1 a share profit. It has gone much lower since so the stop served it's purpose. However, I'd like to get back in the fund.

Dave

Yes, Dave, Tharp does as good a job as any in giving you some entry and exit strategies to choose from.

Larry

By the way, Dave, next time you'll know to have a re-entry strategy before you use a 3 time ATR stop. Believe me, I know this is a learning process.

Larry

I understand that Tharp discusses entry points and exits, but how does that apply to the COT?

Our entry point is when the commercials flip. You then set up a stop. Your stop gets hit and you're out. Obviously at this point you don't wait for the COT to flip again. Does one then fall back on a standard entry point technique to re-enter?

Dave

Dave,

It just depends. Again, there are many ways you can do it. But basically whatever strategy you choose should include the criteria that you only enter and re-enter from the short side when the COT is short. And you only enter and re-enter from the long side when the COT is long.

Larry

http://www.iasg.com/mainframe.asp?

This link will take you to IASG who provide free rate of return tables for CTA's on the net.

Cheers
Andy

posted the above message to the wrong thread

Larry,
I still think you don't understand what I'm proposing. The SAR stop is only used to exit my position when the commercials change in case the market keeps trending in the same direction for a week or month, etc. Let me give a specific example, lets say we are short the market right now and lets say the market drops 15% between Oct. and now at the end of Oct. the commercials switch to Long. At that point I place an SAR stop behind all my short positions. If I get stopped out immediately then I switch all my positions to Long and let them ride with no stops. When the commercials switch to short again I will place my SAR stops behind them again.
Now lets say instead of getting stopped out immediately the market kept trending lower for all of Nov. before it turned. So I don't get sopped out of my short positions till Nov. The result is that I made more profit from my short position and I don't change to a Long position until Nov. when the market has started to turn and even if it goes into a sideways pattern I got out at a lower point so I won't have to watch my account go down as much as if I got out in Oct. This might make it easier to hold on to our positions.
Another benifit I see is if the commercials switch right back the next week we could possibly avoid that switch or if they are wrong like in 98 we might be able to avoid losing money or at least not as much.

Gary

"At that point I place an SAR stop behind all my short positions. If I get stopped out immediately then I switch all my positions to Long and let them ride with no stops."

Okay, you've switched to long after getting out of your shorts on a Parabolic SAR stop. Now you're long with no stops. What happens if the market drops 20% at this point and the commercials are still long? You just ride it out?

Larry

Yes just like you I will ride the long position till the commercials tell me to switch. Which they will usually do before we get a 20% loss. Acutually I think the biggest loss was in 98 when they were wrong for about 2 months correct me if I'm wrong but that was only about 12%. I haven't back tested the SAR stop exit method but there's the possibilty that it would have elimanated the loss in 98.
The SAR parabolic stop is an exit method only, other than that everything is exctly the same as what we are normally doing following the COT report. Is there any reason that this exit method might not work that I'm not seeing?

Gary

I have all the confidence in the world that following the Smart Money gives me the edge. Go long when they go long and go short when they go short, period. Too much data mining can get me to lose my edge by trying to change the rules or over analyze the game plan.
Larry, thanks for the insight in "Trading in the Zone"
The concepts in that book has helped me to eliminate my achillies heel (over analysis of the market). I just don't know what I will do with all the extra cash and free time.

Gary,

It is true that I follow the COT without stops. But it is also true that only about 65% of my portfolio is pure COT. So if the market were to go up right now by 20% while the commercials are short, it would only have an adverse effect on my portfolio of 13% (20% X 65%). It is also true that about 25% of my portfolio is earmarked for trading. So if the market started trending higher, there is a good chance that I would be long in my trading account which would reduce my drawdown even more. And, finally, I have 10% earmarked for precious metal investments, which has very little correlation with the stock market. So I just have a different way of managing risk than to use stops with the COT.

You’re correct that the biggest loss that has been taken following COT signals is about 12%. In fact, every other loss has been very small. But there have been intra-trade drawdowns that have been larger than that. Also, just because the largest loss so far is 12%, it doesn’t mean that there won’t be one sometime that is bigger.

I don’t see anything wrong with your exit method using Parabolic SAR for what you are using it for. But it just seems to me that if you’re going to use stops you would want to use them all of the time – not just some of the time.

Larry

Peter,

You’re absolutely right about too much data mining. I have been guilty of that in the past myself. And I always have to monitor what I’m doing to make sure that I strike a good balance between constructive fine tuning and destructive over analyzing.

I’m very happy that you’ve read “Trading in the Zone.” If someone were to put a gun to my head and force me to pick only two books that would make someone a better investor/trader, I would choose “Trading in the Zone” for the psychology of successful trading and “Trade Your Way to Financial Freedom” for money management techniques.

Larry