Larry,
I was just wondering why strategy 5 incorporates the buy weakness sell strenth filter. Does adding the filter improve the results appreciably over just switching when the COT switches.

Jim

Jim,

Yes, it does improve the results and reduces the number of transactions. You can see for yourself by comparing Strategy 1 with Strategy 2.

Buying on weakness and selling on strength has been a smart trading strategy for as long as I can remember.

Larry

Larry,
I've thought of a wrinkle that I'm considering adding to strategy 5 and would like your opinion. I was partially inspired by Joe's idea of pyramiding into a winning position and my earlier idea of only being in the trade if it is profitable. The drawback that I can see with the COT system is that if you are using 60-70% of your capital then a few significant losses can wipe out years of profits. So I am trying to find ways to keep the losses small but hopefully also keep the whipsaws down. My idea was that if you are going to commit 60% to the COT then whenever the trade closes for the week in the negative reduce your position to only 30%. Whenever the position moves to positive for the week then increase the trade back to 60% of capital or more depending on if the trade is above or below the 200 DMA. Do you think this would be an improvment over just exiting the trade when it becomes unprofitable?
Hope everyone had a happy Thanksgiving and didn't indulge to much

Jim

I believe the best way to get big returns while taking only small risks is to have a prudent pyramiding scheme.

Starting with a smaller amount then adding shares at higher prices will raise your cost basis and will hurt your performance. however, if you’re not afraid to take on a little leverage you can easily make up for lost performance in a longer term, trend-following system - (I know the COT is not actually trend-following but it will work because you often ride winners for several percentage points over time).

Strategies #4 & #5 are good “scale-in, scale-out” strategies as they are and need NO further tweaking. However, if you want to ramp up your returns AND lower your losses, one idea is to combine trading the etf SPY with SPX options! I’ll give one example; from there you can tinker till your heart’s content.

Example: Say you’re trading strategy #3 and the COT just gave us a BUY LONG signal today.

Determine the out-of-pocket (O.O.P.) dollar amount you will commit to this strategy; let’s say it’s $10,000. Your initial stake would be half that, so you buy $5,000 dollars of SPY. If the trade goes against you you will lose half the amount you otherwise WOULD have lost if you were 100% invested. If you have a stop/loss strategy you could use that here.

If the trade goes your way (and the COT stays long), once you’re up 5% ($250) use that money (market’s money) to buy SPX call options. Spend NO MORE THAN $250 on the options and make sure they are “near the money” with 5-6 months of time. With an account this size you may not be able to afford even one option yet. Do not be tempted to buy a far out of the money option or one with less than 3 months time just because they’re cheaper. Also, you may want to wait for a 5 day RSI pull-back to 30 to help time your entry. By the time you get your buy signal you may have an even greater profit! Spend it ALL on the option(s).

Assume the trade continues in your favor - keep using your profits to buy SPX calls each new one with more time. Eventually your first call purchases will be WAY in the money (if you did it right) and you will be taking profits on them for as long as the strategy continues in this direction. Once your first options close out, us THOSE profits to buy more SPY shares.

You’re using SPY PROFITS to buy calls and call profits to buy even more SPY shares!

You could keep this going indefinitely – some times strategy #3 maintains it’s long (or short) bias for YEARS at a time!

If some of the options DO expire worthless you lose only your profits you had in them… no out-of-pocket money. And the entire time you only had half your O.O.P. money at risk.

So… separate YOUR money (out-of-pocket) from the market’s money. Keep YOUR money safe, only have half of it at risk in SPY. But bet 100% of the market’s money buying options. Then, as the options expire in the money, use those profits to buy more shares of SPY. Continue until the COT flips! (Or until you freak out!)

The only O.O.P. money you can lose is however much your $5,000 loses on the trade. The amount you can gain is theoretically unlimited… but you’ve got to have nerves of steel!!



Good luck.

-ja

Jim,

Your idea is fine. I don't see anything wrong with it. It sounds similar to the strategy proposed in Tharp and friends book, "Safe Strategies...."

Joe has a very well thought out plan that is excellent. The main thing is to find something that you're comfortable with and stick with it. So when things are not going your way, you're not thinking about what to do after the fact. And you're not worrying about it. One of the oldest Wall Street truths is to "sell down to the sleeping point." In other words, if we are concerned about our position we're doing something wrong.

Larry

as I re-read my post above a few things occurred to me – I know there are many who read this that are new to trading. I want to make sure no one gets themselves in trouble…

I’ve been trading for a long time - sometimes I gloss over (or even omit) information because it seems so obvious or logical to me – but it may NOT be obvious to others.

example: I said: “… as the options expire in the money, use those profits to buy more shares of SPY.”

I didn’t mean you HAD to wait until expiration. in fact you should probably take profits before the option has 50 days or less. or you could determine a profit-taking % such as, “as soon as the calls reach 100% sell.” I just meant that you COULD wait till expiration (if you’re deep in the money). my post was just throwing out some ideas but you should develop your own ideas that you understand well before you trade.

what I’m saying is: if you’re new to trading and if you’re not real clear about how options behave be very careful. use small amounts of money to practice until you get a feel for it.

leverage is like water – it can help you survive, thrive… or it can kill you.

-ja

p.s. I think my idea above would work on larry’s parabolic sar system too, but stocks are usually much more volatile than indices so bet small.

Joe,
I don't have any experience with options so (I freaked out) when I read your post. Your stratgy is above my head at this point. Maybe I'll check it out again when I get more experience

thanks,
Jim

Jo,
That's a really great idea and plan. Would you wait until you're 5% above your stop loss if it's still lower than the buy price or would you wait until the stop loss got over the buy price no matter what %age profit you'd have by that point. If as usual I've confused an issue, please let me know.
h

jim,

if you want a less freaky idea how about this…

say you buy ZEUS, one of larry’s parabolic sar stocks, and you get in at 22. put a 10% stop/loss on it, at 19.8. of course if it goes down 10% you’re out.

however, say it goes your way and is UP 10%, to 24.2. you can now move your stop up to 22, your breakeven point. this is now a “free-trade” (commissions not withstanding).

now simply stalk the trade - wait for the 9 day RSI to pull back to 30 (or only 50 if you’re aggressive) and look to add shares. this will be your 2nd buy. buy half as many shares as your initial stake. i.e., if you bot 1000 shares initially, your 2nd buy would be 500 shares. place another stop on these shares 10% below their buy price… (yes, you have two different stops at first).

once those shares breakeven, buy another 250, then 125, etc. I would use the 9 day RSI pull-backs to help time the entries. don’t buy when the stock is extended from it’s 10 week MA.

this is something I do, only I use 70% increments rather than 50%. I’ve done the option idea too but I’m more at ease trading stocks. however, if you really want to get the most bang for your bucks, options are your vehicle. start small until you’re comfortable.

also, i don't keep my stop 10% below the highest close... once i get to breakeven i loosen it up to about 15 - 20% depending on how volatile it is (you can look at it's average true range (ATR) to determine it's volatility). if you don't know about ATR, go to stockcharts.com, click on chart school and look it up.

good luck…

-ja

btw, if you had bot ZEUS when larry said you could’ve gotten in around 22 -- today, 2 days later, it closed at 27!

howard...

i think i addressed your question in my reply to jim but i'm not sure. if it does not answer your question please feel free to ask it again...

re-word it like you're writing to a 3rd grader - that's about the age i stopped thinking.



-ja

Jo,
Buy XXX at 10 and set a 10% stop loss at 9. XXX goes to 11 so we move the stop loss up to 10. So far we have a profit of 10% but if we use it to buy more shares or options and keep the 10% stop we're kind of tight compared to your 15-20% stop. Why not wait until the price is 20% over your buy in so that the free trade has a better chance of not getting stopped out?
How has that worked for you? was 10% enough and if so why widen the stop later?
Hoping to learn a lot,
h

Joe Aaron,

What strategy should I use after being short since August 2003, then whipsawed 3 times going leveraged?

Steve (jaded?)

howard,

your question: “Why not wait until the price is 20% over your buy in so that the free trade has a better chance of not getting stopped out?

sure! you can absolutely do that! it’s a more conservative approach but valid. note that I DON’T do this pyramid scheme for the COT strategy. I just use strategy #5 using profunds. I use this strategy for my stock & ETF trend strategy. I think it would work with larry’s parabolic sar strat too.

the reason I loosen my trail stop AFTER I’m in is this: my entry system is supposed to be low risk. I’m buying a break-out or a strong stock on a dip. if the trade goes against me by 10% (often times I uses 8% or less) then something’s wrong. I don’t try to figure out what went wrong - I just want out.

however, once I’m in the trade, I realize the reality of volatility, so I allow for more “wobble” as the stock trends in my favor. I like to allow 2 ATR’s which is sometimes 20 to 25% away from the current price. I loosen my stops ONLY after I’m at breakeven on the trade.

btw, just to be clear, if XXX is up 10% (from 10 to 11) and you move your stop up to 10, you DO have a free trade but you don’t really have a profit yet. meaning, you have an UNREALIZED profit, but you could still only breakeven on the trade. so if you buy an option or more shares you CAN still lose money. be sure your follow up buys are LESS than your initial buy as you scale in.

-ja

steve,

trading the COT i use profunds bull, ultra bull, bear & ultra bear. no stops. pretty basic. i have between 35 to 40% in this strategy right now so i'm a believer - i know it's tough, that's why i have to have other strategies to off-set my current cot losses & to keep me sane. this assumes you WANT to be sane

-ja