Resource Short Setups Part II

Its all a bit insane in the resource space at the moment and following on the short setups over the weekend as highlighted here, we now have very similar short setups on AMS and KIO as noted below.

Setup details as follows:

KIO - Short in the R79.23 - R72.47 zone with downside targets at R58.96, R45.45 and R38.70 

AMS - Short in the R244.82 - R230.62 zone with downside targets at R202.23, R173.84 and R159.65

Resource short setups

A couple of near identical patterns emerging for ARI and AGL in the form of bearish continuation breakdowns being displayed on the 3LB charts. In both instances we see that the bearish longer-term trend has resumed and that the previous swing low as per the daily 3LB charts have been broken - indicative of an increased likelihood of further weakness.

The setups below are as follows:

ARI- Short in the R61.69-R60.11 zone with downside targets at R56.95, R53.79 and R52.21. The initial stop comes in as a close above R63.27

AGL- Short in the R133.81-R130.00 zone with downside targets at R122.39, R114.78 and R110.98. The initial stop comes in as a close above R137.61

Netcare break-down short setup

Potential NTC short on the cards with the major trend as indicated by the 21/89 EMA pointing downwards and the 3LB breaking its previous low to the downside on the day. The setup has been marked up on the price chart - broadly we're targeting the R36.95 - R36.26 zone for entry with a stop in at R37.63 and targets to the downside at R34.89, R33.52 and R32.84.

Reunert breakdown continuation short trade

The 3LB on the RLO daily chart has broken below its previous swing low as indicated on the left hand chart and with the 21EMA< 89EMA this supports a potential further move downwards. Looking at the price chart on the right, we would set this up by entering the short at a break of Friday's low at R61.75 with a soft stop in at a close above R65.25. Target levels to the downside are highlighted and we will also look to ratchet the stop down over time.

Aveng Continuation Short Setup

Aveng is in an extremely strong downward trend and it was noted that in these situations, the 3LB on a  daily basis can give good clues as to trend continuation. In this case, we see that after a brief rally the 3LB has broken its previous swing low and so we have entered a short position at R4.40 on the daily chart (off a bearish daily candle painted yesterday) with the view of an ultimate move to R2.75. We will however start ratcheting the stop downward once a close below the initial  target level at R3.85 is achieved.

Growthpoint counter-trend long setup

This particular system has not generated many triggers of late but another counter-trend setup has materialised as the end of day 3LB on Growthpoint painted green (white on the chart). Given the sharp pullback that price has experienced over the past month, this has set the scene for a potential move back upwards. The full target is at 3-1 with a proposed entry at R25.90 looking for a move to R28.36 and a stop as a close below R25.08 but if it does trigger we will look to ratchet up the stop to protect capital and preserve any profits which may materialise.

Advtech Long Position setup

Not a stock we trade often and in fact, its proving quite difficult to source a product provider for a CFD derivative so we may need to trade the underlying stock on for this one should there be a trigger. Starting off with the weekly chart, we see a strong uptrend in place with the weekly price chart well above the 21 and 89 EMA's. This is also supplemented by an interesting stochastic pattern where the stochastic started to reverse from overbought position but has now crossed back upwards over its signal line in what we refer to as a failed stochastic reversal - a very bullish signal.

The daily chart is equally appealing as well see a price retracement to and upward reversal from around the 61.8% retracement level. At the same time, the daily stochastic is oversold and reversing upwards. Additionally, the stock ended the week painted a big bullish engulfing candle on the daily chart.

The support and resistance chart also illustrates the strong uptrend in place and we can see that price has found support at the strong upward trending support line going back to April 2015. There also appears to be a break out of a triangular-type structure taking place.

The setup for this trade is quite tight given the prices involved but we would look or an entry at around the current price level of R12.25 setting the stop as a close below the last swing low of R12.05 and targeting the structure top at R12.70. This would yield a target reward to risk of 2.25-1. Grading for this trade is at 75%. Worth mentioning that without obtaining a leveraged position for this trade the capital outlay would be quite onerous trading the underlying given the tight stop involved.

Investec counter-trend Long setup

Investec (INL) is giving a long counter-trend trading alert on the end of day 3LB chart and with the strong down-trend experienced over the past 2 months, there's potential for a strong bounce in place. The setup is to enter on a break of the day's price high at R110.60 using R108.44 as the stop-loss. The ultimate target assuming the trade triggers would be R117.08 yielding a target gross reward-risk of 3-1

Truworths Long Position

Truworths has been a very choppy stock over the past 6 months. The length of the candles on the weekly chart reflects a high degree of volatility and while the 21 EMA is above the 89 EMA on the weekly chart (one of our indicators of a longer-term bullish trend being in place), the chart itself just appears noisy in isolation. Looking at the weekly stochastic however we see that it appears to have a fairly bullish shape sloping upwards without being overbought yet and we also see that as at the end of last week there was a long-tailed candle formed on a weekly basis.

On the daily chart we see that now the stochastic has been forced into an oversold condition and that price has retraced just over 61.8% of the way back towards its previous swing low. The daily candle forming as the stock went ex-dividend is also quite interesting and could be seen as a spinning top - generally indicative of uncertainty around which direction the price will next move and potentially indicative of a reversal in the making. Another interesting feature is to see volume has been steadily declining in line with the retracement over the past couple of weeks also adding some credence to a potential bullish trend resumption.

Lastly looking at the support and resistance on a daily close basis we see the price approaching a strong level of support going back for about a year. There's also some indication of lateral support and resistance levels at R81.00 and R94.00 respectively - although as marked up on the chart R89.00 - R89.50 is also a potential resistance area.

Our plan is to fade a reversal from around the R83.00 level and setting the stop as a close below the support level at R81.00. Target level is R89.00 (not swinging for the fence in the current environment) - that would yield a gross 3-1 reward-risk target. Grading for this trade is 55%

Kumba and the Top 40

Today's trading action has seen the development of 2 potential long setups on an end of day 3LB system which we've been developing. The systems rules have been uploaded here . The setups are as follows:

Kumba

Entry would be to go long on Kumba at a break of the previous day's high around the R93.60 level with an end of day stop below R88.52. We are targeting a move back to R108.84 which would yield a 3-1 reward-risk on the trade but will also look to ratchet up the stop as the trade moves into profit.


T40

Entry would be to go long on the T40 at a break of the previous day's high around the 44,848 level with an end of day stop below 43,869. We are targeting a move back to 47,166 which would yield a 2-1 reward-risk on the trade but will also look to ratchet up the stop as the trade moves into profit.

Post-mortem: 100 live trades on the 3LB Trading System

Well actually it was 101 live trades but that's neither here nor there. The number does however allow for some early and essential caveats to all else that follows. 100 (or 101) trades is a very small statistical sample and caution should be taken in extrapolating outcomes over a limited sample and limited time period. Also, what is reflected below is the result of actual live trading outcomes and as such there are trading errors, missed trades, slippage and all the other realities of a manually executed trading system in the final outcomes. (I'll try and reflect a  bit more on these elements and our plans around them later in this post)

All of that said, I do believe there are some interesting trends which have developed over the past few months and that certain findings can well assist in making some positive system optimisation improvements. But lets get into the meat of this thing:

Frequency and results
We've been live trading the 3LB system since 18 May 2015. In the period 18 May to 01 September, we've entered 101 trades which equates to roughly 1.2 trades per trading day. Of that 101 trades, we had 36 winners, 45 losers and 20 break-even trades. 

Importantly we define break-even trades as those which yield a profit or loss less than  0.2 x initial risk adopted. (So as an example if we risk 1% of capital on a trade and we lose 0.1% in the result, this is bundled with the break-even trades). To test the relevance of this threshold, aggregating all the defined break-even trade results shows that the 20 break-even trades cumulatively lost 0.4% of average capital over the 3.5 month period - acceptable as immaterial.

 So our ratio of wins to losses (excluding the break-even trades) comes in at 44.4% at an average reward-risk of 1.91-1 

The equity curve for this result is shown below:

Note that for each trade we defined our permissible risk as 1% of the monthly starting capital and the y-axis reflects the cumulative % capital aggregation. What's interesting is to note the challenges experienced mainly during the July with the 8% draw-down between 7th July and 28 July. Even with this limited sample we can start seeing and experiencing a taste of how challenging it can be to stick to one's system in such a time.

The risk and reward trade histogram for each trade is as follows :

We can see from a discipline front, when executing systems trades we've been relatively good at managing and sticking to the 1% risk rule. On the return side, the frequency of hitting the 1%, 2%, 3%+ levels is quite interesting and its something we will revisit in the optimisation section of this post.

But on balance, not the worst set of results but its within the detail that we start seeing some interesting outcomes.

Across the Trading Day
As a general rule, we've entered trades after the market open (from 09h00) up until the market close (17h00). Where there have been un-triggered setups as at the close, we've left the orders in place to trigger and play out post-market. However eye-balling our results, it became apparent that there were fairly disparate outcomes depending on when during the day a trade was opened. To analyse this further we divided the trading day into 5 distinct zones defined as follows:

• Opening (pre 10h00)
• Morning (10h00 - 13h00)
• Lunch (13h00 - 14h00)
• Afternoon (14h00 - 16h00)
• Close (post 16h00)

The outcomes after stratifying the results into these categories were as follows:

What's pretty clear even in our limited sample is that by simply not taking any trade entries before 10h00 and after 16h00, we immediately enhance both our win-rate and also positively impact our overall reward-risk ratio. What was surprising was the lunchtime results but the sample in that space was so small that this could well be an anomaly

Target versus Trail
The 3LB base system uses a step-trailing system and very often we see trades move profitably and then reverse as the steps can be quite substantial. This begged the question around whether it might not be better to set fixed targets and to forgo swinging for the fences on the huge moves by using the trailing stops in isolation. To answer this we looked back to the trade histogram (for a massive sample we could perhaps use some form of normal curve but we're really only dealing with 36 winners here so I think that's a bit premature) and noted the following return levels by winning trade:

What's clear is that the majority of the outcomes for winning trades fell into the 1% - 2% range. Given that our step-stop moves in 1% average increments  (when we hit 1% we ratchet the stop to break-even, at 2% we lock in 1%, etc, etc) this would mean that on average our trades peaked between the 2% and 3% level. So a rough optimal trade target should be at approximately the average of this range - say 2.5%. But what would the individual trade outcomes have been had we set that target level alongside the trailing stop which we still want to retain to lock in profits and preserve capital. We'd have fewer big spikes but given these compromise a relatively low proportion of overall winning trades, it should be more than compensated for by a general increase in the level of the majority of the trade outcomes. So definitely something to consider building some optimisation around.

Slippage and error
The nutshell summary is that this had a net cost of approximately 2.5% of average capital over the 101 trades. Sources ranged from trade mis-sizing to entry and exit slippage. Unacceptably high at the moment and an area of focus moving forward.

Changes for V1.1
Based on all the findings above,  the following tweaks will be incorporated into V1.1 of the 3LB system. Note that no wholesale changes can be made - its been re-iterated a few times that 100 trades does not provide a sufficient basis for that.

• No trades will be taken before 10h00 and after 16h00
• All trades taken during the "Morning" session as defined above will in addition to the step-stop include a 2.5x fixed target. The rationale here is that the impact of the US open in the afternoon session can really enhance momentum and we don't want to lose out on this by capping gains. Conversely post the open, the morning sessions tend to dwindle off so locking in quicker profits should be more optimal.
• All positions still open as at the market close (17h00) need to be closed out manually by 17h30. We don't want to hold these positions overnight and if the last trade is entered into before 16h00 it has some time and space  to move positively before the close failing which the timed close is actually ideal.
• Reducing mobile trading and looking to manually enter on more trades (as opposed to the stop orders) should reduce the slippage factor.

And that's it. Welcome any input on the above and look forward to the next 100 trades!