Note from Tim: I was absolutely thrilled to get word from Scott a few days ago that he was returning to Slope! He has generously proposed contributing articles, which is terrific. During a rare international trip last August, Scott and I made arrangements to meet one another, but unfortunately we never connected. In any case, welcome back to the baddest bad-ass out there!
For those of you too young to remember me, allow me to re-introduce myself.
I’m Scott Phillips, and I used to go by the name ConvictScott here… because I was a somewhat notorious career criminal who used to end up in prison on a regular basis (most hilariously for kidnapping and torturing some unlucky burglars)
For me, learning to trade was a way of changing my life and becoming a normal, tax paying, rule following citizen like everyone else.
I was a regular here for a long time, until I lost a bet with the Squirrel, over the outcome of the 2016 election. My loss was self imposed banishment for a year.
Turned out to be one of the better things to happen to me, and I’m grateful to the Squirrel for opening my eyes, and to Dutch (rest in power old friend) for continuing to mentor me after I left.
I took a cold hard look at my trading logs. What I found was pretty retarded… even for me.
My system trading, where I followed my trading rules exactly, was consistently profitable and took around 30 minutes a day.
My discretionary trading, where I read the charts and come up with a thesis and manage the trade all the way… SUCKED. I lost money, and spent hours and hours each day in obsession about it.
Now clearly, I’m not as good as Timmay at reading charts (he’s the best *I* know), but I still thought I was pretty good, and better than most. And I’d sold about a million bucks worth of a course in reading charts… so the idea that I wasn’t any good was a bitter pill to swallow.
So WHY in the name of all that’s holy couldn’t I CONSISTENTLY win when I chose my own trades?
And furthermore, why were the trades I had the highest conviction on nearly always losers? Why did the discretionary trades I “held my nose” to take had a far higher win rate than the ones I thought were a lock?
And most of all, why was I magnetically attracted to counter trend trades?
Obviously something was broken in my brain. Either for me, personally… or as a function of broken human DNA.
This started a two-directional search for me.
Inward, into my fucked up, ex-junkie brain, to try and understand why getting better at chart reading wasn’t translating into increased profits.
Outward, recognising that if system trading was working for me, I ought to logically get better at building trading systems and make that a specialty. Doubling down on what works is a no-brainer.
I’ll talk about my “inward” journey some other time, and about my current approach to building trading systems as well.
If there is sufficient interest I’m happy to share all my current trading system rules. These are the real world (not backtest) results over the last year. Roughly 300% (before comms which admittedly are substantial with a maximum drawdown of 9%)… off black and white rules with no wiggle room whatsoever.
Today I’d like to expand on a concept which changed the game for me. It’s a simple matter to improve virtually any trading system with this, and I’ll be showing you how today.
ATR Don’t Lie, Bro
Decreasing volatility trending moves are FUNDAMENTALLY different than increasing volatility trending moves. I’m using ATR (or ATR%) as a proxy for volatility here.
When volatility is falling WHILE the market is trending there are four statistically valid inferences, which I have tested to be consistently valid on all timeframes down to 30 second and as high as yearly charts.
Firstly, Decreasing volatility trending moves LAST LONGER than any other type of move.
If you, like me, shorted and lost multiple times over the last decade… or wondered why this bull market just refuses to die… this is why.
If the rally off the March lows has gone further and farther than you expected… take a look with fresh eyes.
These types of trends, where volatility decreases while the trend continues, are highly unusual, and fundamentally different.
Which is why they consistently catch traders unawares.
Secondly, During decreasing volatility trending moves, counter-trend setups look perfect, but are a profound negative edge.
Here’s the thing. On ANY reasonable technical analysis basis, this pig of a market should have collapsed under the weight of it’s own bullshit long ago.
And we’ve had NUMEROUS wonderful looking short setups over the last decade.
Or the perfect wedge top in 2015
Or the classic retest in 2018
Thirdly, during decreasing volatility trending moves, counter trend setups look TECHNICALLY PERFECT but THEY DON’T WORK!
Finally, Decreasing volatility trending moves have a strong tendency to continue until volatility reaches a historical extreme. Typically they either form a blow-off top, or reverse at that point.