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“Hey, you’re really into investing, aren’t you? My broker stinks and I’m thinking about taking control of my retirement account. Can you teach me this?”
In the last several months three separate non-trading friends have approached me with the same question. I really didn’t have a good answer for them beyond, “Uhhhh” (and secretly, “Grooooaaaaan”). I hate giving investment advice for obvious reasons: the process is fraught with peril and the motivations / expectations of those who ask is unclear.
I’ve given the matter much thought, and I’ve transformed my own long-term trading plan into a simple system that many people can use. It has the following advantages:
1. It gives clear, objective signals.
2. It outperforms the broad markets.
3. It keeps you on the right side of momentum for the majority of moves.
4. It provides the signals for taking partial-profits, hedging, and putting additional capital to work.
This system has three levels. Permanent links for these charts are here, here, and here.
Big Picture View: 13/34 EMA Weekly Crossover. The parameters are simple: Go long when the 13 is more enthusiastic than the 34, and reverse to short when a bearish cross occurs. This very seldom generates signals, and they tend to remain patent for years. According to the plan, this chart alone dictates major portfolio positions and should not be gamed / faded.
Intermediate View: The Ratio Adjusted NYSE Summation Index. This one I learned from somebody on the Slope forum (I don’t remember who!). This provides excellent signals and serves as the framework for hedging, profit taking, and putting additional capital to work. Although a wonderful “tell” of short to intermediate-term directional change the timing can be fuzzy by 1-2 weeks and requires a third signal before acting.
Short term view: Daily 3/10 EMA crossover. This is merely used to confirm the intermediate view and serves as the trigger for entry. Both higher time frames *must* be in agreement first.
One additional level you can add is a 3/10 EMA crossover on a 60-minute chart, located here. With all four in agreement, it's a very good way of stacking the odds in your favor.
All four have triggered long signals as of Friday's close, and barring a hideous gap Monday morning, I'm putting money to work! Remember to use stops! I'm placing mine underneath Friday's low.
Biff – Thanks for agreeing to this interview, Angry Wet Cat! You are a good friend of the Slope community and consistently help others become better traders. Can you tell us a little bit about yourself?
AWC – Howdy Biff! Great to be here. Let's see…I'm 50 (ish), been registered since 1984, started out with J.C. Bradford out of Nashville, did the big firm thing (didn't like it), and quit wearing a suit in 2000. Best move I ever made. I'm nekkid right now. Married, divorced and almost married again, but not quite sure about the legal thing again. The Mrs., as I call her, has been around forever it seems, and we're comfortable with the deal. 2 grown children and both parents still around. They are in their 90's and loving life. I hope to be so lucky, if I make it that long.
Biff – Was there a realization or event that caused you to leave the big firm? I assume you were prepared to support yourself through trading from day one?
AWC - The big firms all talked a great game in interviewing, but the reality of the corporate mentality was nowhere near their pitch. I'm a folksy type of person, and I always treat my customers as I expect to be treated. The final straw that broke this camel's back was another takeover by a bank, whose corporate climate was about as anti-broker as I'd ever seen. We were seen as the red-headed step children. This environment didn't jive with my personal approach. I discussed my displeasure with my core group of customers, and they all agreed with me; find a place to do this on my own, and leave. It wasn't a difficult decision, as I found out very early in my career that 99.9% of all recommendations from the firms "experts" had hidden agendas. Plus these recommendations were based on fundamental analysis, and without offending some, I found that about as reliable as EW; too much room for interpretation. I've always been a "black or white" type of person; it either is or it isn't. And I never placed a customer in a position I didn't personally take, so I did my own research and relied on technicals as opposed to fundamentals. It has worked out quite well, and I still have in my core group customers I acquired going back to 1985.
Biff – Given your affinity for technicals and objectivity I assume you have pretty well defined criteria for entering and exiting trades? Will you give us some insight into your trading protocol?
AWC – Be glad to. I've found that the simpler I keep things the easier it becomes to make a good decision. I've watched excellent traders over the years get buried in so many indicators they start to conflict with each other, and they wind up like a deer in the headlights. When buying for my customers that aren't into high risk assets (non day traders), I rely on PnF. I was extremely lucky to have Tommy Dorsey of DWA as a mentor very early on in my career. He took me in when I was still in sponge form, and I learned a great deal from him. Going back to my black or white philosophy, PnF fits in perfectly. It either is or it isn't, and the charts leave little room for debate. While PnF can get as deep as you would ever care to go, the simplicity of a picture of nothing but the constant fight between supply and demand makes life a lot easier, and keeps my customers happy.
My first high risk customer traded the big S&P contracts. I'll never forget the first ticket I dropped for him. My hands were shaking! And since you had to fill out the ticket by hand, it was barely legible. For my traders and my own account, I gravitated to MACD, after learning about and applying stochs, MA's, RSI and just about every other indicator possible. Understanding the relationship between the histogram and the 2 line tell me about all I need to know. I add the Williams %R to it because of its ability to identify where a price is on a very short-term basis inside the current move. Learning to trust your indicators is extremely important. I remember back when I was getting my pilot's license, and the day my instructor told me it was time to go "under the hood". I freaked out. Beautiful day, no wind, not a cloud in the sky and after I got the plane centered on the runway, down came the hood and all I could see were my instruments. Perfectly good windows were useless. Take off, fly around and land without seeing anything but the dials in front of me. As a trader, these same rules apply; you must have conviction in your charts. Start second guessing yourself and you'll wind up with a bad entry in a trade that has less probability of getting better. Your first feeling is usually the correct one.
I watch four separate time frames when I trade: a 30, 15, 5 and either a 1 or a tick depending upon the days velocity. I do look at the daily and weekly charts, but never while trading. That is weekend work. The 30 gives me the day's trend and overview, and the 15 is my trading anchor. It dictates which direction I look for next. The 5 confirms that I am either on the same page as the 15, or it tells me that I am contra to it. The 1 or tick chart is what I use for my trigger. Contra trades are kept on a short leash, especially when they disagree with both the 15 and the 30. Needless to say, these are most always skinny rabbits if I'm lucky. Once in the trade, I watch for wash-outs on the indicators, and I also keep pivots and SAR on my price charts. Trend lines aren't that important to me, but I do find regression channels to be of some help. Its like making soup; by themselves the ingredients aren't much, but when combined in the right proportions, good things come from it.
I've spent years reading these indicators and how they relate to price movement, and I seem to have the ability to tell where they are going. I guess this is a product of experience. Like flying under the hood, I think I could successfully trade using only the 2 MACD indicators and the Williams %R. But just because I could possibly do this, I still like to be able to look out the window!
Like everyone here says, and there are some of the best traders here I've had the pleasure to run across, entry is the key. A week or so ago I had 3 bad entries in a row. I was on the right side, but patience wasn't with me that morning. Stopped out on each trade. I got up and walked away to clear my head. I went back over my rules and identified the mistakes I had made. I came back an hour later and started hitting them right. They say patience is a virtue, and in the business of day trading, it is paramount. I've sat on a trade for hours before executing the buy. Once in, the indicators again tell me when to exit. I've traded the big S&P, e-minis and have been in the crude markets for about a month now. Crude really suits me, as I'm a better momentum trader than I am a top/bottom caller or stock picker. The one thing that has been the most difficult to adapt to is to take the biggest chunk of the move I can within reason and let the rest pass on by. Trading a 10 contract size, 30tks two to three times a day adds up.
To sum all this up, know your indicators, trust your charts and be patient!
Biff – You've given us much to explore there, AWC. Being systematic and sticking to the trading plan are struggles many go through. Since you've been through the early challenges and survived to tell the story, is there any advice you would offer to the new traders here?
AWC – I'm full of it Biff. Advice that is! First, make sure you are comfortable with your trading setup. Indicators, MA's, time frames, etc.. Don't adopt someone else's system and expect it to work for you just because it does for them (See Elliott Wave). Find the system that works for you. Trial and error is the only way to do this. Keep it simple and don't over analyze a trade. Either you see it or you don't. Once you have your indicators in place, stick with them. Adding another MA or indicator isn't going to make the trade any easier. Using the system you like, if you are consistently fraught with bad entries, one of two things is wrong. You're trying to make your indicators fit where they obviously don't (scrap everything and start over) or you aren't being patient and waiting for the trade to come to you. The latter is the biggest issue most new traders have to deal with. Its a PITA to sit in front of 6 monitors for 5 hours before the right set up appears. There are always too many opportunities to jump the gun. I know as I've done it before. The last thought that runs thru my mind is "I think I can make this one work". These will be losing trades 99.9% of the time. And this brings up losses. Everyone has them, so get used to it. Cut them loose and move on to the next set up. Don't let a small loss become a major blow up. I keep a written log of each bad trade containing the set up, my entry and why I chose it, when I exited, and then what happened to the price after my exit. The vast majority went on to be bigger losses.
Becoming a successful trader is 50% discipline and 50% experience. Either one can keep you out of trouble. Until you have the second part, rely on the first part. Again, be patient. If you miss a set up, don't kick yourself. Make a note of it. Trades are like buses. If you miss one, eventually another one will come along.
Biff – Sadly it really is that easy, provided one has the discipline to become a trade execution machine and leave the drama behind. You've given us some great trading information, and I'm curious about other aspects of your life. What are your passions in life beyond trading? Are there any great hobbies or pastimes you enjoy? Fun weekend activities?
AWC – You brought up a good point about drama. One thing that will ruin a good trader is emotion. Don't dismiss what your gut is telling you, but don't let emotions (read money) dictate your trade.
My passion in life is life itself. A few years back I came extremely close to seeing the other side, and I'm glad I didn't make the trip. Very thankful for each new day, regardless of the outlook and the outcome. We both enjoy poker and tinkering around the land. I also have a little streak of grease monkey/construction worker in me. I like to mess with machinery, tools and lumber. Perhaps it would be more accurate to say something around here is always breaking, and I like to play Mr. Fix-It Man. I collect custom knives, vintage audio gear and dabble in red wines. With all the kids grown and gone, we have a blast with our girls, Cami, Roz and Lucy, (they're dogs, but don't tell them that). Of course living in the mountains we both hunt and love firearms. Lots of firearms. If I were forced to describe myself, I would have to say I'm just a plain ol' country boy, and live my life in that manner; one day at a time and don't get in a big hurry over anything. Wow. After thinking about it, I do believe I could have been on Green Acres or The Beverly Hillbillies.
Special thanks to Leisa and Doolie for offering their pictures and input.
Slopefest exceeded our expectations by a wide margin; it is remarkable what similar beasts we are! I cemented longterm friendships in Las Vegas this past weekend, and I felt honored to be part of the festivities. Many thanks to Tim for pulling this broad community together and organizing the event.
For those interested, I've cordoned off many other pictures taken by Leisa, Doolie, and myself along with unblemished versions of the slideshow. (Click here)
There is a frequently used quote in orthopedics that highlights a
very important general concept, “The enemy of a good result is the pursuit of a
better one.”Those few extra tweaks and
adjustments at the tail end of a successful knee replacement operation could
prove counterproductive, and just might result in the entire procedure failing.
Have you ever found thoughts such as these running through
“I sold my position for a three-point gain, and naturally it
shot up another two.I must figure out
how to capture the remaining move from now on. That’s $2000 in profit I left on the table!”
“My trading account rose 40% last year, but Trader X made
$125%.My goal next year is to beat him.”
“My trading has been so spot-on lately I’m going to use options
instead of stocks to juice up the return.”
“This trade is going exactly how I envisioned, and I’m up
15%!My target is now 2% away; too bad
the trading day is about to end…I think
I’ll hold this overnight. “
On a similar note, a concept called the Nirvana Fallacy is often observed in
trading circles.This line of thinking
is present on other blogs, but certainly not on the Slope!
“The Nirvana fallacy is the logical error of comparing
actual things with unrealistic, idealized alternatives.It can also refer to the tendency to assume
that there is a perfect solution to a particular problem.By creating a false dichotomy that presents
one choice which is obviously advantageous – while at the same time being
utterly implausible – a person using the nirvana fallacy can attack any
opposing idea because it is imperfect.”
We all deal with flawed systems. We all screw up, bite the bullet, screw the
pooch, and get taken to the cleaners periodically.We all have great trades, feel like a champ,
and perform admirably in stretches.The only difference between us is the magnitude
and frequency of our victories and failures. Beware of pie in the sky statements from others, especially if they are selling something or pushing an agenda.
Just a quick comment cleaner here. There is much talk around these parts about broken bearish technical patterns, with last summer's failed head and shoulders top being a prime example. At a minimum, many discount the bearish signals they receive after a protracted bull run (who can blame them?). Take a look at this chart and guess what happens next. A long-term trendline was broken to the downside, and the hot price action subsequently kissed the underside gingerly… Too textbook? Too good to be true?
This concept is certainly nothing new or innovative, but for a lazy approach to investing it's hard to beat. Using two exponential moving averages (13 and 34 EMA) and merely flipping ones position at the crossovers we see the vast majority of broad gains captured regardless of direction.
At a minimum it's a great way to reduce your brokerage fees!