New Look at R Multiples and Partial Profit Taking

This post will require a familiarity with R Multiples (Van Tharp's idea). I did a study on partial profit taking as my timeframe changed from intraday to swing trading. I know that Van Tharp doesn't believe in partialling out of trades, but there are psychological benefits in my opinion. My swing trading exit strategy is to partial out 75% of my position at 1.5R and let the rest go to at least 4R. When you are only holding 25% of your original position, you have the freedom to let it ride and feel less temptation to exit early. Holding overnight becomes less harrowing when you are only holding 25%.

To use this spreadsheet, you should have an idea of the probability of your first and second targets getting hit. If you don't have data, you can guesstimate or paper trade until you have enough data to determine how accurate your entries are.

https://spreadsheets.google.com/spreadsheet/ccc?key=0AicC1UrMfnSqdFhlMTVaYVpmWkJHTlg3RjIxNjg3VXc&hl=en_US

XLF - descending triangle

I can't think of many reasons to be long here. XLF is setting up a descending triangle, there is the H&S setup in XLE, the dollar is getting a dead cat bounce or maybe more, the "sell in May" effect, end of QE2 approaching... It's very difficult for markets to rally without financials participating.

Volatility Based Position Sizing and Choppiness Index easy language code

I don't really pay much attention to this little blog anymore but I've noticed looking at the stats that two of my most popular posts deal with volatility based position sizing and Bill Dreiss's choppiness index. So in the spirit of open source, I'm releasing my code here. Hopefully it is helpful to someone out there.


Inputs: InvestmentCapital (70000),
PercentRisk(.2),
MaxPercentAllocation(50),
StopFactor(.025), {volatility based stop}
ProfitFactor(3);

Variables: DollarRisk(0), NumShares(0), Vx(0), timeofentry(0);
Variables: HMax(0), LMax(0), Period(14), Choppiness(0);

DollarRisk = InvestmentCapital*PercentRisk/100;
Vx = SquareRoot(AvgTrueRange(50));

NumShares = DollarRisk/(Close[0]*Vx*StopFactor);
SetStopShare;
SetStopLoss(Close[0]*Vx*StopFactor);
If ProfitFactor > 0 then Begin
SetStopShare;
SetProfitTarget(AbsValue(Close[0]*Vx*StopFactor*ProfitFactor));
End;

If NumShares*Close[0] > MaxPercentAllocation/100*InvestmentCapital then Begin
NumShares = 0;
End;

NumShares = Round(NumShares, 0);

HMax = MaxList(Highest(Close[1], Period));
LMax = MinList(Lowest(Close[1], Period));
If Hmax = Lmax then Hmax=Hmax+.00001;
Choppiness = 100.0 * Log(Summation(TrueRange,Period)/(HMax -LMax)) / Log(Period);

Japan - deflation

I'll let you draw your own conclusions and parallels to Quantitative Easing in the U.S.

Importance of developing complimentary systems

Developing systems that work well in a trending market is not very challenging. But as they say, the market only trends about 30% of the time. Finding a system that works well in a low volatility, trendless market is more difficult, and that's what I've been searching for the last 6 months. I've now found something that works decently. There is little to no overlap between my trending and choppy system, so when one system is active, the other is inactive. When one system has a good month, the other tends to have less trades and lesser performance. The end result is a much smoother equity curve.

Monthly performance of trending and choppy systems

Combined equity curve

TSL - Bear Flag

I'm personally not trading individual equities but I couldn't help but notice the solar stocks setting up for a possible continuation move down. See also STP for a nice symmetrical triangle. FSLR could easily move to 100.

Something is brewing

Check out the huge volume coming in to UUP several days ago. Looks like the dollar is double bottoming while the S&P could be double topping. Check out $USD also.

As a side note my automated trading systems are forward testing perfectly. I would be trading them today if my broker wasn't being a pain in the neck about not giving me a pattern day trading account. But I'm pursuing some other interests and shooting a video of an idea I have to pitch to a local company. So that's my life in a nutshell.