THE PROCESS
1. Look at the Market State - The Market State column shows the state for all three broad market indices (Green = Bull Uptrend, Light Green = Bull Pullback, Yellow = Bear Rally, Red = Bear Downtrend)
2. What bucket of Volatility - The Market Vol Levels column tells you what level of volatility we are in currently. (Green under 20 = Trending Market, Yellow between 20-30 = Choppy Market, Red > 30 = Whipsaw Market with large moves usually to the downside. You can look to buy and hold assets for longer during Green Markets. In yellow markets you need to be more active and be willing to accept small gains. Red markets are a time to be very conservative and to consider investing in inverse ETFs and/or selling short if you can.
3. SP500 Volatility Structure - The SP500 VIX Volatility column shows a shorter timeframe. A favorable environment has numbers rising as you go down the column. If the first number in the column is higher than the third number in the column , that is a sign there is stress in the overall market to the downside
4. What to buy - keep and open mind and consider all asset classes (stocks, bonds, real estate, commodities and currencies). Certain asset classes perform better than others in different market environments. If possible diversify between multiple asset classes if the data shows multiple asset classes are performing well. If you are only buying individual stocks, do the same and consider buying stocks in multiple sectors.
5. When to buy - Look to buy strength on pullbacks and sell weakness on rallies. Wait for reversals in price either back to the upside for longs or back to the downside for shorts. This means when price reverses and goes above the previous days high for longs, or reverses and goes below the previous days low for shorts.
6. How much to buy - Position sizing is one of the most critical aspects for long term success. There are multiple ways to position size. We prefer to size based upon risk and volatility. For example, we don't like to risk any more than .5% of our account on any position enter. Our risk per position is determined by the volatility of the asset. The formula looks like this...Account Size * .05 = Total Risk per position. Total Risk / (Entry Price - Stop Price) = Number of Shares we can purchase. Our stop price at entry is always 3 * ATR. The ATR of each asset is in the table in the first column to the right of the 15-period history. This must be kept consistent with all new positions and your feelings about one trade vs another should not factor into your sizing decision.
7. How to buy - This is a little of personal preference. Once you determine the size of the position, some people buy the whole position at once. Others enter in pieces. We prefer to enter in pieces and enter 50% of our position first, a second tranche of 25% quickly once the position moves in our favor, and then the last 25% tranche shortly after again if the position is profitable. If we enter any of the first two tranches and the position goes against us, we will not enter the remaining tranche(s) unless the position once again becomes profitable.
8. Managing the position - Positions should be looked at daily. Alerts can be used to alert you if something dramatic is happening during the day. If price moves in your favor initially you should move your stop up with it keeping it 3*ATRs below the current price if you are long and vice versa if you are short. Never move it lower if the price pulls back for longs or higher for shorts. Once the position moves 3 ATRs above your entry price your stop will be at breakeven. From this point on it is good practice to take some of the position off, taking some profits off the table and lowering your risk of giving all your profit back. Particularly if we are in a Choppy Market. When you are in the position, you should be monitoring the table to see any signs of potential weakness (red colors).
1. Look at the Market State - The Market State column shows the state for all three broad market indices (Green = Bull Uptrend, Light Green = Bull Pullback, Yellow = Bear Rally, Red = Bear Downtrend)
2. What bucket of Volatility - The Market Vol Levels column tells you what level of volatility we are in currently. (Green under 20 = Trending Market, Yellow between 20-30 = Choppy Market, Red > 30 = Whipsaw Market with large moves usually to the downside. You can look to buy and hold assets for longer during Green Markets. In yellow markets you need to be more active and be willing to accept small gains. Red markets are a time to be very conservative and to consider investing in inverse ETFs and/or selling short if you can.
3. SP500 Volatility Structure - The SP500 VIX Volatility column shows a shorter timeframe. A favorable environment has numbers rising as you go down the column. If the first number in the column is higher than the third number in the column , that is a sign there is stress in the overall market to the downside
4. What to buy - keep and open mind and consider all asset classes (stocks, bonds, real estate, commodities and currencies). Certain asset classes perform better than others in different market environments. If possible diversify between multiple asset classes if the data shows multiple asset classes are performing well. If you are only buying individual stocks, do the same and consider buying stocks in multiple sectors.
5. When to buy - Look to buy strength on pullbacks and sell weakness on rallies. Wait for reversals in price either back to the upside for longs or back to the downside for shorts. This means when price reverses and goes above the previous days high for longs, or reverses and goes below the previous days low for shorts.
6. How much to buy - Position sizing is one of the most critical aspects for long term success. There are multiple ways to position size. We prefer to size based upon risk and volatility. For example, we don't like to risk any more than .5% of our account on any position enter. Our risk per position is determined by the volatility of the asset. The formula looks like this...Account Size * .05 = Total Risk per position. Total Risk / (Entry Price - Stop Price) = Number of Shares we can purchase. Our stop price at entry is always 3 * ATR. The ATR of each asset is in the table in the first column to the right of the 15-period history. This must be kept consistent with all new positions and your feelings about one trade vs another should not factor into your sizing decision.
7. How to buy - This is a little of personal preference. Once you determine the size of the position, some people buy the whole position at once. Others enter in pieces. We prefer to enter in pieces and enter 50% of our position first, a second tranche of 25% quickly once the position moves in our favor, and then the last 25% tranche shortly after again if the position is profitable. If we enter any of the first two tranches and the position goes against us, we will not enter the remaining tranche(s) unless the position once again becomes profitable.
8. Managing the position - Positions should be looked at daily. Alerts can be used to alert you if something dramatic is happening during the day. If price moves in your favor initially you should move your stop up with it keeping it 3*ATRs below the current price if you are long and vice versa if you are short. Never move it lower if the price pulls back for longs or higher for shorts. Once the position moves 3 ATRs above your entry price your stop will be at breakeven. From this point on it is good practice to take some of the position off, taking some profits off the table and lowering your risk of giving all your profit back. Particularly if we are in a Choppy Market. When you are in the position, you should be monitoring the table to see any signs of potential weakness (red colors).