Live: Friday, Oct. 18, 2019

9 p.m. New York time

An interesting week, exiting options positions and buying stock positions while sound asleep during my Japan trip. It’s my first experience in automating everything in my trading operation, and it has gone well.

The first need to wake up and intervene will come on October 25, next Friday, when I will exit any remaining profitable options positions, 21 days prior to expiration.

The two remaining short iron condor positions are both profitable, TLT at 23.2% of maximum potential profit and XBI at 29.7% of max.

Meanwhile, I’ve spent time working up a ruleset for momentum plays on shares. Here’s a description below, and it has also been posted on the Trading Rules tab at the top of each page of Private Trader.

Momentum Trades of Shares

This strategy relies on momentum for the selection of stocks and on a 20% trailing stop/loss for the exit signal.

Select high momentum symbols based on the criteria of your choice. I discuss my criteria in the “In Practice” section below.

In selecting trades, give preference to

  1. Higher rates of change.
  2. Expansionary periods while avoiding recessionary periods, as signaled by the Sahm Rule Recession Indicator, published on the Federal Reserve’s FRED tool.

Upon buying the stock, set a trailing stop/loss for 20% below the fill price.

Exit the position when the momentum conditions that prompted the trade no longer apply.

Funds from closed positions will be placed in a government or corporate bond fund, such as TLT or HYG, until required for a new stock position.

In practice

There are many ways to define momentum. The Han et al. study referenced below took a universe of stocks and defined those with the highest six-month change as being suitable for momentum trading.

I have chosen to use the Zacks screen for momentum called Zacks #1 Rank Uptrends, which has the following parameters:

  • A Zacks Rank of 1, meaning the strongest buy recommendation.
  • A 10% price change over the past 12 weeks.
  • A 5% price change over the past 4 weeks.
  • A positive price change over the past week.
  • A positive price change since the beginning of the year.
  • A price of 70% or higher of the 52-week high-low range.

The Zacks query also includes a couple of house-keeping items: A minimum price of $5 and average volume of at least 100,000.

I’ve retained those but lowered the minimum average volume to 10,000 and the minimum price to $1.

The so far has produced results ranging from about a dozen symbols to around 20.

My exit signal is the disappearance of a symbol from the screen results, suggesting that the stock is no longer showing sufficient momentum to retain.

Rather than trying to rank the results of the screen from best trade down to least best, I’ve chosen to use a random number to select the trade. The positions are on the small side, taking advantage of the new commission-free rule of my brokerage in order to achieve equity diversification. I add one trade a week, selecting the trade day by random number, in order to achieve time diversity.

———

Three research papers were used in constructing the ruleset:

Han, Yufeng and Zhou, Guofu and Zhu, Yingzi, Taming Momentum Crashes: A Simple Stop-Loss Strategy (September 24, 2016). Available at SSRN: https://ssrn.com/abstract=2407199 or http://dx.doi.org/10.2139/ssrn.2407199

Yusupov, Garib and Shorrason, Bergsveinn, Performance of Stop-Loss Rules vs. Buy-and-Hold Strategy (2009). Available at Lund University: https://www.lunduniversity.lu.se/lup/publication/1474565

Kaminski, Kathryn and Lo, Andrew W., When Do Stop-Loss Rules Stop Losses? (January 3, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968338 or http://dx.doi.org/10.2139/ssrn.968338

By Tim Bovee, Fukuoka, Japan, October 18, 2019

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License
Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.