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Thursday, September 8, 2016

System 12. Trade Management

System 12 is set up in such way that any working individual can easily manage a portfolio, with no need to monitor quotes during market hours. It would be beneficial to take a look just after the open, to see if some kind of unexpected development affected prices too much, but not spending more than few moments on it. To dwell too much on this will lead to over-trading. Daily check after the close should be all that's needed in order to set or move stops. This may take 15-30 minutes. Make sure your family is on board - you will need this quiet and uninterrupted time to manage your wealth. Investing for the future is not a short term stint - specifically, System 12 can run continuously for years, so one should plan for a long haul. Even when it's in cash, you should keep an eye on Mega Dozen to make sure not to miss a good opportunity.

With rare exceptions, all orders are entered on-stop, with buy stop being above current price and sell stop below. This allows to calculate precisely how many shares to buy, at what price to sell, and lets an investor to go about a day as usual, while Market keeps working. All positions are equal Standard size of about $3000 for minimum required $40,000 portfolio, or scale up accordingly for larger account. Do not do it with less money!

Positioning Period (PP)
All trades are done during Positioning Period (PP) of 5 trading days after and including day when trade signal is generated. Trade trigger is a Simple 50 day moving average. For a 'BUY Signal', price has to close a day above 50dma, buy stop order will have to be placed few ticks above the high of that signal day and adjusted as necessary until caught or cancelled. At the end of day 5, stock has to be purchased no matter what, since Positioning Period (PP) has elapsed. This allows certain flexibility to consider market conditions, account for gaps, and use common sense in general. OTOH, if you missed a day here or there portfolio will not suffer any major damage anyway. In fact, sometimes it's better to wait a day or two. Once bought, stock can not be sold for 5 trading days (1PP).

For a 'SELL Signal', price has to close a day below 50dma, sell stop order to be placed few ticks below the low of signal day, with the same PP stipulations as above. If, during PP, stock rallies and touches 50dma then PP gets restarted and stop needs to be adjusted accordingly. When stock is sold, it becomes UN-Available for next 5 days (1 Positioning Period). If, after 1PP has elapsed, stock is back above 50dma - then it becomes Available for purchase again and has to be bought within 1PP, following 'BUY Signal' management. This constitutes an effective Re-Entry procedure, designed to keep money invested into best stocks continuously, notwithstanding an occasional whip-saw.

The whole reason for Positioning Period is a dubious nature of the Moving Average. I am not claiming that 50dma is some magic unbreakable line, nor saying that 50 period average is somehow superior to 45 or 55, or whatever number. It's just an imaginary line that means completely nothing, except for one characteristic - price has to rally in order to stay above it. Mathematically, it can not be any other way. 50 period is something that I found universally fitting and readily available from multiple chart vendors (including my favorite), but certain discretion needs to be applied to its usage. I don't take 50dma as a specific price, but rather as an area, also considering nearby support and resistance. Since 50dma trigger line is more like a 1% ribbon around it, more time is needed to make a rational decision. By trial and error I devised that 5 day period is more than enough, giving the market a whole week to sort itself out. This approach provides a narrow band of time and space for a careful trader to exploit, with hope that some little blip on a chart wont throw a trade off.

Most trades of System12 are set on day 1, but sometimes a normal price action can bring stock to an area where sell order has to be executed, if rules are followed mechanically. In this case normal sell rules can be 'By-Passed' for up to 1PP, giving a trader whole 10 days to observe price action. Another instance where I found 'By-Pass' beneficial is when stock gaps below 50dma, but doesn't follow down. A sell stop order can be trailed up, while price recovers, and as long as stock advances or consolidates PP can be extended in 'By-Pass' conditions.

In a situation when whole market gets affected by some extraordinary development and stocks collapse thru the floorboards, 'By-Pass' can offer some respite, but generally will only prolong the pain and deepen the losses. With this in mind, portfolio is allowed 1 'By-Pass' per 6 positions, or maximum 2 for a fully loaded System12 at any time. Indeed, I rarely use 'by-pass' as I personally prefer not to use my own opinion, and just follow the rules - that's what they are there for.

Emergency Exit
If stock gaps down below 50dma and under any meaningful nearby horizontal support, and causes position to lose 10% or more - sell this stock at the market and not think twice about it. If there is any doubt, then it is not a true 'Emergency Exit' (EE). This condition is rare and very painful, but can not be helped... hence the name. In a previous run of System 12 (that lasted over a year) EE happened only once.

To illustrate these Trade Management issues I offer some recent examples:
XOM closed below 50dma on July 27. Set stop just under days low at 89.80. Stop filled next day on the open, successfully exiting a trade from February 4, for 16% profit in less than half a year.
GE is consolidating sideways in vicinity of 50dma. Even if stock price doesn't touch the moving average for 5 days, it's still isn't falling - so a 'by-pass' condition can be used, as long as GE stays above 30.80 or so. This situation needs to be re-evaluated daily!
KO in this example doesn't really qualify for 'Emergency Exit', but this is what EE roughly looks like.

In order to assist any inquiring minds, I will have real time updates on positions and trades of System12 at private Twitter handle @SWID_iBergamot, as soon as all supporting materials are published in this space. I want to touch on risk and performance next week, followed by unveiling of System 12 running in simulation, with my notes on how to start trading a working system. The whole process is very simple to manage, especially looking over my shoulder, I believe that in a short period of time a trader can get a handle on it ;-)
.this is a third article in 'System 12' series.
Read Part 1: System 12. American MegaDozen. Introduction.
Read Part 2: System 12. Portfolio Construction and Rules
-reading part 3-
Read Part 4:  System 12. Performance and Risk
Read Part 5:  System 12. Portfolio Initiation

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