How do I get started? 

You’ll need to have a brokerage account or retirement account where you can  place orders. If you are trading in a retirement account, remember that you cannot take short positions. And, when you hedge your positions in the Stock Timing program, we suggest that you use the ETF SDS (the double-leveraged inverse SPY), so that instead of selling short SPY, you’ll be buying ½ the position in SDS.

Each morning you’ll get a link to the website logon page. After you log in, go to the Daily Portfolio Reports tab and download the zip file for the group(s) you subscribe to. Each group contains All Signals reports (separated for stocks, ETFs, and futures) giving trading signals for all markets, both longs and shorts. It will also contain the sample portfolios. The file names describe the content. For example:

  • G1 Trend Stocks Orders All 20140122.csv (Listing of all stock trading signals in alphabetic order)
  • G1 Trend ETFs Orders 10 20140122.csv (Sample portfolio of 10 ETFs)
  • G3 Timing Stocks Orders 30 20140122.csv (Sample portfolio of 30 stocks)
  • G5 Divergence Futures Orders 500K 20140122.csv (Sample portfolio of futures for a $500,000 investment)

Files should be opened using Excel. The date on the file represents the last closing price processed. Trading signals are  generated based on the previous closing prices but are executed the following morning when the markets open.

We suggest that you use a price-limit order because the opening range can be quite large. With a small amount of practice, you should be able to beat the previous closing price and improve your results. You’ll only need to trade once each day, and not at all if the positions in the portfolio don’t change.

On the first day, we recommend getting into all the stocks in the portfolio you choose. We can’t know if this is a good or bad time to enter, but overall the programs are more likely to be successful on any one day. You may prefer to enter only new trades, and build to a full portfolio.

Trading specific stocks. The All Orders reports will give you the trading signals on all the stocks, ETFs, or Futures, that we follow in that group, so you can create your own portfolio for the program you choose. The position size will always be based on the a constant dollar investment in each stock or ETF, so dividing or multiplying all positions sizes by the same value will keep the risk the same. For futures, the position size can simply be scaled to your actual investment size.
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Can I start small?   

It’s always best to start small. It will help you get used to the way signals are generated, how to enter the orders, and the size of the profits and losses. Because the stock market allows you to trade any size position, you can change the nominal investment size for each stock from the current range of $5000 to $10,000 to as low as $500.

You can start with

  • The Trend program for 10 stocks but reduce the investment per market from $10,000 to $5,000, making the total investment $50,000. The Trend program does not trade often; therefore, the commission costs will not make a significant impact on the performance.
  • The Timing Sector Rotation ETF portfolio, which trades only 5 SPDR ETFs, the most liquid of the ETFs. Reduce the investment from $10,000 to $7,500, making the total investment $37,500. This program trades more often than the Trend program, so a larger investment will reduce the impact of costs.

You will need to remember to calculate your own position size each time there is a new trade. Instructions are at the top of each Order sheet.
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Can I trade just one contract of the SP mini or 5-year notes?

You can, but you shouldn’t. Trading one market offers no diversification and can be very risky. It’s always best to find 3 or 4 markets from different sectors to avoid too much similar price movement. You can find those markets by looking at the performance available in the NAV Tables (accessed from the “How It All Works” page) and comparing price movement. Or finding the daily returns from the NAVs using r =
NAV(t)/NAV(t-1) – 1, then using the correlation function in Excel, CORREL. Any correlation over 0.70 is too high. You’ll want correlations less than 0.50 and preferably under 0.30.
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What time do I place my orders?

All orders are expected to be placed at the open of trading the next day. For stocks and ETFs that’s 9:30 AM in New York. If you’re outside the U.S. then check the time because we switch the clock forward and backward in the Spring and Fall. For futures markets the times vary with the exchange. U.S. futures markets, mostly listed on the Chicago Mercantile Exchange (CME) open between 8:20 (for interest rates) and 10:30 for energy. Market hours and holiday schedules are always posted on the exchange website.

Orders can be placed in advance for execution on the open. Our experience is that, if the market is indicated higher, we place our sell orders first shortly after the open, then wait 15 to 30  minutes to place the buy orders, hopefully, on a pullback. We do the opposite if the prices are indicated lower. We always execute within 30 minutes of the open to avoid missing the trade and to get on with our other business of the day.
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Can I wait for a pullback to enter buy orders?

Stocks and ETFs are very noisy, and often give you a chance to enter at a better price. But there are times when the stock opens higher and never looks back. We’ve figured out that the 3 of 4 times we can get a small improvement in our fill does not offset the larger “loss” from missing a trade or getting in late on a strong day. Give yourself 15 to 30 minutes to improve your fill (better than the opening price), then execute anyway. You can’t afford to miss the trade.
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Is there a “good” or “bad” time to start trading the strategy?

No, unfortunately, we don’t know anyone that’s figured that out. If so, we would probably be able to trade only during the good times. Each of the trading programs has a history of good returns, so entering at any time should be fine. Even during the internet bubble of the 1990s we might not have entered longs  after 1997 and watched the prices go higher for three more years. And, if we’re in a bear market, we don’t want to wait until we’re sure that prices have turned bullish. By then we’ve missed a good deal of the profits.
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How do we decide the position size?

For stocks, we simply divide a fixed amount, usually $5,000 or $10,000, by the stock price to determine the number of shares. A better way would be to divide the $5,000 by the 20-day stock volatility as we do in futures, so that each stock has the same risk. But then we would always have smaller positions in the more volatile stocks and most often we would not be using all the investment that is available. That means the returns will be smaller. We have decided that higher returns are more desirable. Because higher priced stocks are generally more volatile than lower priced stocks, we still get some degree of risk equalization and good diversification.

For futures markets, which allow a high degree of leverage, we volatility-adjust the position sizes, so that every trade is expected to have equal risk. We then risk-adjust at the sector level and finally target a specific level of risk for the recommended portfolios. This multi-level process is intended to maximize diversification and minimize risk.
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What about stops? 

Stops are important for many different strategies, but for some methods they fight with the underlying concept. For example, in our Timing program, we use a crisis stop based on a drop in value from our entry. However, we use natural stops in the Divergence and Trend programs because a change in pattern or a reversal in the trend takes us out of the market.

Long-term trends need to capture profits from extremely long price moves, called the fat tail, in order to succeed over time. If you get stopped out while the trend is still intact, then you can miss the biggest profits and severely reduce your chance of success. If you get out on a stop then you need a way to reenter if you want to get back in. Our experience and research show that getting in and out of a trade is rarely as good as just staying in until the trend changes.

Most programs use a natural stop. For example, the Divergence program enters at a turning point in prices, when the direction of the price move conflicts with its momentum. If we are right or wrong about the position, the price and momentum will move in the same direction within a few days and the program will exit. The exit is consistent with the underlying strategy and we have not found that setting a stop loss can improve results.
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What are the range of drawdowns that I can expect?

Each program is different. The exact history (simulated) of performance, including drawdowns, can be seen for each market in the NAV History Tables, accessed from the “How It All Works Page.” In general, drawdowns in portfolios of stocks and ETFs have been significantly less than the benchmark index, SPY. There are no specific risk management tools in the stock and ETF programs, except for the extreme 15% stop-loss in the Timing Program, so we only have the history of returns to go by.

Futures programs are handled differently. Because we can manage the leverage, we target a risk of 14% annualized. That’s the same as one standard deviation of the returns (annualized) equal to 14%. For those comfortable with probability, it means that there is a 16% chance (the left tail) of losing 14% in any one year. That’s actually far lower than the risk of the stock market, but year-to-year performance can be very different and futures programs have an effective leverage of about 12:1, which means the chance of high returns will always have larger risk.
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How long are we in the market?

The number of days we hold a trade is different for each trading program. The Timing and Divergence programs are short-term, generally holding a position from 5 to 10 days. The Trend program holds trades much longer, trying to capture the “fat tail.” But the Trend program scales into and out of positions as the trend becomes stronger or weaker, so the length of trade can only be judged from the first entry of a long position to the full exit of that long. It can be anywhere from 1 week to 3 months, sometimes longer.
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The Trend program is expected to have many small losses and a few large gains. Can you be more specific?

Most long-term trend systems have about one profit in three trades, and the size of those profits vary considerably. They also may have a series of small losses if the prices are meandering sideways. However, some of the trades have very large profits, such as the extremely long bull market in interest rates. Overall, the size of the profits should be more than 2.5 times the average loss, to make up for only having one profit in three.
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