SP500 Volatilty Study: Price Closes Below Weekly Bollinger Band (20 week, 2 stddev)

2014.07.30[12.35.33]_$SPX - ProphetCharts®


  • 20 week lookback or 100 day lookback
  • 2 standard deviations below 20 week period simple moving average

Currently the SP500 has completed 540 consecutive closes above it’s 2 standard deviation, 100 day lookback bollinger band.

How does that rank?
Going back to 1950, the streaks of consecutive closes above the volatility inputs are:

  1. 797 days ending Wed, 11-21-1956
  2. 659 days ending Wed, 6-09-1965
  3. 553 days ending Mon, 1-22-1990
  4. Current streak
  5. 519 days, ending Fri, 08-14-1998

Process Rundown: Risk Taking 101 Though A Recent Trade In WDC

It was a Saturday afternoon. It was hot but still early, and I was enjoying the company of good friends and family over tacos and drinks in Inman park in Atlanta.
Talk came to work and a good friend asked me what stocks I own.

Now I know she had some interest but was mostly being polite, so best to give a short and sweet answer then move on. I explained that I liked Western Digital now but mostly went though the disclaimer that I usually cycle in and out of different names to seek a higher rate of return.

Her next question: “You don’t day-trade do you?”

Given her tone, any answer other than “No, of course I don’t day trade” was the wrong answer.
In attempting to answer her accurately but still keep it short and sweet I realized I had found myself in a difficult spot. That exchange got me thinking about how to lay out how I take risk. The following isn’t everything, but there’s enough detail for the casual reader to wrap their head around some basic risk/reward concepts from my viewpoint.

  •  At the core of what I do and how I think is risk, or in terms of risk.  I try to make the most money in the financial markets by risking the least amount of money I can.  This should make sense.  I’d rather make $100 than $65, and much rather lose $20 than $200.
  • At the same time it’s not about taking long shots.  Some people think, “Well if I this penny stock goes to just $5 then I’ll make a fortune! Therefore it’s a smart bet“.The further you extrapolate that notion the closer you are to buying a lottery ticket.  The difference is entertainment versus investing.
  • Here’s and example that may seem strange at first.  Sometimes I  would rather risk $1,000 to make $500, than risk $500 to make $1,000 if my probability of success varies enough between the two propositions. If my odds of success in risking the $500 to make $1000 are 40%, then over time I will net an average of $100 in that situation.
    If my odds of success in risking the $1000 to make $500 are 75%, then over time I will net an average of $125 in that situation.

    Risk Win Need to be Right to Breakeven
    $1,000 $500 66.67%
    ResultA (lose) ResultB (win)
    -$1,000 $500
    p(a) p(b) EV
    25% 75% $125
    Risk Win Need to be Right to Breakeven
    $500 $1,000 33.33%
    ResultA ResultB
    -$500 $1,000
    p(a) p(b) EV
    60% 40% $100
  • With some understanding of how to think about risk and reward  it’s time for the market is like an ocean simile. Often times the comparison is made between the market and the ocean and it’s a good one.  In this comparison individual stocks like WDC are boats and the general market is the ocean.
    There are high tides, low tides, violent storms, and days where the water is almost still.  The strongest stocks can get smashed on the rocks during violent market declines.   Rising tides lift all boats. Conversely when the waters are turbulent some boats may fare much better than others.  It’s important to have a feel for the weather and just how far from shore you are before putting any more money at risk.  The weather is always subject to change.
  • With that said Western Digital was one of those boats that was looking sturdier and sturdier as time passed.  Assuming it makes sense within the big picture to buy that stock, how then to go about it?
  • Here’s what I was seeing
  • From there I choose how much  of my capital to risk which is where day trading comes into the conversation.
  • In this example I’m betting WDC is going to have a sustained up move over the next couple of weeks.  That is not a day trade and I risked 1.5% of my capital.  However while I watch the stock market during the day I may see a spot a sudden drop in WDC which I believe to be a very short term opportunity.  This leads us into a separate bet based on the larger thesis that WDC is strong.
  • Assuming this “drop in WDC” scenario happens, I may enter into a day trade where I risk only 1/10 of a percent of my capital.  I would buy the stock during the day at prices I liked, and either lose my 1/10th percent or come out ahead.
  • To compare the levels of risk in the big picture trade vs the day trade:
    Big picture bet = 150 basis points or 1.5%
    Day trade bet = 10 basis points or 0.1%
    I am risking 15 times less in the day trade.
  • The takeaway is that day trades don’t account for a large portion of risk, and only supplement my returns while I actively manage the stocks in my portfolio.  All in all the revenue from my day trades are less than 20% of my gross income.  They could be much more but that’s how I choose to risk my capital.
  • I risk far less on day trades for a reason.  A a prosecutor builds a case against the defense with evidence, and I build a case on my idea before taking on risk.
    The heavier the evidence the more risk I might take on and there usually just isn’t that much evidence to justify taking on large risks on a day trade.
  • An investor with all the smarts and foresight in the world can still find themselves broke if they stick their neck out too far too fast.  Growing an account always boils down to managing risk well.

The Things I’ve Learned From 5 Years of Trading

This post isn’t a one and done. It will start messy, and may finish that way but I will constantly update and try to organize what I write here.

  • Filed under: Advice to Ambitious Beginners
    • Almost all indicators are derivatives of price and volume.  The more time you spend learning how to read some indicator (e.g. RSI, MACD, etc) is time wasted that you could have been learning the subtleties of price and volume.  In the end, price and the bid/ask are all that will matter.
    • Trading is about survival.  Especially in the early months and years.  Count on the money being gone when the trade is over.  Plan on it.  There are so many opportunities that come around over and over.  Risking <1/2% per trade is a good way to start .  Trust me it’s so much better and easier to start small and finish big than the other way around.  You will constantly improve over time.  It is logical to risk the least when you are the least skilled.
    • Find a mentor
    • Be wary of paying for systems or anything. Traders who advertise big winners and almost no losers are part of the “fuel the big easy money” mindset that will turn your pockets inside out. Learning to trade well takes YEARS of practice and experience.
    • If you have a $10,000 or whatever sized account and think you are going to be able to return 300%, 200%, or even 100% every year that would make you one of the best in the world. Aim realistically
    • If you are fading moves or trying to catch them watching how volume is expanding or contracting with price is a very significant part of the puzzle.  Don’t neglect to watch the volume bars.  They are the second most important indicator.  Some might argue the most important.
  • Filed under: Small Time-frames 
    • Day trading is difficult.  Why?  The smaller the time-frame you trade on the less room for error.  Thus swing trading using daily charts you will have a much wider risk range than trading off a 5 minute chart.-This leads into the way price behaves.  If you see the same pattern on a 5 minute chart as on a daily chart and that pattern seems to lead to a bullish move 85% of the time then do you have the same edge on the 5 minute as on the daily? No you do not.
      Think of all the participants, shares, and contracts that have gone off the create the daily pattern vs the number on the 5 minute pattern.  They are similar but there’s simply less of a case being made on the 5 minute pattern.
  • Filed under: Human Behavior

    • Know thyself.
    • I could start writing out a bunch of bullets like “Don’t revenge trade or try to get even”, which is true but this is common sense.  Falling prey to this habit is a matter of personal weakness.  I’ve had to deal with this and there are so very many personal pitfalls in the world of trading that you will be bound to experience many of them. Trading is very personal performance journey where mistakes will be made. Hindsight will make those mistakes obvious and yet you will probably repeat them again. In the end it will be about finding a way to catch yourself from being the weak emotional being your are before mistakes take away capital.
      Easier said than done.
    • Have a plan. You need to have a plan for how you manage your account, how you are going to manage this trade, your day, what your short term goals are, what your long term goals are and so on.  What’s the end game about? What is today about?  Why this trade?  Playing it on the fly or kind of knowing what you are doing and getting away with it will always backfire on you.
  • Filed under: Risk and Reward
    • Manage risk.  Be obsessed with risk.
      Before you take on the trade figure out what you are comfortable losing on the trade.  From there you can calculate the size you want to put on (and should probably divide by two if you are new to trading).
      Seems simple but DO NOT assume the trade is going to work and DO NOT start figuring out how much you can make before realizing what you might lose.For example even now running the passive SPX strategy with covered calls I think to myself how much could I lose if I wake up tomorrow and the SP500 is down 20%
      Seriously I think of that and it comes into play with how I manage my own money.   Is it likely?  No of course not but in managing my own money I want to know every way I am exposed to the market taking it.  Anything can happen to anyone at anytime.
    • The idea of risking 1 to make 2 or 3 is great but it’s not the only way to make money.
      Risk $1 to make $3, you win 40% of the time.  EV is 0.6
      Risk $1 to make $2, you win 50% of the time.  EV is 0.5
      Risk $1 to make $1.5, you win 65% of the time.  EV is 0.625.
      Risk $1 to make $1, you win 80% of the time.  EV is 0.6.
      I’ve found the style that suits me best is to be right more often and accept worse payouts
  • ====================================================
    to be continued…