System Summary
A short to midterm trading strategy that seeks
to buy large caps stocks that are making new
highs and exhibiting price action that is
outside what can be considered a “Normal
Range” based on a weekly chart..
Description
• The elegance of RLCO is that it applies to any time frame,
and the same lens in one time frame may be used to
identify the opportunity while a shorter term lens can be
used to manage the trade. I view all of the trades in my
shorter term accounts through a RLCO/SQC Lens. An in
depth discussion of RLCO may be found in Mastermind
Basecap Projects. RLCO uses the Regression Line Cross
Over to identify trends, and SQC identifies breakouts. The
system identifies breakouts of stocks using Bollinger Bands
set at 1standard deviation of the previous 30 periods so as
to be statistically significant. During this period, stocks
were selected from target indicies which included the
NASDAQ 100, THE S&P 500, and the Russell 1000.
General Comments
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This system was developed as an extension of the original work done by Dr. Ken
Long and the Regression Line Cross Over System.
The original thesis was that the RLCO Concepts could be adapted across multiple
time frames, and could be used for swing trading as well as longer term trend
following systems.
The rules developed here are rules that are;
– Simple – Yet provide a degree of flexibility
– Can be executed entirely when the market is closed using condition orders
– Facilitates non emotional responses because the decisions are made when the market is
closed.
– Can be modified to fit the personality of the trader
– Stresses Money Management techniques that:
• Encourage the trader to exit losing trades quickly
– 1R is an expression of maximum risk – Not a design goal
• Encourage the trader to exit non-productive trades quickly
– Non Productive trades tie up capital that can be used somewhere else
• Encourage the trader to be bold when the system is working well, and to be
cautious when it is not.
Why RLCO
Unambiguous in any timeframe – This trade looks pretty good from across
the room…..
Inspiration/Background
• As part of the RLCO ®EVOLUTION – How well would RLCO work as a Longer Term Trading
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System – Swing and Beyond
Background: Initial back testing used a Worden product called Stockfinder to conduct
rudimentary backtests on how well a RLCO weekly system might work. (I view this as a “same
way same day” backtest to see if it warrants further interest).
Tested the S&P 500, NAS 100, the DJ30, the Mid Caps and the Small Caps over the period
1/1/2002 through 1/13/2013.
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Entry criteria was go long when the weekly bar crossed above the BB top, exit when the weekly bar
closed below the BB top. Additional Stop Loss of 4%. (1Weekly ATR)
• Win rates ranged from a low of 72% for the DJ-30 up to 76% for the small caps.
• Avg Win is 3X the Avg Loss, with an overall system expectancy ranging from .86R on the Dow to
1.63 on the Small Caps.
• Average winning trade lasts about 3.5weeks while the average loser is about a week and a half.
Calendar Days
• The total number of trades was 52523, although some are duplicates based on index
membership.
• No allowances made for pyramid positions or conversions of stops from hard to trail. There
were no heat restrictions and every trade is taken.
Logic, concepts, definitions
– A short to midterm trading strategy that seeks to buy large cap stocks that are making new
highs and exhibiting price action that is outside what can be considered a “Normal Range”
based on a weekly chart.
– Normal Range is defined as one standard deviation of the price action over the past 30 weeks
– In this system, a target becomes eligible when the current close is outside the previously
defined normal range on a weekly chart.
– We want to buy strength. We prefer targets that are gathering momentum and that will fuel
collective greed as the price action moves higher out of its normal range.
– The system uses the weekly chart as the “eligibility” chart and the daily chart as the “decision”
chart. Trades are entered when the price action of the daily chart is taking out the highs of
the weekly chart.
– The most important belief in this strategy is that the price can continue to rise outside of the
statistically defined normal range. It behaves this way out of greed, herd behavior, and the
desire to not be left behind. This belief is tempered with the knowledge that the trade will be
exited at the first sign the price action may be returning to its’ normal range.
– The entry is not critical. Normally there will be multiple opportunities to enter once the trade
is eligible. While it is certainly desirable to enter as early in the trend as possible, exits and
trade management are key to trading this system successfully.
– Initial Stop – 1 Weekly Average True Range
Logic, concepts, definitions
– Efficient Stock : An equity that is trending in an efficient manner. We define
efficient as a stock whose ADX is above 20, whose price action is rising steadily
and is generally touching or near touching the 20 period linear regression line
on each successive day.
– Portfolio heat: The total amount or capital at risk based upon current
positions and stops.
– Available Portfolio Heat: The total heat minus the total heat associated with
any negative position
– The risk reward ratio based on current resistance levels is greater than 3:1.
– When this trade works it typically works quickly. When it does not work, the
same is true. Exiting quickly makes subsequent re-entry much easier
– If the trade hasn’t worked after five trading days, it probably won’t. Many
times, an equity will continue in a consolidation phase for sometime before
breaking out either high or low. Staying in the trade during consolidation
hoping for the breakout is a misuse of equity. Exit with a small profit or loss,
re-enter when it’s appropriate. Consider plus or minus .2R as an exit target. If
it is still at that level after five days, exit.
Trading Targets
• Primarily Large Cap Stocks
– S&P 500
– Russell 1000
– NASDAQ 100
Historical Performance
Live trades were conducted 4 January 2013 – 31 Dec 2013
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Number of Trades 329
Winners 175 - Average Winner .91R
Losers 148 – Average Loser - .55R
Scratch – 6
Expectancy per trade .24R
Standard Deviation of Completed Trades 1.02
System SQN 100 = 2.35 SQN = 5.57
Max Drawdown 10%
Total R = 79
Commissions expressed as R = 7.8R
Margin Interest expressed as R = 9.2R
Net = 62R
Normalized as 1% of the average
account balance for the trading
period
Entry rules
• Trades are identified using the weekly RLCO charts and are
managed using the daily RLCO charts:
• Rules:
– Price closes above BB (30,1)on a weekly chart. Stock is eligible
to trade
– Enter on a positive day when the previous close is above the BB
top and the open is above the previous close.
• Doesn’t have to be the first day – it can be any day conditions exist
– Risk Reward Ratio is 3:1 based on Overhead Resistance
– Set a hard stop of one weekly ATR.
– Exit the trade when the stock closes below the upper BB
boundary on a weekly chart, when the stop is hit, or
discretionary exit for poor performance.
• Stops are adjusted according to trade management rules
Exit rules
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Always let the market take you out of the trade (Exception is 3%/3R/50%) or
discretionary exit based on non performance
Never expose more than 1R of risk based on initial risk
First Stop is a hard stop based on 1 Weekly ATR, then change to trail it at ½ R Profit
Add to a position only after 1R is achieved, and only in ½ R increments.
General Rules for stop adjustments – Rules are based on the aggregate position
(initial plus add): Hard Rule 1R exposure based on most recent trade entry
– ½ R – Hard stop to Trailing Stop – Original R Amount
– 1R Continue – Add if appropriate (1/2 Initial R amount)- Good Momentum – efficient
stock - trader judgment
– 2R Change stop from Weekly ATR to 1.5 Daily ATR (2R based on initial R amount)
– 3R – Scale position back to 1R open profit with a weekly ATR trailing stop (start cycle
over) (3R based on Current R Amount) This allows a winning position to run but ensures
that no single position becomes overbalanced in the account.
– When a position open profit reaches 3% of account value, reduce the position to 1R
open profit.
– If a single position accounts for 50% of the entire open profits, reduce that position to
1R open profit
Position sizing rules
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Position size uses .05% to 1.25% of the account equity plus an adjustment for market money
based on core equity .
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Core equity is defined at the beginning of the month and is based upon trader discretion. Once it is
defined it is the equity reference point for the rest of the month. Core equity may be adjusted up
during the month if the account size increases 15% or more. It may not be adjusted down
Market Money is defined as the difference between core equity and current account value. Market
Money can be positive or negative and is defined as any amount greater than core equity, or
less than core equity.
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During periods of gains, market money increases position size and during periods
of losses, the negative market money figure reduces the position size. Max Position
size for swing trades is 1% of acct value plus 10% of market money value.
– (Example: Core equity =$50K, current account value =$52K, market money = +$2K.
Position size will then be 1% of account equity ie $520+ 10% of market money $200 for a
total position size of $720.) (Example 2 Core equity = $50K, current account value =
$48K, Position size = 1% account equity $480 + 10% market money ie $50K – 48K = -2K
x10% = -$200) = Total position size of $280.
• If losses persist, the system will reduce the position size to zero forcing a trading
ban at a loss figure of about 8-10% core equity
• Minimum position size is .5R. Stop trading if market money drives position size
below 0.
Margin/Money Management Rules
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Core Equity: The equity you define as the “floor” of the portfolio. This is the amount that will cause you to reduce
your position size if it is violated. It can be adjusted on a regular basis – weekly, monthly, semi annually at trader
discretion. It is an personal number established by the trader based upon individual beliefs and risk tolerance.
The system performs well at a maximum portfolio heat of 12%. Portfolio heat is the total amount or capital at risk
based upon current positions and stops.
Available Portfolio Heat: Available Portfolio Heat is the total heat minus the total heat associated with any negative
position. Example: Using a 1% position size, Let’ you have 7 open positions and 3 of them are currently negative,
your total available portfolio heat would be 9% minus the existing heat of the 4 remaining positions.
Market Money: This is normally a portion of money/profit beyond core equity that the trader is willing to risk. It is
meant to increase position size during times when the system is working well. There are many formulas for increased
position size, but normally a trader will risk an additional percentage of market money in addition to the core position
size. Example: A trader has determined that her core equity is $50000. She determines that in addition to a 1%
normal position size, she will risk 10% of the market money per trade. Her account has grown to $53000. She would
risk 1% x $53000=$530, plus 10% of market money which is 10% x (53000-50000)=$300, for a total position size of
$830 ($530+$300).
Negative Market Money: This is defined as the amount of money below core equity which will cause the trader to
reduce position size. This method will force the trader to reduce risk and the use of margin. Using the same example
as above; Our trader has $50000 Core equity and 10% market money. She finds that her account has fallen to
$48000. Her position size would be 1% x $48000=$480 plus 10% market money which is 10% x ($50000-$48000)= $200. Position size =$480-$200=$280. If equity continues to fall, market negative market money will exceed 1% core
equity and this is a signal to stop trading. I have a rule that says position size will not be less than .05%. When
negative market money has driven the position size below .05% but>0, I use .05%. If the market money mandated
position size falls below zero, stop trading and examine your system, rules, market type and psychology. Adjust core
equity and resume trading only when you are confident you understand you system’s drawdown.
How to start the system from cash
Paper trade this for 3 months or until you are
comfortable with the number and type of signals
you receive, and that you are comfortable that
you can respond to the signals and set the
buy/sell orders and trailing stops. Consider
trading at a reduced equity size with real money
at a deep discount broker in order to build
confidence and professionalism with real money
before increasing size.
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Set-up samples - COP
MO
ACC
RNR
KR
ESS
ESS
SNDK
POM
VLO
DPS
Closed trades– The Biggest Loser
Two Mistakes 4R
Loss
SPLS
EA
CSE
GME
ALSN
2nd biggest losing trade
AWAY
3rd biggest loser Required
discretionary exit
IBKR
Psychology Test
Did you laugh or cry??
Final Thoughts/Lessons Learned
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The entries in this system don’t need to be precise to be effective. Exits Do!
Earnings dates can be toxic. Make sure you are out five days prior – Post earnings are not so bad, but consider a choice not
to trade the gaps that are a result of an earnings beat as they tend to “RTM” or flat line.
Keep the money real. Consider paying yourself – As an example, any day the account makes more than 1%, you could pay
yourself 50% of the difference between 1% and total profit. Ex 1% = $500 Profit= $800, ½ the difference ($300) transfers
out of the account.
Looking at charts every day is important – It trains your inner voice
1R is not a design goal. Get out as soon as you see the trade is not working. Consider choosing a discretionary exit such as
-.5R. 1R exits are typically gaps
The faster you get out the easier it is to get back in – it minimizes the psychological baggage
Don’t hedge within a market type
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A hedge technique was tested that put on a hedge when the daily and weekly charts fell back into the river - and got whacked
each time. Wait for the signal that the market has changed
The system will tell you when its time to stop trading (no eligible set ups) – Listen to it.
Scale in quickly when the trade is moving, but consider keeping your open exposure less than 1R. (A technique would be
to scale in 1/2R increments, and do not scale in more than twice).
Have a profit taking target, but stay in the game. When the trade profit exceeds ____% of account value, or 50% of total
profit, scale it back to initial position size and start over.(I used 3% and 50%, but will go to 5% and 50% in 2014).
If you are trading on margin, make sure you have a money management system that manages the margin exposure.
Learning Journal
The A HA Moment
What I think
about/how does it
connect
What will do about Results
it
RLCOW needs a
mechanism to
followup on closed
trades for additional
opportunities. Why
not use existing
swing systems that
capitalize on
temporary
weakness.
What would I be
comfortable with
and what can I
believe in.
Review closed
trades from 2013
and 2014 and see
how many times
Core Turbo
Principles apply to
this system
A sensible,
professional way to
utilize day trading
buying power
Develop a ruleset
and trade a reduced
position size as
proof of concept