The Varieties of Trading Experience

Nine (9) years ago when I started trading the “mean reversion” strategies that I use today, I was very unfamiliar with them, and they seemed awkward. Today I call this methodology “Reversion to the Trend” — and not only has it become second nature, it has consistently made me solid profits, trade after trade, month after month, year after year, for over 700 trades posted publicly. 

The reason this approach to trading can seem awkward is that so many of us are used to other ways of trading. So let me outline several typical trading strategies, and contrast what I am doing.

(And by the way, this is not some “bright idea” I personally dreamed up one late night. The basic approach, tested systematically and exhaustively, was originated by Larry Connors, famed hedge fund manager and system developer.)

In ancient times we used to contrast two ways of investing: Fundamental and Technical. Fundamental investing, for the longer term, involved detailed analysis of individual companies and their financial prospects. Technical trading relied on charts of the price movement itself, rather than inferences about future price based on “fundamentals”.

“Swing Trading” is a Technical approach to trading for short-term “swings” in a stock or ETF based on what its price chart tells us. It is an approach which fits my personal disposition and attention span.

So now we know I am not a Fundamental trader, and I am not a long-term (or even intermediate-term) trader. My typical holding time is 5 days. The rest of the time I’m safe in cash.

But there are several quite different styles of Swing Trading. As I mentioned I do something I would describe as “Reversion to the Trend.” So let’s look briefly at the other, perhaps more familiar, approaches to short-term trading.

“Trend Following” is a tried and true method of identifying large trends in an equity’s price, and hopping on that trend and holding on for what is hopefully a long ride. The “Turtle Traders” were a famous example of this approach. But it involves many false starts (and small losses) before one of these trends is discovered. How many veins of gold must the prospector try, before he finds the one that goes on “forever”?

“Breakout” trading involves finding a stock with solid momentum, which begins to pause and build a sideways base — and then jumping on it when it breaks out from that base. If you’ve picked the right stock, then a great deal of momentum has built up in the stock while it was building its strength — and you grab onto the tiger as it escapes its cage, and hold on for dear life. This requires patience, but can result in double digit percentage returns. (Morpheus employs a version of this kind of strategy in a very thoughtful manner.) The infamous “cup and handle” formation is an oft referenced example of such a setup.

But imagine you are impatient. That you have a temperament that drives you to only be satisfied with the sweetest part of a stock or ETF’s move.

Rather than build positions in a number of equities and patiently waiting for them to breakout into a strong profit, I prefer to make small percentage profits on trades that end up in the green 90% of the time. It’s what has been called “high probability” trading.

And generally I am dealing with an ETF that has a general directional trend going, and has briefly pulled back from that trend. I jump on this pullback and hold on for the 5 days or so it takes to “rubber band” back to its ongoing trend. Then in a whisker I take my profit and am off in search of my next victim.

And with “inverse” ETFs we can profitably trade when the market (or an individual ETF) is moving down as well. (And with leveraged ETFs we can multiply our dollar profit.)

Of course, buying something “on the pullback” is an approach we hear about all the time. But instead of doing this based on “feel” I am selecting and executing these pullback maneuvers in a very precise, rule driven, and hence repeatable fashion.

And to increase my win rate (which I’ve maintained at over 90% since August, 2011) I use a well-tested, very methodical strategy of “averaging down” — progressively building trades, rather than jumping in all at once.

All this results in a very focused trading approach, where I am only in 2-3 trades at a time, to which I commit a large position in my portfolio. This requires a very well-honed selection process, and careful trade management once positions are established.

But I have made this winning methodology dead simple to follow. An hour before the market closes I put out a Final Trade email with the trades I am taking (or selling or holding) that day. I do my trades with Market on Close orders, to simplify the ETF trading process. It could not be easier to do.

And if you have a smaller account that requires exceptional performance, I put out OPTIONS trade versions for many of these ETF setups. So far this year, I’ve won every option trade since the first week of 2017 — that’s 21 options trades averaging over 20% profit per trade. (No, I don’t win every option trade, but I do consistently win over 85% of them.)

Do you think you could make money with an approach that has been fine tuned over 8 years of trading to consistently yield the kind of outstanding results discussed above? I’ve reached the point where I can support myself by my trading. Maybe this is something that would work for you.