The Finance Book Club

Chapter 6 - Bargain Hunting Along the Edge
The Sitcom System

1. Daily charts
2. End of Day is 5pm ET NY close
3. Daily high is a boundary that buyers could not overcome
4. Daily low is a boundary that sellers could not overcome
5. You need:
   1. A trend
   2. A bargain day
   3. An S&R zone
   4. A profit target

6. Trend is determined with a 13-period smoothed moving average. When price is above it, trend is bullish, when below, bearish
7. Bargain days or pullback days are dips in a trend
   1. Defined as any day that closed against the trend
   2. Prefer ones that pull back closer to the MA
   3. Check S&R that may stop the pullback
   4. Wait for a double pullback
   5. Look for an even number above the high/low of a bargain day (eye rolling)

8. S&R
   1. Mark the high and low price and mark the high or low of the ‘turn’ candle
   2. The turn candle is the one immediately preceding the one that breaks out of a support or resistance zone (note the circular logic. You need the turn candle and the daily highs/lows to find the S&R zone, and to find the turn candle, you need the S&R zone)
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9. Stops above or below the buy and sell zone plus buffer of ‘10 to 15 pips’ (clearly ROK doesn’t like to measure volatility before picking numbers)
10. Profit target is the high or low of the prevailing trend. Basically it’s targeting the difference between the local high/low and the pullback distance.
    1. Must be 3x larger than the risk required by the stop-loss
    2. Otherwise do not trade
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“Discretion is required to trade support and resistance properly, and good judgment will come with time.” (blecch)

This almost seems testable, but then I start to attempt to mark buy and sell zones and there are a dozen considerations not mentioned in the book because it’s a discretionary system.

1. When price is above the MA there is almost never a consolidated range to trade short from and vice versa
2. Do we hold the trade if price switches sides of the MA?
3. This system gets destroyed in long-term ranges. What failsafe is in place to determine if we’re in a trend? Does the MA need to have a slope?
4. What do we do if there is never a ‘bargain day’ like in this trend?
   Attached Image (click to enlarge)

   
   

The first bargain day is actually the beginning of the end of the trend. Just don’t trade these? Seems inefficient. Especially as this is quite common.

For all these reasons I dislike this system, and I don’t think I can objectively test it. I do think dip-buying is a generally cromulent way to trade, but there are plenty of smart mechanical ways to do it that don’t require so much analysis, and don’t require guesswork.

Chapter 7 - Bargain Hunting with Price Action

1. ROK claims this is a more aggressive way of finding bargains that doesn’t wait for a trend to appear
2. Instead it uses the Hull Moving Average (HMA) (This used to be one of my favorites but I don’t bother with MAs anymore. ROK mentions ‘Active Investing’ but ‘Trade my Way is a more recent book that I’d like to review.)
3. “The days that move against the primary direction of price as defined by the HMA are considered countertrend days. Countertrend days are by definition bargain days because they offer bargain hunters a chance to buy into the dominant direction of price at a much better price.”
4. Place indi on chart and configure to 12, 16 or 20 depending on how many trades you wish to take
5. ROK prefers to use open prices of each candle instead of close prices
6. “Bargain days are defined as any daily or weekly candle that has closed against the direction of recent price action as depicted by the indicator and has closed beyond the indicator itself.”

Bargain days.
This seems like madness. You’ll be intentionally trading against the signals offered by the HMA. Not that they have any meaning anyway, but what’s the point of using it if you don’t think it anticipates trend changes?

1. The ‘best’ bargain days correspond with ‘obvious’ support and resistance

 

1. And finally, round numbers
2. Managing risk
   1. Stops placed beyond support and resistance

1. Manage the trade with
   1. Trailing stop (as per ch. 5)
   2. Target the prior high or low (like sitcom system)
   3. Use fib retracement ratios (61.8)

Ok, ok, is this testable?

Let’s review the steps

1. Identify a bargain day using an HMA or WMA and price action.
   1. HMA - yes. I relish the chance to remove ‘price action’ from the equation
   2. ROK’s website mentioned a ‘remora Hull Moving Average’ but as the site is down I can no longer download it and it’s not referenced anywhere else on Google. Did he make it up? I’ll just use mladen’s averages 9.1 with the HMA method set to 16 periods (the median value).
   3. Identify a support and resistance zone at which to enter the trade.
      1. Subjective but I’ll do my best?

      
      

   4. Identify a profit target.
      1. Ok, so I must decide between fib retracements or use the previous low/high?
      2. If the trend is real we should be able to get the previous low/high and get more profit and it’s less time consuming to calculate, right?
      3. Also I don’t believe price has anything to do with Fibs

Let’s try it on D1 GBPUSD again.

Ok, let’s consider this start-of-year trade.

1. The trend has been up lately. So I’m looking for a long.
2. I think I see support at the recent swing low.
3. I put my entry just below that support
4. I put my stop below the recent swing low (support, by definition)
5. I put my target at the prior swing high
6. Then there is a ‘bargain day candle’ as price closes beneath the MA (and it signals short)
7. There must be a round number in here somewhere?
8. Anyone care to critique this trade choice?
9. After all that cognitive effort I advance time to see how it turns out (fingers crossed)

I wait an agonizing 17 days and finally, something happens and it seems like my trade is going to win!

Oh boy oh boy!
But you know what they say. You want to make God laugh? Have a plan.
Also ask yourself, how much of what is happening now is dependent on the ‘bargain’ I found many days ago? The trade went lower so shouldn’t I have bought more to take advantage of the even better bargain? If you recall my trading journal adage. It’s not about entries, as much as it is about exits. And it’s not about exits as much as it is about re-entries. The most important part of trading is knowing how to get back into the market after exiting, if at all.



Drat! Ok, ok, trend-trading is psychologically difficult. I’ll just keep going.
Let’s see. Current trade is obviously down…

1. That’s a bargain day because it crossed above the HMA.
2. Hey this could be bouncing off ‘support’ as defined by my stop level? So is this really a short trade? But it’s a bargain day! I dunno...
3. What am I even targeting? This whole thing is an inside week. Let’s wait for a long.

Good thing I did! Now price has made an even lower low. But that’s a bargain day for sure as we’re below the HMA. I’ll aim long and set my target where the former entry level is now. And I’ll go long as price breaks above the ‘turn candle’.

Like so:


I dunno. Am I doing this right? It seems to be checking all the boxes.



Aw crap! Not again! I guess this was actually a bear trend? Notice the great bargain days (for a short) when price broke up above the MA but no, they have to clear the MA itself. Man, trading is hard!

And trading this way is especially hard. Don’t bother. The only people this benefits are brokers and me, your opportunistic competitor greedily hoovering your funds.

I am not going to bother with the CCI ‘bargain hunting’ chapter as it makes use of another basically useless oscillator. If you’re curious though, check the book out and help keep the O’Keefes in lattes.

Let’s conclude with the ‘bargain hunting with fundamental data, which may be the most (and only?) interesting part of this book.

Chapter 9 - Bargain Hunting with Fundamental Data

1. Novice traders are drawn to news trading because it seems simple
2. In theory, just decide if the news is good or bad and trade accordingly; hundreds of pips in minutes!
3. In fact, this type of trading requires mad skillz says O’Keefe!
4. News trading is pitched to inexperienced traders by authors with ‘asinine strategies’ (lol - ROK should definitely not be the first to cast stones!)
5. Illiquid markets can spoil your plans
6. The mistake news traders make is not relying on support and resistance! (forehead slap)

1. Some reports become important as fundamental factors change (or they all just do nothing)
   1. Example of the housing market report which was important in 2007
   2. Monitor the financial press! (omg - no)
   3. Key fundamental reports

They all do nothing except for the NFP. Check it out for yourselves. Wait for a report to release, watch the wild price moves. FX volatility is at an historic low. Crypto’s where the thrills are now dawg.

 

1. US data is the most important

Some squiggly lines on a chart have spurious explanations appended to them, not for the first time.

 

1. If you not trading on US data, you should select a currency pair that eliminates influence of the US dollar (agreed)
2. Pair strength with weakness
3. Understanding market reactions (there’s nothing to understand)
   1. Valuation errors
   2. Fundamental data meets expectations

Next: wrap up and review

Chapter 10 - Achieving Consistency with simple steps

1. Stop searching for the holy grail
2. Fix yourself first
   1. Ironically ROK uses the example of the turtle trading system but if anything that experiment proved the opposite
   2. The turtles were ordinary people
   3. They were taught how to trade a system that worked
   4. They succeeded
   5. The novice traders were ‘flawed’ but didn’t need fixing. They just needed to be able to follow instructions!
   6. Be financial stable (ok)
   7. Trading is demanding on your emotions (until you figure some things out)
   8. Analytical thinkers may be frustrated by trading (yes, because there’s nothing to analyze)
   9. Workaholics, type A people
   10. Discipline (com-puters!)
   11. Character - bragging and lying
   12. Stop making excuses
   13. Trading systems are a dime a dozen
   14. I’m asleep when the market moves! (com-puters!)
   15. Family support (vital in many areas)
   16. You will not earn 100% a month (not for long anyway)
   17. Consider long-term trading
   18. Specialize in one currency
   19. Be able to explain how you trade in 30 seconds
   20. Write a trading plan
       1. When
       2. What
       3. Entry rules
       4. Risk mgmt rules
       5. Profit mgmt rules
       6. Position size rules

       
       

   21. Keep a trading journal
       1. Specifics about each trade
       2. Position size
       3. Stop loss and risk %
       4. Net gain or loss in pips and money
       5. R:R
       6. Also - let a computer do it

       
       

   22. Demo trade an account similar to what you intend to trade
       1. Take it seriously (good advice)

What to say about Ryan O’Keefe’s book? Well, writing books is hard. I haven’t made one yet. I don’t know if I will. I like blog writing because it’s lower stakes, more serialized. Writing a book is a risk and we should applaud ROK for taking a risk, even if the result was less than stellar. Did anything stand out in this book? The only thing I can think of is the CSOWR chart idea - indexing a table of unrelated data down to a single value. That's interesting. Everything else? Fairly disappointing.

Notes with some additional comments/footnotes.

We are cruising through our book reading pile. One good thing about reading many books is that subsequent books either stand out by their unique take on markets and trading or they can be filed away as more or less similar to some other book that we've already read. This makes evaluation faster. It's cumulative advantage in action!

The next book is
Hit and Run Trading by Jeff Cooper

There seems to be two versions of this book. The updated edition has a foreword by James J Cramer (Jim Cramer?) who says he and his wife used Cooper’s ideas to generate 24% per annum even during some big losing years.

Opening Thoughts

1. This book is all about momentum trading (cool)

Preface

1. “A stock in motion remains in motion, until proven otherwise. That is the cornerstone of momentum trading.”
2. Enter in the direction of the overall trend
3. Risk 1 point or less on a trade
4. Use stops - prices gap
5. People like to outsmart themselves and ‘build a better mousetrap’. Keep it simple.
6. The more complex something seems the more value people attribute to it
7. Overanalyzing and intellectualizing is the kiss of death in markets (Talosian!)
8. The more you try to see, the less you see (The Anti-Brooks)
9. Speculation is observation, understanding isn’t necessary (and in fact observation may not even be necessary)
10. Trade it, don’t think it
11. No mechanical system can put the pieces together for something ruled by human emotions
12. No forecasting, no indicators
13. Patterns never repeat since human emotions go to excess (I agree with the first proposition but I don't see how it follows from the second? Why would human emotions erase patterns, more than say, a desire to profit against traders who are predictable?)

I wish he could explain this a bit more. So far so good though!

Chapter 1 - Opening Bell

1. Jack’s dad went broke believing that stocks always go up
2. He fought back and sold a multimillion dollar textile company
3. This time his dad tries an IPO strategy
   1. This works and he becomes the biggest IPO player on wall street

4. By the time Cooper (C from now on) tries his hand at IPOs the mutual funds get all the stock and he can’t reproduce his dad’s success
5. He starts buying and holding like his pop
   1. And in 1987 gets ‘hurt bad’

6. Now, C claims he has the answer to the stock market - short-term momentum

Chapter 2 - Terms you need to know

1. ADX - a trend measurement formula
   1. Above 30 means the stock is trending ‘strongly’

2. +DI, -DI - a companion to ADX, telling us the direction, when a stock is going up +DI will be higher than -DI
3. Secondary offering - a public company sells additional stock to the public
4. Offer - the ‘ask’ price

I’m going to skip the rest of the definitions as elementary for a learned audience

Chapter 3 - Rules are made to be broken apart from these

1. Money management is more important than entries
   1. Keep losses to a minimum
   2. Control position sizes

2. The trend rules - 90% of the time
3. Sponsorship is critical
   1. Sponsorships is participating in a stock by ‘major players’
   2. C doesn’t have patience for the market to find the new Microsoft (hint: it’s Apple, C!)

4. Start every day at zero
   1. Eliminate all positions not moving in your favour

5. The longer a position is held the more things can go wrong
6. Commission costs must be kept to a minimum
7. Most stockbrokers are good people but clueless
   1. Make all your own decisions

8. Trading is serious business! Get the best stuff (data feed, etc)

1. Overall stock market direction is impossible to predict ‘beyond a few days’
   1. Strategies are based on short-term factors, not macroeconomics

2. Most trading decisions are made with technical analysis and pattern recognition
   1. I may have to bail at that point, but so far it’s going well

3. Prepare for the day, as much as possible, the evening prior, there is too much chaos in the morning
   1. Unless you get up so early the morning is the evening! Shout-outs to my fellow N24s!

4. C is usually right 60% of the time
   1. Became more profitable when he ‘learned to scratch a trade’
   2. Minimizing losses when wrong- assures profitability

5. Doubling-up is for losers!
   1. Get out when a move goes against you
   2. Don’t add to it!

6. Lighten up before news events
   1. Don’t ‘bet’ on the report

7. Trading ain’t easy
   1. There are probably fewer full-time professional traders than there are pro athletes
   2. Still true?
   3. You must work as hard as a pro athlete to be truly successful

Chapter 4 - Creating the Hit List

1. Most important chapter in the book says C (but he also says this about chapter 16)
2. Stocks must be trending strongly
   1. It is next to impossible to make a living doing this with stocks that are going sideways

3. Higher priced stocks
   1. It is a lot easier for a $60 stock to go to $64 than for a $12 stock to go to $16

4. C actually wants illiquid stocks that are under ‘accumulation or distribution’ as that creates higher volatility and opportunity for profits
5. Creates the list every Sunday and adjusts it each evening
   1. Focuses on 15-25 names

6. Main Criteria for the list:
   1. Trend
      1. ADX over 30
      2. ‘Best’ indicator for traders

   2. Relative Strength (RS)
      1. Investor’s Business Daily
      2. Trade only stocks whose RS is 95 or higher
      3. Invented by William O’Neil
      4. No good for bear trades as RS low values are associated with stocks of $2 or $3 and C doesn’t trade those

   3. Moving Averages
      1. Long candidates must be trading above 10 day and 50 day MAs
      2. And shorts must be trading below those values

   4. New highs/New lows -
      1. Some stocks only need to make a two-month new high or a two-month new low

7. Price
   1. Higher-priced - above $30 and preferably above $40

8. Minor criteria
   1. Sponsorship
      1. Uses Louis Navellier’s MPT Review newsletter (still exists? - yes, but $$$)

   2. Liquidity
      1. Better moves happen in less liquid stocks
      2. C has updated this to be an average of 500,000 shares a day

9. No stock has to fit all the criteria

Part One - Main Strategies
Chapter 5 - Expansion Breakouts (!)

1. You cannot buy every new high
2. Not all breakouts are created equal
3. “The best breakouts were accompanied by a daily range that was the largest range of the previous nine trading sessions” (interesting - and testable and worth checking in other markets than stocks)
4. The next day the stock must trade above the ‘expansion breakout’ day
   1. Confirms that yesterday’s buying power was continuing today

5. The trades that work best tend to have small intraday pullbacks
   1. So stops should be tight

6. Rules:
   1. For longs:
      1. 1. Today is day 1
         1. Must be a two-month calendar high
         2. Strategy does not use ADX/RS, just needs a new high with range expansion

      2. 2. Today’s range (high minus low) must be > = the largest daily range of the previous nine trading days
      3. 3. Tomorrow only buy $0.10 above today’s high
      4. 4. Initial maximum risk (stop) is 1 point under yesterday’s close

   2. For shorts:
      1. Day 1 (today) must be a 2-month calendar low
      2. Today’s range >= largest daily range of the previous 9 trading days
      3. Tomorrow only, sell $0.10 below today’s low
      4. Stop is 1 point above yesterday’s close

C explains why this works:

1. The trend is strong
2. Breakouts attract attention
3. Often accompanied by a news release
4. If the stock is illiquid institutions will have trouble getting the shares which forces them to pay up causing prices to run

Well this seems very mechanical and not discretionary at all. I’m looking forward to testing this out tomorrow.

Testing methodology for Cooper Expansion Breakouts (TM)
I’m going to use an indicator I modified for this system that will mark and measure the largest range within any lookback period, in this case, 9 days.

It occurred to me while testing that there are two ways to consider a ‘2-month high’ or a ‘2-month low'.
A) It could be the highest high within the past 60 days or
B) it could be that the previous period’s monthly high was higher than the month before.

If it’s case A then we can just monitor everything on D1. If it’s case B, in some cases where the first month of any two month period was an inside bar, the second month by definition has made a new 2-month high and a new 2-month low, so I guess those situations work for either long or short?
Judging by the example charts it seems to me that case A is what Cooper means, so I’m going to go with that.

In addition to the daily range check I’m going to use a rectangle to enclose 60 D1 bars, and extend it every new high or low, so if price exceeds the boundaries of that rectangle I’ll know its made a ‘2-month’ high or low.

Exits
As with so many other writers, C hasn’t given us any exit considerations for this method, which is very frustrating. In fact, there is no chapter dedicated to exits. It’s clear from the examples that he lets some trades run over more than a day. But it’s called ‘hit and run’ trading so I’m just going to exit at the end of the day, and we can worry about optimization later.

Starting point
I’m going to start with AAPL because why not, it meets all the criteria except that its stock price is too low. I’m going to go as far back as my history will let me, which is Dec 2006.

Attached Image (click to enlarge)

Initial setup on AAPL beginning December 2006. The largest range in 9 days was a bear day. Price has made a 2 month high in the last couple of weeks.

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Price breaks the 2-month high, and sets a 9 day record for the range size. That means we should enter at $0.10 above yesterday's high of 23.23, so 23.33. You can see that because of slippage and spread, I ended up entering closer to 23.60. The stop is one tick below yesterday’s close.

Attached Image (click to enlarge)

After some considerable time has passed another signal manifests, as price breaks the 2 month high, and sets a new 9 day range record. However, the following day there is no break of the previous day’s high. So does this signal expire? Does it expire at the end of the next day? Does it stay valid until the period is supplanted by a new 9 day biggest range? Cooper gives us no help and his examples aren’t helpful in this case as they all showed immediate follow-through, cherry-picked as they were.

No follow-through after the signal, the next day or the following few days. I am going to assume this signal remains valid until it is replaced by a new ‘largest range in 9 days’ so if price breaks up and exceeds the high of 2007.04.25 we will go long.

Attached Image (click to enlarge)

This is successful, and a new 2 month high and a new 9 day range record forms which prompts a new long entry.

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Situations like this are also not addressed by Cooper. A large gap prevents this latest price move from being a valid signal even though it has broken a 2-month low. It seems like gaps should be added to the range of the last trading period to count as a new largest 9 day range?

Attached Image (click to enlarge)

Or this similar situation where a gap rises up so much it creates a new 9 day range record after a 2 month low, but it’s a bullish signal for a bearish breakout? Should we take it if price breaks the low? I would have preferred an entire book about Cooper Expansion Breakouts (™) rather than the dozen shallow explanations of different techniques that we get in this book.

Next: the results

So what happens after 3 years of trading history?

Surprisingly, the results are nothing to crow about. Let’s start with the negatives.
Cons:

1. Trades rarely. Only about 15 trades taken from 2007-2010
   1. Part of this is caused by my interpretation of the 2month filter, and if I simply chose to consider a 2-month high as any month having a high above last month’s high, far more trades would have been taken.
   2. This might not matter if you’re using a galaxy of stocks to choose from, so that you don’t have to wait months for a trade, however I also know that stocks tend to move in synchrony.

2. Win/Loss ratio is basically random
   1. Admittedly there aren’t enough trades to be sure, but this still surprised me.
   2. Most of the problem is the really tight stop - $0.10 is not enough to prevent price from randomly retracing right before it takes off with the trend again. I can only imagine this would be even worse with a higher priced stock. Using the signal bar open level is probably a better SL to allow the trade a chance to return to trending, but this also depends on the size of the signal bar.
   3. The other problem is that the 9 day range filter isn’t really predictive. It doesn’t enter trades when price is steadily trickling up or down.
   4. The real signal is a break of the 2 month high or low. It doesn’t really matter what price does after that. You can count on the trend to continue in most cases. Especially in this trendy stock which is also highly representative of the trendy US equity markets.

3. The follow-through day is usually somewhat lacklustre but is usually followed by at least as much movement as the signal bar. So a better exit method than exiting at the end of the day might have been exiting with 100% of the distance of the signal bar range or even double the range, keeping the SL at the open of the signal bar or trailing it using some method.

Pros:

1. Stays out of trouble, mostly
   1. No big losses
   2. No succession of losses
   3. With a bigger stop it would be way more accurate than random

Despite the cons outnumbering the pros I think this method actually has a lot of promise. However it’s basically a momentum/trend-following system and so a lot of its success will depend on how you choose to take exits and C isn’t interested in teaching his thoughts on that front, at least not yet.

Of course all of this is predicated on a lot more testing, with different (more expensive) stocks, testing with the different exit methods and 2 month filtering, shorter time period filtering etc. Definitely worth the time but left as an exercise for the reader. That’s partly laziness on my part, but also because there are no fewer than four more main strategies to review and 5+ secondary methods to get through! I might return to something later if there’s a demand for it.

I also trade almost same way. For me , an ex participant in the auction of stock lot consumer and scrap goods, it comes naturally to me to teat financial trading market places as auction venues where collusion is tolerated . The major difference I note is the participation.of auctioneers ( known as designated market makers) in making money while delivering typical auctionner duties of managing markets liquidity and keep them tradeable.

As a retail trader I am up against institutions acting as liqidity providers and traders and market makers (occasionally).

Charts provide footprints of all participants to sharp observers using simple measurement statistics like Standard deviations , ADR % or pips from the open. I mainly use bar range speed of 15 m and 4 H as road map for quick hit and run momentum trading.

If you are experienced enough to manage lots and risks and in hedging and using simultaneous scale in and scale out it can compensate for lack of deep pockets.
You need statistics to determine quick exits.
Forecasting is for convenience. I trade with no bias as such. Manual forecasting is for entry and exit and used only when I am not using scale in and scale out simultaneously.

I trade only indices. It may not work with forex.

Chapter 6 - 123 Pullbacks ™

1. Strongly trending stocks tend to rest for three days before resuming, says C
2. Rules (for longs)
   1. 14 day ADX > 30; higher the better
   2. 14 day +DI > -DI
   3. Wait for the market to have three consecutive lower lows or any combo of two lower lows and an inside day
   4. On day four only, buy $0.10 above the day-three high
   5. Once filled, protective stops should be placed near the day three low
   6. “As the position moves in your favour, you should trail your stops”
      1. However C offers no advice on how to do this, aside from saying we should “give them a little more breathing room” because of the upside move potential.

      
      

   
   

3. Short rules
   1. Just reverse the long rules

   
   

FILA - example

1. Late May ‘96 Fila is trending higher
2. ADX readings check out
3. 1 - first lower low
4. 2 - second lower low
5. 3 - third consecutive lower low
6. 4 - bought at 85.125, just above the day3 high
7. 5- upward trend resumes, and moves 15 points higher in six sessions
   1. But this is not the same as telling us when he got out! Suspicious.

   
   

Still, it is another method that can be practically tested and falsified, which I like. Add it to the to-do list.

The first thing I notice is that requiring 3 higher highs or lower lows is often enough to get the 14 day DI lines to cross above or below the other, which invalidates many signals.

Attached Image (click to enlarge)

In this case all the ducks are aligned for a long trade. ADX is above 30. Three consecutive lower lows are formed at the close of the third day but then the -DI moves above the +DI making this invalid for a long trade. This often happens.

Attached Image (click to enlarge)

Here things set up for a bear trade, with the -DI crossing above the +DI and 3 higher highs forming, and as we can see on Day 4 it would have been a good bear trade. The problem? The ADX is only ~26!

Clearly, it’s going to be tricky to find any trades using these strict guidelines. Let’s roll up our sleeves and get to work.

Cooper doesn’t make it explicitly clear if entry signals expire, but he does say ‘on day four only’ which means both: don’t enter on day 3, and I’m going to have to assume, don’t enter on day 5 or later. Which is too bad as here’s another short setup that is as close as we’ve gotten to an entry in 2020 so far.

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Would have worked out just fine.

Ah, but the observant among you will notice that the next bar provides a valid signal as it’s an inside day so

1. Two higher highs
2. Plus an inside day
3. ADX > 30
4. -DI > +DI
5. Enter at $0.10 below the low of day 3
6. And it is a crackerjack trade, as I use the simple 3 bar trailing strategy that we learned from Nekritin&Walters. Who would have had the guts to take such a trade at the height of a bull market? Not many, I fear.

Your friends will think you’re some kind of seer taking a trade like this, unless you were thinking: Covid panic! Which you might have been at the time.

Attached Image (click to enlarge)

A loss…

Well, after a couple of years, the whole thing seems a bit uninteresting. It barely trades, and with my rudimentary trailing system the wins don’t run.


Still, the entries mostly work with only one ‘real’ loss. This might be trend biased though. Let’s try one stock that doesn’t have a reputation for trending constantly...

Disney


Here’s an odd situation where we have two failed entries but then a second inside bar. An inside-inside bar, if you will. Is this a valid entry? Cooper doesn’t say, so I guess not.


As a result on DIS we get only one trade entry, but it is successful, looks like the same big short opportunity that was in the S&P, which is not surprising. Stocks move as a bloc, especially blue chips.

It almost seems like maybe these rules were written for slightly different conditions than we experience in recent times? Cooper later states that these methods work well in combination with each other, but if they signal so seldom, how often are you going to get a confluence of signals?

In his defence, Cooper does mention this is the least common of his setups.

I’ll leave it as an exercise for the reader to check what would happen if you simply traded the SPY/S&P500/US30 long every time price dipped for a few days? Is all this extra machinery of any value to us? How much value? Can you guess which of the rules I think is the most valuable?

Chapter 7 - Stepping in Front of Size
This method is the most interesting to me, personally, but it also is probably impossible to test, (beyond what we’ve already tried with Neiderhoffer and Osborne for example) and is the most difficult to apply to Forex. Still, it should make the hamster wheel in your brain start spinning.

1. Low-risk says Cooper
2. Makes ¼ to 4 points ($4) within ‘a few minutes’
3. Cooper waits for a buyer to ‘show his hand’ in a hit-list stock
4. He then ‘jumps in’ and takes out the offer side of the market, pushing price up a little
5. His buying causes bullish momentum, and the impatient buyer then pays more than he intended where Cooper takes his profits

Rules

1. Again stock must have ADX above 30 with +DI above -DI
2. Average daily volume should be less than 200,000 shares a day
3. Stock must be trading higher for the day, doesn’t work on stocks trading down
4. The buyer, most importantly must show their impatience or more than one institution must be bidding on the stock. How to tell?

“I am waiting for two consecutive higher bid prices where there is size (5,000 shares or more) to buy. I want to see a market that has 5,000 shares bid at 52 and 1,000 offered at 52 ¼. I then want to see the bid go to 52 ⅛ or 52 ¼ with 5,000 shares to buy again. This means someone is desperately looking for stock.”

1. In the previous example, if the market goes to 52 ⅛ bid (with 5,000 to buy) and 52 ⅜ offer, I will pay the offer side. However if the higher bid also has 5,000 or more shares Cooper ignores it as it means the seller can accommodate the large buyer.
2. Protective stop is ⅛ point under the price of the original 5,000 share bid (52 even).
3. Where to take profits is ‘subjective’. ‘Many times’ if the other side of the order has been filled Cooper takes his profits.

Obviously something like this needs level 2 quotes and is a stock-centric strategy. Is there a way to see this without order flow of any kind though?

I maintain that yes, there is. And that method involves looking at the spread.
In many situations where there is a ‘bidding war’ or a ‘face-off’ between buyers and sellers you will see the bid or the ask line ‘twitch’ like crazy as the marker-maker tries to tempt someone from the other side of the deal to take the offer. It happens quickly though (almost all trading of any size being done algorithmically these days) and whether any one can actually react fast enough to take advantage of this is highly speculative. I haven’t personally tried it, but I can always tell based on which line is ‘twitching’ which way the next ticks are likely to go. It is a very brief certainty though, as once the new ticks go in, the next ticks are up for grabs.

Maybe it is possible to make profits trading stocks like this. I just don’t know and I don’t know how to verify it.

Note that you read this weird printout from right to left - time is flowing from the bottom right up to the top left, which is foreign to the usual way of doing things.

It does sound like ‘fun’ and I probably wouldn’t play any other game if it works as advertised.

Why this works according to Cooper

1. Illiquid stocks are hard for large buyers to accumulate
2. Stocks are already trending
3. One problem is you can rarely buy more than a few thousand shares before the stock heads higher, for short-term individual traders though this is rarely a problem
4. Cooper says the strategy is applicable to short-selling but warns that you need an uptick (I think this is a rule of some kind that was implemented at some point in history - is it still applicable?)
5. You may not get that uptick until the seller is done selling (so to me it sounds like shorting isn’t worth it at all)

Chapter 8 - Expansion Pivots ™

1. Another daily range expansion strategy
2. Used to identify institutional buying and selling
3. The 50 day MA is significant because institutions and traders use it as a benchmark

Rules for longs

1. Today’s range > than daily range of the 9 previous sessions
2. Today or yesterday the stock is trading at or below the 50 day MA and ‘explodes higher’
3. Tomorrow buy ⅛ above the ‘explosion-day’ high (pure momentum - wanna bet the 50MA isn’t even needed?)
4. Initial protective stop is 1 point below the explosion day’s close (so a bigger cushion than usual)

Rules for shorts: inverse

The only reason to test this is to see if the 50MA actually adds anything to the level of certainty.

Let’s work with Disney again.
Cooper doesn’t say what type of MA he’s using but it looks smoothed.
He also doesn’t say if gaps count as part of the range. Let’s assume not.

Attached Image (click to enlarge)

Again the results are underwhelming as waiting for the 50MA crosses keeps us out of the market most of the time and when we do enter, without a more sensible exit scheme, our profits are modest. Notice how price clusters around the 50MA just as much as it breaks away from it, making it most likely pointless.

Chapter 9 - 180s ™
Rules for longs

1. On day 1 the stock must close in the bottom 25 percent of its daily range
2. On day 2 the stock must close in the top 25 percent of its range
3. Stock must close higher than both the 10 day and 50 day MA on day 2 only
4. Day 3 only buy ⅛ point above the day 2 high
5. Protective stop under the entry

I’m not going to test this as I suspect it’s like the others. The entries are probably fairly high probability, relying as they do on the market tipping its hand first and enjoying a momentum boost but then it’s all about how we exit that determines whether it’s profitable or not. Since Cooper never addresses exits beyond the simple advice we’ve seen so far there’s not much to gain from it. The requirement to be above or below the MAs likely adds little assurance to the outcome.

Of course if you disagree, please do your own test and post it. Maybe this strategy deserves its own thread. It's definitely simpler than the 'trading made simple' systems.

Cooper mentions that this strategy is mostly for daytrading but he will ‘sometimes’ carry a position overnight if it ‘closes strongly’ in his favour or if it is accompanied by a 60-day new high or new low. Well, that would have been good to know earlier, Mr. C.

Part Two (of Hit and Run Trading by Jeff Cooper)
Part two is what he refers to as ‘ancillary strategies’ but you know what? Trading strategies are not like collectible card game cards. The more you have in your collection doesn’t necessarily mean the more you’re going to win. Better to find the best strategy of the bunch and perfect it than to have 10 less optimal strategies.

In fact, I wonder if we should be suspicious of any book that contains too many techniques, too many methods, rather than dwelling on one in some detail. The reason being, how many techniques do you need to be any good? A passel of strategies is good for selling books, but is it actually good for trading? I guess there's no definite answer. A basket of winning strategies is probably an experienced winner's bailiwick, so some allowance must be made for that. Cooper does say he uses these methods in conjunction with each other.

The second-bench strategies have amusing names like Gilligan’s Island ™ (yeah, I doubt you got the trademark for that one, Mr. C), a short-term gap reversal strategy, Boomers ™, which seem just like shorter-term 123 pullbacks, Slingshots ™ (no way you got that trademarked either), which are a variation on expansion breakouts, Whoops ™, a pattern based on a Larry William’s pattern, Lizards ™ (give me a break), which is a kangaroo tail strategy if I ever saw one, but they are not too interesting to me, (get the book if you are curious!) apart from one called ‘secondaries’ (which for some reason is not ™!)

Secondaries

1. The ‘lowest risk’ strategy he has
2. Brokerage house basically ‘guarantees’ that all he will lose is a few ticks on a trade
3. Secondary offerings
   1. When publicly traded companies decide to sell more stock
   2. One to five brokerage houses are hired to place stock with investors
   3. Sometimes the brokerage house does too good a job and demand outstrips supply

4. On the weekends read the upcoming offerings section in Barrons
5. List them and pick the ones priced to trade
6. It must close above its 20 day moving average the night it gets priced - this shows demand
7. If the offering opens ¼ point or more higher than the offering price - buy
8. Place protective stop ⅛ point under the offering price
9. Sell on the close or hold overnight
10. Offerings that have first-day profits often follow through (couldn’t this be said of any stock?)

Hold for a maximum of ‘a couple of days’ as they lose steam after that, says Cooper.
This is a bull market strategy. Secondary offerings dry up in bear markets. Once the market gets past the weird zone in November (if it does) I may try this out and report back. I will have to find out how to get a secondary offerings feed.