My orientation focuses on total return, without regard to benchmarks or interest rates.
My charting focuses primarily on harmonics, chart patterns, analogs and traditional technical analysis — each of which is discussed under the learn menu. My investing is best described as swing trading, as positions are typically taken ahead of anticipated changes in direction. Although, I’m not against going along for the ride when momentum is strong.
Even in a market where investors have seemingly given up fighting the Fed, it is possible to identify discreet price levels and even timing of many reversals in advance. Positioning one’s portfolio in advance of such turns can be very profitable.
The market’s correction in April 2012 is a great example. Using harmonic patterns, I correctly anticipated that the S&P 500 would peak at 1421. I was able to short ahead of the decline to 1266 and go long again near the bottom for the subsequent rise to 1474 — at which point a major harmonic pattern correctly signaled me to short once again.
A buy and hold strategy would have yielded a 3.7% return (not including dividends) between April 22 and Sep 14, 2012. But, being on the right side of these moves, I was able to capture about 24% (61% including multiple interim trades.)
In addition to capitalizing on market moves, my strategy is designed to limit risk. In fundamental analysis, entry and exit prices are often somewhat arbitrary. When making a purchase based on expected improvements in margins, for instance, what action should one take when prices slip a few percent?
When prices cross specific boundaries, my strategy typically signals us fairly quickly that I’ve made a faulty assumption and should be on the other side of a trade. This makes setting appropriate stops simpler and introduces valuable discipline into the buy-sell decision.
One potential downside of our approach is frequent trading. At some inflection points, for instance, the market can whipsaw for days or even weeks until its ultimate direction is resolved. If I see equal odds of a move in either direction, we might experience a series of false starts where trades are stopped out in the chop.
The alternative is to wait on the sidelines until a direction is firmly established. It might mean lower overall returns, but can reduce the number of transactions and attendant costs.
Another potential downside is the decision to disregard tax effects. If the market is expected to decline meaningfully, I will sell my long position and short — regardless of how long the current position has been held. I’d rather capture short-term gains than experience long-term losses.
I advocate using ETFs and options on ETFs and indices in order to minimize the event risk inherent in trading in the stock of a specific corporation. My orientation is total return; i.e., I make no attempt to beat a particular benchmark over time.
Because I am constantly searching and positioning for trend changes, stops are a must. Even high-probability technical or harmonic set-ups can be blown out of the water by an unanticipated news event or announcement.