Trailing Stops: It's Time
The trading systems timely identifies tradable changes in trend, but how best to trade those trends has always been a challenge. Profits achieved during the trades have not always resulted in profits realized at the end of a trade. If you look at the trade tables below you see some substantial gains. But by the time the trend reverses and the positions are closed, those gains can be higher, lower, or in some extreme cases, turn negative.
To address this phenomenon we introduced staggered profit taking where partial profits are taken along the way. But even staggered profit taking is leaving too much of some very healthy gains on the table. Additionally it has been of no help on those few trades that never see a 30% profit, that go straight down from the onset of the trade. It is a good idea, but in practical application it has stumbled and many subscribers find it too complicated and too difficult to track.
Since we have automated the tracking of all trades it has become much easier to retroactively apply new money management ideas so as to gauge effectiveness. One tried and true profit taking strategy that has worked across all kinds of stock and commodity trading systems has been applying a trailing stop on profits. For the past few weeks we have been experimenting (on paper) with applying a 50% trailing stop on all options trades in both time frames. Expanding that test historically, looking at the most recent 12 months of trades in both systems we are seeing such profoundly improved results that we are going to make this change, and make it now:
Effective immediately we are replacing all exit strategies with a straightforward 50% trailing stop on the returns on all option trades. Here are the numbers covering trading from about the past year. These performance statistics are based upon actual trades in both the Intermediate and Short-Term Portfolios.
Intermediate-Term Trades Using 50% Trailing Stops (August 2016-July 2017)*
Total Trades: 36 (Closed trades only)
Average Option Return Per Trade: +95.03%
Short-Term Trades Using 50% Trailing Stops (August 2016-July 2017)*
Total Trades: 164 (Closed Trades Only)
Average Option Return Per Trade: +36.94%
*These results have been generated retroactively applying the 50% trailing stop to trade profits, meaning they have to be considered hypothetical. Though they are not real time, real money results, they are mathematically derived from what are real time trading signals and option pricing, save for a few isolated instances where that option pricing had to be estimated.
How the 50% Trailing Stop Works
(1) From day one of trade, the 50% trailing stop kicks in, maximum loss = -50%
(2) As trade moves ahead, that 50% stop trails profits up so that at any one time, stop will be 50% of highest gain achieved.
(3) We will keep track of this dynamic 50% stop for subscribers and send out an email alert whenever a stop is hit.
We are working on integrating the 50% trailing stop into the trade tables, and are virtually days away. Until then, I'm maintaining the look of the tables as before. If a new trailing stop is hit for any trade I'll send out an Alert.
New Trading Model
With the removal of Amazon from the portfolio last week (Irrational exuberance made already expensive options insanely expensive) I want to add a replacement model for the intermediate portfolio.In light of the 50% trailing stop exits, some of or older models that were dropped because trades were giving up too much profit before reversing deserve another look. One in particular stood out as a prime example of how good signals generated great profits only to give most of them back before reversing. Only now, with the trailing stop, much of those "great profits" will be realized well before those profits are lost as the trade turns toward reversing.
U.S. Steel (X)
That new "old" model is U.S. Steel (X). It went Long on July 14th at $23.21 and in three days hit a high of $27.44. The Jan $23 calls were trading at about $3.00 and would have likely reached $5.50 at that $27 high, a gain of about 80%. X is trading at $23 today, and the trade would likely have now been closed with a 30% profit. Without the 50% trailing stop, the trade would likely have been in the red. That's how the new stop exit strategy works and that is why we are employing it going forward. (Also, that's why we are adding X to the Intermediate Term Portfolio.)
Below is a close up of X's price action since the July 14th Buy Signal. 10 days after the signal substantial profits were seen...on paper. As X peaked and headed back down, those gains eroded all the way back to zero, maybe less. But the 50% trailing still kicked in two days ago, salvaging about a 30% win for what would other wise be a break-even to losing trade.