Thomas Meyer, Editor
July 24, 2023
Email: algotrendtraders@gmail.com
Twitter: @AlgoTrendTrade1
Disciplined, Rules-Based Trading
Welcome to this week’s AlgoTrendTraders report. Before getting into this week’s report, be sure to follow me on Twitter: @AlgoTrendTrade1
I’ll post updates throughout the week. Also, you can help me out by sharing the newsletter with friends and colleagues who are also interested in learning a better way to invest.
A Quick Conversation – Why AlgoTrendTraders?
This month marks my 30th anniversary of first getting registered in this business. It was a great time to get started. The market was bullish and the internet bubble was just beginning. I started with a company called Dean Witter which later merged with Morgan Stanley. After a few years, I moved to Austin and it was just hopping. The “Live Music Capital of the World” was also becoming one of the great technology hubs in the world. Dell Computer was on fire and everyone wanted a piece of the action. Several of the internet start-ups had explosive IPOs and first days of trading.
Of course, we all know what happened after the turn of the century (has it been 23 years already?). The dot-com crash kicked in and crushed client accounts. During all this time, it was still rare for analysts to tell clients to sell their stocks. There were always reasons to hold on and, we were told, the market always comes back so just be patient. After all, the market has always come back. Just be patient they said. And, from an academic perspective, they always have come back.
There’s just one problem. People have finite lives. We all know we’re going to die at some point. Therefore, we save and invest our money so that it can grow for us and we can use that money for our personal goals. Usually, that means retirement, but it can also mean providing for college, helping take care of parents or children (or both), traveling, or whatever we decide. Today, let’s just look at retirement.
The year is 2000 (or 1987 or 2007 or 2022) and let’s say you’ve been diligently saving and investing for a few decades. Now you want to retire. Unfortunately, you’ve lost half your money in the market because you did what the financial firms told you to do and held onto your stocks or mutual funds and didn’t sell. You have 50% or maybe 60% of what you had a year ago. What are you going to do?
You have 2 choices. You can still retire, but now you’re forced to live on 40%-50% less income or you have to go back to work for another 4 or 5 years and try to get back to even. Unfortunately, there’s nothing else.
This is why I put together AlgoTrendTraders. I want to be able to give you the opportunity to trade in the stock market, but not subject your portfolios to large, life-shattering losses. I want you to understand that it’s ok to go to cash and even go short when the trends are not bullish. And I want to be able to provide you these trading signals in a way that’s easy to understand. It’s my way of giving to you and teaching what I’ve learned over the past 30 years. Hopefully, you’ve been able to share these lessons with your family and friends or will do so soon.
There’s more underneath the charts to understand about trend-following. Please read the disclosure and understand that the information in this newsletter is not suitable for everyone.
An X-Ray of the S&P 500 Sectors
What a huge week! We saw XLF, XLP, and XLV all move into a Bullish condition. Here’s where we stand heading into the week:
XLB (Materials) – Bullish Condition
XLC (Communications) – Bullish Condition
XLE (Energy) – Neutral Condition
XLF (Financials) – Bullish Condition
XLI (Industrials) – Bullish Condition
XLK (Technology) – Bullish Condition
XLP (Staples) – Bullish Condition
XLRE (Real Estate) – Neutral Condition
XLU (Utilities) – Neutral Condition
XLV (Healthcare) – Bullish Condition
XLY (Discretionary) – Bullish Condition
This week, we have 8 sectors in a Bullish condition and 3 sectors in a Neutral condition.
Historical Results Are Underneath the Charts
The updated historical results for the tickers we follow in AlgoTrendTraders are listed underneath the charts. They’re currently showing the trades with closing prices through July 21st.
ChatGPT Answers Questions About Trend-Following
For those new to AlgoTrendTraders, we have a list of questions we asked ChatGPT to answer about trend-trading and its advantages. Be sure to read those to better your understanding of what we’re doing here.
For those wanting to know more about Trend-Trading
The overview of the AlgoTrendTraders system is underneath the charts. Those familiar with our methodology can get right to the trades. If you’re new to trend-trading, be sure to read this introductory section. This will help you understand the concept of trend-trading and why it is so powerful.
Always have your exit strategies prepared before you enter into any trade.
The Composite Table for July 24, 2023
Be Sure to Read the Disclaimer at the End of This Report
Here are the latest charts…
Trend-Trading Overview
The long/short signals are based on trend-following principles. Very simply, stocks and commodities stay in trends… until they don’t. Trends can last a short time or they can last for months and even years at a time.
This is not a “get-rich-quick” scheme
If you’re looking to make a ton of money in a short time, you’re going to be disappointed. Trend-trading is not fancy; it’s boring, and takes time to be successful. This is a system that relies on a historically proven process to generate solid returns on winning trades and avoid large losses on losing trades. We’re definitely the tortoise, not the hare.
Trend-following systems don’t try to guess what the next move in the markets might be. Instead, we measure the markets each week and use our algorithms to determine the current trend and the exit strategy for the current trades.
The key to the winning trades greatly outperforming the losing trades is the risk management system. If a trade moves against us, we’ll get out of the trade with a small loss. But if a trade trends higher for months at a time, we have the ability to build up substantial profits.
AlgoTrendTraders uses both trend and momentum to generate the trading signals. The yellow channel you see in the center of the charts is called the “Transition Zone”. When a stock is above the yellow channel, it’s in a Bullish condition. When it’s below the yellow channel, it’s in a Bearish condition. When it’s in the middle of the channel, it’s in a Neutral condition and there is no trade.
Selling is More Important Than Buying
Every trade has a pre-determined exit strategy. This is based on the normal volatility of the underlying ticker. Each stock has its own unique volatility. And, volatility is dynamic. It’s constantly changing. Each week, we look at the previous 52 weeks of price movement to come up with its normal weekly volatility. This is called the “Expected Move”. The Expected Move equals one week of the normal volatility of the stock or ETF being measured. Every week, the exit strategy for each ticker is updated.
The system is based on the weekly closes of the underlying tickers. All trading information and volatility calculations are based on weekly volatility. By using weekly calculations, the system ignores the day-to-day noise in the markets and is able to give better signals.
It’s easy to see the periods of time that volatility increases and decreases. As the yellow channel Transition Zone widens on the charts, the volatility is increasing. The opposite is true; when the Transition Zone narrows on the charts, the volatility is decreasing.
The best time to enter a trade is when a new signal is given. This gives you the greatest opportunity to get into a trend that could last a long time. Though it’s possible to get into a trade after a trend has been in place for a while, the risk in that trade is elevated. Consider using 1/2 or 1/3 of your normal investment for these situations.
This report gives signals that can be followed by both novice and more experienced investors. Novice investors can use these signals to help them manage their 401(k) and retirement plans by adjusting the signals for SPY and QQQ to match the mutual funds in their plans. Though you won’t be able to short these indices when they become bearish, you can move to cash and avoid the devastating losses from bear markets.
Experienced and sophisticated investors can use leverage or options, but the risk is substantially greater. Never risk more money than you can afford to lose.
Disclaimer:
The information published in this newsletter should not be used to make personal investment decisions. We are not licensed by any federal or state entity to give investment advice. We do not know your personal financial situation. Investments should be made only after consulting with your professional investment advisor and only after reviewing the prospectuses or financial statements of the companies in which you’re considering investing.
Historical Returns of AlgoTrendTraders Trading Signals Through July 21, 2023
ChatGPT Questions and Answers About Trend-Trading
What are the advantages of trend-trading in the financial markets?
“Trend trading is a popular strategy used by traders in financial markets, and it involves identifying and following the direction of market trends in order to profit from them. Here are some advantages of trend-trading in the financial markets:
1. Potential for High Returns: Trend trading can offer high returns in a short period of time. This is because traders can enter a trade at the beginning of a trend and exit it at the end, capturing a significant portion of the trend's movement.
2. Reduced Risk: Trend trading allows traders to reduce their risk by avoiding counter-trend trades. By following the trend, traders can avoid the pitfalls of trying to predict market reversals and can stay in profitable trades for longer periods of time.
3. Simplified Trading: Trend trading is a relatively simple strategy to implement. Traders only need to identify the trend direction and enter trades in the same direction, making it easier to execute and manage compared to other trading strategies.
4. Objective Decision Making: Trend trading is based on objective technical analysis, which takes emotions out of the decision-making process. This helps traders to avoid making impulsive decisions based on fear or greed and stick to a disciplined approach.
5. Wide Range of Markets: Trend trading can be applied to a wide range of financial markets, including stocks, commodities, currencies, and bonds, allowing traders to diversify their portfolio and find opportunities in different markets.
However, it is important to note that trend trading is not foolproof and carries some risks, including false breakouts and sudden trend reversals. It is important to manage risk by using proper stop-loss orders and position sizing techniques.”
What limits the widespread adoption of trend-trading?
“Despite its advantages, there are several factors that limit the widespread adoption of trend trading in the financial markets. Here are a few:
1. False Breakouts: False breakouts can occur when a market appears to be trending in a particular direction, but then suddenly changes direction, resulting in a loss for the trader. These false signals can cause traders to lose confidence in the trend trading strategy and abandon it altogether.
2. Emotional Bias: Even though trend trading is based on objective technical analysis, traders can still be affected by emotional biases such as fear, greed, and overconfidence. These biases can lead to impulsive trading decisions, which can result in losses.
3. High Volatility: Markets can be volatile, and sudden price movements can trigger stop-loss orders, resulting in traders being stopped out of their positions. This can happen even if the overall trend remains intact, leading to missed opportunities.
4. Time-Consuming: Trend trading requires constant monitoring of market trends and technical indicators, which can be time-consuming. This can be a challenge for traders who have limited time or resources.
5. Limited Returns: While trend trading can offer high returns, it is not a get-rich-quick strategy. The returns are often gradual, and it may take time to build a profitable trading record.
6. Unpredictable Market Conditions: The market conditions can change unexpectedly, and market trends can reverse suddenly. This unpredictability can make trend trading a challenging strategy to execute, as it requires traders to be agile and adaptable to changing market conditions.
In summary, while trend trading can be a profitable strategy, it is not without its challenges. Traders need to be disciplined, patient, and able to manage risk effectively to succeed with this strategy.”
How do you trust trend-trading algorithms?
“Trend-trading algorithms are computer programs designed to identify and follow market trends, and they are increasingly popular among traders in financial markets. Here are a few things to consider when trusting trend-trading algorithms:
1. Backtesting: Before using a trend-trading algorithm, it's important to test it thoroughly using historical data. Backtesting involves running the algorithm on past market data to see how it would have performed. This can give you an idea of how well the algorithm works and how much risk it carries.
2. Transparency: A trustworthy trend-trading algorithm should be transparent, with clear rules and parameters that can be easily understood. The algorithm should also be able to explain its trading decisions and provide a clear rationale for why it takes certain positions.
3. Performance Metrics: When evaluating a trend-trading algorithm, it's important to look at performance metrics such as Sharpe ratio, drawdown, and win rate. These metrics can give you an idea of how well the algorithm has performed in the past and how much risk it carries.
4. Independent Verification: A trustworthy trend-trading algorithm should be independently verified by a reputable third-party. This can help to confirm that the algorithm works as advertised and can be trusted.
5. Regular Monitoring: Even if a trend-trading algorithm has a good track record, it's important to regularly monitor its performance to ensure that it continues to work as expected. Traders should also be prepared to make adjustments or switch to a different algorithm if necessary.
6. Robustness: Trend-trading algorithms should be robust and able to handle unexpected market conditions, such as sudden volatility or news events. They should also be able to adapt to changing market conditions and adjust their trading strategy accordingly.
In summary, when trusting trend-trading algorithms, it's important to consider factors such as backtesting, transparency, performance metrics, independent verification, regular monitoring, and robustness. By carefully evaluating these factors, traders can choose an algorithm that they can trust and rely on for their trading strategies.”
Who are some of the best trend-traders over the past 125 years?
“There have been many successful trend-traders over the past 125 years, but here are a few notable examples:
1. Jesse Livermore: Jesse Livermore was a legendary trader who made a fortune by following trends in the stock market in the early 20th century. He was famous for his ability to read the market and his patience in waiting for the right opportunity to make a trade.
2. Richard Dennis: Richard Dennis was a trend trader who became famous in the 1980s for his Turtle Trading experiment. He recruited a group of novice traders, taught them his trend-following strategy, and they went on to make millions of dollars in the financial markets.
3. Ed Seykota: Ed Seykota is a trend trader who is known for his technical analysis skills and his ability to develop trading systems that follow trends. He is also known for his philosophy of "ride the trend" and letting profits run.
4. Paul Tudor Jones: Paul Tudor Jones is a hedge fund manager who has made billions of dollars by following trends in the financial markets. He is known for his macro trading strategies and his ability to anticipate market trends before they happen.
5. Stanley Druckenmiller: Stanley Druckenmiller is a billionaire investor who made his fortune by following trends in the financial markets. He is known for his macro trading strategies and his ability to anticipate changes in economic trends before they happen.
These trend traders have different styles and approaches, but they all share a common philosophy of following market trends and letting their profits run. They have shown that trend trading can be a profitable strategy when executed with discipline, patience, and risk management.”