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Greetings, Pro-fundity team members -
11-15-02 Background music:

“Profundity Trade-Scape (PTS) III”

1. Let’s review; we adopted a trading strategy that shoots for a target increase, which we then sold when the target price was reached. We chose 10 stocks over a two-month period to try different targets. We included a stop at some % below our entry point to protect our capital on the down-side. That meant we had our exits covered, whether the stock moved in our favor or against.

2. Exits from positions should should be automatic! We can exercise our trading skills when selecting stocks to trade, but we need a strategy that gets us out of positions automatically. Than means, “Un-emotionally!” What is “un-emotional?” Without emotion! That may sound like an oxymoron, since we are all emotional creatures. Yet, our success as a trader is directly dependent on how unemotional we can be when getting out of positions. Some do it better than others. PTS was designed to give us experience, to let us try a lot of examples to coming to a strategy that we can be comfortable with.
   
   
   Fig. 1 Target/Stop combination results

3. The three colors show the sequence we followed when trying different combinations. The “green” cells were first, “blue” for the next set of trials, and we then closed the pattern with “yellow” to enclose the highest yields. For this set of tickers, during this time frame, there was a grouping where yield was highest.

4. Since the trials with PTS are so rapid and easy to execute, we went into the high yield section of the table and expanded the combination-results.
   
   
   Fig. 2 Expanded Target/Stop combination results

5. Where should we put our target and stop levels, based on this table? A better answer results if we ask where should we NOT put our levels. For instance, for THIS set of tickers, a 10% target would be a disaster with a 3% stop. Yet, there is a wide range of combinations that would perform well.

6. We started with a 10-ticker set for this study. It would have been easy to cherry-pick one or two price patterns to demonstrate the principle. However, our greatest advantage will come from trials that let us look at a set of results collectively, not individually. Is the trial shown above the answer to all our problems? Hardly. Yet, with that trial example, combined with dozens of others using tickers we’ve carefully chosen, we will see patterns of behavior that can help us become comfortable with our own strategy! And that is the purpose of PTS.

7. Here’s a peek at a totally different strategy we can use with PTS. Don Worden, founder of TC2000/TCNet and consummate trading expert, published the following counsel for getting out of positions:
   “After you are once 10 percent ahead, don't ever give back more than 66 percent of your profit. After you are once 20 percent ahead, don't give back more than half your profit. After you are 50 percent ahead, don't give back more than a third of your profit. You can tinker with these percentages and mold them to your own objectives and temperament if you want to. But after you're once ten percent ahead, don't ever give back all your profit. Set a loss-cut and punt when you have to.” –DW

8. Two trading maxims that have been around forever are “Cut your losses short,” and “Let your profits run.” We violate the second adage when we place a target percentage increase where we sell, no matter what. Worden uses a “Trailing-loss” method in his counsel, placing no limit on how high the price can go. That is, letting profits run. We protect ourselves by moving a stop-loss higher as the price increases, protecting profit.

9. The second strategy using PTS is the following: Place a stop-loss under the purchase price at some percent when we enter the position. As the price moves in our favor, we move the stop higher. The key is to have the stop at a percent of the “highest” price reached, not just at the last closing price. For example, if we buy ABC at $14.25 and select a trailing stop at 5%, we would sell at $13.54 on the down-side. If the price then moved to $15.75, our new stop would be at $14.96. The price could then move around between these two values without changing the stop. If the price moves higher, say to $16.80, that would move the stop up to $15.96, and so forth. But what is a good percentage to use for the trailing stop? Here is the result of PTS-2 (Sell with a fixed Trailing-stop) on the same set of tickers used on PTS-1 (Sell with an “X” % increase).
   
   
   Fig. 3 PTS-2 – Trailing-stop Performance

10. On this set of trials, the average return was less than the fixed % target we studied before. Next week you can try it yourself, with PTS-2 ready for download. What is interesting with this set of tickers over this time frame is how individual stocks performed. Notice for the 2.0% Stop in Fig. 3, with a 4.7% average return, the figure below shows how one of the stocks did perform better than a 10% target would have allowed. This provides hope for the “ten-bagger” waiting in the wings that any % Target will kill.
    
    
    Fig. 4 PTS-2 – Individual results of a 2% Trailing-stop Performance

11. Try this yourself next week. And always use stops!

    2. Pick Performance:

    
    

    
    Fig. 1 Main picks on 11/08/02 (7 days ago).

    
    

    
    Fig. 2 Breakout picks on 11/08/02 (7 days ago).

    
    

    
    Fig. 3 Quick picks on 11/08/02 (7 days ago).

    
    

    
    Fig. 4 Main picks on 11/01/02 (14 days ago).

    
    

    
    Fig. 5 Breakout picks on 11/01/02 (14 days ago).

    
    

    
    Fig. 6 Quick picks on 11/01/02 (14 days ago).

    Return to the top!

    11/15/2002 - Main Picks:
    ATVI,FTI,GPN,NSC,PRGX,PRSE,SBIB,UCO,UHAL,WDFC

    Breakouts:
    BBX,BSTE,CHUX,GSOF,ODSY,PRBZ,RG,RSTN,SSFT,TSCM

    Quick Picks:
    AVEA,CWST,ENN,NEOL,NWK,SGP,STEC,VANS,VSAT,X

    Take advantage of our daily "Funditties," profound thoughts for each day. This weeks focus is on PEACE, more probable using last weeks focus, INTELLIGENCE.

    We have arranged with Worden Bros., Inc. to distribute their products (TC2000, TCNet). See how your Pro-fundity subscription can be a fixed, no-cost feature of TCNet. Please send us an e-mail to sales@pro-fundity.com for all the information. In the meantime, always use stops!

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