Here’s what’s working in this market…
The market bounced
nicely today from an oversold condition. If you’ve been scaling in to
some positions over the last couple of days (like the
(
QQQQ |
Quote |
Chart |
News |
PowerRating) position I
suggested on Monday), then congratulations, you likely have a little bit of a
profit right now. Don’t overstay your welcome. Watch the market carefully, if
the bounce begins to roll over, take your profits. Volume was pretty good today.
That’s encouraging, but it’s still just a one-day bounce so far. Now is a good
time to start looking for potential short candidates in case the bounce fails.
You also may be able to move up some stops on your long positions if they rose
along with the market today.
Today I would like to talk a little about the use of secondary strategies to
enhance portfolio returns. Good traders understand that their methodologies fall
in and out of favor as the market environment changes. When the market
environment is favorable for their methodologies, they will trade more
aggressively. When the market environment is unfavorable for their
methodologies, they will maintain a more conservative approach. Many times, a
more conservative approach also means large cash balances.
Large cash balances, while safe, offer very little upside. To take their trading
to the next level, traders may consider implementing complimentary trading
strategies that allow them to put their cash to work.
For example, someone who focuses primarily on breakouts, may want to institute
pullback or reversal strategies that could help them profit when breakouts
either aren’t occurring or aren’t offering solid profits. When considering
alternate strategies to implement, you should look for strategies with the
following characteristics:
1) Should be inversely correlated or at least non-correlated to your primary
strategy. If your secondary strategy’s returns tend to correlate with your
primary strategy’s returns, then all you will be doing is increasing the
volatility of the portfolio. This may make the good times better, but it will
also make the bad times worse — not something you want a secondary strategy to
do.
2) Should take very little time to research, execute and manage trades. Over
time your primary strategy will likely make you the majority of your profits. In
most circumstances, it will also demand a significant amount of time for
research, execution, and management. Unless you currently have a lot of extra
time on your hands, make sure secondary strategies aren’t time consuming.
3) Should typically be short-term in nature. Again, your primary strategy will
likely provide you the most profits over time. (This is why you chose it as your
primary strategy.) You don’t want capital to be hung up in secondary strategies
for long periods of time in case that capital becomes needed by your primary
strategy.
4) Should have low drawdowns associated with them. Nothing will kill your
trading spirit faster than taking a big hit to your portfolio because off losses
in secondary strategies. Make sure risk is well contained in any secondary
strategy. Stops and position sizing are two ways to help control risk.
By implementing complimentary strategies with these characteristics, it is
possible to increase your returns while decreasing your drawdowns.
Best of luck with your trading,
Rob Hanna
Additional note: Last year I published the
Hanna ETF Money Flow System. In the introduction to the strategy guide, I
discuss some of these concepts in detail in relation to how the Money Flow
System was able to help me in my own trading. If you would like a copy of the
introduction, just email me and I will send it to you.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.