Mark Boucher
Submitted by Trial User:
please explain this lo risk pattern entry point.
mark boucher:
CHRW has broken out of a broad multi-week base on Monday. If we bought the break-out on a daily chart, we would put our stops over 5 points from entry below the consolidation low. But today CHRW broke out of a half-hourly flag pattern at 32 1/8 with a 31 1/4 low to the flag pattern, meaning we could enter with just 1 point risk. One point risk is much lower than 5 points, yet we may have potential to catch the same sized move. Even if we take profits at the end of the day on most of the position so that our risk is covered the first day, we still can have a sizeable position left over because we entered with such low or small risk based on a half-hourly pattern.
Submitted by traderx:
What kinds of price action/patterns are you specifically looking for?
mark boucher:
Flags, trading range breakouts, positive translation, and positive relative strength in stocks with great RS and earnings growth, those on our tradingmarkets.com list.
Submitted by francine:
HOW MUCH LOWER DO YOU SEE THE NASDAQ GOING IN THIS CORRECTION??
mark boucher:
I have no idea, and neither does anybody else. As a trader you should concentrate on stocks making new highs. Forget those ND100 stocks and watch those on our lists that have just broken out of bases instead.
Submitted by Moderator:
Submitted by shane1950:
How would you rate the use of moving averages as tcchnical indicators?
mark boucher:
I’m not much of a fan of MA’s for most purposes, though they can be used as long-term trend tools. I much prefer looking for strength in the form of Relative Strength and translation – and then looking for low-risk pattern entry points.
Submitted by philrock:
After a trade is entered in one of these situations, how do you manage the position, that is, where do you place stops, and would you ever add on to one of these trades as it progressed?
mark boucher:
Good question. First try to book your initial risk after ideally the first day, and certainly after two-days. Then your original stop would simply force you to a break-even proposition at worst, as you’ve already taken profits enough to cover your risk on the remaining position.
Then go to a longer time-frame chart and use normal trailing stop tools until you get at least a 5-1 reward/risk profit. Then go back down to faster charts. In other words on a 1/2-hourly flag, book half profits and let the rest ride, not moving up your stop until you would do soo via a daily chart (6-pivot stop or GTI). Then once you get 5 to one or better you could move back to half-hourly charts to book profits.
Submitted by Moderator:
Welcome to the tradingmarkets.COM Live Forum, featuring Mark Boucher.
Mark has been the manager of the Midas Trust Fund, Cayman Islands, since 1992. In 1998, his fund was ranked number one in the world by Nelson’s World’s Best Money Managers for its five-year annual compounded rate of return of 26.6%. He also is the author of the highly-acclaimed book “The Hedge Fund Edge: Maximum Profit/Minimum Risk Global Trend Trading Strategies” (1998, John Wiley & Sons). His indicator lists appear every night on tradingmarkets.COM’s Hedge Fund Managers Corner section. Mark began trading at age 16, and paid for much of his education at the University of California at Berkeley with his profits. Upon graduation, he day traded for a while before founding Investment Research Associates to finance research on stock, bond, and currency trading systems. He joined forces with Fortunet, Inc. in 1986, where he developed models for hedging and trading bonds, currencies, futures, and stocks. In 1989, the results of his research were published in the Fortunet Trading Course. While with Fortunet, Mr. Boucher also applied this research to designing institutional products, such as a hedging model on over $1 billion of debt exposure for Mead, a Fortune 500 company. Today, Mark will kick off the forum discussing short-term trading patterns. To ask a question, simply type it in and hit the “Submit Question” bar–that’s all there is to it. You also can create a short subject heading for your question in the title space (it helps if you do). Past questions appear in the left-hand portion of your screen for easy browsing. This is a moderated forum, so we ask that you respect the other guests and our featured speaker. We try to get to as many questions as we can, so please be patient. Shortly after the forum is completed, it will be archived and available for review.
Submitted by Trial User:
Are there any patterns that are better or more consistent money makers? Which are your favorites? Thanks in advance.
mark boucher:
My favorite pattern is a flag-pattern. Where a stock makes a strong runup, consolidates and does not retrace 30% of the last advance, and then breaks out on a TBBLBG (if you know what that is). You can use only that pattern and make a ton of money in the markets. It forces you to only buy strength.
Submitted by jweston:
Mr. boucher, what are a couple of your techniques on your timing of buying stocks? Do you chase news stories, analyst upgrades, etc?
Thank you.
mark boucher:
I do not generally chase news stories, although I like Larry Connors news-oops pattern from his book a-lot. Generally I look for break- outs of multi-week consolidations in stocks on my tradingmarkets NH list or NL list (if market trend is down). Then I look for half-hourly flags or other shorter-term patterns to enter with very low risk for what could be a multi-week runup in a stock following consolidation breakout. In this way I can risk 1 point, with 10 point + potential . It’s not really short-term trading, but short-term entry for expected runups lasting days to weeks.
Submitted by Trial User:
Sometimes I see a stock open high & trend lower on small volume. And then stock races in the last 15 minutes to the day’s high. (I see lots of institutional buys at the close!) Do you under go this grind or just put a stop loss & forget about it?
mark boucher:
It depends on the time-frame your investing. If this is a multi-week trade, put in your stop and forget about it. If this is a day-trade you’ld better try some different entry criteria. In general you might try moving down to half-hourly of 5 min bars for confirming signals in your stock after the open before entereing.
Submitted by Trial User:
What value do you place on relative strength?
mark boucher:
If left with only one tool to use I would be torn between using only patterns or using only relative strength. Dr. Tom Johnson and I tested hundreds of variables on stocks for increasing return going back to the 1850’s. Relative strength was the most statistically significant variable we could find.
Submitted by johnalv:
Mark, do you find any oscillators, like stochastics or the RSI, useful for short-term trading?
mark boucher:
Yes I like stochastics for some uses. I use stochastic cycle lows and highs for ops’s and trailing stops. Also I like what George Lane used to call flutter – when a stochastic hits 90+ and then just fluctuates between 70 and 90 while a stock makes a prolonged runup on any time frame.
Occasionally I’ll use half hourly stochastic oversold along with an inside day, outside day pattern to enter a runaway market that has hit support. For example, yesterday July copper came down and hit the exact level of a former high on a stochastic half-hourly correction and then broke out of an inside day – agreat buy signal that has already returned over 4 times risk.
Submitted by Moderator:
Mark, you’re a strong believer that short-term trading should be approached cautiously. What, in general, are the pitfalls you think potential short-term traders should keep in mind?
mark boucher:
Here are the main pitfalls to short-term trading in my opinion.
There are two things one should look for in a good trade. The first is a good reward to risk ratio -generally 3 to 1 or better. The second is a pattern that is going to return a profitable trade at least 60%-70% of the time. Short-term trading does not present a-lot of opportunities that are highly reliable. In addition, because there is such a short-term involved of time, the reward is rarely 3X the risk or more. Thus in the long term, most short-term traders end up doing it for income or consistent profits on a monthly basis – but it is somewhat of a grind. It is rarely a long-term way to build capital. Short-term trading is more difficult for the larger sums I’m managing now. I do use short-term approaches – but only for low-risk entries into trades that have potential of many weeks, as I’ll explain. Finally, short-term trading goes through intense streaks. In the late 1920’s almost twenty percent of the population was involved in short term trading – brought on by that revolutionary new technology the phone. From 1926 to 1929 short-term trading was easy money. But from 1930 on most short-term traders got wiped out totally and approaches that worked in the great bull market failed. Short-term trading became popular again in the early 1970’s toward the peak of the secular bull market that began after WWII. But after the great ’73-’74 bear market, again most short-term traders were totally wiped- out and strategies that made fortunes in the early ’70’s went bad. Today there are many short-term traders who will face a huge suprise when the environment shifts from a wild bull market sometime in the next few years (at least decade). So many times the short-term trader makes a fortune quickly, only to lose it even faster when times change.
Submitted by fscook:
Mark, question #3 tells me I better look for a better way to trade other than short term if I want to keep profits for the long term.Please let us know how you would suggest we trade in order to make a comfortable living and have additional long term growth with our capital.
mark boucher:
Just realize that the easy profits of present markets don’t last forever.
Also, instead of looking for short-term trades, look for long-term and intermediate-term trades. Look for multi-week base breakouts in stocks with strong earnings gains and top relative strength. Then when you find a stock with a good trade for many months on a daily or weekly chart, look for ways to enter that on a short-term basis – with short term sized risk for potentially catching that big move with a loaded up position. Not short-term trading, but short-term entry into intermediate term moves.
Submitted by Trial User:
Do you believe it is better to trade options, either calls (covered) or puts looking to make 3-5% or more a month?
Also why can’t or don’t funds do this? 3-5 % a month equals 36 plus % a year–not a bad return. Lets hear your opinion. Thanks.
mark boucher:
As long as the market moves up and speculation is high, covered calls or covered puts can make very decent gains. But there are risks.
If you buy Microsoft at 98 and sell a May 90 call at 11, you have good income potential. But your also not covered if MSFT falls below 87. It is extremely difficult to get good fills on options in substantial volume. This makes it too thin a market for funds often. In addition most fund managers realize that covered calls and puts work in some environments and not in others. They are good strategies for traders without big mega-million accounts. But realize they don’t return 36% a year without risk consistently. In fact if you look over the very long-term there are times these strategies lose consistently.
Submitted by Moderator:
Submitted by Moderator:
How do you identify markets that you think will offer promising shorter-term opportunities?
mark boucher:
As I mentioned in the last question I look for several patterns. The first is a half-hourly flag pattern just following a multi-week break- out in stocks that are on our strong RS strong earnings list posted here daily, such as CHRW and PLCE today.
Another thing I do is watch bonds, the S&P futures, ND100 futures, and Dow futures. Yesterday for instance, stocks were following bonds down and when bonds finally underwent a slight recovery off of the 119 1/4 level, the S&P, Nasdaq and Dow futures all formed double bottoms on a 5 minute chart and broke out of double bottom formations after the S&P and Dow both hit daily chart uptrendline support levels. This was a fairly reliable buy signal with very limited risk. As it was close to the close in the bond market, it was likely stocks would recover as well, as they often do when they are dragged lower by bonds (such as today again). Investors could have bought futures, or, preferably for many, used our NH stocklist to look for stocks with what I call positive translation. Positive translation means short-term ralative strength – usually on a five minute bar-chart concerning the action of just that day. If the stock is bottoming in time and breaking old resistence levels ahead of the S&P it has positive translation. Even better than positive tranlation is when stocks on our list make a New High just after a suspected market bottom pattern in the S&P. Yesterday, just 5 minutes or so after the S&P, ND100 and DJ futures prices broke out of double bottom patterns on a 5 minute basis, the stock on our list, CPN alarmed us that it was breaking out to a new high. Short term traders should buy these stocks with 1/2-hourly based ops’s for both a day-trade, and the potential for a much stronger move. Note the CPN continued higher throughout even the weakness today. These are two ways we use our tradingmarkets published stock lists to cull out good short-term opportunities.
Submitted by kvale:
Mark, what are you referring to when you say “translation?” Thanks.
mark boucher:
Translation is short-term relative strength. Let’s say S&P opens at 1000 trades down to 990 and then retests that low and makes a slight new low at 989. If your stock made a higher low when the S&P was making a lower low, then it is exhibiting stronger translation of highs and lows than the market itself. Even better, is if as soon as the S&P stops declining and recovers part of a morning decline, your stock makes new highs.
Submitted by trtucker:
Are you trading long only?
mark boucher:
Good Question. No. I trade just the same way oppositely on the short side when such opportunities present themselves. However, since our NL list is getting very small, most trades now are presented on the long side. As soon as the NL list grows, I will definitely want to add some short-exposure via short-sales of New low half hourly flags.
Submitted by MktTmr:
In your opinion will the ending of the Yen carry trade pose a substantial threat to the equity bull market, or will the debt markets diverge?
mark boucher:
In my opinion the end of the Yen carry trade has already played itself out and was one of the reasons for last years correction dynamics.
Traders like Julian Robertson got killed by the Yen carry trade, mostly] in the fourth quarter of last year. I don’t believe it poses a threat to the markets anymore.
Submitted by Moderator:
by clicking on “Hedge Fund Managers” corner on the main menu on our home page.
Submitted by Crook:
Mark; do you find a pattern for the best time to purchase a stock during a market day?
mark boucher:
There are generally two big moves in the averages – one in the morning and one in the late afternoon. Try to buy positive translation during these time frames only if the big move appears to be developing in the desired direction.
As long as bonds are in trouble (a real big problem for the market now!) I suspect the best time to buy, like today, will often be just after bonds close at 3 pm eastern.
Submitted by MktTmr:
In your book you described false inflationary signals (hot spots)which are created due to excess capacity (Hong Kong real estate). In a recent CNBC interview a CEO of an internet company said that he was primarily concerned with “building as much infrastructure as they possibly can,” and stated “there would not be profits until 2003” (zero profits seem to be internet standard).
Seems to me, though I am not a fundamentalist, that there are an awful lot of hut roofers. Q: Is the massive internet infrastructure being created now the hot spot (or one of the many hot spots)of today?
mark boucher:
Absolutely. Down the road this excess capacity will come home to roost. However in the meantime, try not to get burned. My answer to how to handle internets is short-term trading only. And if the IIX double tops here, watch out below. It is very late in the game.
Submitted by Trial User:
Mark,
How would you position your portfolio when the asset bubble deflates, in reguards to question #9, and what level or signal are you watching in bonds? Thank you.
mark boucher:
I’m watching the 118 to 118-14 level in bonds as critical support, which if broken will begin to negatively hit equities and could pop the bubble if bonds keep declining.
I like uncorrelated strategies and funds, like commodities, arbitrage, long/short balanced strategies, and short-term entries into shorts and longs via the stragegies mentioned thus far.
Submitted by jweston:
Mr. boucher,
can you explain the equation of your risk/reward ratio, when taking money off the table and how much to let ride? thank you
mark boucher:
Sure. Let’s say you bought IBM at 100 and used a 98 ops via a half hourly flag breakout early in the day. First of all I’d take half profits (exit half the position) any time during the day that my risk was covered – in other words I’d exit half at 102 or better, because at that point I would break-even even if stopped out of the other half.
If I bought 1000 shares and the close was near 101 I’d sell 700 shares because the profit on 700 of 1 point would just more than cover the remaining 300 shares with my two-point ops risk. This way, in the words of Gann, I’d have nothing to lose and everything to gain, and if IBM continued higher I could catch a mult-week move having entered with only a 2 point risk, a risk that only lasted one day.
Submitted by texra:
Mark, can you think of a fairly recent example of one of these short-term flag trades?
mark boucher:
Yes, today CHRW broke out of a half-hourly flag at 32 1/8 and you would have used a 31 1/8 ops. CHRW broke out of a multi-week flag daily chart base on monday.
Submitted by Moderator:
This concludes our Live Forum. Thanks for all your questions, and thanks to Mark Boucher. Mark will host future Forums, so keep checking our schedule.
Come back next Thursday, May 13, for our next Forum, featuring top options trader Jon Najarian. This forum will be archived shortly for easy review.
Submitted by Crook:
What key technical indicators do you use for short-term trading?
mark boucher:
I use patterns – like flag patterns and trading range breakouts, along with translation (ie: relative strength in the stock versus the S&P over the course of the day). I watch volume and tick volume and bollenger bands and stochastics, but really I use pattern and translation for my trade selection.
Submitted by Trial User:
Mark, I would first like to say that I enjoyed your book. However, my question is as follows: Is there enough productivity gains happening in our economy to justify the present growth rate of the economy (and stocks) or is there an asset bubble and the economy is in the last phases of the Austrian Liquidity Cycle? Thank you.
mark boucher:
There is clearly an asset bubble underway. We’ve had double digit growth in money supply chasing an economy growing at 3-4%. Since 1992 we’ve had 300% gains in stocks on 50% gains in earnings. That is why it becomes critical to watch bonds now!