Wheelie’s New Improved Index Trading System - Part 4 of 4

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This is the Final Part of a Series of Blogs - if this is the first time you have been unlucky enough to find this Series then Links to the earlier Parts are at the bottom of this one if you scroll down.

Conclusion
I am hoping that I have done these Blogs in a way which Readers can makes sense of and will enable them to think about how to go about such Index Trading themselves if the urge takes hold. You can use ETFs like XUKS (a way of Shorting the FTSE100 that you buy and sell like a Share. To go Long on the FTSE100 you could use something like ISF I think - you will need to check this) instead of Spreadbets and of course things like CFDs will give a similar result (but these come with Tax disadvantages when compared to Spreadbets). But it goes without saying (but I will say it anyway !!) if you do fancy having a go you must be extremely careful and start with a Practice Account perhaps or at least start with very low Position Sizes - don’t go betting £1000 a Point on the FTSE100 on your first Trade !! (that would be equivalent to about £7.2m of Exposure by the way !!!).

Before I finish the Blog Series off, I just want to stress the following Key Points:

• Results are the Cumulative Effect of many Trades - when using a System like this there is a crucial principle that needs to be understood that the Overall Results are the total of all Trades added together. This is vital to understand because if you fail to get a proper grasp on this concept then it will hurt your Performance and lead you to make bad Decisions as a result of weak Discipline. Having Tight Stoplosses which mean a controlled amount of Loss is potentially possible when Opening any Trade is all part of how the System works. You do not measure your Results over 3 or 4 individual Trades but you measure it over perhaps 3 Months or 6 Months or a Year or something - depending on how many Trades you do. If you do not understand this and accept what it entails and the Discipline required, then there is no point even starting down this path because you can be totally certain you will fail.

• Discipline is essential - all Trades need to be thoroughly planned and executed exactly as per the Plan. You need to look for very good Entry points which mean that you are highly likely to succeed with the Trade and you are in effect stacking the odds in your favour; but such Entries also mean that your Losses will be small and controlled if the Trade does not go your way. When carefully planning each Trade you need to size your Position according to where you are going to Enter the Trade and where your Stoploss is going to be placed - this must be equal to or less than the acceptable Loss Amount per Trade that you have established for your System from the off. I myself accept that on any Trade I am prepared to lose the equivalent of 0.3% of my Total Portfolio Value. After a long time of using the System, if I find I am happy with the Results then I might stretch that to a higher amount such as 0.5% or more - but that is for the future. 

 

• While planning your Entry and Stoploss Levels, it is worth considering a Target Level as well - I am not overly focused on this at the moment, but many Trading Gurus say you should be looking for a Ratio of  3 to 1 or 2 to 1 between the amount you are likely to ‘Win’ if the Trade goes your way and the amount you will lose if the Stoploss gets hit (as an interesting aside, from a psychological viewpoint it helps to not really consider a Trade that hits its Stoploss as a ‘Losing’ Trade - you have not so much lost as won in the sense that you have obeyed the Rules of your System and your Discipline has been robust and you should be congratulating yourself. Don’t pop too many Champagne Corks though - you must analyse the Trade thoroughly and try to see if you did anything wrong which could be ‘fixed’ or if in fact it was ‘just one of those things’.) if you have read ‘Way of the Turtle’ by Curtis Faith or any of the other Books on the Turtle Trading System, then you will know how much Discipline turned out to be a vital element which separated the few Successful Traders from the majority who Failed - having a System is the easy part but actually executing it properly is the area where most people go wrong.

 

• I have focused on the 4 Trade types I like in particular but of course in reality you can Enter Trades that fulfil other Setups and there is no reason why you should not do this. I guess in many ways a number of them will be variations on the Breakout idea and it always makes sense to Trade in the Direction of the Dominant Trend. I think the Book ‘Candlesticks for Dummies’ is good on the idea of Candlestick ‘Continuation Patterns’ and this Book might give you a better understanding of what sort of opportunities for Trades there are (you can find that Book in ‘Wheelie’s Bookshop and I thoroughly recommend it - it is probably the only Book that I look at several times every Week when trying to interpret Chart Patterns. In fact, I noticed the other night that my copy is starting to look a bit worn !!)

 

• Ignore the ‘Noise’ and the ‘Talking Heads’ on Bloomberg etc. (it is acceptable to listen to Talking Heads - ‘Psycho Killer’ might get you in the right frame of mind to be a ruthless Trading Beast !!). I am very much driven by the Chart Patterns and Candlesticks and suchlike - but it is crucial to keep things simple and uncluttered. I take very little notice of the ‘News’ that the Financial Media is pumping out although I do love the ‘Buy Signal’ that is provided by the Normal Mainstream Media when we have had a Major Market Sell-off and Stocks have been falling heavily for perhaps a Week or so and then when we see the Market Collapse on the BBC 6pm News then that is the best Buy Signal ever - it means we have hit the Bottom and Stocks always shoot up just afterwards !! I take little notice of what the ‘Experts’ are going on about - it is just more clutter that leads you to make mistakes and feeds your Emotions and plays on your Nerves - stay like a Robot and ‘Trade what you see, not what you think’. I am working on a Blog about this subject which should appear in coming weeks sometime.

 

• I tend to focus on the S&P500 because it is the ‘widest’ US Index in the sense that it contains 500 Major Companies which spread across pretty much all the Sectors etc. The DOW is quite limited because it is only 30 Huge MegaCap Stocks and the Nasdaq Composite Index is only Tech Stocks - so that is quite skewed. If I want to do something in the UK, then the obvious one is the FTSE100 and I generally find it ok but it can be a pain if the Pound is doing extreme things. In reality, using my System and focusing on the Rules and Discipline and following what my Charts tell me, then the FTSE100 is fine and as long as the ‘Thing’ you want to Trade is highly liquid and gives clear Candlesticks etc., then you can pretty much Trade anything. My System is not really just limited to Indexes - you can adapt it to Trade any Assets I think but you might need to tweak your Rules a bit.

 

• Keep your Technical Indicators simple and limited - if you have too many Indicators and stuff then you just end up confused and you will make errors. If you regularly read my Charts Blogs that I produce pretty much every Sunday Night, then you should see various Charts which show the fairly limited range of Indicators I use - and at the bottom of this Blog I have included a Link to a Series of Blogs I wrote a long time ago about Optimal Payments OPAY which I used as a Test Case to show the Indicators and to explain what they mean. In practice I have a couple of new Indicators that I use now as well - such as the Heiken Ashi Candlesticks which I think are truly brilliant (I am convinced you could create a Trading System which simply used these HA Candles to trigger your Buy and Sell Decisions - as long as you Plan the Trades with Tight Stoplosses etc. then it should work). The main Signals I use (pretty much in order of how much I like them) are: Normal Daily Candlesticks, Support and Resistance, Trendlines & Channels, RSI (Relative Strength Index), 13/21 Day EMA Crosses, Heiken Ashi Candles, MACD Humps (Moving Average Convergence Divergence), Bollinger Bands, etc.

 

• Execution of Trades - I didn’t really cover this in the previous Blogs so it might as well go in here. I tend to look at my Charts around 10.15 to 10.30pm at Night (this is because the US Markets Close at 9pm UK time and the ShareScope Software I use does not update until 10pm and takes about 5 minutes) and after some poking around if I decide to place a Trade (or to Close an existing Trade) then I will execute this immediately. In a practical ‘Lifestyle’ sense this suits me very well but it might be that Readers find a variation on this more timely and perhaps superior Trades will result. However, I suspect there is an element of ‘Swings and Roundabouts’ and ‘Win some, lose some’ about this and over many Trades my Entries and Exits probably average out over time. I suspect that if you try to time your Trades to the minute and do lots of ‘Screen-Watching’, then you won’t actually achieve Results that are much better than mine and you are putting yourself through a lot of grief and hassle for very little gain. Quite often with Investing and Trading, ’Over-thinking’, trying too hard and too much complexity don’t actually bring about a better Result. This is something Readers can consider and experiment with as they see fit - but I just wanted to explain how I tend to do things. In a similar vein, using 4 Hour Candlesticks rather than Daily ones might give better Results.

 

• Try to monitor your own Psychological Condition and Frame of Mind - this is so important, although of course not easy to do. If you are going to Trade successfully then you need to have your Head fully under control and you need to be focused and yet relaxed and unflustered. It is never a good idea to Trade if you are tired or not feeling well or similar - make sure you are really in a fit state to be in charge of a Computer and Trading Account. It is also worth appreciating that you will have periods of perhaps many Trades where they simply do not work and you keep getting ‘Stopped Out’. Keep your Head when such runs occur and try to remain Objective and to ‘See the Bigger Picture’. 

 

• Often a good way to handle this is to take a break from your Trading and spend time away from the Screen thinking in a relaxed way about what you are doing and what is likely to be going wrong. One way to do this might be to keep a Journal recording all of your Trades with commentary on what went well and what went badly and this can be invaluable when looking back and trying to review where something is simply not working and you think your Approach needs to be tweaked to remove the problem. Above all, don’t panic - these difficult Periods are normal and happen to all Traders - just remember to take your time and to analyse things in a Robotic, Calm and Rational manner - and make sure any changes you make to your System are more along the lines of minor tweaks rather than complete junking and resurrection of how you do things. If you really are at the latter stage, then you need to take a long time out and to figure out a new System from scratch - it should not come to this if you are following the Basic Principles I have laid out in this Blog Series. 

 

• If you have mates who are Traders with similar ways of doing things, then perhaps meet them down the Pub and have a proper discussion with them about your System and what is going wrong - often just talking about these things will make you realise where your Approach can be tweaked. If you are a Dog Owner, then take your Pooch out for a Walk and tell him/her all about your frustrations - they probably won’t say much but just the process of doing this might help you figure out the Solution (if you see People coming the other way though, be careful because they might look at your very strangely if they hear you having an in-depth Financial Discussion with your Mutt).

 

• I put a ‘Warning’ at the end of Part 2 to these Blogs but I want to just stress what this means in The Real World. I was thinking back over my Years as an Investor which spans about 19 Years now, and in that time I can only think of that one event, The Twin Towers attack in 2001, where this occurred - so we are really talking about a 1 Day in 4750 Days which is something like a 0.02% Occurrence. Obviously such Events can and will happen again, but they are clearly true Outliers (the ultimate ‘Black Swan’?) and as I mentioned before, the Circuit Breakers and other mechanisms that have been introduced into Stock Exchange Electronic Systems since then might lower this Risk.

The future for me is to get my ‘System’ working consistently for at least a year and then to slowly increase the Bet size - but I will do this very carefully.

I hope Readers have enjoyed this Series - it has been extremely useful for me to get this down in electronic text form and following this I feel a lot more happy that I have a System which can deliver nice Returns for me in coming Years and to lower my Long Portfolio Drawdowns by effective Hedging when we go through tough periods for the Markets. If it simply helps me achieve the latter then it will be a very successful and useful technique.

Regards, WD.


Related Blogs:
I have talked a lot about Psychology in these Blogs and if you click on the Blog Category ‘Psychology’ you will find oodles of Blogs I have written related to this important element of Trading.

Here are Links to the Optimal Payments OPAY Buy Rationale Blogs which contain detail on the Technical Indicators I like to use (these go back to the early days of the whole WD thing and back then I hadn‘t started putting in Links to the other Blogs in a Series !!):

http://wheeliedealer.weebly.com/blog/opay-technical-buy-signals-part-1-of-probably-lots

http://wheeliedealer.weebly.com/blog/opay-technical-buy-signals-part-2-of-maybe-a-few-more

http://wheeliedealer.weebly.com/blog/opay-technical-buy-signals-part-3-of-surely-near-end-of-series

http://wheeliedealer.weebly.com/blog/opay-technical-buy-signals-part-4-of-probably-going-to-be-about-6-maybe

http://wheeliedealer.weebly.com/blog/opay-technical-buy-signals-part-5-of-definitely-looking-like-6

http://wheeliedealer.weebly.com/blog/opay-technical-buy-signals-part-6-of-6

And here are Links to the other 3 Parts in this ‘Index Trading System’ Series:

http://wheeliedealer.weebly.com/blog/wheelies-new-improved-index-trading-system-part-1-of-3

http://wheeliedealer.weebly.com/blog/wheelies-new-improved-index-trading-system-part-2-of-3

http://wheeliedealer.weebly.com/blog/wheelies-new-improved-index-trading-system-part-3-of-4