2 Great Bollinger Band Trading Strategies

I recently updated Incredible Charts’ Bollinger Bands page to highlight two great trading strategies:

First, if you are not familiar with Bollinger Bands here is a quick summary of basic Bollinger Band trading signals.

Bollinger Band Squeezes

The traditional way of trading the Bollinger Band squeeze is on breakout above (or below) the bands after a squeeze. Now Microsoft had been trending upward since 2012 and another advance was likely. It is important to guard against fake signals in the opposite direction, like the one highlighted in mid-September 2016.

Microsoft Bollinger Band Squeeze with Twiggs Money Flow

Green arrow = Long entry
Red arrow = Exit

The red candle on Friday, September 9th closed below the lower band after a narrow Bollinger squeeze, signaling a downward break, before a large engulfing candle on Monday warned of reversal to an up-trend. The primary trend would alert traders to treat shorter-term bear signals with caution but it is also advisable to use Twiggs Money Flow to confirm buying or selling pressure. Here 21-day Twiggs Money Flow is oscillating above zero, indicating buying pressure despite the downward breakout. So the trade would be ignored.
Subsequent rising troughs on Twiggs Money Flow would give me sufficient confidence to enter the trade [green arrow] before the next breakout, with a stop below the recent low at $56. More cautious traders would wait for breakout above the upper Bollinger Band but this often gives a wider risk margin because the stop should still be set below $56. The subsequent pull-back to test support in November 2016 underlines the need not to set stops at the breakout level.
Exit [red arrow] on bearish divergence on Twiggs Money Flow, when the second dip crosses below zero, or if price closes below the lower Bollinger Band.

Bollinger Band Trends

The second strategy is a trend-following strategy I picked up from Nick Radge’s book Unholy Grails, where he uses 100-day Bollinger Bands to capture trend momentum. The rules are simple:

Enter when price closes above the upper Bollinger Band
Exit when price closes below the lower Bollinger Band

Nick proposes setting the upper band at 3 standard deviations and the lower band at 1 standard deviation but I am wary of this (too much like curve-fitting) and would stick to bands at 2 standard deviations.

Here I have plotted Microsoft with 100-day Bollinger Bands at 2 standard deviations and 13-week Twiggs Money Flow to highlight long-term buying and selling pressure.

Microsoft Bollinger Band Trends

For a detailed discussion of trading signals for this chart, go to Bollinger Band Trends.

November 2, 2014

S&P 500 Prime Momentum 12 month performance

S&P 500 Prime Momentum

The S&P 500 Prime Momentum strategy has now been running for twelve months, since November 2013, and returned 17.46%* for the period compared to 17.27% for the S&P 500 Total Return Index. This is below the average return for the 1996 to 2013 research period and is attributable to the sell-off of momentum stocks in recent months. Macroeconomic and volatility filters continue to indicate low to moderate risk typical of a bull market and we expect stocks to recover in the months ahead.

* Results are unaudited and subject to revision.

August 8, 2014

When to sell and when to buy?

Investors are faced with the same emotional tug-of-war at every correction: Do I sell and abandon my positions or do I sit tight and ride out the storm? Here are a couple of useful perspectives:

What is your investment time frame?

Do you plan to invest for the long-term (5 to 10 years) or is your investment horizon a matter of months or weeks? If your investment horizon is long-term, you are investing for the primary trend. Your intention is unlikely to be to time secondary market movements.

Is timing secondary corrections profitable?

Our research shows that the average re-entry point, after brokerage and slippage is higher than the exit point and erodes performance.

Has the earning capacity of stocks you hold been affected by the correction?

A correction is a wave of negative sentiment, normally caused by an external shock — like the prospect of higher interest rates, oil prices, some new conflict or a threat to international trade. Where the market decides that earnings are unaffected and there is no permanent loss of value, it tends to recover fairly quickly. If, however, the market decides that there is a long-lasting effect on earnings then stocks are likely to be re-rated — resulting in a long-lasting drop in value. The probability of the former is far higher than the latter: the ratio of primary to secondary adjustments is low.

When is the best time to hold Momentum stocks?

We have not done a wide-ranging study of this, but the best two months performance for our ASX200 Prime Momentum strategy in the last two years were July 2013 (11.00%) and February 2014 (9.04%) — both in the middle of corrections.

ASX 200 Corrections

Attempt to time the correction and you may miss the best-performing months.

July 18, 2014

To sell or not to sell?

Recent acquisition Northern Star Resources [NST] in the ASX 200 portfolio is a great example of the conundrum faced by long-term investors when a new stock leaps out of the starting blocks. Profit-taking is evident from the tall shadows/wicks early in the week and in the decline of 21-day Twiggs Money Flow. Medium-term selling pressure suggests the stock is likely to retrace and give back some of the gains of the last two weeks. The temptation must be great to sell the stock and lock in profits of close to 30 percent.

It is important, however, to stick to the plan. We are investing for a longer time frame in anticipation of much larger gains. There is no guarantee that any individual stock, including NST, will deliver. But I can guarantee you that they will not deliver long-term gains if you sell within the first few weeks.

Investors in S&P 500 stock Micron Technology [MU] faced a similar conundrum in July 2013. The stock had put in a good run from $9.00 before encountering profit-taking as it approached $15.00. 21-Day Twiggs Money Flow retreated below zero and the stock fell back to $12.50. Many investors would have taken this as a sign to get out.

With hindsight, the decision to stay the course looks easy: support held at $12.50 and MU is now trading at $33.00. But I am sure that there were many investors who forgot their original plan and took profits at $12.50.

….They just aren’t bragging about it.

July 5, 2014

Understanding Momentum

Since its initial discovery by DeBondt & Thaler in 1985, the momentum effect has been documented and researched in many markets worldwide. Stocks which have outperformed in the recent past tend to continue to perform strongly over the months ahead.

Research conducted by Dr Bruce Vanstone and me indicates that Momentum significantly outperforms the major benchmark indices in both US and Australian markets. Investors, however, tend to focus on the annual rate of return without considering the accompanying volatility. Consider our simulation of Twiggs Momentum on the S&P 500 for the period January 1996 to June 2013 as an example.

Dark green areas represent cash holdings, when market risk is identified as elevated. The blue line represents the benchmark S&P 500 index. Click on the image if you need a larger view.

Investment Strategy:	Twiggs Momentum	Buy & Hold
Starting Capital (USD):	$100,000	$100,000
Ending Capital (USD):	$4,871,686.27	$258,649.35
Annualized Gain:	24.89%	5.58%
Total Commission Paid (at 5 BPS):	$66,194.35	$49.96
Number of Investments:	331	1
Win Rate:	54.38%	100.00%
Average Profit:	44.16%	158.79%
Average Loss:	10.15%	0.00%
Maximum Drawdown:	38.64%	56.77%
Maximum Drawdown Date:	9/11/2006	3/9/2009
Sharpe Ratio:	0.98	0.42

Investors tend to focus on the annualized gain of 24.89% p.a. without really applying their minds to the other statistics in the table. Maximum Drawdown of 38.64%, while lower than the index, means the portfolio is still subject to gut-wrenching volatility. Soaring gains are often followed by sharp falls and it takes strong resolve to stick with the strategy after one of these setbacks. Many investors would have abandoned ship after the first major drawdown in early 2000.

Another factor is the Win Rate of just above 54% which means that over 45% of all stocks purchased are sold at a loss. These are typical statistics for a momentum strategy, but investors can expect a high percentage of stocks to be cut from the portfolio for failing to adhere to the expected growth path. The strength of the strategy, however, is the expected gains on stocks that do adhere to the momentum growth path, with average profits exceeding average losses by a ratio of almost 4 to 1. That is where the excess returns are generated and is the reason why the strategy outperforms the benchmark index.

There are also extended periods where the portfolio remains in cash — long enough for doubts to grow as to whether momentum still works in the markets. My own view is that momentum strategies have been shown to outperform the Dow over the last 100 years and are likely to remain viable for as long as we have stock market cycles.

Coping with the emotional roller-coaster ride of investing in stocks is never easy, but here are some hints.

Focus on your investment time horizon of at least 5 years.
Check stock prices no more than once a week. Tracking prices daily or more frequently tends to cloud your judgement.
Welcome gains ahead of long-term averages, but expect them to fade over time.
If something unusual occurs, step back from the market, examine the long-term history, and ask: “Is this really unexpected or were my expectations unrealistic.”

That’s all for today. Take care.

June 24, 2014

Quant Funds Are Hot Again | Morningstar

By Greg Carlson

Funds that use quantitative stock-picking models are on a roll. A list of 52 U.S.-sold quant funds compiled by Morningstar beat more than 80% of their respective peers over the trailing three years through June 13, and the group outperformed its respective peers in 2011, 2012, 2013, and thus far in 2014.

S&P 500 Momentum and Economic Outlook

This an example of the monthly updates from the new Research & Investment joint venture between Incredible Charts and Porter Capital.

S&P 500 Momentum – October 2013

Latest Performance

S&P 500 Momentum is based on Porter Capital’s successful ASX200 Prime Momentum strategy which returned +38.43% for the 12 months ended 31st October 2013. Actual historical performance for the S&P 500 is not yet available.

Sectors

The portfolio includes the usual technology, Internet retail and biotechnology sectors but also insurance, airlines, and oil & gas exploration.

Stock Performance

Star performer Netflix (NFLX) climbed from $80 to above $350 over the last year, breaking its 2011 high of $300. Twiggs Money Flow troughs above zero indicate strong buying pressure.

GILD

Stock Selections

Hold

We continue to hold the following stocks:

NFLX

New Additions

There are four new additions this month:

GILD

Biotech newcomer Gilead Sciences (GILD) climbed from $20 to above $70 over the last three years. Short corrections indicate buying pressure and respect of support at $64 would signal a fresh advance. Twiggs Money Flow troughs high above zero also suggest strong buying pressure.

GILD

Disposals

Stocks replaced are:

REGN (SELL)
BSX (SELL)
GT (SELL)
CELG (SELL)

Regneron Pharmaceuticals (REGN) rose from $30 to $300 over the last three years, but encountered strong resistance at $300/$320 and has fallen outside our top ten ranking. Breach of support at $270 and the rising trendline would warn that the primary trend is weakening. Recovery above $320, however, would most likely see it regain its position in the portfolio.

TRIP

Market Outlook

Market Filters

Our market filters indicate low to moderate risk and we maintain full exposure to equities.

General Outlook

As global growth recovers we expect equity markets to be buoyed by improvements in both earnings and dividends, with strong momentum over the quarter. There is much discussion in the media as to whether various markets are in a “bubble”. Little attention is devoted to the fact that bubbles can last for several years, and sometimes even decades. The main driver of both stock market bubbles and real estate bubbles is debt. Anna Schwartz, co-author with Milton Friedman of A Monetary History of the United States (1963) described the relationship to the Wall Street Journal:

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates …..

Currently, there is evidence of expansive monetary policy from the Fed, but the overall impact on the financial markets is muted. Most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed. The chart below compares Fed balance sheet expansion (QE) to the increase in excess reserve deposits at the Fed.

US Household Debt

A classic placebo effect, the Fed is well aware that the major benefit of their quantitative easing program is psychological: there is little monetary impact on the markets.

Corporate debt (green line below) is expanding rapidly as corporations take advantage of the opportunity to issue new debt at low interest rates, but household debt (red) is still shrinking.

US Household Debt

There are pockets of concern, like the rapid recovery in NYSE margin debt, but risk of a Dotcom-style stock market bubble or a 2002/2007 housing bubble is low while household debt contracts.

Regards,

Colin Twiggs

Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. We are what we repeatedly do. Excellence, then, is not an act but a habit.

~ Aristotle

Disclaimer

Research & Investment Pty Ltd is a Corporate Authorized Representative (AR Number 384 397) of Andika Pty Ltd which holds an Australian Financial Services Licence (AFSL 297069).

The information on this web site and in the newsletters is general in nature and does not consider your personal circumstances. Please contact your professional financial adviser for advice tailored to your needs.

Research & Investment Pty Ltd (“R&I”) has made every effort to ensure the reliability of the views and recommendations expressed in the reports published on its websites and newsletters. Our research is based upon information known to us or which was obtained from sources which we believe to be reliable and accurate.

No guarantee as to the capital value of investments, nor future returns are made by R&I. Neither R&I nor its employees make any representation, warranty or guarantee that the information provided is complete, accurate, current or reliable.

You are under no obligation to use these services and should always compare financial services/products to find one which best meets your personal objectives, financial situation or needs.

To the extent permitted by law, R&I and its employees, agents and authorized representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information. If the law prohibits the exclusion of such liability, such liability shall be limited, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.

Important Warning About Simulated Results

Research & Investment (R&I) specialize in developing, testing and researching investment strategies and systems. Within the R&I web site and newsletters, you will find information about investment strategies and their performance. It is important that you understand that results from R&I research are simulated and not actual results.

No representation is made that any investor will or is likely to achieve profits or losses similar to those shown.

Simulated performance results are generally prepared with the benefit of hindsight and do not involve financial risk. No modelling can completely account for the impact of financial risk in actual investment. Account size, brokerage and slippage may also diverge from simulated results. Numerous other factors related to the markets in general or to the implementation of any specific investment system cannot be fully accounted for in the preparation of simulated performance results and may adversely affect actual investment results.

To the extent permitted by law, R&I and its employees, agents and authorized representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information offered by R&I whether or not caused by any negligent act or omission.

November 16, 2013

The coach who never punts [video]

Coach Kevin Kelley would make a great share trader/momentum investor. He questions the accepted norms, analyzes the data and plays the percentages, instead of following the herd.

Coach Kevin Kelley of Pulaski Academy in Little Rock, Arkansas, instructs his players to never punt, never field punts, and only do onside kicks, and he claims that math backs up his innovative philosophy. Grantland spent some time with Kelley and his players to learn more about the coach behind the team that once scored 29 points before its opponent touched the ball.

Hat tip to Barry Ritholz

November 16, 2013

What’s New: Twiggs Momentum research results

Further to my recent part-acquisition of Porter Capital Management, I would like to share with you our progress in developing new investment strategies.

Quarterly Performance

Firstly, Porter Capital’s ASX200 Prime Momentum strategy achieved a 38.43% gain for the 12 months ended 31st October 2013, out-stripping the total-return index by 12.95% (performance is measured after brokerage costs but before fees and taxes which vary according to portfolio size and commencement date).

Twiggs Momentum

We have also completed testing of strategies using Twiggs Momentum to identify top-performing stocks. Twiggs Momentum is a specialized momentum indicator developed by me and used extensively in my Trading Diary. Test results way exceeded our expectations.

Market Filters

Just as important, we have expanded our use of macroeconomic and volatility filters to help preserve capital during sustained bear markets.

I have long been opposed to mechanical trading/investment systems on the grounds that no one system is suited to all market conditions. To overcome this, Dr Bruce Vanstone and I developed a new approach employing filters to identify when market risk is elevated, so the portfolio can be moved to cash and/or government bonds.

S&P 500

Historical simulation of $100,000 invested in S&P 500 stocks since January 1996 using our Twiggs Momentum strategy returned an average of 24.89% p.a. Dark green areas represent the move to cash when market risk is elevated. The blue line represents the benchmark S&P 500 index.

Click on images to enlarge.

ASX 200

Historical simulation of $100,000 invested in ASX 200 stocks since January 2000 using Twiggs Momentum strategy returned an average of 23.77% p.a. Dark green areas represent the move to cash when market risk is elevated. The blue line represents the benchmark ASX 200 Accumulation Index.

Click on images to enlarge.

The Momentum Effect

Since its initial discovery by DeBondt & Thaler in 1985, the momentum effect has been documented and researched in many markets worldwide: stocks which have outperformed in the recent past tend to continue to perform strongly.

Investment Research & Systems

All strategies are developed and rigorously tested by Dr Bruce Vanstone, head of investment research, and myself to ensure their suitability for local market conditions. And all systems are rule-based to ensure decision-making is disciplined, unemotional and objective.

Porter Capital

Porter Capital manage funds for high net worth investors and independent financial advisers. We currently manage funds in individual accounts across two adviser platforms, Hub 24 and Mason Stevens, offering investors five key benefits:

Beneficial ownership of your underlying investments;
Online access (24×7) to your portfolio;
Comprehensive tax reporting;
Brokerage at wholesale rates; and
Portfolio and risk management by a team of market specialists.

Momentum is an active strategy suitable for lower tax vehicles such as self-managed or self-directed superannuation, pension or retirement funds. The strategy complements and diversifies other equity strategies, smoothing overall portfolio returns. Within this context, the ASX200 Prime Momentum strategy enhances Core and Satellite equity exposure where the objective is diversification of style and strategy.

A Word of Caution

Results that look too good to be true, normally are. No market filter can provide 100% protection against market down-turns, and simulations carried out on data history are no guarantee of future performance. Diversification, across markets and strategies, is important to spread risk, but you must consider your overall risk profile. Please consult your financial adviser for advice tailored to your specific needs.

We will be visiting major cities in Australia in the next few months and look forward to updating readers on our latest research and performance. For more details, visit our website at Porter Capital Management.

If you do what you’ve always done, you’ll get what you’ve always gotten.

~ Tony Robbins

Disclaimer

Porter Capital Management Pty Ltd is a Corporate Authorized Representative (AR Number 300245) of Andika Pty Ltd which holds an Australian Financial Services Licence (AFSL 297069).

Porter Capital Management (PCM) has made every effort to ensure the reliability of the views and recommendations expressed in the reports published in this newsletter and on its websites. Our research is based upon information known to us or which was obtained from sources which we believe to be reliable and accurate.

No guarantee as to the capital value of investments, nor future returns are made by PCM. Neither PCM nor its employees make any representation, warranty or guarantee that the information provided is complete, accurate, current or reliable.

You are under no obligation to use these services and should always compare financial services/products to find one which best meets your personal objectives, financial situation or needs.

The information in this newsletter and on this web site is general in nature and does not consider your personal circumstances. Please contact us or your professional financial adviser for advice tailored to your needs.

To the extent permitted by law, PCM and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information. If the law prohibits the exclusion of such liability, such liability shall be limited, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.

Important Warning About Simulated Results

Porter Capital Management (PCM) specialise in developing, testing and researching investment strategies and systems. Within this newsletter and the PCM Web site, you will find information about investment strategies and their performance. It is important that you understand that results from PCM research are simulated and not actual results.

No representation is made that any investor will or is likely to achieve profits or losses similar to those shown.

To the extent permitted by law, PCM and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information offered by PCM whether or not caused by any negligent act or omission.

October 27, 2013

Saving Investors From Themselves | WSJ

Jason Zweig, in his 250th Intelligent Investor column for The Wall Street Journal, writes:

From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance…….My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

While I agree with Jason that investors are often their own worst enemy, I would hesitate to advise anyone to invest in under-performing stocks (anticipating reversion to the mean) or to adopt a buy-and-hold strategy. Our research shows that investing in top-performing stocks (buying momentum) delivers significant outperformance over a buy-and-hold strategy in the long-term.

The risk to momentum investing is not of reversion to the mean, but of significant draw-downs when there is a broad market down-turn. Most stocks fall in a bear market, but top-performing (momentum) stocks tend to fall further. Value stocks are also likely to fall during a market down-turn and the best defense is often to move to cash or counter-cyclical investments such as bonds.

The difficulty is to identify these broad market swings with enough certainty to confidently switch your investment allocation. Common mistakes are to continually jump in and out of the market at the slightest hint of bad news, leading to expensive whipsaws, or to get caught up in the intoxicating sentiment of a bull market, blinding you to warning signs of a reversal.

I believe investors should allocate half their time to deciding what stocks to buy/sell and the other half to identifying when to be in/out of the market. Too often I see them focusing on one half while neglecting the other — usually with disastrous consequences.