The Universal Tactics of Successful Trend Trading: Finding Opportunity in Uncertainty (Brent Penfold, 2020)

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Principle of successful trading

  1. Preparation
    • Maximum adversity
    • Emotional orientation
    • Losing game
    • Random market
    • Personal boundary
    • Best loser wins
    • Risk management
    • Trading partner
    • Toolkit
      • Portfolio construction
      • Data
      • Software
      • Attributes of winning strategies
      • Strategy review
      • Strategy benchmark
      • Strategy development
  2. Enlightenment
    • Avoid risk of ruin
      • Best loser wins
      • Money management
    • Holy grail = E x O
    • Simplicity
      • Support/resistance
    • Tread where majority fear
    • Validation - T.E.S.T
  3. Develop a trading style
    • Style
      • Trend trading
      • Swing trading
    • Timeframe
      • Intra day
      • Short-term
      • Medium-term
      • Long-term
  4. Selecting markets
    • Characteristics
    • Single markets
    • Multiple markets
    • Market segments
      • Currencies
      • Interest rates
      • Indices
      • Energy
      • Metals
      • Grains
      • Softs
      • Meats
    • Trade segments
      • Consumer discretionary
      • Consumer staples
      • Energy
      • Financials
      • Health care
      • Industrials
      • Information technology
      • Materials
      • Metals/mining
      • Telecommunications services
      • Utilities
      • Real estate
  5. The 3 pillars
    1. Money management
      • Fixed risk
      • Fixed capital
      • Fixed ratio
      • Fixed units
      • Williams fixed risk
      • Fixed percentage
      • Fixed volatility
    2. Methodology
      • Approach discretionary/mechanical
      • Method: set-up + trade plan + validation
      • Set-up: analysis - which market theory?
      • Trading’s Pandora’s box
      • Astrology
      • Cycles
      • Dow theory
      • Elliott wave
      • Fibonacci
      • Fractal
      • Geometry
      • Indicators
      • Market profile
      • Patterns
      • Seasonals
      • Statistical
      • W.D Gann
      • Trade plan: entry + stop + exit
      • Validation - E(R): Thirty Emailed Simulated Trades (TEST)
    3. Psychology
      • Managing hope, greed, fear and pain
  6. Trading
    • Putting all together
    • Monitor performance
    • Positive reinforcement
    • Equity momentum

Basic knowledge

  • Acknowledge and accept everyone loses
  • Expect and accept 67% losses
  • Accept technical analysis has little value
  • Seek evidence
  • Accept no one can predict the future
  • Time to get serious
  • Stop trading what you think
  • Read The Universal Principles of Successful Trading
  • Become a cynic
  • 0% risk-of-ruin (ROR) is king
  • Compound annual growth rate (CAGR) is queen
  • The only secret
  • Accept the truth about trading
  • Acknowledge being a discretionary trader is difficult
  • Follow the smart money
  • Placebo traders
  • Be sensible with indicators
  • The biggest crime

4 horsemen of strategy apocalypse

  1. Data mining
    • Few markets
    • Select markets
    • Sector dependent markets
  2. Excessive curve fitting
    • Too many rules
    • Too many variable-dependent indicators
    • Different variable values for buy and sell setups
    • Different variable values per market
  3. New
    • Marketing hype heralding the virtue of a latest discovery
    • Lack of out-of-sample data
  4. Missing equity curve
    • No equity curve = no strategy
    • No strategy means absence of clearly defined trading rules

Trend trading

  • An approach that uses past prices to make buy and sell decisions.
  • The trick here is to correctly define the trend.
  • Golden tenets
    • Follow the trend
    • Cut losses short
    • Let profits run
  • Momentum trend trading
    • Relative momentum
      • Relative price move
        • Hearne 1% rule (1850)
        • Gartley 3- and 6-week crossover (1935)
        • Donchian 5- and 20-day crossover (1960)
        • Golden 50- and 200-day crossover
    • Relative time move
      • Calendar rule (1933)
    • Absolute momentum
      • Breakout system
        • Price breakouts
          • Ricardo rules (1800)
        • Swing breakouts
          • Dow theory (1900)
          • Congestion breakouts
          • Livermore reaction (1900)
          • Darvas box (1950)
          • Arnold Pattern Probability Strategy (PPS) (1987)
        • Channel breakouts
          • Dochian 4-week rule (1960)
          • Dreyfus 52-week rule (1960)
          • Turtle trading (1983)
        • Volatility breakouts
          • Bollinger bands (1993)
          • ATR bands
      • Retracement systems
        • Elder’s triple screen trading system (1985)
        • Mean revision
  • Relative strength trend trading
  • Important observations
    1. It is the safest way to trade with trend.
    2. Trends move markets and are the basis of all profits.
    3. It is miserable being a trend trade, you lose on 67% of your trades
    4. Popular ways to trade a trend
      • Trade breakout
        • Never miss a big trend
        • Use larger stops
      • Trade retracements
        • Can miss big trends
        • Use smaller stops

Financial models

  • Random walk theory (RWT)
  • Efficient market hypothesis (EMH)
  • Modern portfolio theory (MPT)
  • Capital asset pricing model (CAPM)
  • Black and Scholes option pricing (Options)
  • Value at Risk (VAR)
  • A normal distribution
  • The bell curve

Trading techniques

  • Cycles
  • Pattern recognition on chart patterns and/or candle sticks
  • Seasonals
  • Astrology
  • Moon phases
  • Tidal rhythms
  • Dow theory
  • Elliott wave theory
  • WD Gann
  • Market profile
  • Fibonacci analysis
  • Fractals
  • Sacred geometry
  • Trend lines
  • Indicators analysis for measuring price, trend, retracement, momentum, sentiment, volatility and volume

Cognitive bias
  • Underreaction
    • Anchoring bias
    • Belief preservation bias
    • Confirmation bias
    • Conservatism bias
    • Loss aversion bias or disposition effect
  • Overreaction
    • Herding bias
    • Recency bias
Available indicators
  • Accumulation distribution
  • ADX
  • Aroon oscillator
  • ATR
  • Bollinger bands
  • Chaikin Money flow
  • Chaikin oscillator
  • Chaikin volatility
  • Chandelier exits
  • CCI
  • Coppock indicator
  • Chande momentum oscillator
  • Choppiness index
  • Candlestick patterns
  • Detrended price oscillator
  • Directional movement
  • Displaced moving average
  • Donchian channels
  • Ease of movement
  • Elder ray index
  • Equivolume charts
  • Exponential moving average
  • Fibonacci extensions
  • Force index
  • Heikin-ashi candlesticks
  • Ichimoku cloud
  • Keltner channels
  • KST indicator
  • Linear regression
  • Least squares
  • Hull moving average
  • MA oscillator
  • MACD
  • Mass index
  • Median price
  • Momentum
  • Money flow index
  • Moving average
  • Moving average filters
  • Multiple moving averages
  • Negative volume
  • On balance volume
  • Parabolic SAR
  • Percentage trailing stops
  • Pivot points
  • Positive volume
  • Price comparison
  • Price differential
  • Price envelope
  • Price ratio
  • Price volume trend
  • Percentage bands
  • Rainbow 3D moving averages
  • Rate of change (price)
  • Relative strength
  • Relative strength indicator (RSI)
  • Safezone indicator
  • Simple moving average
  • Slow stochastic
  • Smoothed rate of change (SROC)
  • Standard deviation channels
  • Stochastic oscillator
  • Stochastic RSI
  • Trend lines
  • TRIX indicator
  • True range
  • Twiggs momentum oscillator
  • Twiggs smoothed momentum
  • Twiggs volatility
  • Twiggs trend index
  • Ultimate oscillator
  • Volatility
  • Volatility ratio
  • Volatility stops
  • Volume oscillator
  • Weighted moving average
  • Wilder moving average
  • Willams %R
  • Williams accumulate distribute
Performance measurement
  • Risk adjusted returns = annual return / annual risk
  • Sharpe ratio = annual excess returns / standard deviation annual excess returns
  • Sortino ratio = Annual excess return / standard deviation annual negative returns
  • The Ulcer index (UI)

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