Individual Stock Analysis using
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Dr. John F. Clayburg
Portfolio Trading Method
A single, basic trading theory applied across a wide variety of contracts
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Spectrum System - General Operating
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Portfolio Trading Method
System Operating Method
The spectrum portfolio trading method utilizes two basic theories of short term trend analysis - follow through and range expansion.
Follow through can best be described
as a tendency of a market, when in a short term trend, to stay in the trend
into the next day of trading. A market which has a weak close is expected
to follow through to the downside at least for part of the next day; a
market exhibiting a stronger close should show some strength early tomorrow.
For our purposes, we'll define the strength or weakness of a daily trend by the relative position of the close with respect to the high and the low of the day. If the close is relatively near the high of the day the market is exhibiting a strong close - one which should follow through to the upside in early trading for the next day. If the close is nearer the lowest price of that market for the day, it is defined to be a weak close which should lead to lower prices during at least the early part of the trade tomorrow.
the box to the left note examples of market follow through.
Bar #1 shows a weak close with the close of the day much closer to the low than the high. Observe how the market, in this case, respects the follow through pressure of the preceding day by trading considerably lower in bar #2 before rallying to close near the high of the day.
Again the market respects the follow through tendency in bar #3 as the market continues to trade higher and close once again near the high of the day.
Is every follow through signal this effective? Of course not. But the percentage is great enough, when combined with range expansion, to give us a definite edge in the market.
Range expansion is another rather basic concept which, by itself, has some trading merit. It's effectiveness is expanded considerably when combined with follow through.
Think about the first
few minutes of trade posted for the day. What is the likelihood of
this range being the range for the entire day? I think you would agree
that it is reasonably small. Since we are fairly certain that the range
will expand from this point, it would be extremely helpful if we were able
to determine, with some degree of certainty, on which side of the early
range this expansion was most likely to occur.
The spectrum approach
to trading combines both the follow through and range expansion tendencies
into one trading theory. Although the concept is simple and straightforward,
the calculations are not.
The spectrum program calculates the relative strength of the market over the past several days using the follow through strategy outlined above. This calculation gives the system a long or short bias for the next trading day. It then calculates the probability of the market, with respect to expected follow through, to move higher or lower from the open based on historical behavior of the market in question.
If the system is in a short position a buy stop is placed above the daily open which will reverse the position from short to long if the market moves through our buy stop.
If the system is in a long position a sell stop is placed below the daily open which will reverse the position from long to short if our stop is hit.
In the position trading mode, the system is always in the market unless it is taken out by the trailing stop. The default trailing stop in the system is $2500.00 but may be altered by the user.
If the trader is using the system as a day trading tool both the buy stop and the sell stop are entered, with the fill of one order canceling the other. The same rules are then followed, with the exception that all positions are closed out at the end of the day.
Day Trading and Position Trading
The Spectrum method is
applicable for both position and day trading, depending on the trading
style of the user. Those wishing to take smaller, higher percentage
trades may use the day trading strategy and exit the trade at a pre determined
exit point. Those with a higher risk carrying capacity will want to hold
the positions over night, attempting to take full advantage of the
follow through strength or weakness of the market.
Performance summaries and equity curves are included later in this package for side by side comparison of the activity of each mode.
In each summary, for accuracy and consistency, the inputs and trailing stop settings are identical for the entire testing period, both in the position and day trading modes. Varying the user selectable inputs and trailing stops can vary the performance of the system considerably. The ultimate end user should feel free to experiment with the inputs provided to more accurately adapt the system to his / her individual trading style and risk tolerance.
A True Reversal System
The daily system is a true reversal
system, or one which is always in the market. A buy signal reverses the
position from short to long;
a sell signal reverses the position from long to short. No other stops are active in the system as it has been programmed and tested
other than the end of day exit for the intraday system.
Only one order per day is issued,
that order coming immediately after the opening of the day has been determined.
This will occur at
the closing of the first bar of the day.
you will have by now noticed, the frequency of trading by this system can
fluctuate markedly. Notice that when the system identifies a long term
trend it will stay with this trend for a considerable period of time, frequently
banking substantial profits as the system captures most of the predominant
trend. The downside to the tendency to capture a large portion of the trend
is that it can frequently take several trades, a few small losses and a
few small profits, for the system to get on board the trand in the proper
direction. As with all mechanical trading systems, it is important that
the user take all trades from the system in order to be on board when the
long term, substantially profitable trade occurs.
All users of this system should carefully examine charts displaying the above tendencies of this system to get an appreciation of the variation in trading frequency and decide if this type of activity is consistent with their own individual trading style.