Sunday, January 2, 2011

Happy New Year

Another good year for bulls, SPX 13% up after a wild 200 points drop to 1020 then a huge rally to 1260. For me, it was the best year ever despite a huge mistake I made at the beginning of December when I have chosen to ignore my EMAs crossing.

As a reminder for those who haven't follow me from the beginning, my main "buy" and "sell" signals are generated by EMA 25 crossing EMA 50 (plus SMA 120 as a confirmation) on hourly chart. As a momentum trader I also pay close attention to Directional Movement Indicator (DMI), a non-price indicator that lets me know if the market is in an uptrend or in a downtrend. I am using this indicator on daily and weekly charts. DMI is a confirmation indicator, it doesn't really generate buy and sell signals. DMI on hourly chart is too choppy for me, it could be used by very active traders but for intermediate time frame I am interested in I do prefer to use daily chart. This pair of EMAs (plus SMA 120) is optimized for SPX index, it works with other indexes as well but it's not too much help for individual stocks. For those and for other ETFs one should spend some time to find the right pair. I explained in an article a few months ago how to chose the best pair of EMAs.

My system has generated a huge profit this year. I am very happy with its performance especially when I see many professionals who actually lost money this year and others being just a little bit ahead of my system (look at the top 10 letters and 10 worst investing letters for 2010). The best thing I like about this system is that I cannot go broke. If market is trading in range I may get whip-sawed and have some losses  but at any given moment I am not in danger to lose my shirt.

Let's see how the system performed, YTD. All are 4 hours charts since that's the only way to look back to the beginning of the year. The "buy" and "sell" signals are a little bit off compared to those I showed you in real time since I had to divide EMA 25 and EMA 50 to 4  and I had to round the values to EMA 6-EMA12 and SMA 30 on 4 hours chart.

First, the January-February plunge. The system scalped 50 points on the short side.

February-April rally was pretty good, the system added another 100 points.

A huge plunge in April-June with system gaining about 100 points.

June-September, two short plunges and a short rally. System lost about 20 points due to a whip-saw. It managed to scalp 70-80 points.

September-November, a huge rally. Buy signal at 1080, sell signal at 1200. A clean and nice 120 points gain.

November-December mini-plunge. System lost 5 points, I lost much more since I tried to be smarter than my system. Instead of covering at 1205 and go long (for a 15 points loss since I hesitated and went short at 1190 instead of 1200) I covered at 1225 then went long. I lost an extra 40 points, 20 on the long and 20 on the short side for a total of 55 points.

Overall, the system made 400-450 points on SPX. Double this amount for those playing 2x ETFs, SSO-SDS pair. This means 35-40% on SPY (long or short) or almost 70-80% on SSO-SDS. I played SDS-SSO pair but I made much less because I made a few mistakes that cost me good points, besides the 55 points lost in November, I lost at least 100 more by gambling on options, I hesitated to go short or long exactly when the system indicated, or I haven't been 100% invested.

My worst enemy are emotions, no matter how hard I am trying to invest based strictly on charts I can't do it. I have huge "scars" from the past when I pretty much lost everything (80-90% of my portfolio). I know the system loses money when market trades in a very tight range and every time I am getting a "buy" or a "sell" signal a little devil whisper in my ears "this time you'll get whip-sawed". My New Year resolution is to get more disciplined and follow my system with less hesitation!

Let's hope this year is going to be a good trading year for everybody reading this blog. I am open to any suggestion you may have to improve the system.

All the best!


P.S. stock market, money, trading system, SMA 200

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