Pullback Scale-in Within Price

Range
By Ken Hodor
10/19/11
 Current Market
• The recent market looked choppy to me
• How can I effectively make money?
• Dust off my old scaling routines and improve
them

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 Observation and experiment
• Markets are random
– If I can develop a strategy that make money here it
will work everywhere.
• Only found one strategy style that works
• See Ken’s Stock Market presentation on
XSProfits.com on 2/9/11 at:
http://xsprofits.com/Presentations2011.aspx

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 Objectives
• Minimize initial risk (drawdown)
– I hate losing money…especially mine
• Use Optimal f for position sizing
– Want the fastest possible gain
• Be able to apply this on any tradable equity
– Want to trade across various asset classes

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 Basic Strategy
• Look for a number of lower highs--pullbacks
• Buystops to enter at yesterday’s high

• Look for a number of higher lows

• Sellstops to exit position

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 Trading range
• Determined by historic high and low

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 Money Management
• My maximum market exposure for this asset
class is based on funds I allocate
– Say…20% of my assets would be allocated to SPY
• Trade size is based on the allocated funds
divided by scales based on distance between
high and low
– If we have $10,000 and 10 scales there would be
$1,000 available to buy at each scale

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 Artificial Intelligence
• Market conditions constantly change
• Let the strategy learn the best parameters to
use.

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General Idea

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Basic Strategy

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No Slope Equity Curve

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No slope Performance

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0.01 Slope Factor

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Optimize slope

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Optimal Slope Factor

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Optimal Slope Factor Equity Curve

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Optimal Slope Factor Performance

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 What if we used Options instead?
• Returns should improve
• Limit my downside risk
– Stops not necessary

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SPY 120 Strike Oct Option

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SPY 120 Strike Oct Option Equity Curve

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SPY 120 Strike Oct Perf Summary

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Another way to look at comparison

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Compare SPY 115 to 120 Strikes

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 Manual Implementation Buy Side
• At the end of the day or before the market
opens set up a buystop at previous days’ high
• Determine the trade size—example
– $10,000 allocation
– Subtract recent lowest low from highest high
– Divide this by 10 (steps)
• If $1 per step this would mean for each dollar drop buy
1/10 of the shares $10,000 would buy. If fall drops $5
then buy 5/10 of shares $10,000 would buy.

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 Manual Implementation Sell Side
• At the end of the day or before the market
opens set up a sellstop at previous days’ low
• Determine the trade size—example
– $10,000 allocation
– Subtract recent lowest low from highest high
– Divide this by 10 (steps)
• If $1 per step this would mean for each dollar rise sell
1/10 of the shares the new equity position. If rise by $5
then buy 5/10 of shares equity position.

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 Caveat Emptor
(Buyer beware)
• Always remember “the market can stay irrational
longer than you can stay solvent.”
• The strategy works well in a sideways or slightly
down market. It works extremely well in a bull
market.
• However, if the market plunges unabated with
lower highs you have nothing at risk.
• There is considerable “heat” if the market
plunges with fits and starts that suck you in.
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 Conclusion
• This strategy works well on SPY and other
equities
• But it works extremely well with options
– Work in progress: automated options trading

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