Trend Trading Performance Update

Here is an update on the performance so far:

Going Long Versus Going Short Stocks

For the last 2 weeks, the stocks selected for this strategy performed quite well. On the average, the shorts continued their relentless slide downwards, and the longs inched higher as well. To be more specific, here is a view of the spreadsheet this week:



The gains so far represent an annualized yield of about 31%. Also, as you can see, some of the shorts have produced exceptionally enormous profits. It seems to me that the short positions are responsible for the bulk of the profits so far, in fact. In the stock market, there is always a lot of potential shorting stocks, and I think it is a shame that most investors only ever go long.

One misconception about short selling is that it is more risky than going long. There is some truth in that, as there technically is no limit to the amount you can lose short selling, but that risk can be taken care of with any sort of risk management system or investor discipline.

In my opinion, short selling is actually less risky than going long. This is because stocks always go down faster than they go up. There are many times during each year where there are small panics, and stocks sell off violently. The same is true in the commodity markets. Gold for example, will sometimes drop $30-40 in a single morning, yet it would never rise by that amount in such a short period of time.

This is a risk of being long in any market, and it is a risk that is difficult to eliminate. Stop loss orders cannot eliminate this risk, as the price can blow through a stop level. Protective puts work, but they cost money, and only have a limited life.

Thankfully, there are an increasing number of short or inverse ETFs being introduced that allow investors to go short different markets without actually literally shorting stocks.

DXD -2x the inverse of the Dow 30
QID - 2x the inverse of the Nasdaq 100
SDS - 2x the inverse of the S&P 500
HXD.to - 2x the inverse of the TSX 60

And, as always, here is this week's trending stock:

Making Money Without Predicting the Markets

For the past week, the stocks that have been selected produced incremental profits again. One stock in particular, SORC, which was shorted on August 3rd, has lost over 50% of its value since that time:


Two posts ago I mentioned a book I was reading called, "The Way of the Turtle". I'd like to touch on another theme presented in that book in this post. The author, Curtis Faith, makes the point that it is not necessary to know what a stock is going to do in the future to make money trading it.

Although Curtis Faith was not able to predict stock market fluctuations, he still made $35 million in profits trading. How did he achieve this? He did so by trading with an edge, by trading with the trend.

With the stocks posted on this blog, I have no idea if they will continue to fall, or continue to rise. All I know is that there is an inherent edge in trading with the trend, and if you trade enough trending stocks, you will come out ahead.

Think about how casinos make money. When a gambler puts a coin into a slot machine, does the casino know if they are going to lose or make money on that coin? They have no idea what is going to happen. But the odds are built in their favour, so that when enough coins are deposited into the slot machine, the casino will come out ahead.

The casino does not feel upset when a large payout is made, since it is simply the cost of doing business. The same applies for trading. Losses are unavoidable, and are merely the cost of doing business, which means that an experienced trader will not get emotional about losses.

Here is this week's trending stock (or ETF):

Trading with the Trend Stock #16

It's been 2 weeks since the last post, so it is definitely time for an update. I'll try to post on this blog every week, but that will not always be possible.

The stocks that this system has generated performed very well during this time. Here is an update on the performance:


It has been 4 months since the first stock in this strategy was selected, and -although getting off to a very poor start- since that time, the average performance has been just over 8%. This strategy is about generating slow and steady wealth, and I feel that is what is beginning to occur now.

An element that I have not mentioned in this blog so far is diversification. Even though a part of me feels that diversification is for wimps, I still think that this strategy can benefit from it. One way that my selection technique diversifies risk is by holding both long and short positions.

This helps reduce risk in that when the markets sells off violently, the type of sell off that affects all stocks, the short positions help mitigate the damage.

In addition, when I select the stocks for this blog, I do now know what product of service the company provides, but I am sure that I am probably getting into companies from many different sectors, which helps to diversify my holdings. I think it would advantageous to spread one's money amongst at least 5 to 10 stocks to help manage risk.

Anyway, here is this week's trending stock:

Is Trading With the Trend the Turtle Way?

Over the last few weeks, I have felt increasingly more confident that the method of trading stocks illustrated here is one conducive for making profits in the markets. It may need some slight tune ups here and there, like as mentioned in the previous post, but all in all, I think its a system based on a strong foundation.

This foundation is based on four principles, which again are:

• Going with the flow by trading with the trend
• Risk management, which uses the 50dma as a stop out point, and using the PPO to define risk
• Locking in gains that occur since the 50dma moves as the the stock moves
• Cutting losses short and letting winners run

I have recently started reading another trading book, and this book is called "The Way of the Turtle" by Curtis M. Faith. I would highly recommend reading this book.


In the 1980's two successful traders made a bet to determine whether or not it was possible to train individuals to become successful traders or to whether successful traders are simply born. As part of this bet, the two selected about dozen people to be apart of a experiment.

The man who bet that traders are made and not born, Richard Dennis, reportedly said that he was going to raise traders like they raise turtles in Singapore. One of these "Turtles" was Curtis Faith, and in his book, he goes through the training he received, and the mentality he acquired through the training process.

It turns out that Mr. Dennis won the bet, at least in terms of Mr. Faith's performance, as he turned his 2 million dollar account into over 30 million.

Anyway, back to the point, in this excellent book, "The Way of the Turtle" sums up the lessons learned in these three essential points:

1. Trade with an Edge: Find a trading strategy that will produce positive returns over the long run because it has a positive expectation (Going with the trend gives us the edge)
2. Manage Risk: Control risk so that you can continue to trade or you may not be around to see the benefits of a positive expectation system (Take small losses, let winners run)
3. Be Consistent: Execute your plan consistently to achieve the positive expectation of your system (Cutting losses when 50dma is broken, no exceptions)
4. Keep it Simple: The core of our approach was simple: catch every trend. Two or three trades might account for all your profits, so don't miss a trend or you might kill your whole year. This is simple and easy to understand, not easy to do. (Buying stocks that are trending is not a rocket science)

There will be no mega trending stock posted this week. Here are the results so far:

Using Percentage Based MACD to Manage Risk

This blog has been in existence for almost four months now. In this time, I have selected many stocks that would have been very profitable. I must also admit though that many others would have lost a lot of money.


I feel that in order to improve results, we should focus more closely on the stock trading techniques of market legend Jesse Livermore. Besides being made famous for his trend trading strategies, Jesse Livermore was also known for his risk management techniques. Livermore would set tight stops on all his positions, which meant that he would take many small losses. These small losses were more than made up though by the occasional gigantic gain.

With this in mind, this strategy requires more focus on risk management. The rules of this strategy dictate that the stock should only be dumped when the 50 day moving average (dma) is broken. Therefore, it is integral to determine how far the stock is from the 50dma. This is such an important piece of information because it represents the amount we are willing to lose before discarding the stock.

Fortunately, there is an easy way to determine how far a stock is from its 50dma by using an indicator called the PPO. The excellent website, StockCharts.com, has a very thorough explanation of many types of indicators including the PPO here.

The PPO essentially is a percentage based version of the MACD (moving average convergence divergence). The PPO takes the percentage difference between 2 moving averages, and then takes a moving average of that difference.

If we tell the PPO to take the difference between the 1 day moving average of price and the 50 day moving average of price, and then take a 1 day moving average of the difference, then it will tell us the information we are looking for.

Here is this week's mega-trending stock with this new indicator. The PPO will make a lot more sense when seen in context, so here it is:



I think the above chart shows how powerful StockCharts.com can be. I have spent thousands of hours tinkering with Stockcharts.com's features, and I am still finding out new things. There is no technical analysis tool that I could recommend more highly than StockCharts.com.

You can sign up for an account for under $10 a month. For those who are interested, here is a link to the site. If you enter 'Danny Merkel' in the referral box during the sign up, that would help me out a lot.

Making Money Shorting Stocks

Another week has come and gone, and in that time, most of the stocks I have selected produced incremental profits. The stock that was shorted last week, which was the stock that I said I knew nothing about, produced a profit of more than 10% in one week. Many fundamental analysts, especially the CFA type, the type that thinks they are smarter than everyone else, but could never outperform an index if their life depended on it, probably would die for 10% a year.

That being said, one stock I selected, EKO.v, has been a real stinker. That stock was too far away from its 50dma when selected, and I will keep that in mind when selecting stocks in the future.

This is the 14th week of the experiment, and here are the breakdown of the results thus far:



Here is this week's mega trending stock:



As you can see, the 50dma has formed an impenetrable wall that has acted as a bulwark against any bullish price action. Naturally, as per the rules of this strategy, we would place a stop above the 50dma.

In order to maximize profits trading and investing in stocks, I feel that we should take WD Gann's advice, and "be just as willing to sell short as you are to buy." In fact Jesse Livermore, certainly made more money shorting stocks than he ever did going long.

What I try to to do is to go with the flow. If the trend is down, then short, and if the trend is up, then buy. Here is what Mr. Livermore had to say about this principle:

"I was short one hundred and fifty thousand shares of
stock, not because I knew the news was coming, but because I was
going along the line of least resistance."

By trading with the trend, we are going along the line of least resistance. Thanks for visiting.

Let the Charts Show You the Fundamentals

Over the last week, the stocks selected for this strategy did quite well. Slow and steady profits seem to be accruing each week. The profits are not out of this world, but, then again, this strategy is not about getting rich quick. Here is a breakdown of how we are doing so far:



Here is this week's mega trending stock:




This company is called Ryland Group, Inc. I have no idea where this company is located, or how their financial statements look like, or what product or service they provide, but I do know that, by looking at its chart, that this company must be in bad shape.

Thousands of other investors have likely looked at every detail of this company, and have "voted" with their money as to the future outlook of the stock. By looking at the chart, I can see the result of this voting, which is why I need not look at any details of the company myself. The market has done this for me. This one of the basic tenants of technical analysis. Thanks for visiting this site.

Trading with The Trend Example 12

During the last week, nothing out of the ordinary happened on the markets. This means that this strategy performed as expected, which means that most stocks experienced slow but steady gains last week. This is what trending stocks tend to do.


Here is this week's mega trending stock:


This stock is currently right on the 50 day moving average (dma). This means that it must continue falling next week in order to avoid getting stopped out. This in turn means that this is a low risk, and potentially low reward play.

The Hidden Advantage of Canadian Stocks

Another week has passed, and that means another post to this blog. Out of the 6 stocks in play, 5 produced gains last week. The one stock that did not produce gains was the stock selected last week, and, as the following table shows, it did quite poorly:











Keep in mind that this blog is really just an experiment. I'll keep posting these stocks, as scientifically as possible, for at least a year, and at the end of this time, we will see what the results are. If you want to experiment with any stock trading ideas of your own, then I would recommend signing up for a free practice stock trading account with virtual money.

Although this blog really just is an experiment, I do, nevertheless, sometimes put money into these stocks. If you are curious, you can see what positions I am holding by having a look at my trading journal.

Here is this weeks trading with the trend stock:
















One thing that my table at the top of this post does not take into account is currency fluctuations. While the stock above trades in the United States, I also have many Canadian stocks in the table.

If you are American, and judging by my stats, you probably are, then many of the stocks I have posted should be of extra interest to you. This is because if you invest in the Canadian stocks I have posted, you have the potential to make money in two different ways. Firstly, of course, by the stock's appreciation, and, secondly, by the fact that the US Dollar is in a bear market.

For example, if you had invested in Canadian stock XYZ in 2001, and it increased in value by, say, 30%, then you would actually be sitting on a 65% gain, since the US Dollar has lost 35% of its value since 2001.

Also, please do not take offense by the fact that I am shorting American stocks and going long on Canadian stocks. This has nothing to do with politics or anything of that nature. I am only trying to make money!

Thanks for visiting.

Another Trend Trading Example

This week, the markets were much less volatile relative to recent weeks prior. This is beneficial to this strategy, since no stocks were blown out of the water this week. Here is an update on how we are doing so far:



In comparison, the TSX has been down about 3.5%, the Dow Jones has been down about 1.5%, and the TSX Venture exchange has been down about 17% since the commencement of this strategy.


Here is this weeks stock that is currently in an unstoppable trend:


(please click here to see a larger image)


There are a lot of things that are interesting about this stock. One of them is how is reliably it breaks out of trading ranges and then explodes higher. Another is how volume tends to accelerate before price does. However, in terms of this strategy, the main thing we care about is that this stock is in a major trend.

Before I go, I'll leave you with some excellent Jesse Livermore quotes. Enjoy the long weekend!

"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"

"Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end."

Using Stock Scanners to Find Trending Stocks

Here is an update on this strategy's performance to date:


Here is this week's mega-trending stock that my stock scanner pulled up:



Before I go, I'd like to leave you with a quote from a book I just read called, "Trading in the Zone":

"Any expectation about the markets behaviour that is specific, well-defined, or rigid - instead of being neutral and open ended - is unrealistic and potentially damaging."

I think that this quote applies to this strategy since we are not assuming that the stocks that are selected will rise. We, of course, know that they have a high probability of rising, since trends usually continue trending, but we remain open to the fact that they can fall. This is why we always protect ourselves with stops below the 50 day moving average.

Trading with the Trend is More Profitable Than Picking Tops and Bottoms

It was another unbearably volatile week for the markets last week. The TSX in Toronto was down almost 600 points intra-day on Thursday, and the Venture Exchange in Vancouver is down about 25% from recent highs. This volatility has obliterated most of my stock selections, but I will continue to monitor this strategy for at least a year before I draw any conclusions.

Here is an update on the positions:



Not surprisingly, the only positions that are still alive are the short positions. Even my favourite position, POT.to, which had held up amazingly well for so long, has finally thrown in the towel. The loss that I had to take on POT.to was quite small at least, since this strategy has very strict risk management rules. (Dumping stocks when the 50 day moving is broken.)

Here is this week's stock pick:

Finding Trending Stocks Through Scans

So, it was another wild week for the markets. The amount of volatility in the markets was immense, and that has taken a toll on this strategy. Nonetheless, I feel that things will average out over time.


Here is what my stock scanner pulled up this week. Notice how the stock finds support at the 50 day moving average. Also notice on the last day of trading, the chart formed a tall open candle stick pattern. That is normally considered to be a bullish sign. Best of luck.


If you click on the table at the beginning of the article, you will see that many stocks have been stopped out. At first, this may seem like a bad thing, however it does have some benefits. For example, I have held 2 stocks from this strategy, WES.to and POT.to. The former was weak, and had to be eliminated, since it broke the 50dma. However, the latter was strong, and withstood the harsh storm of volatility we experienced in the last 2 weeks.

The end result is that there is a sort of natural selection process, whereby the stocks I select compete for my money, and only the strongest and most vigorous stocks succeed, while the weak are discarded. This is the process that I feel will lead to above average returns in the long run.

Stock Scanner Example 6

In this week's update I'm going to give you another mega-trending stock, but first I'm going to go over the performance of this strategy in a more scientific method. Below is an image of a spreadsheet that I have created that will be used from now on to give us a better of idea of the status of my picks.



The average gain, which is 1.01%, is a simple average, and not a time-weighted average. But no matter how you calculate it, it is not particularly impressive. However, keep in mind that 80% of the stocks were long positions, and the markets in North America have performed very badly. For example, the Dow Jones Industrial Average had its worst week in 5 years two weeks ago, and the TSX in Canada has lost over 7% in just the last 2 weeks.

In addition, this spreadsheet does not take into account statements, like the one I made for RCI/B, saying that I would wait for a pullback before buying this stock, as the risk was too great at the time of posting.

I'll keep posting this spreadsheet every weekend when I update this blog, and I'll let you be the judge.



Anyway, here is this week's stock:



I had to go through about 30 stocks before I found this one, and when I saw it, I knew it was perfect. This is a textbook example of a stock that I am looking for. Notice how it bounces off its dashed 50 day moving average line every time there is a counter trend rally. That's a sign that the bears are totally in control, which is what we want when we short sell.

However, since anything could happen, we must protect ourselves from losses. Therefore, we would place a buy stop above the 50dma, so that if the stock breaks through this line, we would no longer be in the position.

Since this stock is below $5.00, you may not be able to short sell it, however, you could set up a position using equity options.

So, thanks again for looking at my blog. I'll make another post in 7 days.

Stock Scanner Example #5

Before we get into the next example, let's again have an update on how the previous picks are doing. I'll start off by saying that I lost quite a bit of money with the stock screener example #2 pick. However, that does not surprise me considering how much the markets tanked last week.

The good news, and this is nothing short of a miracle, is that none of the stocks I have selected have decisively broken their 50 day moving averages so far. With example #2, I thought there were times that it certainly would, and that it was game over. The following image shows what I mean.


The main thing to notice about the above image is how the 50 dma was broken intraday, but the stock never closed beneath it. This means that the 50 dma, our last line of defense against the bears, held. Also notice the long lower shadows in the recent candles, which indicate that the bulls are still in contol. This sort of price action makes me more optimistic about this particular security, and I may have to consider doubling my position in it.

Anyway, for this week, I had a very difficult time finding a new stock to post. The market's precipitous decline caused so much distortion that my scan could not pick out another good opportunity.

So what I did was flip the scan's criteria, so that it would find stocks in massive, unstoppable downtrends. I also made it look for only American stocks, since the US Dollar is in a bear market, and since I am Canadian, this could potentially enhance my returns.

Here is a chart of the stock the scan isolated:


The rules are the same as before, just flipped around. You would go short this stock, and place a buy stop above the 50 day moving average. The 50 dma will act as resistance this time around. Your risk would be limited to the amount of distance between the price you short sell it at and the current level of the 50 dma.

For this stock, I would perhaps wait for a little counter trend rally to short sell it on. So, that is all for this week's post. I hope that made sense.

Trend Trading is Easier Than Day Trading

Before I show the next example, let's have an update on how we are doing. In the past week, Example #3 is basically unchanged, but the important thing is that it has not broken its 50 day moving average. I actually bought a few shares of this company, and I'm going to keep on holding it until the 50 day moving average is broken. That could happened in a few days, or it could happen in a few years.

The main thing I like about this strategy is that there is no emotion involved. If the stock I buy goes down, I don't start sweating, and start thinking if I should sell it or hold on. I keep it if stays above the 50dma, and sell it if it closes below.

What most traders do not realize is how much investment psychology plays apart in being successful at trading. This strategy will hopefully keep your emotions in check, since you have made out the rules ahead of time.

I am currently reading a book called, "Trading in the Zone." This book is about the psychological aspects of trading. In this book, the author, Mark Douglas, says that:

"Learning how to redefine your trading activities in a way that allows you to completely accept the risk is the key to thinking like a successful trader."

In terms of this strategy, this means looking at the stock, and saying to yourself, "Will I be able to accept the loss if the stock in question falls to below the 50dma." If you can accept the risk, then this strategy will become a lot less emotional, and much more systematic, which is what we want. We don't want fear or greed to apart of our trading.

Now, without further ado, here is example number 4:



This stock is obviously in a massive uptrend, but I would not buy at this level. The amount of distance between the current price and the 50dma is too great. In other words, I wouldn't be able to follow the rules, and be able to accept the risk. This means that I would wait patiently for this stock to come down to perhaps the 20dma, and then pick up some shares.

Hope that makes sense. Thanks for stopping by.

Stock Scanner Example 3

So, it's been about a week since I last made a post on this page. The last 2 stocks I posted are up an average of 2.44% for the week. Following the rules of this strategy, you would be moving up your stop loss order as the stock rises, which means, at this point, these 2 trades will almost certainly come out to be winners.

I had to go through about 20 stocks before I found this next one. Not all stocks the scanner brings up are good ones. The scanner is really only the first layer of the filtration process. I take the results and narrow them down until I only have the best ones.


What I like about this stock is that, of course, the overall trend is up, and that the stock has clearly bounced off its 50 day moving average many times. Presently, the stock is trading near its 50 day moving average, which should act as support.

Also, on the close on Friday, the stock made a tall white candle on higher than average volume. This is another bullish development, and was one of the reasons why this stock got posted, and not some other stock the scan picked out.

Remember, my rule is to get rid of the stock if it decisively breaks the 50 day moving average. This means that the potential loss here is quite small. Warren Buffett's first rule of investing is to not lose money. This is why I'd place a stop below the 50 day moving average. Anyway, I hope this makes sense. Best of luck.

Trend Trading Plus Risk Management Equals Profit

Here is another example of a stock that is in a powerful uptrend. Trying to pick a top in this stock would be like getting in the way of a speeding freight train. Like all my mega-trending stocks, I would recommend placing a stop just below the 50 day moving average. If the stock breaks this level of support, I would just sell it, and forget about it. A certain percentage of these picks will not work out, and the key is to just take your small loss, and pick another trending stock. In other words, we cut our losses short, and let our winners run.




Update - July 18:


I was looking at this stock more carefully, and when I did, I noticed some more bullish evidence for it. I examined it from a point and figure perspective, and noticed that it had just gone through a very bullish quintuple top formation. The image below show what I mean.


I realize that most people don't understand P&F charts, and I didn't myself for the longest time. If you are interested in learning more about this form of charting, please have a look at the book review I just wrote which can be found from a link which is on my home page.

In full disclosure, I bought shares of this stock yesterday.

An Introduction to the Stock Scanner

After realizing how much sense it made to just ride the trend rather than picking tops and bottoms, I immediately set out to find a way to find stocks that were in powerful, unstoppable trends. This was much harder than I had imagined. Most people know what a trend is, but to define a trend in mathematical terms was quite difficult. This site is supposed to be about simplicity, so I won't go into discussion about how the scan works. However, I will post a screenshot of the scanner for those who are curious.



Anyway, you need not worry about how complicated the scanner is, even though it's simpler than it appears, since I will be posting its results as they are generated, and once the results are posted, it is very simple to understand what is going on.

So, I ran this scan through, and I came up with some results which I will now post. The chart below is the stock of a company I know nothing about, but I do know that if I invest in its stock, there will be an extremely high probability of success.



As you can see in the above chart, this stock starts in the bottom left hand corner, and is now at the top right hand corner. This a sure sign of an uptrend. The reason why investing in this stock would likely bring about profits is because the odds of this massive trend turning around the moment you put your money on the table are very small .

The natural inclination is to think that this stock has already had its run, and it's due for a correction. I mean, it's been going up for almost a year, surly it's is due for a breather. Although this is entirely possible, this mentality is the top picking mentality, and the top picking mentality is not a profitable one.

Because it is, in theory, possible for this stock to start to decline the moment you buy it, we need an exit plan. I think the best course of action would be to place a stop right under the 50 day moving average, which is the dotted line in the chart. This means that as the stock continues to rise, you will have to adjust your stop order every couple of days, since the 50dma will also rise. This will have the effect of locking in profits.

Anyway, I will keep posting these stocks, and hopefully you will see that it pays to trade with the trend.