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.