Thread by @BambroughKevin

Another #investing #trading #advice thread for those that care…#stfu if you don’t :)

In the late 90’s I grew confident that we were developing into a historic bubble market that I believed would peak around Y2k and this is what lead me to study markets and trading.

I decided I wanted to get out of the tech industry because I saw a huge glut coming. In the mid 90’s I was on the forefront of upgrading businesses, starting with getting some (for the first time) and on the internet using email, web pages and sales.

I was dabbling in investing in ‘new tech’ with a bit of a greater fool mentality. ‘If they like that they will love this’. Buying into B2B internet stocks before the term was even popularized. But as we approached y2k it became obvious that there will be little to know work soon

My network of IT professionals had basically upgraded every computer system in Toronto. Government, large and small businesses and most people had gotten new home systems. It was clear to me that the projections of $intel $dell, $msft and $Csco (the four horsemen) were way off

Growth stock valuations hyped by the biggest bullshitters in Wall Street and Bay street where about to come crashing down. So studying market bubbles became my passion and how to trade them as they fall apart. Looking at both market psychology and how stocks patterns play out

One stand out for me was a book I bought by HM Gartley. “Profits in the stock market”

investopedia.com/terms/g/gartle…

I played around testing out the various patterns and indicators that were outlined and came to prefer and love the ‘butterfly’ patterns

I found I could pick off excellent entry points with outstanding consistency as long as I was incredibly picky and patent. Following other trading rules such as:

- only look to long stocks in a bull market also in a bull sector and conversely only short stocks in a bear sector

For a bull stock/sector the macro is on your side. Revenue and earnings more likely to continue to grow then fall and valuations are low to reasonable in a historic context.

Both also when looking for an entry I would combine the Gartley pattern with…

- 50 dma is above the 200 dma
- volume rising at my target inflection point
- RSI divergence
- relative strength indicating a bottom

Not rocket scientist… just trying to find those butterfly patterns forming on stocks that have most of not all of the other indicators coming together calling for a trade long. Worked especially well with stocks that has a Gartley pattern lining up with a major moving average

I also found that I had my greatest success the more perfectly the pattern was playing out. Not just the that the price was retracing to a major Fibonacci number in magnitude but also in two equality sized waves and both time and price

If the retracement in price was unfolding to be a total of 61.8% then the time that the retracement was occurring was also in 61.8% of the time that the last up cycle took.

Another thing I noticed was that for some larger cap popular names you could look back over years of the chart and see that it often had Gartley patterns that would have yielded successful trades. I speculated why…

The Fibonacci pattern is one that we see in nature and for trading it also plays off our human nature and triggers our optimism and pessimism or greed and fear.

A given stock has a nice bull run for say 60 days and everyone wants to hold on hoping the party keeps going

But once the chart is broken and some the technical indicators go bearish then longs bail and shorts might jump on the trade. Volume can dry up as people decide to wait to buy and the stock falls to the first major fib number 38.2% give back of the recent run.

It’s here where enough investors following the stock collectively decide it’s a decent discounted entry and the likelihood of a bounce out ways the risk so they come in to buy, out number the sellers and take the stock back up a portion of the recent decline.

But as the Gartley butterfly pattern plays out the stock only modestly recovers before falling again under selling pressure and takes out that recent 38.2% fib level and this is where the really fear comes in and volumes pick up. Stock looks bad on most TA

The fear of an extended decline similarly in price and time to the first 38.2% drop enters shareholders mines and there’s a bit of a flight out of the stock until it finally starts to approach the 61.8% and so very often this level is where perception changes.

It’s no longer a chart that looks to most people to still have a lot of downside. It quickly morphs into a great opportunity to buy on a big retracement with not much downside.

This pattern also likely repeats more often on some big cap stocks because…

Some stocks are heavily own by long term oriented institutional investors that most likely look to profit take and raise cash when stocks they own rise well away from major moving averages. But they also always look to add to their favourite long term holds after big pullbacks…

And at major moving averages. One stock that comes to mind that I used to trade like this on occasion was Coke $ko it was a darling of Warren Buffet and a core holding for decades. The stock is well followed & generally considered longterm holding so it’s bought on big pull backs

One thing I didn’t touch on is the actual ‘stick handling’ of the trade. What generally worked well for me is to jump in fairly heavy and try to get my full trading position around the major butterfly retracement. Looking at volume and scaling my position size…

So that I will likely have good liquidity for an exit on the bounce. General rule of thumb for me was and is that I don’t buy stocks for a trade like this unless I believe that i will be able to make 4 times as much on this sort of trade than I will typically lose on the trade.

So, if I think the stock I’m buying requires me to have a $1/sh stop loss on the trade I best be hoping to make $4/sh. I found that this ratio worked out exceptionally well when buying Gartley patterns in bull market stocks at major averages for a trade.

The math was such that as long as I was successful in my trades at least 50% of the time I could compound very well. Losing $1’s when wrong and making $4’s even just 50:50 pays very well.

Over time you also learn to use your instincts and navigate the trades to increase the win%

I would sometimes look to take some profit half my win in order to ensure it remains a win. Other times let the winners run farther and get paid more. These changes would come on the fly based on over all market conditions, sector or stock specific news.

But discipline must be maintained and you can’t let the stop losses slide or you’ll find yourself waiting for markets to recover and bail you out vs actively trading and turning over your capital to compound. I often tell people to keep trades separate from long term investments

One of the worst things people do is rationalize losing trades into long term investments. One thing to consider is if a stock gives back 61.8% or it’s recent bull run and isn’t bouncing well, at a key TA point, ask yourself why?

Is a major investor bailing? Do they know something I don’t? Are insiders selling? Is the sector facing trouble? Is the over all macro changing the investment environment and leading people out of stocks and into bonds? Point being.. if your trading stick to a plan….

And assume the worst when the plan fails and punch out.. regroup. Resume your hunt and try again… or

“There is time to go long, time to go short and time to go fishing.”
— Jesse Livermore

Saw that quote bouncing around today and it made me think of my old trading days

As I said, I loved that book and have lived that quote many a time. Deciding to take a break and make a new harvest table in my garage when the market wasn’t for me. Also, spent a lot of time reflecting on my style and trading in boats and on beaches. Patiently waiting…

The market I know how to trade / invest in will come and that’s when I should focus all my attention and get paid. When it’s not right… best to pursue other things in life as it’s so short anyhow

Using this technique I was able to compound at very high rates in my early years when capital was small and I move in and out of stocks with out effecting them.