Legendary stock trader Jesse Livermore said, “It never was my thinking that made the big money for me. It always was my sitting.”
The simple definition of Trend Trading is picking a direction long or short setting a trailing stop and allowing the position to run until the stop is hit.
The following guest blog post is provided by Chet Miller. An accomplished trader and a member of the MARA Elite Program. At the time of this writing, he has nearly doubled the YTD return of the S&P 500 generating +35% on the year.
Today I am going to provide you with an overview of my process to help traders, like you, who may be interested in this trading style. Please note that I trade Long only and this post is for educational purposes only.
Chet’s Trend Trading Process:
I keep my process as simple as possible and follow it mechanically. Ideally, positions should be a maximum of 6% and a minimum of 2%. You sell some at the top of the range and buy more back at the bottom of the range, assuming it is still strong and trending.
To avoid second-guessing when I should make a sale, I set up my trades with a possible target price and divide them into 10R trades. I sell 10 % of my position when it increases by 10% and move the stop up accordingly. All of my trades have a target sale and a stop programmed into my brokerage acct ahead of time.
Here is an example of a trade I currently have on (as of 7/6/21).
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PLAN: (Trend Trade) updated 6-3-21 (1.634% ATR RANGE) 10.0% STOP
Entry: 103.25
SL1: 92.92 (sell all 100)
Ideal Stop At entry Is below the keltner channel
PT: 154.88
R= $5.17
TOS SIZE: 100, RISK $
Sell 10 at 10% 108.42, Sell 10 at 20% 113.59, Sell 10 at 30% 118.76, Sell 10 at 40% 123.93, Sell 10 at 50% 129.10, sell 10 at 60% 134.27, Sell 10 at 70% 139.44, Sell 10 at 80% 144.61, sell 10 at 90% 149.78, sell 10 at 100% 154.95
TRANSACTIONS:
Bought 26 at 103.22
Bought 37 at 103.27
Bought 37 at 106.48
Sold 10 at 108.42
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Table to calculate stop percentage
| 0-2% | 10% |
| 2-3.99% | 12% |
| 4+% | 15% |
In this example use ATR .0166333 divided by entry price 103.25 this equals 1.610 percent which is a 10% stop
My first 10% sell was already hit so the stop has been moved up.
10 percent of 108.42 equals 10.85
108.42-10.85 equals 97.57 my new stop price
How I Consider a Stock:
I spend the majority of my time looking for low volatility trending stocks to add to my watch list. I’m not looking for setups. The setup is to buy at the bottom of the channel and sell some at the top of the channel.
With trend trading the idea is to ride the trend till it ends however in order to incorporate some sell rules I have to set a reasonable target as a starting point. In this case I took the entry price and added 50% for a target price of 154.88 and an R multiple of $5.17 which means every time the share price increases by $5.17 I sell 10% of my shares and move the stop up 10%.
I currently have 34 positions on and always diversify in as many sectors, currencies, ETFs, foreign stocks etc that are working.
The biggest considerations I use for choosing a stock are:
- Is it in a strong sector
- Is it the strongest trending stock in the sector
- High relative strength
- High composite rating
- Increasing sales
- Low Float (outstanding share count)
Since my sales and stops are already set I don’t do much until something is triggered.
My main consideration is watching the stocks that are doing poorly and deciding if I should continue to give them room to prove themselves or cut them and buy a new position or roll the money into a position that is working. At some point the trend will stop working and a judgement call has to be made when stocks show classic signs of breaking down.
ALLY financial is a recent example of a stock I sold early before the stop was hit because the sector was breaking down.
In the screen shot below you can see many of the trades I have on in the left pane and my watch list sorted by percent gain in the right pane
In the left column I watch the bottom of the list (the stocks losing money) for signs of breakdown and possible sell. On the right I can get an idea at a glance at what sectors and stocks in those sectors are working the best. You always want to be in the sectors and stocks that are working best this changes from day to day so you need to look at the big picture what is working for the week, month year to date etc. Oil has been the top performing sector this year it is up over 45%.
Screenshot from Tastyworks
Option Expiration:
I have come to find this year that option expiration is very important to pay attention to even if you don’t trade options which I personally no longer do.
https://www.marketwatch.com/optionscenter/calendar
You can see a strong correlation in my drawdowns during option expiration week where volatility is high. Options contracts expire, funds are over levered and forced to sell due to margin calls.
This is episodic and non trending volatility so ideally you would want to be lighter in your positions going into options expiration week and load up on your positions on that Friday afternoon and at low points during the few days following. In practice this is difficult to do but definitely a goal to reach for. So that your drawdowns are lower than mine which have been in the 20% range a number of times.
Two main indicators in how the market is trending are the dollar and the volatility index. When the dollar is going up in value stocks generally go down in value. When the volatility index is high you are more likely to get stopped out of your positions. A VIX consistently above 30 means you should be cutting way back in number and size of your positions.
My Current Watch List Is as follows (as of 7/8/2021):
IDT,ASAN,FTNT,WAT,TROW,HCA,MCO,PSA,MSI,DOCN,OEF,SBUX,MAA,LSI,HIBB,TIXT,WH,TT,CP,AMEH,AVB,CPT,EXPD,DELL,ELS,LNG,RCD,THC,BAK,XLC,TIP,CUBE,EMR,PRFT,DFS,LB,GD,RTX,SLX,OKE,DAVA,DAC,VTV,PM,LQD,VAKE,SEM,EFNL,INVH,JBL,ALTR,AMH,FR,LKQ,MT,COF,CPER,ASO,XLRE,MPLX,VGK,NORW,SYF,DBC,JCI,KSA,XLI,PSP,XME,HYG,SGRY,EWG,XLB,CNMD,AMLP,FEZ,VICI,PNR,MS,INFL,TMST,DOW,GIL,EWC,EWQ,KRBN,CX,ALTM,BRX,NAVI,CNHI,SLM,HONE,ACHC,IPG,XOG,XLE,NUE,HMHC,RRR,IP,GPMT,STKS,FE,STLD,TEN,GOGL,CROX,EMN,EOG,FL,CARR,VECO,MCFE,IHRT,BMO,EQBK,CUBI,FITB,ABR,MNRL,ARW,WFC,CPRI,BAC,COMM,AR,DEO,CLH,EVRI,GRN,CASH,OLN,VRT,IVZ,XRT,GWB,CCRN,HES,COIN,CFLT,SBLK,AMN,MGA,EXP,ZIM,OPY,TW,GS,MTDR,AVTR,DKS,HRI,PLBY,CVLT,CBRE,FANG,JYNT,JACK,OAS,SPG,IWN,KFY,VRTS,DEN
I am constantly adding and subtracting names removing stocks that break down and adding new names that are beginning to trend.
From this list I choose the least volatile best trending most in-demand sector stocks possible I will add and subtract to/from my portfolio incrementally raising or lowering share count adding or subtracting names. Always with the idea to be in the best performing names possible.
You also want to be more heavily weighted in the least volatile instruments
Current examples are LQD and HYG at other times currencies or treasuries may be good options.
Helpful Trend Trading Tidbits:
You may have heard the adage sell in “May and go away.” It should actually be cut back in July and August for the big drawdown in September. Before the run up into the end of the year… But that doesn’t rhyme very well. 😂 There are many signs this is currently happening as stocks have been getting bid up during the day and selling off by the end of the day while the index just keeps running up ever higher giving the false signals. The rug will be pulled out likely around options expiration week destroying the portfolios of people who bought at the high and creating a nice entry point for fund managers.
As you can see my trading day consists of resetting sell targets that are hit and recalculating stops. Looking for new trending stocks to add to my watch list and cutting back or removing losing trades.
A rule from a hedge fund manager that I have recently added to my arsenal is if a trade goes against you cut it in half if it continues to go against you cut it in half again. If it continues to go against you get out completely. This is assuming it hasn’t already hit your stop and taken you out. I apply this to my worst performers. Stocks that break below the Keltner channel.
Type of Scans I Use:
Besides all of the scans I use in market smith and checking The Mara Lists (https://www.marawealth.com/membership/) each week I review lists from other sources looking for trending stocks
Marketsmith:
StockTwits TOP 25 lists
PatternProfits Velocity, Focus and Power scans
Richard Moglen Scans
Performance Ranked Top 50 Stocks as of 6-26-2021
Fundamentally Ranked New IPOs as of 6-26-2021 #IPOT50 #IBDPartner (Must have IPOed since 6/1/2019)
Fundamentally Ranked Top 50 Stocks as of 6-26-2021 #RMT50 #IBDPartner
Additional Great Resources for Trend Trading:
I hope this blog post has been helpful to you! A great resource to start if you are interested in Trend Trading is Michael Covel’s book “Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets.” Also, his podcast, which includes interviews with numerous successful traders, is another great resource. You can find out more here (trendfollowing.com).
I also like Larry Tentarelli’s website which shares “The blue chip daily trend report” (bluechipdaily.com) and Keith McCullough at (hedgeye.com) to maintain my understanding of how the market is behaving what sectors are working and how to manage a portfolio using methods that a hedge fund uses. Realvision.com is an excellent web site with interviews of the top traders and portfolio managers in the world.
**Please note that this blog post is for educational purposes only and that MARA is not recommending any particular stock or setup for you to take.
Chet Miller is one of our MARA Elite members and is our first MARA Spotlight Member! Chet is a Trend Trader and has been trading for about 11 years. He is currently up about 35% for the year in 2021 and we are honored to have him provide some background about Trend Trading and his process to help other traders who may be interested in this trading style.
Thank you Chet for this excellent, detailed, and helpful blog post!
CHECK OUT SOME MORE HELPFUL BLOG POSTS:
How I Failed My Way to Trading Success
How a Competitive Spirit Can Lead to Trading Success, with Akil Stokes
Top 3 Things Every Trader Should Know When to Hold or Sell Stocks