Stock Exchange: Are your Trading Rules Too Rigid?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Do you have a Strategy?

Our previous Stock Exchange pointed to readers that while drawing lines not a chart is not a trading strategy by itself, it helps to visualize your strategies. A glance at your news feed will show that the key points remain relevant.

Many people for this reason often go with software such as the one from bearbull traders. Using software can help you to understand the market, and develop a system and program that will yield long-term profitable returns.

This Week: Are your Trading Rules Too Rigid?

While each of us might have definite rules for trading stocks, we should also see that the rules are not so rigid that we become incapable of using our own sense of judgement in a novel situation. As Pradeep Bonde has posted in StockBee: “The good skilled trader no longer relies on rigid rules, guidelines. They operate within certain framework of rules but they are not rigid. Those frameworks can be difficult to navigate, consider consulting ecn brokers if you feel a bit lost.

They have flexibility to bend rules and guidelines as they dynamically read the situation and can change on the fly during the trade.” He also concludes saying: “In order to improve your trade performance you need to do hundreds of trades . Or study hundreds of past patterns”.

Pegasus has a nice explanation of the advantages of rules-based trading:

  • Setting rules allow you to be more discipline and it emotion when you you are analysing a trade setup.
  • Having rules allows you to formulate methodology based on preset criteria and to evaluate trading method.
  • It eliminate random trade entries and you know when exactly to buy or sell.
  • Trading with predefined rules, keeps you in a trade longer, no unnecessary trade stop-out because you are able to determine the trade direction more accurately.
  • Rules eliminate stress and gives confidence especially beginner traders.

Dr. Brett Steenbarger explains other techniques that traders can use kill the fear of failure in our trading.

He comes up with three techniques to kill the fear of failure: 1. Being mindful of our breathing to keep us grounded in the present, 2. Reassessing the severity of the threat of failure, and 3. Directing our Attention outward.

And finally, do our models always follow the rules? We discussed this a bit in a prior Stock Exchange: How Long Was Your Learning Curve? At NewArc, our models follow specific trading strategies that have been well-tested. Our human trading team nearly always executes the indicated trades, but there is some discretion. Humans are the final arbiters, responsible for spotting anomalies.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models. Our trading models have shown excellent performances over the last weeks as you can see below:

We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks from The Models:

In this week’s Stock Exchange, we are delighted to have guest expert Brian Gilmartin of Trinity Asset Management.

Holmes: I bought FireEye (FEYE) today. As a “dip buyer”, I expect some upside to the stock in the coming weeks.

Brian: Let’s look at its fundamental chart from FAST Graphs as well. FireEye (FEYE) has been consolidating on the charts for two years now, and has built a solid technical base, despite losing money every year for shareholders. However, 2018 will see a slight profit and earnings per share for FEYE shareholders, and EPS growth is expected to be robust in the next few years. Fair value or intrinsic value estimates vary between $15 to $18 per share FEYE, so my guess is the Street is waiting for some strong guidance before turning more bullish on the stock.

FEYE is in a desirable space right now within Tech software, i.e. cyber security, and after coming public and trading up to $80 per share, the stock had a tough 3 years, losing almost 80% of its market value. The technicals have improved, but FEYE needs to deliver on sustainable revenue and earnings growth.

Holmes: Though I don’t get it fully, it’s still nice to hear good comments from you on my stock pick this week.

Brian: Roadrunner, do you have any picks this week?

Roadrunner: Nothing new, but several candidates are close.

Felix: I sold my Hertz (HTZ) stock this week. I had bought these shares on 7/17/17 for $15.69 and they were sold for a profit at $17.01 this week. While my typical holding period is 66-weeks, even my early sale was a little too late to maximize the gain.

Brian: Hertz (HTZ) is another stock that has had a tough few years, trading down from $150 in mid-2014 to $17 today. Forward earnings estimates, while showing growth, are also still seeing negative revisions, and more importantly so are HTZ’s forward revenue estimates. The Felix portfolio sold HTZ this week, and that was probably a smart move.

Felix: Looks like my move was all right this week!

Felix: I am also sharing my ranking of the top 20 stocks in the Russell 2000 index.

Oscar: This week, I ranked my top 20 ETFs from among our Diverse ETFs universe.

Brian: The TAN ETF undoubtedly got a boost from the news that new homes in California will have to be solar-powered or have some solar power capability. First Solar (FSLR) is 8% of the ETF and TAN’s largest position and has also gotten a boost from the California regulation. Given the weight that California carries in annual housing start data (single family residential construction) the California regulation favoring solar should be a plus for the sector.


While it is also always good to follow good trading rules and have a distinct trading strategy, sometimes it is also prudent to make trading decisions based on our long experience and our knowledge of how the markets are expected to react and the likely stock movements. This comes out of our years of expertise in trading and deep understanding of the markets and our models.

Background on The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

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