“When it’s not necessary to trade, it is necessary not to trade.”

This is one of my guiding principles. It’s also one of the most difficult for me to follow. Like most people, I want to make money. When I trade, I usually make profits. Therefore, my default thought is that more trading will result in more profit. Unfortunately, that is not always the case. For example, during the month of November, 2020, I made only two trades – far fewer than usual. The US Presidential election and other current events made that necessary.

From time to time, after I make a recommendation, people ask me the reason for the trade. I seldom answer. It could be one or more of several reasons. In this article, I’ll discuss some of the reasons I might buy or sell in no particular order.

• Trend I use the definition of trend originally postulated by Charles Dow and Edward Jones (of the well-known Dow Jones) in the late 1890’s. It is found by checking the high and low of the most recent daily bar vs the previous daily bar. A higher high and higher low signifies an UP trend. If there is a lower high and a lower low, it signifies a DOWN trend. If neither of these conditions is true, the trend remains whatever it was the previous day. If the trend changes from DOWN to UP, I will tend to buy the following day. If the trend changes from UP to DOWN, I will tend to sell the following day.

• Moving averages. If the 3-day simple moving average of the close crosses over the 5-day simple moving average of the close, I will tend to buy the following day. If the 3-day simple moving average of the close crosses below the 5-day simple moving average of the close, I will tend to sell the following day.

• Wicks and tails. If there is an exceptionally long wick on today’s candle, I will tend to sell tomorrow. If there is an exceptionally long tail on today’s candle, I will tend to buy tomorrow.

• Bar color. If there are two red bars followed by two green bars, I will tend to buy tomorrow. If there are two green bars followed by two red bars, I will tend to sell tomorrow.

• RSI. If the RSI(close,4) drops below 20, I will tend to buy tomorrow.

• Volatility. If the bars (no matter what color) are substantially bigger than usual, I will sell, and I won’t buy again until the bars are closer to average size.

There are several other factors that may come into play. I’ll write about some of them later.

In our quest for ways to predict markets or stocks, the idea of Walk Forward Testing arises from time to time. Basically, the assumption is that if you examine your data, say 1, 2, 3 years of data, you may find a strategy that can predict future price movements. To do this, you divide the data into segments. For example, if you have 3 years of data, you might divide it into the oldest 2 years, and the most recent 1 year. Theory has it that if you find something that worked on the oldest two years, it should work on the most recent year. In this example, the older two years of data is called “out-of–sample” data, and the most recent data would be called “in-sample” data.

You can do the same fragmenting of data using months, or even weeks. The idea is the same. Divide the data into ‘in-sample’ and “out-of-sample” parts, find something that works on the “out-of-sample” portion, and hope that it works on the “in-sample” part.

Having done a lot of this sort of thing, I suggest that, bottom line, it doesn’t work. I believe there is a better way. In my experience, your results will be closer to reality, if you back test using 3 months, 6 months, 9 months and one year. If you find a strategy that works in these time frames, it’s likely to work for the coming 3-6 months going forward. Any further testing is unnecessary, in my opinion.

During 2020, I made trade recommendations the day prior to making live trades. Our profit from June, 2020 until December, 2020 was 107%. Beginning now, I will make additional trade recommendations on the same day I make trades, but still prior to actually placing the trade. This will result in a few more trades, and hopefully more profit.

One of the factors we consider when deciding to trade (or not to trade) is volatility.

There are many ways to measure volatility, and they invariably use the size of bars on the chart.

I use daily bars, so I pay attention to the size of daily bars. I ignore minute bars, weekly bars, or any other size bars.

For past couple of weeks, the symbols have been too volatile to trade most of the time. That is to be expected this time of year, and given the current events now going on.