Set ups f or St ocks Entries and Triggers Adam Grimes CIO, Waverly Advisors, LLC Date Outline • What we are trying to Theoretical accomplish with a “setup”? • How does the market move? • Specific trading patterns Practical • Filtering to find best candidates • Understanding yourself Applied • How Waverly Advisors research might help. © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Why Setups?  We have a finite amount of time and attention.  Where to best deploy resources? – Capital – Attention – Risk  There are, very roughly, 7,000 stocks traded in the US.  How to find the best and have reasonable confidence we are not missing opportunities? © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Market Lessons (from Statistics)  Financial markets are highly competitive. – There is no free lunch  Financial markets usually move in ways that are indistinguishable from random walks. – Why can we not simply say they move randomly?  Behavioral and psychological factors play a part in market prices. © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Two Forces Model © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Lessons from the Two Forces  Price movements are shaped by mean reversion (range contraction) and momentum (range expansion).  Over a large sample of market action, these two forces balance each other out. – Random walks describe price movements well when the forces balance.  Is it possible to identify conditions that will show when one force is likely to predominate? © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. The Two Forces in Patterns Mean Reversion Momentum  Fading large single bars  Volatility compression  Fading N-day runs  Pullbacks  Fading breakouts of N-day highs or lows  Fading large excursions from moving averages • Different asset classes and timeframes have different tendencies for mean reversion! • These tendencies can be captured in some traditional chart patterns. © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Implications for Trading  Usually we have no reason to be in a market (because of random walk).  When we do identify spots that might offer opportunity, there is only a very small statistical edge. – This is why consistency, discipline, and risk management are so important.  The patterns we use must reflect statistical reality and say something meaningful about the probabilities. © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Where Is the Trend? © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author. Or Like This? © 2015 by Adam Grimes. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For other permission requests, contact the author.