Production Line Trading - How it Can Work For You (Episode 13)

It's funny to say that I actually start out as an index trader, so I do follow the indexes . So I think the first thing to keep in mind is I'm completely agnostic to what's going on outside of my window. I was resistant for many years to actually consider economics and the fundamentals and stuff and just acknowledge I'm a pure technician. And I can say that confidently these days, because my time horizon for trade opportunities is about 30 to 45 days. So with that in mind, that's gonna influence the way that I describe things. So I generally don't care about what's going on the economy, the fed announcements, um, all the, again, we'll just generically call it stuff that's going on in the real world, but I'm just not paying any attention to it. And I never have done the only times where I pay attention, actually there's no times I pay attention to it.

The acceptance of the rule is, is if I do look at a trade and earnings is tomorrow a little bit of common sense. I'm probably not placing the trade. However, to come back to your question, price is in a retracement and a corrective move of want of a better description. The way that I view the charts now is I'm looking for levels on the chart and I'm trying not to be discretionary with those levels. So I'm just sharing my chart with you on, you can see what I'm looking at. If anyone's listening, we'll share will let you know where to get the visuals for this, but I've got three lines on my chart. One of them is the 50 period move in average, the 200 period move in average and the 20. And there's nothing magical about these lines. It just allows me a frame of reference to evaluate what we're looking at.

We could be using any tool or any indicator. It's just gives anyone a frame of reference to look at. I'm sure our loving listeners can appreciate that. So what I want to see is price to go back above the 200, because it's right now on the S and P futures below that. And then to go back above the 50 period, move on average, which it's right next to for the moment. So I'm not really worried about the crosses in the average prices in the traditional way. I just want to see price in a bullish posture for once a vet description. So that's what I'm looking for. So I'm aim for 4,500. And for most of this year on the index futures, which I do trade I've been sat in cash because everything was well, the first sign was priced dipped below the 50 period, move on average. So I wanna see price above all the move on averages stacked essentially. And that's gonna be an opportunity for me to get positioned on the markets and that is at, at its moves. Basic what I'm looking at,

I'll place a trade on anything that is worth it. . So what you've just seen me, uh, put on the, the visual is if it's kind of like the back test of that evaluation. So when price is above the 200 period, the 50 period and the 20 period move of an average, when it's above all three stacks moving averages, I'm gonna be taking bullish positions. And if I just did that and then go to cash, when price comes back below the 50 or between the 50 and the 200 period move and averages, when it does that, I'm either gonna be stock out or I'm gonna go to cash and close for a small profit. If I just do that, and I did that over the last 20 years, I've got some sort of positive expectancy. So I've shown you the charts versus we're doing this.

I appreciate it's not the best medium for visuals , but nonetheless, you can see it and ask me a sensible question if you want. So if I just do that, then I've got an expectation that on average, over a long period of occurrences, I should be able to make some money. So that's what I'm doing. And that's how I evaluate the charts these days. Again, we could be looking at the S and P we could be looking at individual stocks, the principle and the process is exactly the same with whatever. I'm looking at a typical example for me when I'm asked about the markets and what I think I'm trying not to have opinions on the markets and my most recent realization that I need to stop opinions is post the market crash in 2020. I made a lot of money on the way down, and then like, most people, you get a little bit cocky, a little bit confident and you go stop banging your chest and go, I'm gonna trade my opinion this time.

. And I thought it was gonna BEEST at the lows, like many people in the media and the public. And I just got in trenched in my own opinion. So I backed myself into a corner and I went lots of bearish positions. Um, you know, the way that I do it is using stock options. And I, I was buying puts essentially as an alternative to shorting stock and I backed myself into a corner and it was an expensive lesson or an expensive reminder, but it just influences the way that you, the next phase of your journey. And it's been about 10 years, that since I've had such a huge, let's face it cock up, you know, listening to my ego instead of the data, and this is influence in the way that I'm answering new questions. I'm trying not to have an opinion. The data tells me I don't need an opinion.

Now I'm not saying that a system or mechanical approach is the best way to trade, but I wanna sleep at night. I don't wanna stress, have anxiety. I've got Crohn's disease. So I'm very sensitive to those things. I also wanna spend a lot of time away from the computer. I wanna do this in as little time as possible. So this is influencing the way that I trade. So, uh, stocks that I'm looking at, um, for example, right now are LNG Lehman of Emma golf is the ticker. This is Cheshire energy. And the energy sector is in the news headlines at the moment. But like I've been trading this for several years, not because of the current events, current affairs, the way that I view things like that are going on in the news and the media, it's gonna speed up what is already happening. So if there's a bullish movement on a stock, for example, or an instrument like an index or an ETF, then it's gonna speed up what was already happening on that instrument. And that, that's kind of like where I'm at in my own journey, you know, and I've, you know, 28 years later, I'm trying to make it as easy as possible for myself.

What I'll do is I'll back up. So the first step to making all this work is I need a strategy that I wholeheartedly believe in. So based on that very basic explanation, if prices above the moving averages go long, if it's below all the moving, just go short. So it's a two-sided approach. The second part to that is to find a small universe of stocks that behave favorably for the way that I want to trade. So the only time consumer part of what I do is about once a year or once every 18 months, I'll go through and screen for stocks that have liquidity that have options. Cause I know I'm gonna trade options. And the basic premise there is is that at least if they've got a million shares traded on average and they've got weekly options and there's, uh, volume on the options that there's liquidity there, then that's gonna bring that list down to around about 2000 stocks.

I also at a personal level, like to trade stocks that are above $20. So that then trims that universe down. Now the time consuming part is I'm gonna take the algorithm that I'm showing you now, and I'm gonna go through the stocks and find out which ones are behaving favorably. Now I don't know which trade's gonna work. What I do know is if there's a stock that behaves over a multi-decade time horizon, then there's a good chance. It'll continue to behave favorably for the next 30 to 45 days. That's the logic, okay? It's not perfect, but it helps me sleep at night. A good example might be if we go to Pepsi Cola and you can see this, so maybe you can ask a question if it's relevance. So Pepsi we'll know it's a good company, it's a good stock, but it's just not a favorable stock for my style of swing trading, which is very passive but profitable at the same time, it means that I can spend lots of time away from the computer and I can check in two or three times a week, but to trade this, it's not impossible to trade Pepsi, but the data suggests that it doesn't behave favorably.

So if I was gonna trade it, I need to bring other things to the table. I need to bring maybe discretion, maybe patterns, maybe things that are subjective in nature to make that strategy work. And I'm trying to move away from that in my trading career. So it's not that swing trading wouldn't work on Pepsi. It's just, I've gotta be cherry picking. I've gotta be selective with my opportunity and the timing. And I don't wanna do that.

So when I plug those base rules, it's above the prices above the 200 it's above the 50 it's above the 20. And when it dips back in between the averages, that's what I would call a Bible dip. And then when it resumes and goes back above, then I'm gonna get positions on a trade. So if I just do that at its most basic, very back of the envelope interpretation, I plug those rules into the algorithm and back test it with the money management that I like to use. It's not favorable for the way that I want trade. It's not impossible to make it work. I could use a faster combination to move on averages, but the trade off for me then is I've got to spend more time with the computer. I've got to be a little bit more hands on with the trade. So it's not that swing chain doesn't work on Pepsi.

It's just the way that I wanna trade, which is to have minimal time minimal inputs. I wanna put the trade on. I want to be passive in that regards, but I want to have the fruits of active training at the same time. I'm trying to find that fusion of the two things so that I can be up a mountain. I can go partying. I can go and enjoy myself because I wanna life. I don't wanna be sat in front of the computer. So it's trying to find that fusion of both things that makes it work for me. So come back to your question, we'll get an answer. Don't worry. so if I apply strategy and I'm gonna filter it through the liquid stocks, and then I'm gonna apply the strategy to those liquid stocks. So I end up with about 700 stocks that could be traded.

And then when I put it through the algo, I should end up with about a hundred. I'm gonna pick the best hundred stocks that have a steady equity curve. Let's go back to the SMB 500 continuous futures, just so you can see the illustration. So I can back test the algorithm, the rules, the concept, the way that I wanna trade and say, if I just did that over the last 20 years, what would it be in the outcome? I'm not necessarily looking at the dollar amounts. All I'm looking at, is there a steady equity curve? Yes, there is meaning that it's going to behave favorably for the way that I want to trade. So I'm less focused on the individual data points and the metrics and the, all the other stuff that comes along with such back testing reports. I just want to know, would this have been a problem for me to trade?

Would I have had to put any extra screen time into make it a profitable strategy or can I place the trade and be actively engaged in the market, but without having to watch every up and down ticket the market. So when I do that, I get 89 stocks. So the last part of any strategy is consistency. Not just consistency with the application of a strategy, but I need the consistency of the application on individual stocks. So I wanna try and emulate the performance that I'm showing you on the algo on a small group of stocks that makes sense to consistently trade them every day, every week, every month for the next 12 months, when I reevaluate the universe that of stocks and driven. So I've got a small number of stocks that I like to trade. I'm trying to trade them consistently so I can emulate the back tested expectation so that I've got this positive expectancy strategy.

So that's the way that I trade. So I'm not looking at every stock every day, all of the time, I'm not bouncing around. I'm not hunting for opportunities. I sometimes compare this to farming. I've got a small basket of stocks that I know behave favorably for the way that I want to trade. And I'm just waiting for the set I'm waiting for that seed to grow and bloom into. Maybe it'll produce a monetary loss. Maybe it'll produce a monetary gain, but all I know is that the data is saying that on average, I should have a positive expectation. There should be a profit. And absolutely, I don't know what's gonna happen anymore. The next person , you know, but I've been doing this 28 years. It must be working at some level,

Um, energy sector, generally just broadly speaking over a multi-decade approach. Most things in the energy sector seem to be very favorable for this. I can't quite figure out why, if I'm gonna be honest, that is on my research to-do list, but stocks that I like that are exceptional within that gonna be Halliburton, uh PXD which is a pioneer we've got LNG for, um, Cheshire energy there, three stocks that I really like at the moment in the sector, they all historically perform very, very well. Apple is the darling of wall street, as you know

Yeah. It's the darling of my strategy. I mean, if you look at the it's almost straight line, it's like, you can't believe the historical performance, um, with the benefits of hindsight, you go, of course you would've traded apple, but we didn't know that it was going to be such an amazing performer.

Yeah. Well, if we look at say the actual charts, the, when I'm visually assessing the charts, cause I don't always start off looking at the charts, but now that I am looking at the first thing that we always want to consider is the trend. The trend is the friend. It's a cliche, it's a cliche for a reason. If you think about it as in context, it's a river of money. And I, all I'm trying to do is jump on the shirttails of the money and that could be the institutional money. I'm just trying to catch a piece of what they're doing. So generally, whenever I'm looking at a chart, I look at the last 12 months, at least 12 to 15 months, and just try and evaluate if the chart starts at the bottom left, it finishes at the top, right? It's got to be an up trend. Now I've got a mechanical evaluation as I was just showing you. But if you're doing this visually, then you are confirming, there is a trend just cuz the average prices are crossed upwards. For example, a golden cross to quote the textbooks. It doesn't make it an automatic bullish trend. It doesn't make it an automatic by signal. If there is such a thing, which I don't believe there is.

Well, the indicators by nature, they're always lagging aren't they? So all I'm trying to do is use the move and outs as a framework to evaluate price. So I'm not married to the crossover points in the traditional sense. Again, all I wanna do is say, where is price in relation to the three movement averages? That's all I'm looking for. But when I do look at a chance, I wanna then visually confirm as I showed you just a moment ago, it's not critical to the process, but there's just some things that can't be quantified. And again, just a visual common sense approach. Start at the bottom left, finish at the top, right? I was expecting to see a trend. I am seeing a trend. Great. I can move on to the next part. And this is where I'll then just zoom in a little bit more so I can see the detail.

So if we look at where price is right now, so where is the latest data point yesterday's closed essentially? Or, you know right now is open. Depends on when you're looking at your opportunities. And all I'm doing is saying, where is price in relation to the move and averages? It's above the 200 period. It's right next to the 20 and it's below the 50. Now I want that 20 periods below the fifties. So we've got a slightly longer and deeper retracement as we're doing this. And just to data, it's the middle of March. If you wanna depends on when you're listening to this. So what I'm looking for is I'm waiting for price to be above all three moving averages. I'm not necessarily worried about the crossovers and the fact that one's here and crossover the at ones here and crossed over there. And it's of no consequence when price is above all three moving averages, I will be bullish. And I want you to pay attention to the way that I said that Kate, cause I'm trying to make a statement and that makes it an algorithm. And then there's no ambiguity. Whether, you know, you are looking at the chart in one way and trying to read the patents. It's like both of us can agree that when price is above all three moving garbages, it is above all three moving garages. There's no question. There's no, because we're both looking at that same frame of reference. And that means that I can replicate it.

There and you raise an interesting point. It doesn't mean it's perfect. I still lose money from time to time, but it's from time to time and I'm looking to like any business to make money on average, over a long period of time, there's gonna be periods of time where it doesn't work. you know, but one of the ways that I can combat that is by not having stop loss. So the way that I get ran, don't panic instead of trading with stock, I use a stock option. I'm gonna buy a lot of time, more time than I'll ever need. Again, I'm looking for 30 to 45 days as my time horizon. So I'll buy, you know, 120, 150 days maybe longer. So it's plenty of time. So I'll still be impacted by all the concerns that go along with options, but they're gonna be minimized initially so that if I have to wait for my trade to turn around, then I've got the luxury of a little bit of extra time on the clock.

It also means that I've got a timeout. If it's not working, I can let it expire in 120 days. So I also use the full price, the premium as a built in stop loss. So I don't have to have a stop loss cuz the mistake that most people make is they're over positioned. I wanna trade small. I wanna trade frequently. I don't know which ones are gonna work. So I've got to take every trade without deviation, without hesitations. So that I've got that consistency. So what we've got marked off, actually I'm actually in a, a long trade at the end of January, beginning of February is when I got in and you'll notice that the algo said I've been stocked out. So that was a monetary loss. But just by simply moving from stock to an option with plenty of time on the clock means that I get the opportunity to manage it more effectively. I don't know if I'll make money on this right now. I'm on the water on it, but I don't need to use a stop loss. It'll time out when it's not.

I started there as well.

You know, annoyed me more being stopped out.

Yeah. What they don't tell you with that rule is re-entry, that's what they forget to tell you. And that cuz you get stopped out, but often by a tick and then you watch your trade idea, do the thing that you expected it to do in the first place. So the textbooks never tell you to, or you can reenter the position if your condition set up again. And I found that that helped when I was using stop Boston trade on more traditional approach. But with the option side, I get this luxury of time, a freedom of flexibility. I'm also just to kind of finish the thought from Ellie before you ask your next question, I'm using the full price of the premium as a stop loss built in as the risk managements. So I don't have to use that traditional stop loss. Even with the option.

I get to take it all the way to expiration. If I need to like with apple Apple's under, before me, for me, I'm very open about what I'm trading, what's working and what's not working. This is not working for me right now, but I've gotten to expiration to see if I can manage it more effectively in this case, if I can get a break, even trade because time's marching on for me. If this can turn around to break, even I'll be super happy, but just by moving from stock to an option as an alternative with plenty of time on the clock, I've got that luxury of time. The other thing that makes it work again, just a last part of this, the secret that makes it work. It's a portfolio approach. I don't know which stocks are gonna set up on when they're gonna set up.

I know that about 50 of the stocks that I usually watch will set up. So I've got to place every trade. There's gonna be a portion of bullish trades. There's gonna be a portion of those that are bearish trades. I'll be prodding in the upswings and the down swings. And that means every Thursday can be up on mountain hiking. I like that. I'm not worried about what the market's doing or what's going on in the world or paying attention to the fed. I was at a zoo when the fed was, uh, meeting, you know, I'm not like watching every tick in the market because of several pieces that all come together to make it work. Yeah.

Well. You're right. It's cost effective just by moving over to an option, using the full price premium and always be on the buy side. There's no margin requirements for the stock, you know, so you are not locking up capital in margin requirements for what perceivably could be the same trade. So you get to allocate that other places you can have the small risk, the small position size and have all the available capital in your account to have. Instead of one trade locked up with, you know, 20, $30,000. I can put that to work with 5, 10, 15, 20 other positions. If I wanted to, I'm not saying you need to go that crazy, but you should be looking at a portfolio approach. You know, 10, 15 stocks is a nice kind of small account, small portfolio. You could do the same thing with debit spreads instead of singles.

So if that opens up the opportunity to trade like Tesla, apples, which is quite expensive option, you can trade the big name stocks if you choose to, because you there's always a way to trade even with a big account or a small account. So it's very versatile, very flexible in that regard. And again, it just frees up the capital without having to lock it up unnecessarily just because of the vehicle that we choose or that we're should forced to choose because apparently options is a really advanced way of trading. I mean, there's a lot of moving parts, but I wouldn't say it was not necessarily complex, but it's for a lot of people it's quite scary when there's a lot of moving parts to consider,

Like anything, I compare it to like learn how to drive or like learning the game of golf. There's a list of rules that tells you here's the rules of the road. If you're driving, get an instructor, they'll get you to be competent to drive on the road. And then once you've reached competency right off you go, here's your license off you go qu on. You know, and that's what dread is to me. It's there is a learning curve I'm never gonna blow wind in anyone's sales that it can't be learned, but it's a learned skill. It truly is. And the mistake that I've made and the mistake that I see people make is that they're trying to start their choices with discretion and they've not got the experience to know what's a good decision or a bad decision. So we can add in the patterns, the doubt with the down, through the yellow wave three to this process and like adding salt and pepper to a meal, it's gonna enhance the flavor, but you're still gonna have to meal if you choose not to do it or you're not experienced enough to do it for me personally, I don't wanna do it anymore.

I can do it. But like the sacrifice for me is like, I've now gotta spend a couple of hours looking at the eight wave counts. , you know, it's not critical. It could enhance the flavor of the trade, but I don't need to do it as I've just shown you with the back testing and the data and all the other good stuff.

How do I make it work? Yeah,

That's all I want. So I wanna make it work and make money and not really be super critical about like, did I count the Elliot way from here, but it's a different count from there, which, you know, it's not that it doesn't work. It's just the trade off is you gotta spend more time doing it.

Sure. If people like a copy of the charts that we've spoken about or any of the charts that we've not had time to mention, cuz Phil's a little bit of a talker you can go to, uh, my website there memorable, uh, link for you is production line trading. I like to think of what I do as a production line, just like in a factory. So production line trading.com. That'll redirect you to my website. And if you wanna contact me there, you can download the list of stocks that I'm talking that I'm only looking at. And if you like to hit reply on any of those emails, I'm very open and very accessible. If you've got questions about what I'm doing, um, you know, by all means get in touch. I try to be as accessible as possible because when I started that I had no one to ask.

So I just like to try and give back as much as possible wherever I can, whether we're working formally together or not. Because at the very least I like to try and pump people off in the right direction for what they're looking for. And maybe what I do is not right for them. And that's cool. I'm fine with that. But maybe they'll be able to ask a, a smarter, more informed question from the next person who generally can help them on the next leg of their trading journey. So production line trading.com and that'll take you to my main website.