5 Pillars of Active Trend Trading

Timing is More Important than Price. ~~ W.D. Gann

Dennis W. Wilborn

Disclaimer

U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futuresand Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willingto accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer toBuy/Sell futures or options. No representation is being made that any account will or is likely toachieve profits or losses similar to those discussed in this training. The past performance of anytrading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

All Materials presented are for training purposes only . Traders should paper trade any new method prior to risk of personal capital.

5 Pillars of Active Trend Trading

Pillar 1: What to Trade

Fish Where the Big Fish Hang Out

1. Clarity, Simplicity & Time

2. Find a reliable source to do

your searches

• ATTS

3. Combination of both

Number 2 can make a lot of sense

for busy traders

Searchable data bases:

- IBD: MarketSmith

- StockChart.com

- BarChart.com

- MarketWatch.com

- Finance.Yahoo.com

- Brokers Website

- TOS

Why is knowing what to trade important?

1. Sound Fundamental Growth Stocks

2. Index/Sector ETFs with huge volume and liquid Options

My Solution: Use a list provided by a reliable source with a proven winning track record!

IBD 50 (Primary)

Leaderboard

Stocks on the Move

Sector Leaders

IBD Screens

Select Index/Sector ETFs

All at www.investors.com or www.ActiveTrendTrading.com

Criteria for Trophy Stocks

1. 50 top-rated growth stocks with top fundamentals showing

strong relative price strength in the market

2. Computer generated list

3. Excellent Record of providing trophy stocks year after year

4. Downloadable

5. Easy to keep up to date

IBD 50: What is it?

2007: S&P Return = 3.53%

Of the 100 stocks on the list at the beginning of 2007

77% of the stocks had an average return of 78.95% from low to high of the year

42% of the stocks had an average return of 56.9% from the beginning of the year to end of year

2008: S&P Return = -38.51%

Of the 100 stocks on the list at the beginning of 2008

95% of the stocks had an average return of 78.77% from low to high of the year

22% of the stocks had an average return of -19.2% from the beginning of the year to end of year

2009: S&P Return = 23.45%

Of the 100 stocks on the list at the beginning of 2009

57% of the stocks had an average return of 121.6% from low to high of the year

32% of the stocks had an average return of 58.4% from the beginning of the year to end of year

2010: S&P Return = 12.78%

Of the 100 stocks on the list at the beginning of 2010

93% of the stocks had an average return of 78.77% from low to high of the year

44% of the stocks had an average return of 52.0% from the beginning of the year to end of year

2011: S&P Return = 0.0%

Of the 50 stocks on the list at the beginning of 2011

88% of the stocks had an average return of 43.10% from low to high of the year

34% of the stocks had an average return of 22.1% from the beginning of the year to end of year

2012: S&P Return = 13.41%

Of the 50 stocks on the list at the beginning of 2012

88% of the stocks had an average return of 45.93% from low to high of the year

44% of the stocks had an average return of 35.91% from the beginning of the year to end of year

IBD 50: Track Record

2013: S&P Return = 29.6%

Of the 50 stocks on the list at the beginning of 2013

78% of the stocks had an average return of 68.39% from low to high of the year

52% of the stocks had an average return of 44.9% from the beginning of the year to end of year

2014: S&P Return = 11.39%

Of the 50 stocks on the list at the beginning of 2014

80% of the stocks had an average return of 51.51% from low to high of the year

38% of the stocks had an average return of 35.86% from the beginning of the year to end of year

2015: S&P Return = -0.73%

Of the 50 stocks on the list at the beginning of 2015

92% of the stocks had an average return of 46.9% from low to high of the year

66% of the stocks had an average return of 20.61% from the beginning of the year to end of year

2016: S&P Return = 9.54%

Of the 50 stocks on the list at the beginning of 2016

90% of the stocks had an average return of 46.9% from low to high of the year

44% of the stocks had an average return of 27.16% from the beginning of the year to end of year

IBD 50: Track Record

Season 1: First of the year until Feb-March

2 Fishing Seasons

Season 2: March-June through End of Year

Refining to the List: Finding Where you’ll fish first!

- Account for stocks moving on and off the list- Running List- Stocks from other Sources (Stock Check Up)

- Reduce the list to the most tradable Stocks!- Volume- Options Liquidity- Patterns- Moving Average Sorts

- Develop a routine- Daily—Short List- Weekly—Short List, IBD 50, Running List on Daily/Weekly Chart- Monthly—Short List, IBD 50, Running List on Weekly/Monthly Chart

How & Where

- Account for stocks moving on and off the list- Running List—ActiveTrendTrading.com or keep your own- Stocks from other Sources (Stock Check Up)—Investors.com

- Reduce the list to the most tradable Stocks/ETFs- Volume (simple sort)- Options Liquidity (visual inspection)- Patterns (visual inspection)- Moving Average Sorts (simple custom sort)

- Develop a routine- Daily—Short List- Weekly—Short List, IBD 50, Running List on Daily/Weekly Chart- Monthly—Short List, IBD 50, Running List on Weekly/Monthly Chart

Sector ETFs Biotech Seasonality

ATTS Copyright 2007-2018

ATTS Copyright 2007-2018

Wait for Winners

5 Runs in 2 years

Average Move = 76.6%

79% 9 Weeks

84% 9 Weeks

66% 7 Weeks

89% 9 Weeks

65% 8 Weeks

Summary

✓ Find where the Trophy Stocks Hang Out

✓ Get the List

✓ Refine the List

✓ Strategically Plan when & where you’ll fish

5 Pillars of Active Trend Trading

Sound Trading Systems tell us:

1. When To Enter

2. When To Exit

Each of these Pillars should have the following characteristics:

A. Have Estmated Objective entry/exit Action Points

B. Be Planned For

Pillar 2 & 3

When to Enter & Exit falls into these categories

1. Trend Line Breaks

2. Moving Average Breakouts

3. Support & Resistance Bounces/Failures (Up or Down)

4. Candlestick Reversal Patterns

Pillar 2 & 3

Modeling Bullish Trades on the SPY from 2004 through 2013 with all

triggers allowed with the exception of trend line breaks showed the

following.

Pillar 2 & 3

Summary Model Results Available at: http://activetrendtrading.com/expectations/

Trend Line Break Entries: Probably the easiest but least

total objective

1. Trend susceptible to the artist and the canvas!

2. Best when used with supporting clues

3. Can be used with conditional order but one needs to

buy on strength at a define level above the trend line

How Much breakout? 10¢, 20¢, 50¢, $1.00 depends on

the entity being traded

Pillar 2 Entries

Trend Line Break Entries Examples TNA

6 Entry Action Points in 9 months

Trend Line Break Entries Examples TNA

Entry Order Set Up1. Estimate Value of trend line at “A”

2. Determine Trigger Price by adding Trigger Value

3. Determine Position Size

4. Determine Stop Loss

5. Determine Profit Target

The trend line at “A” is Approximately 67.04

Trigger Value = 25¢

Trigger Price = 67.29

Shares: ?

Stop Loss: ?

Profit Target: ?

Time for conditional order: ?

Each trader must determine these last four based on

their risk tolerance and account size.

A

Support & Candlestick Set Ups 1

What is Support:

1. Define Yours

- Horizontal

- Moving Averages

- Keltner Channels

2. Establish Trigger Values

- How Much to add 10¢, 20¢, 50¢, $1.00 depends on the entity being traded

Notice there is consistency here between the triggers. Once you choose stick with

the choice and refine slowly

Support & Candlestick Set Ups 1

Horizontal Support

Reversal Candlesticks

Candlestick Entries TNA

Candlestick Set Up

Better Convergence of Clues

1. Well Defined Support

2. Retesting Support

3. Legitimate Reversal Candles or Doji’s

4. End of Day or After Hours Set up

The Order Set Up

1. Define the high of candle signal

2. Determine Trigger Price by adding Trigger Value

3. Determine Position Size

4. Determine Stop Loss

5. Determine Profit Target

Top of Support Zone at “B” is 64.76

Trigger Value = 20¢

Trigger Price = 64.96

Shares: ?

Stop Loss: ?

Profit Target: ?

Time for conditional order: ?

Each trader must determine these last four based on their risk tolerance and account size.

B

TNA TIPS

Be Aware of difference

between RUT & TNA

RUT TNA

Summary

✓ Four Major Entry Signals For Long Trades

✓ Estimated Objectiveness

✓ Decide and Then Be Consistent

✓ Monitor & Refine

Entries are one time events

Exits require more strategy, planning and patience

Greater “Pucker” Factor

More Emotional and with Impulsive Temptations

Like getting out of a relationship

Types of Exits

- Partial Profit Exits (T1)

- Full Profit Exits (No Such Thing)

- Time Exits

- Loss Exits

- “Line in the Sand” Exits! -5 to -7% from purchase price

Pillar 3--Exits

Trend Line Break Exits: Probably the easiest but least

total objective

1. Trend susceptible to the artist and the canvas!

2. Best when used with supporting clues

3. End of Day Exit

How Much breakout? 10¢, 20¢, 50¢, $1.00 depends on

the entity being traded

Once new downtrend is established, can use to enter

bearish trades

Pillar 3 Exits

Trend Line Break Exit Examples TNA

Macro & Micro Trend Breaks

for Exits & Entries

Exit

Exit

Entry

Entry

Trend Line Break Exit Examples TNA

Exit Order Set Up 3-101. Estimate Value of trend line at “A”

2. Determine Trigger Price by subtract Trigger Value

3. Determine Position Size to Close

The trend line at “A” is Approximately 81.79

Trigger Value = 25¢

Trigger Price = 81.54

End of Day if Price is below 81.54 sell to close

Shares: ?

Stop Loss: ?

Profit Target: ?

Time for conditional order: ?

Each trader must determine these last four based on

their risk tolerance and account size.

A

Trend Line Break Exit Examples TNA

Exit Order Set Up (what Happens)1. Next Day Closes below 81.54

2. Close Position

If you are not around just before the Close, place a

conditional order that will sell the position on a close

below the Trigger Price.

The trend line at “A” is Approximately 81.79

Trigger Value = 25¢

Trigger Price = 81.54

End of Day if Price is below 81.54 sell to close

Shares: ?

Stop Loss: ?

Profit Target: ?

Time for conditional order: ?

Each trader must determine these last four based on

their risk tolerance and account size.

A

Summary

✓ Six Major Exit Signals For Long Trades

✓ Entries for Short Trades after confirmed downtrend

✓ Estimated Objectiveness

✓ Decide and Then Be Consistent

✓ Monitor & Refine

5 Pillars of Active Trend Trading

Sound Trading Systems tell us:

4. Strategy to Use – Or when to apply our Strategies

5. What to Expect

The last 2 Pillars are often either overlooked by traders or ignored.

Strategies without the Foundation of the System are prone to Failure!

Systems & Strategies without knowing the Expectations is like being in the Fog. No Landmarks to let you know how you’re doing!

Pillar 4 & 5

Strategies with increasing levels of complexity due to more

variables and knowledge requirements

1. Buy & Sell Stocks and ETF

2. Buy & Sell Options

a. Covered Calls

b. Directional Options

c. Spreads (debit & credit/Vertical, Diagonal, Calendar)

d. More Exotic Option Trades (Iron Condors, Butterflies,

Straddles, Strangles and more.)

3. Futures & Forex

4. Others (Mutual funds—not complex just no control)

Pillar 4

Stocks & ETF’s: Buy & Sell based off of proper Action Points from the System.

Variables:

o Stocks

o Earnings

o News

o Index ETF’s (bullish)

o No Earning Surprises

o News

With a Margin Account can be leveraged up to 2-3X depending on the stock and broker

Pillar 4

Options: Buy & Sell based off proper Action Points from the System

Attraction: More Leverage with small account! Some times the Attraction is Fatal! Leverage is a two edged Sword!

Fact: Greater Reward/Greater Risk than trading stocks/ETFs

Variables: Many more variables—must be MORE RIGHT!

For a trader who is anchored to a great system trading options can work very well, but many jump into option strategies without being successful in trading stocks/ETF’s.

The allure of turning small money into big money blinds them to the downside risk—They buy cheap out of the money option on a hope and prayer it will run up, but……it expires worthless!

Pillar 4

• Futures & Forex: Similar Challenges as Options but often with great leverage. Requires more skill and potentially more time to trade.

• Fact: Even Greater Reward/Greater Risk than trading stocks/ETFs

• Others (Mutual funds—not complex just no control which is a different kind of risk)

Regardless the strategy, knowing and using a sound trading system is critical to successfully applying the strategy.

Too Many Trader focus on just the strategy and this is hazardous to the health of the trader’s trading account!

Pillar 4

How do we define expectations for a Systems?

What are the most important characteristics to define?

Which of the following is most important?

▪ Winning %

▪ Losing %

▪ Number of Trade

▪ Size of winning trades compared to Size of losing trades

▪ Defined Expectancy (How much you can expect to make per

trade on average)

Pillar 5: Expectations

While each of the preceding elements are important some are

more important than other in defining the Expectancy of a

system.

Least Important: Winning % and Losing %

More Important: $ gained per Win & $ lost per loss

Expectancy and Win/Loss Ratio

Pillar 5: Expectations

Lease Important: Winning % and Losing %

Example: A system that has 70% winning trades, sounds great but.. What happens if each winning trade gains less than each losing trade loses?

Average Winning Trade Gains $100

Average Loosing Trade looses $400

Out of 100 trades

70 winners x $100 = +$7000

30 loses x $400 = -$12000

Net Gain/Loss = - $5000

The system would have a Negative Expectancy and thus not a good system

Pillar 5: Expectations

Lease Important: Winning % and Losing %

Example: A system that has 40% winning trades, sounds great but.. What happens if each winning trade gains less than each losing trade loses?

Average Winning Trade Gains $400

Average Loosing Trade looses $100

Out of 100 trades

40 winners x $400 = +$16000

60 loses x $100 = -$6000

Net Gain/Loss = + $ 10000

The system would have a Positive Expectancy and thus system worth checking out

Pillar 5: Expectations

Most Important: Win/Loss Ratio & Expectancy

Psychologically a system with less than 50% winners might be challenging to trade!

Win/Loss Ratio =

(Total of Profitable Trades/Number of Profitable Trades)

(Total of Losing Trades/Number of Losing Trades)

From the past example of 40% winners

(Total of Profitable Trades = $16000/ Total Profitable Trades = 40) = $400

(Total of Losing Trades = $6000/ Total Profitable Trades = 60) = $100

Win/Loss Ratio = 400/100 or 4:1

For every dollar I risk I have the potential to gain $4

A system with a W/L Ratio of > 2:1 is very good

Pillar 5: Expectations

Most Important: Win/Loss Ratio & Expectancy

Expectancy: Tells us how much we will like earn on each trade & we want this to be positive greater than zero

Expectancy = (Ave Profit X % of Winning Trades) – (Ave Loss X % Losing Trades)

From the 40% example:

Ave Profit = $400

% Winning Trades = 40%

Ave Loss = $100

% Losing Trades = %60

Expectancy = (400 x 0.4) – (100 x 0.6) = $100

So over time we could expect to earn $100 per trade

Neither of these calculations answer the questions of trade frequency per year or how much capital is required. Frequency is a function of what entity is being traded.

Pillar 5: Expectations

The Active Trend Trading System over 10 years trading SPY Long

Average Winning Trades = 72%

P/L Ratio: 4.4:1 average over 10 years

Expectancy : $193.64 per Trade

Average Trades per Year: 16.70

On a $10,000 account trading only Long SPY

Ave Profit per Year = 16.70 x 193.64 = $ 3233.79

Ave Return Per Year = (3233.79/10000 ) x 100 = 32.34%

Pillar 5: Expectations

Summary

✓ Learn the system before apply the strategy

✓ Start with the simplest Strategy

✓ Know what to Expectations on each trade