Mutual funds price once a day, at end of day (EOD), and they don’t report volume. But orders --to buy or to sell-- have to be submitted BEFORE market close. So you never know what price you’re going to get (though there are ways to make a good guess). If mutual funds are charted with the same types of bars used for stocks or ETFs, this is what a chart might look like (assuming colored OHLC bars are used).
Pretty hard to tell what’s going on, right? But things can be improved hugely by adding a 1-period, simple moving average (SMA) to connect the dashed lines.
If the HA Smoothed indicator is added, the trends become obvious, and the actual prices can still be seen.
chart 3
Let’s take a closer look at that chart. There are four segments (or waves) to it. A rising wave, followed by a falling waved, followed by another rising wave, followed by a (still ongoing) falling wave. 1-2-3-4. Simple. Surf’s up, right? However, let’s zoom in some more and try to see where it might have been prudent to get onboard wave #3.
Quill argues that the ‘Buy’ rule is simple. Get in when the bars turn from ‘red’ to ‘green’. This time, doing so would mean you caught a low price that the next day’s higher price would have created a fat profit for you, and you’d feel like a trading genius. But prices fall the next day, and the day after that. So, now you should be getting worried they’ll fall a third day and, maybe, a fourth. What to do? This is where/when you need to decide how much “wiggle room” you’re going to allow yourself. Said another way, “At what point do you cut your losses?” Are there any indicators that might help you make a decision? In fact, there are, as the following chart suggests.
Again, look at the middle of the chart with Quill’s 'Buy" rule in mind. He says, 'buy when the bars turn from ‘red’ to ‘green’. Note, also, that underneath the first green bar you see (following the second wave --which was a falling one-- there’s a fat green dot. That setup is as good a ‘buy’ signal as you’re going to get, and the signal should be acted on. On that, Quill and I would agree. You don’t hang around waiting to accumulate more evidence. Or in Ben Graham talk, you accept ‘information-risk’ to reduce ‘price risk’. (And if he didn’t say it, then Justin Mamis sure does in his book, The Nature of Risk.
Back to the chart. We got in on a solid signal. However, the following day, the dot turns ‘red’, and it jumps on top of the HA bar. Opps. What’s going on? Simple. The SAR indicator (which BC calls Parabolic Time/Price) says the trend has switched back to ‘down’. Therefore, if you’re a panicky, Chicken Little trader like me, you’d get out the following day. However, if you’re a bold and brave trader with stones like Quill, you’d stay with the position, because you’re still in the money (ITM) on it, and the HA bars are still printing ‘green’.
Therefore, I’d suggest that this investing/trading stuff isn’t just about seeing an opportunity and trying to jump on it, but a matter of knowing who you are and how you manage risk. How are you going to discover that? By charting lots of examples of whatever it is you intend to invest in and doing these sorts of “What if’s?” when the chart is at the “hard, right-hand side of the page” and you can’t see what the next day’s price will be.
What I predict you’ll find is this. Quill’s rule will make you money, on average and over the long haul, because the rule comes from his decades of market experience, and he’s the best trader you’re ever going to meet. However, I would also predict that if you add PATP as a filter and only take trades where HA Smoothie and PARTP are BOTH in synch, and always get out when they disagee, you’ll cut your loss-rate. But what doing so WON’T do is increase your overal profitability. ‘Fast-on/fast-out’ means smaller losses, but it also means smaller profits. That’s just how the numbers work out, and that’s what decades of studies done on investing and investors report. The big money goes to them who can tolerate big drawdowns. (Look up Dennis Ritchie and the Turtles Method.)
I’ve run enough back-tests to know --for my own comfort and sanity-- I need to filter my signals rather than depend on HA Smoothie alone. What you decide to do should be based on what you can prove to yourself might work best for you and your own personality, and it might well involve an entirely different way of charting stocks and an entirely different rule set.
There is no “one best way” to do any of this stuff. There is only what works for you.
