Another Simple Chart Template

Both Schwab and Fidelity are offering “starter kits”, whereby opening a new account with a $50 deposit earns $100 from the broker. My sister’s daughter has three kids who might be old enough to introduce to stock investing. But as I thought through how they could do it responsibly and without much supervision, I realized they’d need a system even simpler than Quill’s ‘Simon Says’ charts and rules, plus a means to size positions, plus a means to find tradables. In short, they’d need tools that tell them What? When? How Much? but done in the simplest versions possible, given that all of them --the three kids, their mom, and their mom’s mom-- are clueless about markets and that markets have turned increasingly vicious of late, and especially now that “earnings season” has been inflicted upon us once again.

A scanner can tell you What? and that’s easy to build. Likewise, a position-sizer. Likewise, even a chart template. What is tough are the entry/exit rules. But here goes. Both StockCharts and BarCharts offer free accounts. But charts templates can’t be saved, nor watchlists, at StockCharts unless one has a paid account. So that becomes Rule #1. Don’t spend money you don’t have to. Here’s my proposal for a chart template.

The upper panel is StochRSI with BarChart’s default settings except that I’ve erased the MA. The second panel is daily Heiken Ashi bars, with NO price or high/low labels, a 1-month lookback, and a speeded-up version of PARTP (15,3).

The game is this. Buy ‘Green’ or sell ‘Red’ when StochSI and PARTP confirm that the trend has changed. Now for the rules.

Generally speaking, prices can move up, with each day making a higher high. Or they can move downward, with each day making a lower low. Or prices can’t make up their mind and do a bit of both: up a couple days, then down a couple days. Arbitrarily, let’s say that a run of five days is ‘a trend’. Less than five days is ‘chop’ or maybe a ‘transition’. More than five days is a “sustained trend”. In order to keep my neophytes out of trouble, they won’t be able to trade stocks that don’t trend well. (More on that later.) But let’s take a look at how those definitions might be applied.

The rule of thumb with HA bars is that ‘down’ bars typically have no upper wicks, or only small ones. ‘Up’ bars show the opposite pattern. Bars with small bodies and
relatively large and relatively equal-sized wicks are ‘dojis’, and they signal a likely trend change, where ‘likely, but not always’ is the key concept. Thus, context matters. A dogi that occurs in a middle of a strong trend with a steep upward or downward slope probably should be ignored. A dogi that occurs when prices are stalling and going mostly sideways can be significant. Thus, there can be no hard and fast rules. There is only practiced judgment, whereby a person sees what he remembers he’s seen before and makes a guess that prices will do the same thing again as they did before.

In short, I’ve decided to jettison trying to tell a literal-minded computer what to do when confronted with the infinite variations that price patterns form and, instead, I’m going to say that, if a set-up isn’t drop-dead obvious, then it isn’t a setup and that it should be avoided. Hence, I’m going to skip the math and skip the programing and focus on what humans are really good at, namely, pattern recognition. So, instead of playing the Sesame Street game of “Which one of these things is not like the others?” I’m going to turn the game around and ask, “Have you seen this pattern before, and what happened next?” In other words, I want to teach ‘tape reading’, not ‘rule following’. (Sorry, Simon.)

Further, I’m going to posit right up front that the right/wrong ratio will probably average around just 1 in 3. Therefore, not over-betting one’s hand and chopping left-hand tails are going to be a huge part of the “rule set”, which won’t be so much a ‘rule set’ as merely a set of guidelines whose purpose is to keep the investor out of trouble more than to pull the max amount of money from every possible trade.

Yeah, yeah. Lots more thinking and drafts to come. But I really think this approach is viable, and it needs a name. So I’m going to call it "Oscar’, because a healthy skepticism is what keeps an investor out of trouble.


[later] Some work with the Kelly Formula suggests that the achieved win rate needs to be above a coin flip rate if the gains on wining trades are small.