AAPL Auto-Trader enters on a zero cross of the Deviant Plot Linear Regression Indicator (click to enlarge)
The main reason 90 percent of all traders lose money is that all the odds are stacked against them. The markets are complex, everything is random and there are gotchas around every corner. Traders are defenseless when they enter this arena; with no discipline, without a plan, and with no skill, traders haven’t a chance in hell of winning. And the icing on the cake is that we have this thing called emotions, which are built-in self destruct mechanisms that kick in just when you hit a lucky streak and start winning.
The vast majority of traders have no strategy and employ no rules; so it is impossible to measure, analyze or adjust what they do. They are flying blind against a vastly superior foe.
This is where the auto-trader comes in. It is a robot that does what it was programed to do. The auto-trader has no emotions to vere it from its purpose. The result is trade data that can be measured, analyze, allowing the programmer to make adjustments, validate them, and either go with improved results, or pivot and try something else. This is how an auto-trader gets better.
If a trader could trade like a robot, then they too could measure, analyze, adjust or pivot. A Some people can do it, but it is a very small group, and there’s still no guarantee of success, especially if their auto-trader has a lousy strategy and poor risk and money management. It’s only as good as the programmer.
Fortunately I have a lot of experience designing effective strategies, the knowledge to incorporate risk and money management, and the skill to program it into a trading system. So, let’s get into the strategy…
Linear Regression Best Fit Line (click to enlarge)
The Apple Auto-Trader makes trades based on a very simple principle, but uses very sophisticated statistical tools. The primary tool is a Linear Regression, which is a line drawn through all the price data points in such a way that it best fits the direction that price is moving. This is also called the least squares method. The auto-trader watches the slope of that line. The slope of the line is like looking at the velocity and direction of the price.
When the line is sloping up very steeply, then price is moving up very fast. As price slows down, the line starts to level off. When the line is flat, and goes just beyond flat, that’s an indication that price is likely changing direction. And so, that’s when the auto-trader initiates a position.
While in the trade, the auto-trader kicks off money management tools that are constantly monitoring the unrealized profit and loss against a wide variety of configurations, including simple stops, trailing stops, sometimes incorporating trailing floors, as well as daily and monthly profit protects.
The size of the trade , or the number of shares traded, is determined by looking at the current volatility of the stock over a specified period of time, or number of bars. When volatility is low, the position size goes up, when volatility is high, position size goes down. There are several other factors that govern position size such as the total size of the account, and limits to the size a position can grow to. Also, sometimes trades can pyramid, or initiate a second or third trade while the previous trade is still in play.
These pyramid trades only kick in when profits are locked in and there’s a chance to milk the trade due to a strong trend, so additional shares will be committed.
Auto-Trader Indicators help visualize the strategy (click to enlarge)
The system gets into the trade under just one condition, but it can exit the trade on a wide variety of conditions. Those conditions are in two basic categories. The first we already touched up, and that’s money management. The second is the linear regression strategy. Once in a trade, the system monitors the slope of the linear regression. Once in the trade, the slope should get steeper and steeper. At some point it will stop accelerating and the slope will syart approaching level again.
This is where it gets a little tricky. Often when the slope of the linear regression returns to level, you might think that price is starting to go the other way. Sometimes this is the case, but more often than not, price doesn’t start reversing for some period of time after the linear regression has passed through level. Sometimes it goes a little beyond level then returns and continues the original direction when it first got into the trade. This can best be explained as a kind of stall, or rest, while price picks up some steam to continue on the original path.
The auto-trader is configured to take into account this stalling period. The auto-trader will wait and see if this is a real reversal, or just a fake, providing time to consolidate and continue on. If it isn’t a fake, based on some factor, then it means that price is reversing and time to exit the trade. If it is a fake, then the auto-trader does nothing and waits for the next leveling of the linear regression slope.
To see the auto-trader in action you have to register with the AppleInvestor website. After you do, you’ll have full-access to the auto-trader and can participate in the live chat. You’ll also get instant updates whenever new content is published.