smart is better than lucky · if you feel you cannot afford to pay just now due to circumstances,...

April 18th, 2020 A publication of Algobot Pte Ltd CRN201604500D. Copyright © 2020

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Weekly for Saturday April 18th, 2020. Based on Thursday’s Close

CONTENTS

SMART IS BETTER THAN LUCKY pg1

FUNDAMENTAL NONSENSE pg7 POSITIVE AND NEGATIVE LISTS pg9

ADVANTAGES OF SMALL TRADING SIZE pg13 NEWSLETTER OUTLOOK: TRADING WITH FEAR pg15 PORTFOLIO CASE STUDIES: MONEY MANAGEMENT pg18

SMART IS BETTER THAN LUCKY By Daryl Guppy

You cannot forego a good laugh in times like this. The chart below says it all. It

reminds me of the days of the internet boom when everything ‘internet’ was hot. There was a short-lived surge in the Australian stock called EMAIL. Unfortunately, the

company produced washing machines and had nothing to do with the new internet.


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Tomorrow I will do a free webinar with Metastock on COVID TRADING

STRATEGIES. Click here to register. I will discuss analysis, strategy, tactics, tools and the limitations of revenge trading.

https://www.metastock.com/offer/event/?whc=Apac-Summit&pc=eq-guppytraders.com


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LONG SIDE BUY SIGNAL? Here’s the application of basic GMMA analysis to the unnamed chart below. The conclusions should come as no surprise.

Here’s the GMMA analysis.

The uptrend is well supported by the long term GMMA. The pullback is using the upper edge of the long term GMMA as a support

level.

Further compression in the short term GMMA is a signal that the rally rebound is beginning.

A close above the downtrend line is an entry signal. This is a high probability rally rebound trading opportunity.

Is this a long-side buy signal? Answer is provided later in the newsletter.

SUBSCRIPTION RELIEF

It’s a tough time for all so we have decided to offer subscribers a choice when it comes to renewing your subscription.

1. We will continue to send you a subscription renewal notice. If you feel you can

afford to pay it now, then it would be greatly appreciated.


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2. If you feel you cannot afford to pay just now due to circumstances, then we will not cut you off. Instead you will continue to receive the newsletter until the end of May when we will reassess the situation.

3. If you decide not to resubscribe for other reasons, then please let us know so we can stop sending the newsletter and reminders.

XJO CONTEXT UPDATE

Here’s an update from last week on the context of the current fall as compared

to the 2008 collapse. As noted, we suspect that the current rebound is the mother of all dead cat bounces. Note the dead-cat bounce in 2008. On the weekly chart you can

see how this developed as a six week rally.

The most important feature of note is the speed of the current fall. In 2008 the fall played out over a year. This fall is playing out over a few weeks. That’s materially

different as discussed in the strategy notes. This is not GFC. It’s the Great Panic. GFC solutions will not work, and that impacts on how we re-enter the market.

UPDATE ON WHAT WE ARE DOING As noted in following articles, we are easing back into this market with a

defensive approach. 1) Identify sustainable rebound activity suitable for short term trades. 2) Look for stocks that did not overreact to the market fall and which have

maintained steady low volatility trend behaviour. 3) Enter near to the stop loss levels to reduce risk.

4) Manage as a short term trade with tight protect profit stops. 5) Identify support points and potential buy points for investment style

accumulation

Our current strategy is cautious trading until there is absolute proof this is not a sustained dead cat bounce because the macro economic situation runs counter to the

market behaviour


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Both the US and the UK engaged in what can only be called a cover-up, by not reporting COVID deaths that occur outside of a hospital. Deaths in nursing homes,

care facilities etc are excluded from the total. New York has only just started to include them. This chart shows US jobless claims and the US market reaction. Jobless

figures portend a massive economic slowdown, but the market apparently doesn’t care. One of these realities will win and although we want to believe the market, we really think it’s the economic reality that will win.

You can download the ATR indicator for MT4 at

https://www.mql5.com/en/market/product/29683 Use this to improve your trade risk management.

https://www.mql5.com/en/market/product/29683


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CASE STUDY EQUITY CURVE

The case study portfolio return is $53,915 or 53.9% for the period starting

July 1, 2019 and ending June 30, 2020. For the year starting July 1, 2018 – 2019 the case study portfolio return is

$91,794 or 91.79%. For the year starting July 1, 2017-2018, the case study portfolio return is

$115,330 or 115.3%. For the year starting July 1, 2016-2017, the case study

portfolio return is $92,464.15 or 92.5%. For the year starting July 1, 2015- 2016, the case study portfolio return is $156,450 or 156.45%.

Equity trade size is generally kept constant at $20,000 in the case study portfolio so it is easier to compare the case study trades over this and other years. Unless otherwise noted in the trade management notes, all equity case study trades

are managed on an end of day basis, with the exit taken at the best reasonable price on the day after the stop loss is triggered.

Warrant and CFD trades are generally kept constant at $10,000. Warrant and CFD trades are closed on an intraday basis using a guaranteed stop loss as this is a primary method of managing derivative risk.

FX trades are generally kept constant at $5000. Stops are managed intraday. This capital allocation reflects the risk in each of these asset classes.


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FUNDAMENTAL NONSENSE By Alexander O’Malley

When looking at the market it is important that what you feel is going to happen and what is happening are correlated. If you think the market will rise and it

is rising then we enter longs. If the market is falling and you think it should be rising then we stay out. This is a fundamental principle and one that we adhere to religiously

when trading leveraged products like CFDs. But these are extraordinary times and we must adhere to a higher philosophy: Fundamental analysis is bollocks – trade what is on the screen.

I am still quiet bearish on the Aussie market even though we have seen this great rebound. With the continued COVID-19 spread and devastation in America and

Europe we cannot be unaffected. However looking at the market we can see, even though I think there is disconnect between market sentiment and reality, the market thinks we are winning. So taking that stance that my opinion is unimportant in the

grand scheme of things, we look to get back into the market. Just because the market is rallying strong doesn’t mean I throw out my bearish

sentiment. It means now I am getting back into the market I am more cautious. Using defensive trading strategies to reduce risk, manage trades and protect capital is paramount. These are phrases that we were using 6 months ago during the bull

market but they take on a new meaning now. 6 months ago when we looked at a trend change we would chase price in order to get into the trade because we knew

https://www.metastock.com/offer/event/?whc=Apac-Summit&pc=eq-guppytraders.com


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there was a higher probability of price continuing to rise on bullish sentiment. It didn’t matter if we let out stops go a little bigger. We still maintained the 2% rule but we could set out stop lower because there was bullish sentiment. Now we look to take

trades closer to our stop loss and are willing to wait longer or even miss a trade completely, waiting for price to pull back.

We don’t take aggressive entries. A good example is where we enter on an upsloping triangle pattern. Traditionally we would enter close to the trend line and on a breakout as this is what we do during this time, when we are trading defensively.

However in a bull market we can take aggressive entries just below the resistance level in anticipation of a break out, if we think price is not likely to retest the trend

line. In this example we may look to enter on that last bar. We are getting close to the end of the pattern and a breakout has a high probability from this point on. We are eager to get into the pattern and would take an aggressive entry. During this

period we would wait for either a retest of the trend line or a breakout confirmation.

Similarly with trend changes. We are looking to get into a trend as close to our

stop loss as we can to limit capital risk. Again traditionally we could look to make

aggressive entries on a trend change. On the GLL chart the bar that closed above the long term GMMA could be a good aggressive entry. A strong move upwards that

breaks the down trend. But our stop loss would be quiet low. Even now as the initial rally has consolidated and the short term GMMA group is pushing up through the long term GMMA group we are still looking for price to either retest or at least return to the

1xATR line. We do not at this stage want to be entering when price is hugging the top of the short term GMMA group, even though this does indicate strength. We want to

limit out downside risk.


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Some readers may say this is being scared. To a certain point they would be

right. My feeling on the market and global situation is bearish. My expectation is markets will continue to fall and when the reality snapback happens I think we would

see a repeat of the March falls. But I need to trade what is in front of me on the charts and the charts are saying there are opportunities. So I look to take advantage of those opportunities but I do so protecting my capital.

POSITIVE AND NEGATIVE LISTS By Daryl Guppy

There are two ways to create an approved activity list. These are a positive list and a negative list. Some countries use a positive list. If an activity is not on the

positive list, then its banned or illegal. Australia uses a negative list. If an activity is not on the banned list, then its ok. We use the negative list in the current environment. This is a list of market

areas at high risk, so we exclude companies in these areas from consideration as trade candidates. They include airlines and tourism, shopping centres and hotels etc.

When a search scan is completed then companies in these areas are excluded. For the remainder we look for evidence of strength when the market turned down. These are stocks where the price fall in March was not cataclysmic. They are stocks

where price activity has remained stable and with low volatility. Our personal preference is to trade long.

We prefer opportunities where the entry point is near to the stop loss point. The objective is to keep the risk in the trade very low so if the market suddenly turns

against us. If necessary, we consider reducing the risk by reducing the trade size from our standard $20,000 position to $10,000. This means the stop loss conditions remain unchanged, but the reduction in position size reduces the potential loss if the

stop is hit. This relationship has been explored in a number of recent articles.


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We add two examples to the case study list. Both are trend breakouts, but the nature of the breakout is different in each example.

The first example is 5GN. We consider these factors. The collapse in the trend started before the Market collapse so it was an

established downtrend. The price fall did not accelerate when the market collapsed so the downtrend

remained steady and intact

This means that standard measures of trend behaviour, GMMA and ATR can still be applied.

The short ATR is a 2*ATR because market conditions suggest more caution is needed in entry decisions, so we apply a wider and slower entry signal.

We wait for the ATR crossover, using a 1*ATR long.


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The entry is delayed until after Easter because we do not want to take the risk of adverse news events in this period. Entry is taken at $0.88. The ATR stop is at $0.81. This puts $1590.91 at risk. This level of risk can be reduced by reducing the

position size to $10,00 but in this case study we leave the position size at $20,000.

The second trade example is TBR. This is a classic trend breakout trade that is

largely unaffected by the market collapse. We consider these elements in making this

type of trade entry.

This is an established downtrend. There is no sudden collapse when the market collapsed. This behaviour is uncorrelated with the market.

This means that standard measures of trend behaviour, GMMA and ATR can still

be applied. The short ATR is a 1*ATR because the trend stability does not show the broader

market volatility. We wait for the ATR crossover, using a 1*ATR long. We wait for GMMA crossover confirmation.

We wait for the breakout to move above the trend line value.


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The plan was to hold off entry until after the Easter break using a low-ball entry price near $5.42. This advance order was filled on the day before Easter. The stop loss

was set at $5.12. This puts $1,107.71 at risk. This level of risk can be reduced by reducing the position size to $10,00 but in

this case study we leave the position size at $20,000.

The progress of these case study trades will be updated in next weeks newsletter.


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ADVANTAGES OF SMALL TRADING SIZE By Daryl Guppy Great aspirations are an essential part of the toolkit for traders. We aspire to

obtain better than market returns from our trading. However, we must not let our aspiration get in the way of reality. We must use the methods which are suitable for

our trading size and our circumstance. Unlike Warren Buffet you cannot afford to sit on massive losses during the

COVID because you are’ in the market for the long term.’ You simply do not have the

spare capital to allow large chucks of capital to remain unproductive. Rather than let a loss grow you have to cut a loss quickly.

An acceptance of our trading size does not mean we blunt ambition. Our smaller size allows us to trade in areas that are ignored by larger traders. These areas often have the added advantage of price leverage.

We need to consider survival strategies suited our size. Although investment advisors like to create the impression we can all be like Warren Buffet the reality is

very different. Here is a reality check designed to help more effectively harness ambition so we can survive in the COVID market. .

TRANSACTION SIZE

The first difference is that Warren Buffet controls several hundred million

dollars of capital. Their trade size is measured in millions, and often buys them a seat on the board where they can influence the management of the company. Your 300

shares with ANZ do not give you a seat on the board. This fund size provides them with more capital to trade and a larger cushion against losses.

PROFIT MARGINS If you trade a million dollars than a 1% return is good money. If you trade

$50,000 –about the average retail account size – then a 1% return is inadequate. With smaller capital you must aim for higher returns that translate into useful dollar returns on the trade. The good news is that smaller trading size makes it possible to

get much better returns.

MANAGING RISK Trading means choosing and then managing risk. After 2008 was market

landscape littered with experienced professional traders for funds, banks and

institutions who proved they could not effectively identify and manage risk. Government money came to their rescue. They were too big to fail.

We are likely to see the same thing following on from COVID. For private traders it is a long wait before Government will step in to handle the

mistakes you make in managing risk. We are simply too small to worry about so we

must pay much more attention to risk management. Overcoming fear and bailing out of a trade as soon as it goes against you is the

greatest challenge for every trader. Nobody will step in to help you maximise a winner or exit a losing trade. Your ability to handle risk and take the tough decisions is what will make you a successful trader. If you copy the institutional traders you will be

washed out of the market very quickly because you cannot have losses like them. This is one of the most fundamental differences between yourself and company traders.


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ACCESS TO RESEARCH AND INFORMATION

Continuous disclosure does not include retail traders. Institutions will always have many advantages when it comes to research. They have large support staffs for

ferreting out information. They pay for information that comes from outside by directing commissions to its sources. Access to hot information gives institutions an edge.

Access to research and information is an undisputed edge that the mutual funds and institutions have. However, it is only an edge if you are trading on their terms and

try to go head to head with them. There are methods which can be used, and these are covered in our EWS Trading DVD

To survive we have to make much more use of technical analysis tools to

identify the mood of the market, to find the twitches in the stock price, and to trade the profitable entry and exit points.


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OUR SIZE ADVANTAGES Our first advantage is time. We have the luxury of deciding whether the risk-

reward ratio is attractive enough to trade.

The second is our small size. We can trade in areas that are ignored by the institutions. These are the mid-cap and small cap stocks that offer the advantage of

price leverage. The most important advantage is that same information can be used

simultaneously by many people to make money in the market. The institutions may

trade news, but they buy and sell price. As private traders we have access to price data which we can analyse in depth using a desktop computer with technical analysis

software. The market quickly recognises frauds (although Bernie Madoff is an exception). If you try to invest like Warren Buffet on an account with only $300,000 then you will

not achieve Buffet-like results. Even if you achieve Buffet-like returns on capital, it will not be enough to provide a retirement income.

Small capital must work harder. It works harder by accepting the limitations of trading size and then trading within those limitations. We use different methods, hunt in different areas, and use different instruments to maximise the return on the capital

we commit to the market. The chart extract shows a simple trade in a low priced mid-cap stock. The combination of trade size and price leverage delivers a 195%

return. It is not a trade that Warren Buffet can participate in simply because his trading size is too large. For smaller traders, this opportunity is very suitable for our

trading size. Recognising our size and trading accordingly, will maximise our advantages and discount our disadvantages. We are not Warren Buffet which means we can get a

better return in capital than Warren Buffet when we trade appropriate to our size.

NEWSLETTER OUTLOOK: TRADING WITH FEAR By Daryl Guppy

All the chart analysis - except one – confirm this is a trend change. The

Index has moved above the downtrend line. The index has moved above the short side ATR line and the long side ATR line has moved above the short side ATR line.

And yet we remain very cautious about the market. The unnamed chart extract in the manage notes explains why. This was an inverted XJO chart

and its designed to challenge our natural bullish bias. Basic GMMA analysis on the inverted chart supports a rally rebound

analysis – trade long. Turn the chart back up the right way and the analysis

conclusion just also be reversed. This is a retreat from a strong resistance feature – trade short.

So, here’s the conclusion. Short term trading from the long side with tight stops and tight protect profit stops is appropriate. However, we remain alert for a resumption of the downtrend.

We include several different styles of chart analysis. None of them confirm a

change in trend developing from the strong rally rebound. The primary risk remains an extended dead-cat bounce with a pattern similar to that seen on the Shanghai Index as discussed in the management notes.

We have applied the short side ATR as a 1*ATR plot. The long side ATR is also a 1*ATR plot. These are suitable for trading decisions. In stock analysis a conservative

approach suggests that the trend change is not confirmed until the long side ATR


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crosses above the short side ATR. This has not developed so there is no confirmed evidence of a trend change.

The daily chart shows the placement of a downtrend lines from last week. We

added trend line B has been adjusted to include the new high, but this line placement has been invalidated by further upside activity. Trend line A is the valid trend line. Trend line B, the uptrend line, has been confirmed by subsequent activity this week.

However, this remains a rally.


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Trend line B is plotted on the same basis as trend line A with 3 anchor points. This becomes the key reference line to asses trend consolidation and trend change.

This may seem like too much nit-picking but sound analysis and better and consistent trading rests on these distinctions.


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PORTFOLIO CASE STUDIES: MONEY MANAGEMENT

Starting cash position $100,000 - no brokerage or slippage 2% of risk = $2,000 NOTE Entered date is the newsletter date which contains the case study discussion.

OVERALL PROFIT TO DATE

The case study portfolio return is $53,915 or 53.9% for the period starting

July 1, 2019 and ending June 30, 2020. For the year starting July 1, 2018 – 2019 the

case study portfolio return is $91,794 or 91.79%. The case study portfolio return is $156,450 or 156.45% for the period starting

July 1, 2016-2017. Note that this includes 6 to 21 trade results. The case study portfolio return is $92,464.15 or 92.5% for the period starting July 1, 2015- 2016. Equity trade size is generally kept constant at $20,000 in the case study portfolio so it

is easier to compare the case study trades over this and other years. Unless otherwise noted in the trade management notes, all equity case study trades are managed on

an end of day basis, with the exit taken at the best reasonable price on the day after the stop loss is triggered.

CUSTOMER CAUTION NOTICE AND COPYRIGHT Algobot Pte Ltd (CRN 201604500D) Pte Ltd is not a licensed investment advisor. This publication, which

is generally available to the public, falls under the Singapore Media Advice provisions. The information provided is for educational purposes only and does not constitute financial product advice. These analysis notes are based on our experience of applying technical analysis to the market and are designed to be used as a tutorial showing how technical analysis can be applied to a chart example based on recent trading data. This newsletter is a tool to assist you in your personal judgment. It is not designed to replace your Licensed Financial Consultant or your Stockbroker. It has been prepared without regard to

any particular person's investment objectives, financial situation and particular needs because readers come from diverse backgrounds, with diverse objectives and financial situations. This information is of a general nature only so you should seek independent advice from your broker or other investment advisors as appropriate before taking any action. The publication should not be construed by any reader as Publisher's (i) solicitation to effect, or attempt to effect transactions in securities, or (ii) provision of

any investment related advice or services tailored to any particular individual's financial situation or investment objective(s). Readers do not receive investment advisory, investment supervisory or

investment management services, nor the initial or ongoing review or monitoring of the reader's individual investment portfolio or individual particular needs. Therefore, no reader should assume that the Publisher serves as a substitute for individual personalized advice from a licensed financial professional of the reader's choosing. The decision to trade and the method of trading is for the reader alone to decide. The reader maintains absolute discretion as to whether or not to follow any portion of our content. Publisher does not offer or provide any implementation services, nor does it offer or provide initial or ongoing individual personalized advice. It remains the reader's exclusive responsibility to review

and evaluate the content and to determine whether to accept or reject any strategy and to correspondingly determine whether any such strategy is appropriate for a reader's individual situation. Publisher expresses no opinion as to whether any of strategy contained on this publication is appropriate for a reader's individual situation. The author and publisher expressly disclaim all and any liability to any person, whether the purchase of this publication or not, in respect of anything and of the consequences of any thing done or omitted to be done by any such person in reliance, whether whole or partial, upon

the whole or any part of the contents of this publication. Neither Algobot Pte Limited nor its officers, employees and agents, will be liable for any loss or damage incurred by any person directly or indirectly as a result of reliance on the information contained in this publication. The information contained in this

newsletter is copyright and for the sole use of trial and prepaid readers. It cannot be circulated to other readers without the permission of the publisher. Each issue now incorporates fingerprint protection that enables us to track the original source of pirate copies. If we find that you are redistributing the newsletter then, at our discretion, we will reduce the length of your paid subscription by the value of the

multiple copies we believe you are circulating. Share with nine friends, and we cut your subscription period by 90%. Contributed materials reflect the personal opinion of the authors and are not necessarily those of the publisher. Articles accurately reflect the personal views of the authors. Stocks held by the authors are marked* and are not to be taken as a trading recommendation. This is not a newsletter of stock tips. Case study trades are notional and analysed in real time on a weekly basis. Any past investment-related performance .


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referred to may not be indicative of future results, and therefore, no reader should assume that the future performance of any specific investment, investment strategy will be suitable or profitable for a reader's portfolio, or equal historical or anticipated performance level(s). Algobot Pte Ltd does not receive any benefit or fee from any of the stocks reviewed in the newsletter. Algobot Pte Ltd is an

independent international financial education organization and research is supported by subscription fees. Please note that in the interest of timely publication of the newsletter, this document may be incompletely proofed.

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