Patterns repeat, because human nature hasn’t changed for thousands of years.

-Jesse Livermore, legendary trader

There are two different types of markets—trending and volatile. And in each of those markets, there are patterns of behavior. We have spent years studying these patterns and have developed rules for each environment to maximize gains no matter which market we are in. Below, we have outlined our rules for both markets. They are our secret sauce.

Trend Trading Rules

Environment Definition

After a Major Corrective Wave sell-off, trend trading begins when the market confirms a Major Impulse Wave has begun. Trend trading ends when the Major Impulse Wave targets are hit and the market shows signs of topping. See the chart below. Trading during this period is easy and slow as we hold trades for longer periods of time to capture bigger moves.

Trend+Trading.jpg

What We Buy

Stocks above their daily 200 simple moving average and in a long term uptrend.

When We Buy

When qualifying stocks receive large call buying activity signaling momentum.

How Much We Buy

Our purchase orders are always the same using this formula:

1% portfolio size/(Stock Price x 15% stop loss)=# of shares to purchase

We use this formula to ensure that a 15% drop in a stock we own will only cause a 1% loss in our entire portfolio.

When We Sell

At +15% gains, we cut 1/2 of the position and move stop to entry. We hold the other 1/2 for upper targets.

At -15% loss, we cut entire position.

Volatile Trading Rules

Environment Definition

Volatile trading begins when a Major Impulse Wave shows signs of topping. It continues all the way down a Major Corrective Wave and into the beginning of the next Major Impulse Wave. See chart below. Trading during this period is fast and furious to take advantage of wild swings, both up and down, to capture quick gains.

Volatile+Trading.jpg

What We Buy

On the long side, stocks that are above their 200 simple moving average (ideally, though in bear markets this may not be possible), are oversold, and are receiving large call buying.

On the short side, stocks that are overbought on bounces and not receiving notable call buying.

When We Buy

On the long side, when the general market is deeply oversold and ready for a bounce.

On the short side, when the general market has bounced, is overbought and ready to fall again.

How Much We Buy

Our purchase orders are always the same using this formula:

1% portfolio size/(Stock Price x 15% stop loss)=# of shares to purchase

We use this formula to ensure that a 15% drop in a stock we own will only cause a 1% loss in our entire portfolio.

When We Sell

In volatile environments there are no set rules for taking gains. We take gains when they are there and we do it quickly.