This is a good example to show the difference between the two styles of trading I am using: a mechanical one and one that uses technical analysis with a heavy human element.
The first quarter of 2016 has consisted of me relying on a technical approach with a heavy human element to it. What that means is that while I have used specific technical parameters to search for, identify and trade securities, the ultimate decision to enter and exit a position has been largely on the fly based on what my sentiment has been.
Obviously, that is not an ideal way to trade. In fact, I feel that over the long run, it is also not a pattern of trading that will yield consistent profitability. Is it fun? Absolutely! The rush of being right and making money never gets old, but the risk of capital loss is not in the cards for me and I want to limit this behavior as much as possible.
AMD had been brought to my attention a number of times during the first months of 2016. Each time I took a look at the charts and quickly dismissed it because I just did not get a “good feeling” on it. With the recent price action representing a roughly 228% increase (low of 1.75 to recent high of 3.99), I wanted to go back and see if I would have taken this position anytime during the first quarter of 2016 from a mechanical standpoint.
The criteria for taking a long position are listed below:
1. The Point & Figure chart must show a bullish signal some time between January and the end of March.
The Point & Figure chart does not show a bullish signal until April 22. FAIL.
2. Long-term trend: Price should be at or above 200-Day EMA with 125-Day ROC positive.
AMD crossed above its 200-Day EMA around early March – late in the quarter but lets take it. 125-Day ROC went positive in early February. PASS.
3. Medium-term trend: Price should be at or above 50-Day EMA with 20-Day ROC positive.
AMD crossed above its 50-Day EMA in early March. 20-Day ROC went positive during the same time. PASS.
4. Short-term trend: RSI should lie below 50% with PPO positive but staying below 5%.
RSI was below 50% with PPO showing early indications of movement to positive territory in mid-late February. PPO did not become positive, however, until early March. Again, fairly late in the quarter but it meets the criteria. PASS.
On balance, it does not look like I would have taken a position in AMD anytime during the first quarter of 2016. While most of the criteria had been met by March, the Point & Figure did not signal a bullish sentiment until late April, and the fact that it took place on a gap did not sit well with me.
Was it a missed opportunity? I don’t think so. In fact, it was a growing opportunity. It has reinforced my confidence in relying on mechanical methods to identify opportunities that correspond with my view of the markets.
Mechanical trading is still a new concept to me but one that I intend to expand on and become more familiar with. I will try to document my experiences and growth here as time goes by. I am leaving pride at the door as I walk into a new realm of thinking. Humility and a desire to improve my trading are the key things that I will anchor back to going forward.