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TSG Swing Trading System

Guide to Using this System

This page is a guide to using this system. It describes the system, illustrates example trades, answers frequently asked questions (please ask me if your questions were not answered here and I'll add this information in a future update), and provides the complete mathematical algorithm, so that you have full disclosure what you are getting into and can make an informed decision before jumping in.

System Description

The Trading Systems Group Swing Trading System (TSG-STS) is a swing and position-based trading system that provides specific instructions to incrementally buy equities as they decrease in price and to sell them as they increase in price. Trades will close out with profits as fast as 1 day or as slow as several years. It is contrarian system in the sense that it buys when a stock is trending down, and sells when it is trending up. A "free shares" permanent portfolio component is included as a feature to the system that keeps shares that are completely earned with trade profits and builds over time. The "free shares" also performs the function of providing a container for dividends to accumulate

The system instructs the end user to exponentially average down purchases: 1st buy is $500, 2nd buy is $1,000, 3rd buy is $2,000, 4th buy is $4,000, 5th buy is $8,000, and 6th buy is $16,000, with a stop loss set only if a 6th buy occurs. In most cases, a trade cycle rarely gets beyond the 3rd or 4th buy, and by design, the screening process focuses on weeding out high risk equities that would require large buys. The system in its presented form is intended for those with large $100K+ trading accounts. Those with smaller accounts may choose to alter the system to their needs; potential suggestions on how to do this are presented on this guide page.

Equity Selection

Equities are backtested over 10 years and forward tested in real-time to determine the optimal purchase prices and to determine the most profitable sell targets. The system screens out equities that do not have at least 10 years of historical data available. Leveraged (2x or 3x) funds are also not included. The system only looks at equities with market caps over $10 billion dollars or well established Exchange Traded Funds (ETF's). The method of backtesting and forward testing is the same method presented in the algorithm. After running through the algorith over a 10 year period and at least 1 cycle of forward testing, scores are assigned to each equity. A risk score, which is a measure of how much would need to be invested; a reward score, which is a measure of how much profit an equity can create; a consistency score, which is a measure of how fast an equity exits a trade; and finally a composite score of all 3 of these. If an equity scores too low in any category or scores a low composite score, it fails the test and is not traded by the system.

An Illustration of the System in Action

This is the chart for ticker SCHW and a simple illustration of how the system would trade it.

SCHW

This is what the orders would have done in a trading account:

NODEDATEACTION TAKENPROFIT
B121-Aug-2015BOUGHT 16 SHARES $31.81 
B224-Aug-2015BOUGHT 36 SHARES $28.44 
S19-Sep-2015SOLD 17 SHARES $31.47, DEPOSIT 1 SHARE$23.07
B2H22-Sep-2015BOUGHT 18 SHARES $28.44 
S12-Nov-2015SOLD 17 SHARES $31.28, DEPOSIT 1 SHARE$19.84
B2H11-Jan-2016BOUGHT 18 SHARES $28.44 
B320-Jan-2016BOUGHT 80 SHARES $25.00 
S14-Mar-2016SOLD 38 SHARES $27.50, DEPOSIT 2 SHARES$45.00
B3H27-Jun-2016BOUGHT 40 SHARES $25.00 
S118-Jul-2016SOLD 38 SHARES $27.60, DEPOSIT 2 SHARES$48.80
SA10-Nov-2016SOLD 75 SHARES $34.39, DEPOSIT 17 SHARES$48.33
    
  FREE SHARES: 23 
  TOTAL CASH PROFIT: $185.04

So in short, the system had $185.04 cash profits, and 23 shares for "free", which will remain in a permanent portfolio and gain dividends and value over time. In addition, dividends were earned during the trade cycle as well, but were not account for to simplify this example. Note that at the end of the trading cycle, the "free shares" were worth 23 X $34.49 = $790.97 So total profits were $790.97 + $185.04 = $976.01. This was over a 15 month period with 1 equity. The premise of this system is to do this with hundreds of equities over and over and over.

The Detailed Algorithm

The complete algorithm for this system is as follows. Note that you do not need to study this algorithm to use this system. The limit orders to set for each day are already provided.

  • ABBREVIATIONS AND DEFINITIONS:
  • TC= TRADE CYCLE, STARTS AT END OF PREVIOUS TRADE CYCLE, ENDS WITH 2 SELLS IN A ROW.
  • CYC = CYCLICAL HIGH.
  • LOD = LOW OF DAY.
  • HOD= HIGH OF DAY.
  • INIP% = INITIAL PULLBACK PERCENTAGE, VALUE DEFINED BY EXHAUSTIVE TESTING FOR EACH EQUITY.
  • INCP% = INCREMENTAL PULLBACK PERCENTAGE, VALUE DEFINED BY TESTING FOR EACH EQUITY.
  • SELL1% = FIRST SELL TARGET (PERCENTAGE GAIN TARGET).
  • SELL2% = SECOND SELL TARGET (PERCENTAGE GAIN TARGET).
  • DAY F = FINAL DAY OF PREVIOUS TRADING CYCLE.
  • DAY # = DAYS AFTER DAY F. STARTS AT DAY 1, DAY 2, ....
  • ALL BUY ORDER PRICE CALCULATIONS ARE ROUNDED DOWN THE NEXT CENT. THE SYSTEM DOES NOT BUY IN INCREMENTS OF 1/10TH OF A CENT.
  • ALL SELL ORDER PRICE CALCULATIONS AND AVERAGE COST CALCULATIONS ARE ROUNDED UP TO THE NEXT CENT. THE SYSTEM DOES NOT SELL IN INCREMENTS OF 1/10TH OF A CENT.
  • ALL SHARE QUANTITY CALCULATIONS ARE ROUNDED UP TO THE NEXT WHOLE NUMBER. THE SYSTEM DOES NOT BUY FRACTIONAL SHARES.
  • EXCEPTION: FREE SHARE QUANTITY CALCULATION RESULTS ARE ROUNDED DOWN TO THE NEXT WHOLE NUMBER.
  • ALL LIMIT ORDERS ARE SET WITH NO EXPIRATION DATE.
  • THE ALGORITHM
  • 1. ALGORITHM STARTS AFTER MARKET CLOSES ON DAY F. CYC = HOD ON DAY F. N=1, J=1
  • 2. AFTER MARKET CLOSES ON DAY F (IF COMING FROM STEP 1) OR DAY #, A LIMIT ORDER IS SET TO BUY $500/[CYC * (1-INIP%/100)] SHARES AT A PRICE OF [CYC*(1-INIP%/100].
  • 3. AFTER MARKET CLOSES ON DAY #, IF THE BUY ORDER IN STEP 2 EXECUTED, GO TO STEP 4A. IF NOT, GO TO STEP 4B
  • 4A. SET LIMIT ORDER TO BUY $500*2^N/[CYC*(1-INIP%/100-N*INC%/100)] SHARES AT A PRICE OF [CYC*(1-INIP%/100-N*INC%/100)].
  • CALCULATE SELL TARGET PRICE AS FOLLOWS: SHARE PURCHASE PRICE THAT ACTUALLY EXECUTED MOST RECENTLY * (1+SELL1%/100)
  • IF N=1, POTENTIAL FREE SHARES QUANITY = 0 AND QUANTITY OF SHARES TO SELL = QUANTITY OF SHARES MOST RECENTLY PURCHASED. CALCULATE POTENTIAL FREE SHARES QUANTITY AS FOLLOWS: [J * QUANITY OF SHARES PURCHASED MOST RECENTLY * (SELL PRICE TARGET CALCULATED IN LINE ABOVE - BUY PRICE THAT ACTUALLY EXECUTED MOST RECENTLY) - 20]/SELL PRICE TARGET
  • CALCULATE QUANTITY OF SHARES TO SELL AS FOLLOWS: J*QUANTITY OF SHARES PURCHASED MOST RECENTLY - POTENTIAL FREE SHARES QUANTITY CALCULATED ABOVE.
  • DELETE ALL PRIOR SELL ORDERS. J=1/2; SET LIMIT ORDER TO SELL THE QUANITY OF SHARES CALCULATED ON LINE ABOVE FOR THE SELL TARGET PRICE 3 LINES ABOVE. PROCEED TO STEP 5.
  • 4B. CYC = MAXIMUM (PREVIOUS CYC, HOD). GO BACK TO STEP 2 AND ADJUST LIMIT ORDER WITH NEW CYC IF NEEDED.
  • 5. TAKE NO ACTION UNTIL THE BUY LIMIT ORDER OCCURS THAT WAS SET IN STEP 4A OR THE SELL LIMIT ORDER OCCURS THAT WAS SET IN 4A. IF THE BUY LIMIT ORDER OCCURS FIRST AND IF N=5, GO TO STEP 9, OTHERWISE GO TO STEP 4A WITH N=N+1 AND J=1/2. IF THE SELL LIMIT ORDER OCCURS FIRST AND N=1, GO TO STEP 8. IF THE SELL ORDER OCCURS FIRST AND N>=1, GO TO STEP 6.
  • 6. ACCOUNT FOR PROFITS AND DEPOSIT FREE SHARES. SET LIMIT ORDER TO REBUY QUANITY OF SHARES AS FOLLOWS: J/2 * $500*2^N/MOST RECENT SHARE PRICE PURCHASE PRICE AT THE MOST RECENT SHARE PRICE PURCHASE PRICE.
  • CALCULATE THE AVERAGE COST OF ALL REMAINING SHARES.
  • CALCULATE SELL TARGET PRICE AS FOLLOWS: AVERAGE COST OF ALL REMAINING SHARES * (1+SELL2%/100)
  • CALCULATE THE POTENTIAL FREE SHARES QUANTITY AS FOLLOWS: [QUANTITY OF REMAINING SHARES * (SELL TARGET PRICE - AVERAGE COST) - 20]/SELL PRICE TARGET
  • CALCULATE THE QUANTITY OF SHARES TO SELL AS FOLLOWS: QUANTITY OF REMAINING SHARES - POTENTIAL FREE SHARES QUANTITY
  • SET LIMIT ORDER TO SELL THE QUANTITY OF SHARES CALCULATED ON LINE ABOVE FOR THE SELL TARGET 3 LINES ABOVE. PROCEED TO STEP 7.
  • 7. TAKE NO ACTION UNTIL THE BUY LIMIT ORDER OCCURS THAT WAS SET IN STEP 6 OR THE SELL LIMIT ORDER OCCURS THAT WAS SET IN 6. IF THE BUY LIMIT ORDER OCCURS FIRST, GO TO STEP 4A WITH N=N+1, J=1. IF THE SELL LIMIT ORDER OCCURS FIRST, GO TO STEP 8.
  • 8. TC HAS COMPLETED. ACCOUNT FOR PROFITS AND FREE SHARES. RETURN TO STEP 1 AND BEGIN A NEW TRADE CYCLE.
  • 9. N=6. SET STOP LOSS TO SELL SHARES AT [CYC*(1-INIP%/100-N*INC%/100)]. GO BACK TO STEP 1 TO START A NEW TRADE CYCLE.

Well, reading through that, it looks quite complicated. Basically, what the system does in simple terms is this: 1st buy on initial pullback percentage of $500 worth of a stock. Next step, either sell that $500 worth at a specified sell target percentage or buy another $1000 at further specified pullback. Then either buys $2000 worth on further pullback, or sells half of the previous buy 1/2 * $1000 = $500 worth. Then $4000, $8000, $16000, same deal. Profits are taken as "free shares" instead of money if the profits exceed the share price minus a $20 buffer. The key to the system is the pullback and sell target percentages, which vary depending on the equity in question. How are these determined? By running each equity through the algorithm using historical and real time data (backtested and forward tested) and assigning Risk, Reward, and Consistency scores, along with an overall score. A sensitivity analysis is performed to determine if a 5% pullback works better than a 25% pullback, etc. Ok, sounds cumbersome, but luckily all these calculations are automated by spreadsheet programs in google sheets.

Trading with a Small Account

The TSG-STS is specifically designed to be used with large accounts ($100K+), but what if you want to use the system with a small account? A few suggestions are provided here that may help you tailor the sytem to your specific needs. Use one or as many combinations of these suggestions as you wish:

  1. Only buy the stocks in bold in step 1. These are low risk, high reward, fast trading stocks.
  2. Buy only half the number of shares using a no-commission brokerage.
  3. Buy only 1 equity in each sector or industry.
  4. Wait and just paper trade for now and build up some equity. Might not be the most glamorous option, but probably a smart move.

Why Bother with a "free shares" Account?

The free shares portfolio serves 2 purposes. It provides a container for dividend collection and it provides long term capital gains for the portfolio. One might suppose it also provides "emotional" confidence in the system if say you have $20K-$50K in the free shares portfolio, it provides a tangible value that you can see. It is essential for the overall goal of the system to reach $1 Million after 10 years. Of course, one may tailor the system to thier own needs and goals and forego the free shares portfolio portion of the system.


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