Tactical Trend Trading: Strategies for Surviving and Thriving in Turbulent Markets

263 Pages·2012·8.49 MB·English

by  Rob Robbins

Tactical Trend Trading: Strategies for Surviving and Thriving in Turbulent Markets
Copyright © 2012 by Robert Robbins
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ISBN-13 (pbk): 978-1-43024479-0
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This work is dedicated to those
who have helped make it possible.
To my wife Nicole and my son Logan:
You both mean everything to me and I’m truly
lucky to have such a great family.
To my brothers Mike and Jimmy,
and my mother and father: Thank you for
your support and love through the years.
To Luciano, Rich, and my investment brothers
in arms: Thank you for the ideas, the camaraderie,
and your trust.
To my mentor Ralph Bloch: Thank you for
taking a chance and sharing your wisdom.
Contents
About the Author
Introduction
Chapter 1: Tactical Trend Trading
Chapter 2: The Market Backdrop
Chapter 3: Setups and Chart Patterns
Chapter 4: Technical Tactics
Chapter 5: Market Considerations
Chapter 6: Systematic Trend Following
Chapter 7: Discipline and Risk Control
Chapter 8: Pitfalls
Chapter 9: Philosophy
Chapter 10: Summing It All Up
Appendix A: Resources
Index
About the Author
Robert Robbins, CFA, started his financial
career in 1994 in stock market research. From
1995 to 1999, he worked as a stock market
strategist, using technical analysis to drive
sector strategy, investment ideas, equity
strategy, and macro research. In 1999, he
started Robbins Capital, LLC, an investment
adviser and fund manager, and he served as its
portfolio manager. Since 2011, Robbins has
been the sole principal, portfolio manager, and
president of everTrend Global, LLC, a
systematic macro investment fund. Robbins
has been quoted in Barron’s and the St.
Petersburg Times and has provided his insights
and knowledge into the stock market on several television newscasts.
Introduction
It was April of 1994, and the market was in a correction. The S&P 500 was in a
waterfall decline that had carried it down 10% from its first-quarter peak. Under
the surface, the action was far worse. Small-cap stocks were being obliterated,
with bids falling away and 20-30% drops common across a broad spectrum of
industries. I was working in the research department of a large brokerage firm,
and, as I walked out of my office and turned into the hallway, the sight of half a
dozen fundamental analysts huddled around the quote machine with a palpable
look of anxiety splayed upon their faces will be forever etched in my mind.
I joined the group in watching the blinking red lights signaling the slaughter as
clearly as cannon smoke did a few centuries ago. It was a mess; stocks were in
full retreat, panic was in the air. The source of the analysts’ confusion centered
on the fact that, while the market was coming apart at the seams, their stocks and
industries were reporting no fundamental problems. Business was good,
outlooks were fine—or so their CFO and CEO contacts were telling them. The
dichotomy between the fundamental situation and the market situation couldn’t
have been starker, and their confused looks and anxious tones confirmed that
they couldn’t make sense of the situation. It was cognitive dissonance writ large.
They had both failed to foresee the sell-offs in stocks they were intimately
acquainted with, and they had no sense as to when the bloodletting would end.
At the far end of the hall, the situation was far different. Our technical analyst,
Ralph Bloch, was widely known in Wall Street circles and a veteran with over
30 years of experience. His stock market method was altogether different from
that of the fundamental analysts. Instead of battling against the reality of the
prices on the quote machines, he was in tune with them, and his method
analyzed the core supply/demand situation of the macro marketplace itself. He
had correctly called the sell-off and, based on the high put/call readings that he
was seeing, was now looking for a quick end to this steep drop. I had been
reading Ralph’s daily missives for a few months, and his work intrigued me
enough to lead me to start a dialogue with him and to read Edwards and Magee’s
classic Technical Analysis of Stock Trends. He was a forceful personality and
confident in his technical abilities.
Some days later, I asked him why these fundamental analysts seemed so lost in
analyzing the prices of the stocks they were close to. He laughed and then told
me a joke. “An American was on vacation in New Zealand, and as he drove
down a small, winding road, he came upon an incredibly large herd of sheep. He
stopped his car and looked out over the rolling hillside. The owner of the sheep
came up to him after a few minutes and saw the look of wonder on his face, so
he said to him, ‘If you can tell me how many sheep I have, then you can pick one
out and keep it.’ The man laughed arrogantly and began counting. After only a
few minutes, he turned to the shepherd and said, ‘Sir, you have 1,133 sheep.’
Amazed, the shepherd stood back, then proceeded to tell the man that there were
five grades of sheep and he could now pick his sheep. The man climbed up the
hillside, picked his sheep, and returned. He saw that the shepherd was now
smiling. ‘What’s so funny?’ the man asked. The shepherd then posed a challenge
to him, saying, ‘If I can guess your occupation, will you give me my sheep
back?’ The American quickly agreed, thinking, ‘There are literally thousands of
occupations out there. How would he possibly be able to guess correctly?’ The
shepherd cleared his throat and guessed, ‘You’re a fundamental stock analyst,
aren’t you?’ Perplexed, the man queried, ‘How could you possibly know?’ In an
even tone, the shepherd replied, ‘Well, you’re obviously very good with
numbers, but then you picked the worst one!’”
Ralph’s joke, which highlights the differences between fundamental and
technical analysis, stayed with me, and I eventually switched to the technical
method that I now employ in my trading. Technical analysis has been the core of
my investment philosophy for many years now, and I continue to see the
advantages of this pragmatic approach to analyzing the supply and demand
dynamics that shape the prices we see every day in markets, ranging from stocks
to bonds, from commodities to currencies. But as trustworthy as this investment
style has proved to be over the years, my methodology has evolved and grown
over time, and I now use a blend of technical analysis and trend trading, an
approach I like to refer to as tactical trend trading.
Tactical trend trading, in my view, is the most reliable way to increase your net
worth and gain financial freedom in an uncertain world. It entails significantly
less risk than long-term buy-and-hold investing in individual stocks. It takes
commitment, discipline, and the right psychological makeup, but for those
willing and able to make the journey, it is the truest path to financial freedom.
Here are the primary benefits to tactical trend trading: at any given time your
assets will be at work in the leading stocks and futures markets or will be safely
in cash, your stop-loss sell discipline will protect your hard-earned capital during
the inevitable times when you are wrong, and you will be in tune with the
broader stock market and macro environment. The long-term buy-and-forget
investor, on the other hand, will typically enter the market on an upswing and
mentally commit to a conservative investment program. When the bear market
comes to maul his portfolio, he will either cower in fear, hoping his investments
rebound, or sell his “long term” holdings into the bad news of a slumping stock
market and incur a terrible loss. I’ve seen it happen time and time again. Most
investors simply do not have the stomach for the gut-wrenching 20-40% drops
that are inevitable over a full market cycle. There is a better way.
The simple aim of this book is to illuminate the path to that better way. The
methodology I share with you in the pages of this book will work over the
course of any investment cycle. In broad terms, you can divide the goals of this
book into three major themes. The first is generating returns and finding the
stocks, market environments, and futures markets that are conducive to meeting
that goal. The second is risk control, discipline, and avoidance of common
pitfalls that await the amateur and seasoned trader alike. The third is a
philosophical and epistemological framework that correctly reflects and works
with the real world—not the theoretical world taught by academics and Wall
Street talking heads.
I have divided the book into ten sections, each of which covers a specific
element necessary for successful tactical trend trading. They are as follows:
1. Tactical Trend Trading – What is it, what are its primary benefits, and what
kind of commitment is required?
2. The Market Backdrop – Looking at the big picture, then working down to
the leading sectors and stock market indicators.
3. Setups & Chart Patterns – Using technical analysis and relative strength to
find the profit-generating ideas we seek.
4. Technical Tactics – A guide to trading tactics to aid your work and round
out the investment process.
5. Market Considerations – Taking account of the big picture and
incorporating the macro outlook into your work.
6. Systematic Trend Following – Using trading rules, risk management, and
portfolio selection to create a systematic trading system.
7. Discipline and Risk Control – The concepts and practice of implementing
risk control, which is the most important rule in investing.
8. Pitfalls – The psychological and emotional obstacles that hinder the journey