The ACD Method

[copyplus]

I'll tell you what koolaid. I think I've told this story many times before, but back in the days when I traded equities for Worldco, I had a mentor. I sat next to him and just watched him trade and just observed what he did and why he did it. Tried to see things from his perspective. Why don't you do this. Pick a market, any market. Just something you are watching. Whatever it is, I probably have the NL on it. I'll give you my perspective for whatever that is worth. I'll walk you through how I would trade it or at least approach that market. Just to give you my perspective. It helped me immensely when I was starting out.

More of that would be great. I liked reading all the old Mav commentary in the archives. Last year I went back through the thread again and wrote down every trade idea mentioned and every answer to a trade suggestion and reviewed them through the lens of my own ACD work. Doing that was helpful in solidifying my ideas.

So yeah, I guess you could say I am looking forward to koolaid's question.

 

[koolaid]

I'll tell you what koolaid. I think I've told this story many times before, but back in the days when I traded equities for Worldco, I had a mentor. I sat next to him and just watched him trade and just observed what he did and why he did it. Tried to see things from his perspective. Why don't you do this. Pick a market, any market. Just something you are watching. Whatever it is, I probably have the NL on it. I'll give you my perspective for whatever that is worth. I'll walk you through how I would trade it or at least approach that market. Just to give you my perspective. It helped me immensely when I was starting out.

Thanks, Mav! I spent the summer coding everything into R with the help of a few people here and I'm now able to put in any symbol and have it spit out the analyses for me. Yet, I still struggle with interpreting all of this and finding value. Here is my analysis on VMC.

https://imgur.com/t9wlbF8

Legend:
top line plot: stock 30NL (black) vs SPY 30NL (blue)
middle line plot: rate of change of 30NL (red), 10 NL (green), 5 NL (orange)
bottom line plot: daily NL value adjusted for that day's volume vs 15 day avg


I went long early Jan above the monthly Aup (after it confirmed). Looking to hold a week or two on news of infrastructure spending and such. I think the sector was running hot at the time. Anyways, I got stopped out for a small loss. This isn't a perfect example, but it's a common thing with my ACD system. I am finding myself getting in too late with the NL. Here, I got in when 30 NL went positive and confirmed at 8+...only to be stopped out and then the eventual cliff fall. The move before the confirmation was good and I wish it had gotten me in closer to that. I tried other things like looking for the rate of change (derivative of the 30NL), plotting the stock 30 NL vs SPY 30 NL, the 10 NL and 5 NL, and even adjusted the number lines for volume. It seems I've gone crazy to find value.

Yes, one should let go of a system if one does not find value. However, INTUITIVELY, I feel that ACD should work. The technicals of it...I feel...I'm off on.

Now, looking over some of these graphs, it almost makes we want to fade extreme values in 30 NL. In that case, we go long when 30 NL is at -15 or less and go short when it's 15+. Like right now my 30NL on SPY is -14 or something...ACD says not to go long...but I think with the data I've seen...going long here isn't a bad idea.

 

[punisher]

Maverick, could you help me out with some general advice?

I know you can do bigger OR if you're fader and smaller if you're breakout/momentum trader. But as in Fisher's book and as I'm reading through the thread it looks like you guys are setting p your own ORs and A/C levels and you use them for breakouts as well as fades?

That's my dilemma. As I'm working on my own method, one of the appeals of ACD to me was that it would keep me from trying to fade/pick tops/botttoms. In an essence it would make me focus only on momentum trades and as an added bonus, keep you away from overtrading by going either long on confirmed ups or short on downs. But as I'm reading on, seems like you guys are using A/C levels for both (fades and momentum). And so in the back of my head that old voice starts again with the "fade,fade,fade" ! I'm trying to face these deamons. On top of that, if you can do both (fade and momentum) then it is much easier to overtrade as there are many more possibilities (i.e. you short failed Aup then it stops you out and suddenly looks like a good Aup breakout, later same might happen with C down)

Since in trading you need to be flexible and committing only to momentum might not be the best solution, would you have a general advise on how to set up ACD (or the trader himself!) in a way that would prevent trader from seeing too often one thing (oh, that's a good fade against failed A or pivot) when in fact the market is telling you something else (just wait, wait, wait, let it breakout one way or another)? Mr market can and will do anything it wants, but what to do in order to decrease the amount of leeway in interpretation so you don't overtrade?

 

[Maverick74]

Thanks, Mav! I spent the summer coding everything into R with the help of a few people here and I'm now able to put in any symbol and have it spit out the analyses for me. Yet, I still struggle with interpreting all of this and finding value. Here is my analysis on VMC.

https://imgur.com/t9wlbF8

Legend:
top line plot: stock 30NL (black) vs SPY 30NL (blue)
middle line plot: rate of change of 30NL (red), 10 NL (green), 5 NL (orange)
bottom line plot: daily NL value adjusted for that day's volume vs 15 day avg


I went long early Jan above the monthly Aup (after it confirmed). Looking to hold a week or two on news of infrastructure spending and such. I think the sector was running hot at the time. Anyways, I got stopped out for a small loss. This isn't a perfect example, but it's a common thing with my ACD system. I am finding myself getting in too late with the NL. Here, I got in when 30 NL went positive and confirmed at 8+...only to be stopped out and then the eventual cliff fall. The move before the confirmation was good and I wish it had gotten me in closer to that. I tried other things like looking for the rate of change (derivative of the 30NL), plotting the stock 30 NL vs SPY 30 NL, the 10 NL and 5 NL, and even adjusted the number lines for volume. It seems I've gone crazy to find value.

Yes, one should let go of a system if one does not find value. However, INTUITIVELY, I feel that ACD should work. The technicals of it...I feel...I'm off on.

Now, looking over some of these graphs, it almost makes we want to fade extreme values in 30 NL. In that case, we go long when 30 NL is at -15 or less and go short when it's 15+. Like right now my 30NL on SPY is -14 or something...ACD says not to go long...but I think with the data I've seen...going long here isn't a bad idea.

OK, let's start here. Why did you choose this stock? One of the best attributes I believe ACD has is it's ability to allow traders to find rare opportunities in a universe of endless possibilities. It allows us to stay away from crowded and obvious trades. I'm not saying you were wrong to choose this stock but I want you to tell me why you chose it. That is where we need to start.

 

[Maverick74]

Maverick, could you help me out with some general advice?

I know you can do bigger OR if you're fader and smaller if you're breakout/momentum trader. But as in Fisher's book and as I'm reading through the thread it looks like you guys are setting p your own ORs and A/C levels and you use them for breakouts as well as fades?

That's my dilemma. As I'm working on my own method, one of the appeals of ACD to me was that it would keep me from trying to fade/pick tops/botttoms. In an essence it would make me focus only on momentum trades and as an added bonus, keep you away from overtrading by going either long on confirmed ups or short on downs. But as I'm reading on, seems like you guys are using A/C levels for both (fades and momentum). And so in the back of my head that old voice starts again with the "fade,fade,fade" ! I'm trying to face these deamons. On top of that, if you can do both (fade and momentum) then it is much easier to overtrade as there are many more possibilities (i.e. you short failed Aup then it stops you out and suddenly looks like a good Aup breakout, later same might happen with C down)

Since in trading you need to be flexible and committing only to momentum might not be the best solution, would you have a general advise on how to set up ACD (or the trader himself!) in a way that would prevent trader from seeing too often one thing (oh, that's a good fade against failed A or pivot) when in fact the market is telling you something else (just wait, wait, wait, let it breakout one way or another)? Mr market can and will do anything it wants, but what to do in order to decrease the amount of leeway in interpretation so you don't overtrade?

I think as you keep on reading through the thread this question will be answered but I'll offer some input here. First, trade decisions should not be based on the A levels or the OR or I want to trade breakouts or fades, etc. The decision has to come from the number lines. You will see me talking about number lines as an analog to the vital signs in your body like your blood pressure, oxygen levels, heart rate, etc. We want to find opportunities and the NL is our tool for doing that. The NL will TELL you how you should be trading XYZ.

For example, say you wanted to trade Widget Industries, a large cap stock. You found this stock because of it's strong 30 NL. You are even more impressed that it has this strong NL despite lets say a downtrend in the overall market. So we know we have a strong stock. Do we want to chase it? No, why, the market is in a downtrend. I'm going to use the A levels to fade the stock to "buy" it. In other words, I want to trade "momentum" in a strong stock at good prices. I found the stock via a strong NL. The market is weak. The stock is strong. I want good prices. It matters not whether I'm a daytrader or a swing trader or a long term 50 year investor. If I'm a daytrader, I'll enter Widget industries at the failed A down and play for a close on the highs (a very common scenario). If I'm a swing trader, I'll enter at the failed weekly A down to get long to play for a close at the weekly high. If I'm a grandpa that wants this bad boy long term, I might enter at the Monthly or QTR A down and play for a longer time period. It doesn't matter, the structure is the same.

You are not trading back and forth fading and momentum, buying and selling, selling and buying, and over trading your way to bankruptcy. You are HIGHLY selective about what you trade. You are HIGHLY selective of your prices. You have to use ALL the tools in the ACD toolbox. God gave you a brain that can perform a million calculations in your head in seconds. ACD will help you make those calculations.

You have to understand the market environment you are in. You have to understand the product you are trading. You have to understand the volatility of both the overall market and that product. You have to be aware of seasonality in all it's forms. Markets trade differently in Jan then they do in Aug. Markets trade differently on the open then they do at noon. They trade differently around news events. They trade differently when the VIX is at 40 vs when it's at 10. You have to use this information to optimize your decisions. You should not be a crack addict looking for a fix trading everything on both sides at all times of the day.

 

[tonysoprano]

If I'm a daytrader, I'll enter Widget industries at the failed A down and play for a close on the highs (a very common scenario). If I'm a swing trader, I'll enter at the failed weekly A down to get long to play for a close at the weekly high. If I'm a grandpa that wants this bad boy long term, I might enter at the Monthly or QTR A down and play for a longer time period. It doesn't matter, the structure is the same.

Hello Mav,
At a high level, and glossing over a lot of probably-important details, it seems like the above can be boiled down to 1) find a strong market using the NLs ) use the failed A levels to buy a retracement in the trend 3) use opposite A level as a target. I.e., buy retracements in a trend.

 

[koolaid]

OK, let's start here. Why did you choose this stock? One of the best attributes I believe ACD has is it's ability to allow traders to find rare opportunities in a universe of endless possibilities. It allows us to stay away from crowded and obvious trades. I'm not saying you were wrong to choose this stock but I want you to tell me why you chose it. That is where we need to start.

to be honest with you...I was running NLs on indexes and then ETFs...if I remember correctly materials were breaking out. I first looked at MLM, EXP, SHW, SUM and then narrowed it down to VMC. I saw the initial leg up through the Jan A up.

 

[Maverick74]

Hello Mav,
At a high level, and glossing over a lot of probably-important details, it seems like the above can be boiled down to 1) find a strong market using the NLs ) use the failed A levels to buy a retracement in the trend 3) use opposite A level as a target. I.e., buy retracements in a trend.

No. LOL. That is the wrong way to think about this. Think of it this way. Pretend you are a writer asking for advice on the next great American Novel. And I say to you all you need to do is string together some words mixing up your nouns, verbs, grammar structure, etc. Throw in a few plot twists, some flashbacks, add some interesting characters, maybe a historical reference or two and there you do, the next great American Novel. Everyone can read and write, or at least many can, lol. But few can actually combine words in such a way that makes reading them riveting. Anyone can trade. Buy or sell, take your pick. But few understand the nuance that can actually extract real value from the markets. So no, I don't like the phrase, "it can be boiled down to".

What I described above was one approach (out of thousands) to apply to one market (out of thousands) that can be applied to one time period (out of thousands) to find value. There are an infinite number of pathways. A trader's job is to find one that works. If speculation in markets could be "boiled down to", everyone would be flipping that stove on right away.

 

[Maverick74]

to be honest with you...I was running NLs on indexes and then ETFs...if I remember correctly materials were breaking out. I first looked at MLM, EXP, SHW, SUM and then narrowed it down to VMC. I saw the initial leg up through the Jan A up.

You picked a VERY crowded part of the market with a lot of noise. So here is one of the tells that you should spot that should give you pause. When I pull up all those stocks you mentioned, guess what? All the charts have the EXACT same pattern. It's the epitome of noise. Your job is to find a ballerina at a rodeo. A poet at a UFC competition. A liberal in Alabama. LOL. Stay away from the obvious, the crowded, the noisy. All those stocks are tied to headlines. They all move together.

 

[tonysoprano]

No. LOL. That is the wrong way to think about this.

I kind of thought, and deep in my heart probably knew, and which you confirmed, was that what I stated was a gross oversimplification and as you said "boiling it down" is not the way to think about the markets and ACD.