Questions to TSM about Trading Methodology: 

                                                                                   "Entry and Exiting Trades and Entering from a Trading Range Forecast" 

Hi Ric,

    I have subscribed to your TSM for three months and am thinking of renewing my subscription. I am a little confused with the performance and the position table, especially the sell price you post in your website. It looks like if the price hits your initial profit target, then your position table will show that the trade is exited at the initial profit price. If the price doesn't hit your target, then you will be able to exit the trade few pennies below the high (for long position). How do you determine whether to wait until the price hits the target or to exit the trade before it hits the target (it may never hit the target)? How can you constantly exit the trade right under the high (for long) when you decide not to hold the position?

 

For example, there are two trades on 4/24/2008.

 

 

 

 

 

From your report for 4/24/2008:

 

Trade Management Update:  [08/04/23] GYMB didn't hit our buy point Wednesday so let's use a new buy range for tomorrow: 41.06 to 41.56 with a new target profit point 43.31.

 

On 4/24/2008, the price range for GYMB is 41.01 to 41.50. your position table shows that 1/2 position is sold @42.46 (41.11+1.35). Would you please tell me what is your exit strategy on this trade? My understanding is we won't sell 1/2 position yet since 43.31 is not hit. How do you determine to sell 1/2 before target is hit and when or at what price level you would sell 1/2 before target is hit? why?

 

Let us look CSX. On 4/24/2008, the price range is 58.3 to 61.05. While your report suggested that a initial target is 61.43, your position table showed that 1/2 position was sell @61.01, four pennies below the high.

 

Many similar examples can be found in position table you post in your website. I must miss something. Would you please help me out.

 

Thank you.

 

Jim X. (04/26/08)

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TSM's Answer

            First , let me say that I view my obligation to subscribers as two fold:

•      to identify fundamentally sound stocks that are set to move higher in the near future (and the converse for shorts),
•      to identify stop-loss points that should be honored religiously (I'm right 70+% of the time, but the key to taking money from the market consistently lies in one's ability
           to control loses that 30% of the time you're wrong); therefore, with every trade, I provide two stop-loss points for each half of the position (the first based on technicals
           and the second 3 percent below the first).

            Having said that, I suggest a profit taking target for first 1/2 of the position.  But as far as I'm concerned you need to set your own profit targets. Your particular methodology dictates the sell profit points you're happy with.  For instance, you might wish to stay longer to build greater profits.  For me, the first half position's profit target is short term.  I try to sell the first half of each position at ~$1 gain (~$0.75 for $20 stocks) or at the forecasted target if the market looks good that day, and the stock is rising.  I would then let the second-half profit run higher and use the low of the prior two days as a trailing stop to exit.  In today's market, however, with all its volatility, I prefer to take profits more quickly then move on to the next trade.  The exact profit points are dictated intra-day by the market's behavior.  It's something that cannot be determined the night before.

            My interest lies primarily with the day trading aspects that I write about.  I have trading accounts totaling ~1.5 million but actively trade a $90k account for which I aim to achieve a 1 percent daily gain.  While the folio that TSM is following is my actual folio (set up originally to evaluate the TSM benefit of trading a small account), I don't trade all the TSM forecasted trades (usually ~ 75 percent of them) because I prefer $100+ TSM stocks trading more than 3 million shares daily and a much shorter time frame than the average 7.1 day TSM trade.  The forecasted trades not actually made are paper traded to their fruition.   To give you a better idea, the following is a list of my completed trades for the week of 4/21/08 through 4/25/08.  Thirty of the 32 trades with these 11 stocks were profitable.  The total gain for the week amounted to 4.37 percent of the trading account.  Note, this is the net gain after commissions were deducted.  This week, only SYT and NKE were taken from the daily forecast though AXYS, WW, GYMB and CSX all provided profitable opportunities.

 

 

How Does the TSM Trading Range Work for Entering a Trade?

            My historical analysis (remember, I'm a professional statistician and data analysis is my forte) (Trading Pullbacks , Pullbacks versus 21-Day Highs and Lows, Buying Pullbacks), as well as that of Larry Connors, has shown that pullbacks of fundamentally sound stocks offer far more profitable entries than do breakouts.  Further, they're less risky in today's market.  Consequently, I not only try to buy these stocks as they move though a muti-day pullback, I also try to buy them tomorrow on a slight pullback from today's close.  Therefore, I forecast an entry range that tries to get you into the trade at a lower price than would be projected from a breakout entry.  You might target the midpoint of the range.

            Let's consider the CSX trade as an example.  First, consider the fundamentals that were offered in TSM's "Before the Bell" report. 

• Both it's industry and the stock itself is under accumulation, and since 85 percent of the market's trade volume is institutional, that's institutional accumulation; 

• Zacks ranked it a 1 which reflects upward earnings revisions; 

• PEG (price to earnings to earnings growth) are well below one which shows that the current price is very undervalued; 

• These facts  lead to CSX's membership in four of TSM's six fundamental screens and a membership in Zacks fundamental screen; 

• Earnings and sales have risen steadily over the past four quarters;

• It's trading close to its 52-week high;

• Its earnings estimates for the current year have been increased by 18.8 percent in the last 90 days.

Truthfully, forecasting the CSX trade was a no brainier, a license to print money.

 

From TSM's Thursday (4/24/08) Daily "Before the Bell" Report ...

Company Profile: CSX Corporation provides rail-based transportation services in North America. The company offers traditional rail service and the transport of intermodal containers and trailers. It also provides coast-to-coast intermodal transportation services linking customers to railroads, through trucks and terminals. CSX Corporation transports crushed stone, sand and gravel, metal, phosphate, fertilizer, food, consumer, agricultural, paper, and chemical products. In addition, it delivers coal, coke, and iron ore to electricity generating power plants, as well as finished vehicles and auto parts. The company also engages in the real estate sale, leasing, acquisition, and management and development activities; the operation of a resort; and leasing equipment and vessels. As of December 28, 2007, it operated approximately 21,000 route mile rail network, 4,000 locomotives, and 222,000 freight car fleet, serving various population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec. CSX Corporation was founded in 1827 and is based in Jacksonville, Florida.

Company Fundamentals: CSX is a 23.94 billion market cap company. Its sector is Transportation; its industry, is currently under major accumulation by institutional investors (top 9 percent of all industries)-held steady at 6 percent three weeks ago. CSX itself, however, has been under accumulation by institutions as shown by its 91.0 accumulation/distribution ratio.  Zacks ranks CSX a 1 ranked 1 four weeks ago). PEG ratios of 0.39 and 0.89 for the next two years reflect the value left in the price (read about the effectiveness of PEG ratios in forecasting value here , though it has increased 32.89 percent in value over the past six months (S&P 500 decreased -8.39 percent).  CSX reports earnings on 7/16/08. It is a member of four of the six TSM fundamentals screens and a member of a Zacks earnings revision screen.  Over the past two quarters, it has averaged a 21.2 percent positive surprise and produced a 22 24 49 60   (most recent quarter) percent year-over-year earnings growth and 5 4 8 11  (most recent quarter) percent year-over-year sales growth   (producing 11.0 billion in sales this year).  Its Price/Sales ratio now stands at 2.18, and it's currently trading at 97 percent of its 52-week high. Further, this year's earnings estimates have increased their numbers by 18.8 percent from 3.04 to 3.61 in the past 90 days. 

Technicals: This great company has been pulling back to the support of its rising 20-day moving average.  This is an opportunity to buy it as it pullbacks a little further.

 

            Even with great fundamentals, I would like to buy Thursday at a lower price ($58.06 to $58.76) than CSX closed at on Wednesday ($59.36).  Having said that, I would also like to enter the trade, and I run the risk of missing it altogether if it were to gap up.  If that were to happen, however, I would  just go on to the next trade.  In this business, there's always a next trade.  In today's volatile market, it's worth building a cushion at the entry so you're not as likely to be stopped out later.  Further, losses are tempered.  Remember, over the longer/intermediate term we're currently in, the market is bearish so all long trades tend to swim against the current. 

            Thursday, CSX fell over the first half hour then bounced higher over the next few minutes.  This behavior is characteristic, i.e., the first reversal at the half hour occurs routinely (see the TSM methodology book for a description of common intra-day cycles).  Therefore, I waited to enter after the bounce when the down trend resumed.  When this downtrend then turned higher, I entered the trade at $58.41.  The trade turned bullish, and I closed the first half of the position in the same day for a $2.60 gain (40 cents or so under the price target).  I remain in the trade and expect it to move higher from here.  I've raised the stop-loss point to $57.94, but may take the 2nd half profit sooner should the market turn bearish.

            Again, my offer to you (at only $25 monthly for a 100 of you) is to get you into go trades and establish stop loss points.  Profit targets, on the other hand, are individual preferences.