Trend Following - Reverse Engineering ZF System

Based from my previous’ blogpost: $2GO dissection from Kap Kidlat’s June Trades. I mentioned there that I am self-studying ZF system. One is thru trade dissection of successful ZFT members and second is asking other ZFT members for help. 

Whenever I dissect trades, It gives me 2 things:

1.       Clarify what I know

2.       Discover what I don’t know

For other traders especially those who are starting trading, maybe you can try to dissect trades too and share if you'll discover anything.

Aside from trade dissection and back-testing some parameters, I ask technical questions to ZFTs in order to get something. This is part of ‘discovering’ what I don’t know. But of course, not all technical information are shared by the Tribe, I understand and respect that since it’s part of their system and it’s strictly confidential. It really lies on discovering it on your own.

During those times I came across with the “Trend Following” setup or “TF” as we call it. This is based on ZF system. So I’ll be sharing it again to gauge my knowledge and for everyone’s perusal.

Let’s start…

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As the saying goes...

It sounds easy as it may seem. But what really is it?

Let's have a knowledge check (so we're on the same boat)

From what I understand, trend following is simply following the trend, whether up or down. AOTS or iAOTS. Of course, we would like to trade a stock in AOTS that rallies up and makes a decent uptrend. It’s more profitable setup but more on conservative type since the trend’s rally will take some time to go up. After some time, the uptrend can show signs of weakness and due to a correction or breakdown. Patience is a virtue when riding this kind of setup.

In trend-following I’ll be sharing, the technical indicators used are:

-  Moving Averages

-  SMA20 (more of this)

-  SMA50 and

-  SMA100

-  RSI (Relative Strength Index)

-  RSI 14 period

-  RSI 70 upperlimit; RSI 30 lowerlimit

-  Simple darvas technique

                -  6mos high, 52wk high, multi-yr high and all-time high resistances

[References]

Read here for more info about MAs, AOTS, ZS and PUA:

http://zeefreaks.blogspot.com/2011/09/moving-averages-and-patintero.html

http://zeefreaks.blogspot.com/2013/03/zeus-strike-and-alignment-of-stars.html

http://zeefreaks.blogspot.com/p/blog-page_8.html

Moving Averages:

http://www.tradeciety.com/how-to-use-moving-averages/

http://www.tradeciety.com/simple-moving-average-trading-strategy-that-works/

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Moving on, let’s talk about more of ‘criteria’ in trend following plays based from my research.

From Boss Zeefreak’s blog entry (Swing Trading vs. Trend Following), he mentioned there the use of SMA20. Which is an effective moving average for trend following since we can use it as a sell signal whenever SMA20 ‘snaps’.

See below for a snippet from the blog entry:

PXP chart May 2012 to June 2012. Sample of Trend Follower’s Chart.

In another blog of Boss Zeefreaks’ (The Trend Following Astronaut), what he mentioned there were:

  -  The formation of AOTS

  -  Intended max trade volume (‘Cause he’s Zeefreaks, he has volume! :D)

  -  The 20SMA / 50SMA for setting stops

  -  The hierarchy of resistance breakouts

Trend Following Template

To put all into a simple criteria:

1.       The stock must have broken-out of at least the 6 month resistance

           All-time high > Multi-yr high > 52-week high > 6month high, and so on

2.       AOTS formation in daily

           More conviction if AOTS formed in weekly (longer timeframe)

3.       SMA20 trail is being respected in the daily

 Last resort, SMA50 is respected

4.       Sell whenever SMA20 ‘snaps’

 Or when SMA50 snaps

    

Timeframe:  Could take a month to 3 months to 1 semester to 1 year, and so on.

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From Boss Zeefreaks’ blog example, let’s take a look at $PXP in 2012 with those 4 criteria above.

$PXP daily chart Feb 2012 to July 2012. 

1.  Plotted the All-time high (ATH) resistance at 14.18. Again this is the trigger point. A breakout from these kinds of resistances will start the uptrend. $PXP broke out of this ATH on 04/24/2017. After which, followed by momentum candles with supported volume.

2.   Month of May 2012 $PXP transitioned into AOTS. The price is > 20SMA > 50SMA > 100SMA. We can see here that the rally continued until July 2012. May 2012 was the start of the uptrend.

3.   Let’s take a look at the SMA20 (red line). Since the breakout from #1, the price respected this line for 3 times and continued its rally.

4.    As for the selling, 07/17/2012 $PXP broke down from SMA20. 07/19/2012 broke down from SMA50. These are the areas where the trend weakens. There is RSI bearish divergence seen from May 2012 to July 2012.

Buying from 14.18 BO point and selling at 43 area isn’t bad after all. Around +200% gain in less than 4months. :) 
(Caveat. The %gain is not always like this, though.)

But, I found out there’s an easy way to spot a trend-following play. Where we can find the start & end of the trend.

Let’s take a look on the weekly chart of $PXP from 2012.

$PXP weekly chart. Oct 2011 to July 2012.

Highlighted in green is the end of week of 04/27/2012.

Highlighted in red is the end of week of 07/20/2012.

In the weekly chart, the uptrend usually STARTS when stock breaks out of RSI70 and WEAKENS when stock breaks down of RSI70.

Simple, right? Let’s further dissect the chart above.

1.       $PXP ATH plotted at 14.18 – the trigger point

2.       End of week of 04/27/2012, ATH breakout at 14.18.

      2a.   RSI breakout at 70 level.
      It is confirmed from daily chart that this is the start of the uptrend.

3.       End of week of 07/20/2012,

      3a.   RSI breakdown at 70 level.

      It is confirmed from daily chart that this is the time when the trend weakens.

The uptrend rally of $PXP in 2012 happened from 04/2012 to 07/2012.

What’s more interesting is that if a stock is above RSI70 in weekly chart and stayed above it for some time, automatic, the daily chart is in AOTS. It’s in uptrend. A trend-following candidate. :)

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Let’s have an example. Case in study:  $STI

$STI Weekly Chart. Highlighted is Oct 2016 to March 2017.

Take a look at the weekly chart of $STI. MA’s are hidden so we can see the behavior of price vs. RSI alone. The green line is the start of RSI70 breakout and red line is the breakdown at RSI70. Plotted are the 52wk and 2yr high darvas resistances.

1.       This is the start of the uptrend. End of week of 10/14/2016, $STI broke out from its 52wk high

   1a.   RSI breakout at 70 level.

2.       After 5 weeks, end of week of 11/18/2016, $STI broke out from 2-yr high (multi-yr high)

   2a.   Few weeks before that, it consolidated and RSI70 was retested then rally continued.

3.       This is where the trend ‘weakens’. End of week of 03/24/2017, RSI breakdown at 70 level.

 Let’s shift at the daily chart of $STI.

$STI Daily Chart. Highlighted is Oct 2016 to March 2017.

There. From Oct 2016 to March 2017, the stock is already in AOTS. See how the price rallied? It respected the SMA20 line for 5 times (1a to 1e). There was an instance start of March 2017, the price visited the SMA50 and went above SMA20 line. This registered a Lower High (LH) from Feb 2017’s recent high. It failed to recover above SMA20 in March 2017 that’s why April 2017, $STI started consolidating.

But this June & July 2017, a different story happened for $STI. It did breakout into new highs again. And I missed it.

Going back. 

Buying $STI from 0.72 BO point and selling at 1.10 area isn’t bad too. Around +50% gain in less than 6months. :) 

(See the %gain varies from $PXP? Caveat again.)

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Let’s take a look at another stock. $MRP this year. I traded this one but wasn’t able to ride the whole uptrend. 
The stock code was still $MCP back then.

$MRP Weekly Chart. Highlighted is March 2017. The start of uptrend.

From the start of 2017, we can see that another kicker for $MRP was PUA. ZS in weekly. The SMA100 went under the price in weekly chart, which signals the beginning of a major trend shift. See ZF's PUA blog entry here

1.       Plotted previous’ 52wk high at 4.93 – Jan 27, 2017 High.

2.       End of week of 02/17/2017, $MRP broke out of previous’ 52wk high. 
   But this is not the start of the trend yet. RSI is still below 70 level.

3.       End of week of 03/10/2017, $MRP broke its RSI70 level (3a). This confirmed the start of uptrend.

4.       End of week of 05/19/2017, 10weeks after #3, $MRP broke out from 2yr high. Price reached 8.20 area. 
    And guess what? This is +100% gain from the start of $MRP in Jan 2017. $MRP was at 4.00 level that time.

5.       As of writing, July 1^st week of 2017, $MRP is still respecting RSI70 levels in weekly.

a.  $MRP might show further weakness when weekly RSI went below 70. If not, then it's a different story. Caveat.

Let’s take a look at the daily chart.

$MRP Daily Chart Jan 4, 2017 to July 7, 2017.

Highlighted is March 10, 2017. The start of uptrend.

Switching $MRP to daily chart we can see the beautiful rally. It’s automatic, daily chart is in AOTS. 

1.  Jan 27, 2017 $MRP registered its new 52wk high at 4.93. The stock is not yet in AOTS during that time.

2.  Feb 16, 2017 $MRP broke out of its 52wk high. This is the day I entered $MRP.

$MCP buying transaction

3.  Few days after breaking its 52wk high, $MRP consolidated and re-tested the previous resistance. This was Feb 23 to March 2, 2017. It managed to stay above it and as we can see, our SMA20 trend support was confluence with the price pullback. So the price rallied up afterwards.

               a.   April 18, 2017 - $MRP just broke down from the SMA20 in the daily chart. 

                     Respecting the SMA20 rule, I sold all my positions on this day.

$MCP selling transaction

$MCP Trend Following Trade. 2-month hold. +26% gain.  

b.  Little did I know, $MRP rallied further after respecting the SMA20 in daily. The price went above it and continued its rally touching the 2yr high at 8.22 on May 8, 2017. SMA20 was respected again on May 18, 2017.  

  

4.  May 19, 2017 - $MRP finally broke-out of its 2yr high at 8.22. Price rallied further and June 2, 2017 it registered a new high at 10.20 area.

a.  I swing-traded $MRP in May during this rally because the momentum is really strong that time.

$MCP Swing Trade. 5 trading days hold. +12% gain.

     5.  June 23, 2017 - $MRP failed to recover at SMA20. Will this signal that the trend is over? Only the market can tell. 
          Let’s see how $MRP will react to RSI70 in weekly chart.

So there’s the trend following of $MRP. Just imagine the rally from start of 2017. From 4.00 area to 10.00 area in just 6months.

Buying $MRP from 4.93 BO point and selling at 9.00 to 10.00 area isn’t bad! 
Around +80% to +100% gain in less than 6months. :) 
(See the %gain varies from $PXP and $STI? Caveat again.)

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Now let's move on to my favorite part. Trade dissection of Kap Kidlat's TF Trade: $POPI. 

This was wayback 2015 from his #Throwback FB album.

Kap's Throwback Trade: $POPI

Strictly Trend Following

Actual FB post here

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This was the actual caption from Kap Kidlat's post:

Strictly Trend Following #POPI

Start of Log.

May 5 

A convo between ZF and Kidlat transpired -- 

ZF: In stocks like POPI, you buy on breakout and TF or do you sell on TPs? Or do you do both?

Kidlat: Sell on TPs lang ako sa popi kasi buy on breakouts. Di ko kaya antayin ung conso if meron man. [**this is so me being a momentum trader**]

ZF: Ahhh.. Was wondering kasi the last I know na TF mo was $X.

Kidlat: Very strict kasi ako dun sa "i hate consolidation" na statement ko. Walk the talk tlga yan. And ung $X hindi ko iti-TF yan if hindi mabilis ung stock. Pansinin mo ung $X during nung time na nag TF ako walang mahabang conso. [**the entire tribe knows that I really hate consolidations**]

Jun 16

Entered $POPI when I saw a good opportunity. Plan was to follow the trend (TF) by STRICTLY trailing the 1 month moving average (i.e 20-MA).

Aug 18

Two months later, liquidated my position when price broke down from 20-MA. [**check comment section for the chart**].

Realization: TF is really not for me. My balls are built for momentum trading. Maybe I could blab about this $POPI trade when I launch my blog. So that i can show you the entire log. Mahirap mag-monologue sa FB ng mahaba. Not sure when tho. Coz im tamad AF.

But let me tell you this now, trend following looks like a very simple setup in hindsight. Until you trade it. 

End of log.

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Okay, let’s start. Let’s try to dissect the trade based from what we’ve discussed above.

$POPI TF Trade

Setup                   :        Breakout Play / TF Play

Conviction             :        Multi-yr high BO | AOTS daily & weekly | Trend following

Trade Objective      :        Trend-follow

Kap Kidlat's $POPI trade.
June 16 to Aug 18, 2015. 2months hold. +45.07% gain.

$POPI Weekly Chart. Nov 2014 to Sept 2015.

Let’s start with our weekly analysis, where we can see the start & end of trend in just one look. 

Can you see it? In just one look and then yun iba na? (…malagkit dumikit ang tingin ng mata. One smile, iba na ang ibig sabihin… :D)

1.   End of week of 06/11/2015, $POPI broke out of RSI70 weekly (1a). 
This is the start of the uptrend. Kap Kidlat entered 06/16/2015.

2.   End of week of 08/20/2015, $POPI broke down of RSI70 weekly (2a). 
This is where the trend weakens. Kap Kidlat liquidated his position 08/18/2015.

Another conviction for this trade is that in weekly, $POPI is in AOTS. Uptrend it is.

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$POPI Daily Chart. April 2015 to Aug 2015.

Let’s shift into daily chart. There, we have AOTS in daily from June 2015 to Aug 2015.

Let’s go further in detail where Kap Kidlat exactly made his transactions.

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$POPI Daily Chart. June 16, 2015.

Buying Area

Let’s simulate what happened on June 16, 2015.

1.   Plotted Multi-yr high resistance at 1.28. This is the high since 1998, an area of least resistance. A breakout from this area will be explosive.

2.   $POPI registered a higher low (HL) around 0.90 area. This was confluence with SMA50 and golden fibo ratio.

3.   On June 8, 2015, price broke out and stayed above SMA20. From our observation discussed above, SMA20 is the trail support for trend following plays. After breaking SMA20 in daily, stock shifted to AOTS again.

4.   On June 11, 2015, price broke out of the Multi-yr high of 1.28. This is accompanied by volume spike (4a) which is above average traded volume. RSI also broke out of 70 level in daily chart (4b).

5.  On June 16, 2015, $POPI opened at 1.28 and never went below it. It closed at 1.35 area and Kap’s AEP was 1.3540.

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$POPI Daily Chart. Aug 18, 2015.

Selling Area

Let’s simulate what happened on Aug 18, 2015.

1.   After the breakout from June 2015, $POPI rallied further. As a trend-following play, it clearly respected our SMA20 trail of support (1a & 1b). There was one time on Aug 11, 2015 where the price broke out (1b) with a decent volume-spike (1c).

2.   But after 2 days, on Aug 14, 2015, the price attempted to break from 2.50 area but failed. The selling pressure was strong (2a) and $POPI closed at 2.26.

3.   RSI bearish divergence manifested during #2’s attempt for another breakout. While the price attempted to make higher highs (HH), RSI registered lower highs (LH). This is clear that the trend is losing its momentum.

4.   Aug 18, 2015, price broke down from SMA20. It is also clear with the RSI since it went below RSI50 level. Entering bearish area. This was the day Kap sold his positions.

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$POPI Daily Chart. April 2015 to Aug 2015.

Using SMA20 only

Let’s look at $POPI in a simple approach. Plotting the Multi-yr high and just the SMA20. 

We can have 2 options for buying.

Buy 1 – When price went above SMA20

Buy 2 – When price broke out of the Multi-yr high

Selling area is the same, after SMA20 snaps out. Both buying options can still be profitable.

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To put everything in summary:

Previous Trend Following Criteria

Revised Trend Following Criteria

1.   The stock must have broken-out of at least the 6 month resistance     All-time high  >     Multi-yr high  >     52-week high >     6month high, and so on 2.   AOTS formation in daily § More conviction if AOTS formed in weekly (longer timeframe) 3.   SMA20 trail is being respected in the daily §  Last resort, SMA50 is respected 4.   Sell whenever SMA20 ‘snaps’ §  Or when SMA50 snaps

1.   The stock must have broken-out of at least the 6 month resistance     All-time high  >     Multi-yr high  >     52-week high >     6month high, and so on 2.   RSI stayed above 70 in weekly §  Start of trend - RSI70 BO in weekly §  End of trend - RSI70 snaps in weekly 3.   AOTS formation in daily §  More conviction if AOTS formed in weekly (longer timeframe) 4.   SMA20 trail is being respected in the daily §  Sell whenever SMA20 ‘snaps’ §  Last resort is the SMA50

- End of entry -