TripleScreenMethod's Thoughts

Making TSM Trades - Don Y.

2011-04-16T19:51:00.000-07:00

Ric,

Do you have any reading material or suggested reading on how to tell when to take profit on a stock trade? For instance, I took profit with DIS after only gaining $.70 on the same day of purchase, fearing it would not go further with all the bad news out there or that something drastic would happen overnight. How did you decide to sell at the price that you chose? Even if I watch the market every minute, I don't know how my performance can come even close to your theoretical one if I don't sell at something close to your sell signals right? Please advise.

Thanks,

Don
_________________

Don,

As I point out in the TSM daily report, the TSM trades are not necessarily actual trades.
Instead they are possible trades for the forecast stock. Typically, soon after I buy a
position, I put in half position sell points for profit: the first one near the low side of the
profit range and the second above that near prior resistance if possible. Seventy cents was
below the profit range but still a nice intraday gain.

I too was expecting poorer performance last week so I held my contra etfs which lost money.
Most often, the market will do exactly what most expect it not to.

Ric

New to Selling Puts But Made Money - Betsy B.

2011-04-16T19:47:00.000-07:00

Hi Ric . . . I am preparing to leave the country and will not be trading while I am away, so I would like to cancel my account.

I wanted to thank you for your awesome service. I really appreciate everything I’ve learned from you and the money you made me. I was a little slow to sell naked puts, but once I did I was hooked. When I come back in six months, I hope you’ll let me back into your “club”. I also appreciate how responsive you were to all of my questions. Your knowledge is vast and it is apparent you are quite a talent.

Thanks again,

Betsy B.

Better Understanding the TSM Strategy -- Jerry F.

2011-04-16T19:33:00.000-07:00

Ric,

After some hit and miss observations from your site and maybe not enough understanding of your program I believe I will start selling puts this Monday starting with GMRC. My first trade way back then was selling some BP puts and I did very well.

What would be a good starting point to gain a better understanding of your the TSM strategy. I believe I learned more by reading and attempting to understand it simply by going over your "COMMENTS"section. It's an education by itself.

Thanks,

Jerry F.
____________________

Jerry,

The triple screen approach is not difficult to understand. It's simply an approach to buying fundamentally
sound stocks that still have value left in their price.

I run ~30 screens on Sunday (IBD, Zacks, Vector Vest, Value Line, TheStreet.com, Morningstar, Forbes,

etc) that are fundamentals based and require multiple screen membership to narrow this list from

~10,000 stocks to about ~1,000. I then use the next 2-year PEG ratio to qualify value and that takes the

list to ~300, then price and volume criteria to reduce that list further to ~200. This final list is the best of the

best, those stocks that institutions want to hold. During the next week, this list is the only set of stocks
that I trade that week.

Having cleared these stocks for their fundamentals, during the week I look for their pullback to major levels

of support (20-/50-day moving averages, prior highs or lows) where I can buy. Statistically (and I'm

a professional statistician), buying stocks in pullback is far more profitable (and less risky) than buying

stocks breaking out. .

Each of these buy recommendations comes with suggested profit targets and set in stone stop losses based

on half-position sizes. My goal is to make at least one recommendation in each daily report.

That's the heart of the program. It's simple and profitable. Note, the statistics I present are based on optimal

outcomes from these TSM forecast trades, not necessarily actual trades, though I do make many of them. Your

results won't be quite as good, but the system consistently turns out +70% winners (+90% for the past two

quarters).

In addition to the above, I also recommend a short-Put strategy for these stocks as a strategy to invest cash

at ~18% targeted return. Of the 100s of Puts available for TSM stocks, only a few make the TSM criteria

(>18% annualized return with from 5-15% downside risk protection). Possible trades are provided in the TSM

daily report, while my actual trades are reported intraday through a protected Twitter account. I would recommend

you read the free reports linked from the site that goes deeper into the short-Put strategy if you're interested..

Ric Miller, Ph.D.

6-Sigma, Master Black Belt

How does TSM choose its Puts recommendations? Don Y.

2011-01-16T07:03:00.000-08:00

Hi Ric,

I just looked at your latest tweets and every time you give a reco, I check out the price and the chart on the option. And every time I can't help but wish that you gave it a day or 2 in advance when it's usually 50-100% higher. I'm sure it is related to risk vs. price movements etc. Can you let me know why you would not sell Deck's puts for example last thursday or friday for a much higher price? Or use any other as an example if you like.

Much appreciated.

Don

......................................................

Don,

I try to find the TSM stocks offering a good combination of risk and premium. Too, I prefer to forecast Puts offering more than $1 in premium. As time to expire nears, I accept less downside protection, i.e., last week my limit was 7.5%; this week it's 5% (for the Jan expiration in 12 days). So an option's premium has to return >18% annualized and, at the same time offer the required downside protection.

DECK is trading in an area of prior support (in early Dec), but it also is trading between its falling 20-day moving average and its rising 50-day moving average. I wasn't happy with the risk situation last week, but am this week.

Given the TSM list of 200+ stocks, there's usually a small list (10 or fewer) that offer Puts meeting my requirement. I could relax the criteria, but that would increase risk markedly, especially if the market was choppy.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

TripleScreenMethod's Approach

2010-12-31T11:25:00.000-08:00

Subject: TripleScreenMethod Subscription Information

The TripleScreenMethod.com homepage highlights the forecast record over the past 28 quarters, as well as provides sample page information. Essentially, for $25 monthly, TSM provides the following:

1. Monday--a weekly list comprised of stocks that show up on at least two of 28 fundamental screens and a value analysis based on the next two years of PEG ratios (usually from 50 to 250 stocks);

2. Mon-Fri--nightly, at least one (usually more but sometimes less as the market dictates) TSM pick off the above list that is in pullback and ready to rebound higher with both profit and a stop loss exit criteria (75%+ winners over past 14 quarters - 86 Wins & 10 Losses for 114.81 points in current quarter -- 4th quarter, 2010);

3. Mon-Fri.--nightly, a list of potential naked Put options for the a TSM stocks aimed at providing income (>18% annualized yield) with10% dowside protection; 159 Wins & 28 Losses in forecast positions for $44,914 in premium; actual trades are forecast during the day through Twitter (twitter.com/TSM_rm);

4. Various articles detailing strategies for day trading, for deploying money at higher rates of return and for the performance of technical indicators as they relate to fundamentally sound stocks. (see articles at http://www.tradingmarkets.com/.site/stocks/contributors/?contributor=Richard%20Miller)

5. A resource who actively trades the above strategies whom you can question (specific to TSM or more general).

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Questions about the TSM Methodology ..... Dalton B.

2010-12-31T11:17:00.000-08:00

Hi Ric,
Is there somewhere else on the TSM site I’ve missed that explains in complete details the TSM approach? I think I’ve read everything I’ve found on the website but am still not clear on how you structure the half positions & when they are sold. I’m obviously talking here about the Stock of the Day portion.

Thanks,

Dalton B

_______________

Dalton,

Details of the TSM approach:

TSM stocks are identified as those that: (1) hold membership in at least two of my 28 fundamental's based screens; (2) averaged trading at least 150k shares daily over the past 20 trading days; (3) closed above $10; (4) have two year PEG ratios less than 1.50; (5) hold a current Zacks ranking of less than 3, but if 3 have a market cap >$25 billion. I generate this screen each Sunday and use it for the next week.

Each evening, I look for at least one of these TSM stocks that has pulled back to a major level of support (20-, 50- or 200-day moving average or prior low or prior high) to forcast a long trade for the next day. I usually suggest a price that one buys below, but if the market is very bullish I could suggest a price to buy above. Sometimes I'll suggest both type entries for a position, and one could buy half a position utilizing each or buy a full position utilizing the first entry criteria that hits.

I then specify stop loss targets for half positions. When these are hit, I sell each half position at a loss. This methodology has produced ~70% winners, but when a loss occurs, the key is to keep it small (~30% of the time, this will happen).

As to taking profit, I suggest a price range where one should sell. I typically sell half the position near the lower half of the range and the second half at a higher price. I continue to hold or sell based on what I see the market doing. I guarantee that my sell price will fall within this range, but I cannot tell you exactly where as I make my own decision while the market is open.

Having said all that, I feel it's my job (1) to identify quality stocks with value left that are ready to be traded and (2) to identify (in stone) stop loss points. It's up to you to identify where to take profits. This methodology has produced ~70% winners through good times and bad. For $25 monthly (and ~20 picks), I don't think you could ask more.

Additionally, most evenings I'll scan all the current TSM stock's option positions and identify those Puts that offer premium that equates to an 18% or better annualized return with some degree of downside protection (5-15%).

Hope this helps,

ric

Writing TSM Put Options: Why Choose Front Month?

2010-12-31T11:04:00.000-08:00

Don Y. asks on 12/31/10

Hi Ric,

I am new at writing Puts. I have a concept of how options work, but am no expert at all. That's why I really want to ask you something that I find perplexing. I'm sure you have a good explanation.

For example, on SWKS's Put that you recommended on twitter lately, why not sell it back in Nov when it was above $2? On the surface, that looks like it offers better protection against losses and would be more profitable, but I'd like to hear your reason for selling it at the time you recomended it, since the pattern seems to be consistent in all your options recomendations. Thanks.

Regards,

Don

____________________

Don,

I haven't recommended SWKS for a TSM trade. So far as TSM Puts go, I present two types of information on twitter:

(1) actual trades that I've made, which are labeled by a Trade #, and (2) possible TSM trades that meet our trading

criteria. The latter is how I presented SWKS. I only track the first type trades at the TSM website.

As to actual Put trade characteristics with respect to time and % downside protection, those choices are made based

on an annual return criteria (>18%) and % downside protection (from 5-15% depending on time to expiration.

Your question is: Why not go further out and collect a bigger premium?

Let me answer that with a hypothetical position: $50 stock with 40% implied volatility, 1% interest rate and no dividend (all these impact the level of premium according to the Black-Scholes equation). The immediate calculated Put premium for a $45 strike is just a function of time to expiration, e.g., for 10 contracts, assuming that price doesn't change, then

....($50 strike price and $45 Put)

150 days = $2,675 30 day delta $445

120 days = $2,230.....".............$495

90 days =...$1,735.....".............$565

60 days =...$1,170.....".............$650

30 days =...$520........".............$520

Every option experiences its greatest loss of value percentage wise in its last 30 days (100% loss) versus

any other 30 day period, e.g., from 90 to 60 days, the above option would have lost 32.6% of its value.

I choose ~30 days expiration (front month) to maximize the time decay and, at the same time, reduce risk.

Having made the above argument, I could choose a longer expiration--as you indicated--for a larger premium

with an aim to close that position after 30 days, for example, if the above stock remained at $50, one would

have made more money by selling the 60 day Put then closing it at 30 days ($650 vs $520). That's true, but the

risk situation is much worse. Remember I want to protect the downside.

Say during the 30 days, the stock drops in value to $45 (the Put's strike price), and I close the position. Here's

what my profit situation would look like for the various Puts:

($45 stock price and $45 Put after holding position for 30 days)

150 day Put at 120 days $4,028 loses -$1,353

120 day Put at 90 days $3,500 loses -$1,270

90 day Put at 60 days $2,869 loses -$1,134

60 day Put at 30 days $2,038 loses -$865

30 day Put at 0 days $0 gains +$520

I choose the front month to minimize risk. The TSM stocks are fundamentally

sound with value left in their price. Most will experience a rapid price rise

(~70%) and I'll close the Put position early (usually when 75% of the premium has been

captured, and there's more than 2 weeks before expiration) to capture more premium

in another stock for those 2 weeks. The above Put strategy protects me in those 30%

where I'm wrong and price drops. Note, before I exit a Put position, I calculate the

return that's left given the premium drop. If it's greater than 18% annualized, I continue to

hold the position.

Hope this helps,

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Trading Cash Covered Puts ... Larry H.

2010-06-17T20:10:00.000-07:00

I've been selling cash covered puts in my IRA account. YTD, I've sold 70 puts with 54 winners (77%). I've profited $31,100. Since the market downturn, I've focused on trading options and minimized trading stocks. I have tested day trading high volume TSM stocks this week, but cautiously. Traded CREE and BIDu. Looks interesting but may require too much time to be profitable. Have you a current recommendation on high volume TSM stocks for day trading? With current high volatility and downside pressure, would you recommend selling naked puts on inverse ETFs as a means of hedging?

Appreciate hour report and your recommendations on books (Connors and Dent).

....

Larry,

I'm glad that you've made some money using TSM puts. Intraday, as well as every evening, I run a screening program that looks for TSM puts that meet annual return and downside protection criteria (as well as other criteria that change depending on the time to expiration: >10 contract volume, >25 contract open interest, 0.25 bid/ask spread, 0.45 put premium).

So far as day trading, I only trade AAPL. In an IRA account, when you sell a positon, you have to wait three days for funds to clear. With an expensive stock like AAPL ($255), I sell high delta puts ($290) instead of buying/selling the stock shares. While the spread is a little wider--requiring a greater stock price movement--there's no three day wait for funds to clear.

You could certainly sell inverse ETF puts (e.g., SH). I've done that, as well as bought gold (GLD) and bonds (TLT) as hedges in these volatile times.

ric

Successfully Trading Cash-Covered Puts ... Matti V.

2010-06-17T20:00:00.000-07:00

Ric,

I just closed OPEN naked put position for a nice $635 profit. I still have CSTR, MED and BIDU naked put positions. I'm new to writing naked puts and not sure when to close a position so I'd really appreciate if you could tweet also when you close a position.

Next, I'm starting to study your day trading method, which seems excellent. I think your TSM service is the best value that I've seen.

Thanks.

Matti,

As a rule of thumb, I close a naked put position when I've earned 75% of the premium. In fact, as soon as I open the position, I put in a GTC order to close at 75% of the premium. At the other extreme, I use double the premium as a stop loss.

Ric

Trading TSM Stocks ... Michael

2010-04-23T08:49:00.000-07:00

Ric,

I have been achieving about a 95% success rate on my TSM trades for the last three weeks, which were the first three weeks of my TSM subscription. I have probably made at least 70 trades over those three weeks. I have told several of my friends about your service and wondered how many more slots you have available in your subscriber list? What I like best about the weekly TSM list is that it has been providing buying candidates even when the market has been trending up, unlike the ETF 2-period RSI strategy (Connors' TPS strategy) which provides almost no buy possibilities when the market is going up.

Michael

...

Michael,

I always glad to see TSM subscribers are using the TSM strategy profitably, whether it be buying stocks or selling puts (intraday or over several weeks).

As you know, I limit my subscription base at any one time to 100 people and give no free trials. I would rather spend time conducting research than managing a large group of subscribers. Currently, I have about 20 slots that I could fill. In addition to being a statistical process improvement consultant for industry, I manage money: primarily trying to get a ~20% annual return in an environment where CDs return less than 1%. To do that effectively, I spend about 20 hours a week conducting research and writing the TSM report. My primary purpose for the TSM report is to share that research. I use your monthly fees to buy the services (Zacks, IBD, Vector Vest, TradingMarkets, PowerOptions, etc.) that support my research.

Ric

Questioning Twitter Posts ... Jeff

2010-04-22T07:19:00.000-07:00

Good morning Ric,

As you know, I have been experiencing outstanding results following your suggested plays. I am constantly trying to learn and improve my trading and my understanding of how to best use your service. This past week or so I have attempted to follow nearly all your plays. I'm noticing small differences between your trades and mine, and I'm hoping you can help me understand and improve my fills.

When I see you tweet with the word "sold" at the beginning, I have been taking that to mean you have already placed your trade, and the price you list is your fil price. I then try to match your trade or better. Am I interpreting your tweet correctly?

I'm noticing that the listed prices of your trades in the "Open/Closed Naked Puts" section of the Daily TSM Report is different from your tweet. Example: You may tweet a trade for CREE May 75 @ 2.40 and it will not be listed in the Open/Closed section while a CREE May 70 write and cover is. Second Example: DTG tweet sale at 0.80 is shown in Open/Close at 0.85. Please help me understand how best to interpret your tweets.

On a wish list, I would love it if it were possible to get tweets as you exit Naked Puts. I understand you're busy, and I'm just throwing it out there.

I'm very appreciative of the time you take to answer my questions and the effort you put into your service. I am doing very, very well.

Regards,

Jeff

...

Ric Miller's Answer ...

Jeff,

Though I try to tweet my trades shortly after I make them, that doesn't always happen so there could be a lag time involved which accounts for fill differences.

You are correct. When I say "sold," I've actually made the trade.

Since not every subscriber is following me on twitter, I don't include my picks/observations made on twittter in the TSM list of trades. Even if every subscriber did follow my tweets, I wouldn't as it would be just too time consuming. In the TSM Daily Report, I only include those Naked Put (and stock) plays that are forecast in TSM's daily report (none for today but usually one highlighted and one to three other suggested ones).

I will make an effort to tweet my trades closing Put positions, but I cannot promise to catch every one. The official TSM position closing data is updated in the TSM daily report.

Note too, the TSM forecast trades are not necessarily trades that I've taken myself though most are. They could instead be simulated trades, which could happen: (1) if I've already committed my funds allotted to Naked Put positions (my limit is 15 open Naked Put positions); or (2) I already hold a position in that stock (Naked Put or shares, my limit is $30k per position).

Ric Miller

Another Profitable Month --- Jeff

2010-03-18T20:30:00.000-07:00

Ric,

Thank you again (writing Naked Puts).

CSIQ +0.65 pts (5 contracts)

CREE +0.45 pts (5 contracts)

GES +0.60 pts (5 contracts)

Long SWKS +0.90 pts

Zero losses!!!

I'm not sure why I was so reluctant to put on more positions. I think I was my own
worst enemy this past few weeks. I guess I'm concerned about the market looking
like it's due for a pull back?

Regards,

Jeff T.

..................

I'm glad that you're making money. Selling Puts, especially Puts of fundamentally
sound stocks, is a real money making propostion. You're essentially selling insurance
to someone over the next 30 days who's wants the security of limiting his or her loss
in that stock.

Typically, the TSM approach starts with a quality stock and writes a
strike that is at least 15% below today's price (30-40 days to expiration, 10% with
15-30 days and 5% with 1-15 days) with a premium that guarentees an annuallized
18% return. A stock can do five things over our holding period: go up a lot, go up a little,
stay flat, go down a little (say 10%) or go down a lot. We make our premium in four of
those scenarios and don't lose as much as a stock owner in the fifth.

Since 2/9/09 (13 months ago), TSM has forecast 92 Naked Puts of which 84 have proved
profitable (91.3% winners). Trading 10 contracts in each would have generated $44,924
in premium.

Selling Naked Puts is a conservative, profitable strategy. Every evening I run an option
search using the current TSM list of stocks looking for candidates (5-15% downside
protection based on number of days left before expiration and 18% annualized yield). I
personally take most of these trades as a way of deploying money at this rate of return.
Further, I try to "tweet" the particular Puts I'm trading -- follow me at TSM_rm if you're
a subscriber.

ric

Great Results THX!!! ... Jeff T.

2010-02-26T19:37:00.000-08:00

Ric,

Friday was the first expiration day since my subscription to your service began.

I am extatic with the results over the past four weeks.

GMCR sold 65 put (2) +150.00
GMCR sold 70 put (5) +600.00
AIXG sold 30 put (5) +550.00
ANR sold 44 put (2) +180.00
CSIQ sold 24 put (5) +400.00 *got a little lucky, I sold on Thursday,fslr earnings due scarred me out. Whew!
BMCR sold 1/2 at .60 gain *got a little lucky here too, I sold a day or two after RSI > 80.

Investing has always been something I enjoyed and have achieved some success.

Learning your methods is exciting for me and will likely improve my performance.

Thank you again for making the time to answer all my questions.

The Larry Conners books you recommended are very interesting, are you using some

of his analysis to enter ETF trades?

I may be able to send some people your way, are you still limiting your service to 100? If so how many spaces are available?

Regards,

Jeff T.

..........

I'm glad that you've done well writing naked puts. It's really a high success trade, especially with TSM stocks.

I use Connors' TPS strategy to trading country ETFs. That's been very successful, though I took some hits

in the recent market down turn.

I have about 30 spaces left. Note, I use your payments to supplement the services that I purchase and then use to

improve the TSM page. Zacks Research Wizard and Elite Service, TradingMarkets PowerOptions, IBD's ETables, PowerOpt Options Search page, Vector Vest's Stock Analysis Page are just a few.

Ric

Stock Repair Strategy: One Way to Recover from a Position Gone Bad - Miller

2010-02-02T10:14:00.000-08:00

All of us get caught from time to time holding a position that suddenly goes bad. A stock suffers a sudden price drop, usually while the market is closed when one cannot do anything about it. It simply closes today at one price then opens tomorrow several dollars down. So what does one do, sell the shares immediately and take the loss or utilize some strategy to try to minimize the loss?

One of the benefits of position sizing is to minimize the impact of these kinds of events. If I build a portfolio with 5% of my account in each position, even a loss of 50% in that one position only accounts for 2.5% loss in my overall portfolio, unpleasant yes but not likely to cause me to lose much sleep over.

Here, I describe an option approach I could use to repair such a position. Of course, each of us has to decide first whether the position is worth saving or not. In the long run, nothing will save one from a large position in a stock like Enron.

Of course, one should consider the chart before going further. Here, BRCM has reached an area of support from which it should spring higher for a while. Ideally, I would execute this repair strategy when it meets some resistance and looks like it's ready to resume its fall.

Option Repair Strategy

The above table details the approach. Here, 1,400 shares of BRCM are owned at a cost of $30.13 per share, and now its price stands at $27.76, so I'm $2.37 per share down ($3,318 in total). This repair strategy calls for one to buy 14 in-the money calls while selling twice that many less in-the-money calls. The idea is that half the short calls would be covered by shares owned and the other half by the additional calls purchased. Ideally, one places this position at a credit. Here, we'll consider going long 14 May 27 calls and short 28 May 28 calls at a credit of $1.66 per share. Note, the calculations are based on the 1,400 shares owned so the short call premium is doubled.

The table considers possible BRCM prices in 108 days at expiration. The impact of each component of the position is considered for this range of prices. If price, for example, at that time was $25 a share ($2.76 down from where it currently is), I would be down -$3.47--a little more than a dollar more than I was at the outset. Contrast that with where I would be if I just held the shares hoping they would go up, i.e., down -$5.13. Too, my ownership basis would have dropped to $28.47 (from the $30.13 I started with) because of the $1.66 credit.

If price were $27 at expiration, I would have improved my position by now being only -$1.47 down (from down -$2.37 that I started with). Both option positions would be worthless, while my stock position would be down -$3.13. If price instead rose just 24 cents to finish at $28 at expiration, my position would now show a 53 cent per share profit, the maximum attainable from this strategy applied here. Beyond $28, shares are called away, and the long and short shares cancel one another.

There you have it, This repair strategy allows me to lower my basis and, at the same time, gives me a chance to recapture much of my losses. Further, it reduces further loses. Its only downside is that it caps the upside should BCRM bounce back strongly over the 108 days.

Booking a Gain in GMCR ... Jeff

2010-01-31T22:36:00.000-08:00

Hi Ric,

I wanted to let you know and thank you, yesterday I closed my first profitable

naked put. (+$650.00 GMCR). I could have made an additional $200, if I had waited till expiration,

but I was happy to book the profit.

I'm trying to figure out how much of my put writing allocation needs to be invested most of the time?

If I have $30k for this strategy and want to achieve 20+ % gains annually. Note also that I'm more comfortable for now

having the loss protection of owning the lower strike put. Any advise for me?

Jeff

............

Jeff,

Congratulations on your profitable GMCR trade. I would immediately look for another trade with >10% downside protection
and greater than 20% return. If you want to make 20% annually, you'll need to stay invested at that rate. As to booking
a gain early, you should calculate the return available from the remaining premium then judge whether you can get a
better return some where else.

Annualized Return on Remaining Premium = (Remaining Premium / Strike Price) x (365 / days left till expiration)

For an Out-of-the-Money Put like we're writing, more premium decays from 30 days to 0 days than does from 60 days to 30 days.
That's why I always look to write the front month. This is not true, by the way, for In-the-Money Puts.

Utilizing the Naked Put strategy, one also needs to understand the In-the-Money Covered Call strategy to utilize when shares
get put to you and the Repair strategy to utilize when shares get put to you at a big loss. I'm in the process of writing a book
that draws all these strategies together.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

2008 Characteristics of TSM Stock List ... Andre

2010-01-17T12:35:00.000-08:00

(Click on Chart to see clearer image)

Subject: Characteristics of Trade Population Using RSI(2) Triggers
Mr Miller,

Your post Characteristics of Trade Population Using RSI(2) Triggers was very helpful in understanding your strategy.

I would like, however, to know a little more about how you selected the 2008 trades.

I the article Buying Weakness and Selling Strength you mentioned that 101 stocks were selected (the 2008 TSM picks) and generated 418 trades.

Does it mean that every stock was tested for the whole year although it might only have showed as a TSM pick in November or December?

Also, is there a huge rotation among TSM picks or is the list pretty much the same through the year?

Again, the post on your blog was very helpful in understanding your methodology.

It's always great when a trader can back its strategy when stats.

Thanks,

Andre

....................

Andre,

Revisit the blog post as I've added an example that may add to your understanding.

Yes, the 101 stocks forecast in 2008 supplied the data for the article where trade data
were generated for the whole year though the stock may have entered the TSM list in
December.

I will post the statistics for 2008 (chart I above: distribution of weeks on TSM lists).
There were 718 stocks that made the TSM list during 2008, and the average time
on the list was 7.2 weeks. Only 22.84% (164 stocks) made the list just once while 25 stayed on
the list for 26 weeks or more.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Characteristics of Trade Population Using RSI(2) Triggers

2010-01-16T17:56:00.000-08:00

(Click on Chart to see clearer view)

I wrote an article recently entitled " Buying Weakness and Selling Strength" which detailed a trading strategy using the 2-period RSI as a buying (2 closes below 15) and a selling (close above 80) trigger. I've been using the strategy to enter and exit the TSM picks. By the tone of your questions, I can see that you're wondering about the use of stop losses to reduce risk. Bear in mind that the RSI exit is a dynamic trigger, that is, the only way to exit the TSM trade (profit or loss) is at the next day's open following a RSI(2)>80 close. That's not to say that you might use other criteria. Here, I want to briefly cite some pertinent statistics. Note though, that this dynamic exit can create a few large losses (see the plus 10 point loss at the extreme left of Chart I).

2008 was a bad year for the markets. The S&P, for instance, lost 38.5% of its value. As I cite in the article, the above RSI strategy produced 80% winners and a 1.6 average point gain (per share, per trade) in 2008. Chart I shows the distribution of points gained and lost for these trades. Note, rules defining the trade strategy can be found in the article. While the strategy is sound, you should understand its draw down characteristics and the idea of controlling risk by position sizing before following it in your own account.

Before going into those subjects, let me say that I view TSM's obligation to you is solely to identify quality TSM trades, i.e., what's ripe to trade. You have to choose the manner of trading that suits you. It's up to you to choose to use hard stops, trailing stops or some other manner of risk control. I will suggest TSM entry and exit criteria based on the RSI criteria and trade my account that way. Of course, this is subject to change in the future, and if that happens, I'll let you know what I'm thinking.

Back to the 2008 data above and some important statistics: average draw down was 6.7% during the life of the average trade; the average trade life was 6.6 days; the win rate was 80.6%; the average loss was 2.43 points; and the average win was 2.49 points. You can expect to win:

Expected Win ($) = (% Win)*(Avg Win) - (% Loss)*(Avg Loss) = (0.806)*(2.49)-(0.194)*(2.43) = +1.54 points per share per trade

Great strategy, but let's now consider the draw-down risk. If I were to use a static stop loss (say IBD's 7%), this strategy's return would be far less (nearly always true with strategies utilizing static stop losses). Instead, let's consider position sizing. Say you want to put 30% of your portfolio into this strategy (whether your portfolio is $10k, $100k or $1 million). You have the option of building a single position or dividing my 30% into multiple positions, for purposes of illustration here, say 10 positions. Consider the draw-down risk of the strategy for the entire portfolio, that's the important number.

Chart II shows how portfolio risk changes with the number of positions comprising the portfolio. The red line is the 1.54 point average from 1 to 10 positions per portfolio; the blue lines are the 1%/99% confidence limits; and the green lines are the 5%/95% confidence lines. For example, if I divided the 30% of my account into 2 TSM trades, I could expect a 7.5 point loss (average for the 2 individual trades) or greater 1 time in 100. Conversely, I could expect an average 12 point or greater gain 1 time in 100, too. Now, if I divide the 30% of my account into groups of 10 TSM trades, I could expect a far smaller average loss ($1 or greater loss 1 time in 100 for the group of 10), but also, a much smaller average gain ($4.1 or greater gain 1 time in 100). There it is, good trading strategy utilizing position sizing to minimize risk.

Other ideas that I plan to pull together in a more formal report: selling Puts on TSM stocks meeting the above TSM criteria; generating additional income with a Covered Call strategy for these type stocks; scaling into the stock positions with 2 or 3 entries rather than a single following 2 days with the RSI close below 15. I also plan to develop an Excel based program that will enable one to generate portfolio risk charts like Chart II utilizing a Monte Carlo approach coupled with a group of test trades that define the expected returns from your strategies.

Example of Controlling Risk by Position Sizing

As an example, assume a $100,000 account that devotes 30% ($30,000) to trading TSM stocks. For calculation purposes, assume, too, that the stocks being traded are $40 stocks. Trader one puts his money in 375 shares of two stocks ($15,000 in each). On average, he can expect to make $1,155 (2 x 1.54 x 375) or 3.85% on his $30,000 every 6.5 days (if a new group of stocks are ready to trade); however, once in 100 trades of these type pairs, he can expect to lose $5,625 (2 x 7.5 x 375) or a 18.75% loss--perhaps on the very first trade made. Too, once in 100 trades he can expect to profit by $12 points to win $9,000 or a 30% gain. Personally, I want less variation in my returns.

Contrast the 2-position approach with a 10-position approach. Trader two puts her money in 75 shares of ten stocks ($3,000 in each). Again, on average, she can expect to make the same $1,155 (10 x 1.54 x 75) on her $30,000 every 6.5 days (again, if new trades are available). Now, once in 100 trades of these 10-position trades, she can expect to lose $750 (10 x 1 x 75) or 2.5% or make $3,075 (10 x 4.1 x 75) or 10.25%. This trading strategy (using position sizing to mitigate risk) experiences far less downside and upside variation.

My trading platform (Tradestation) costs me $1 per 100 shares or option contract in commission so the difference in the two approaches describe above is small. If you're using a broker that charges a fee by the trade, your commissions would be substantially larger. Consider broker ThinkorSwim for a commission structure similar to mine with even a $10,000 account, though you might have to ask for it.

If you have any questions, don't hesitate to ask.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Cutting Losses ... Howard

2010-01-15T06:38:00.000-08:00

You still haven't said what to do when the stock proceeds to fall after I buy it. Nor have you listed what your average loss

was per trade loss. If the stock fall 10 points after I buy it, then rallys a point or two driving the rsi(2) above 80 for

2 consecutive days, I have stll lost 8 points. My stop loss has noting to do with interfering with the rsi(2) above 80

rule when the stock rallies, only when it falls. The problem with conners data is that he never shows what happens

when the market and the stocks i buy fall right away. I do not intend to hold onto such stocks indefinitely hoping

they rally.

I would appreciate your thoughts on the the above.

Thank you,

Howard

.....................

If you want to set a stop loss at a fixed percentage or a violation of technical support, do that. My job is to identify
quality stocks with value left in their price that are pulling back. I use the RSI(2) exit because it tests well in good and
bad markets. Having said that, there will be times when a stock continues to fall, gets bad news and drops over night or
is down graded simply because it meets an analyst's price target. MELI is a good example as it's being impacted by the
unsettling financial markets in Latin and South America.

I handle these large losses by position sizing. I devote 25 percent of my portfolio to buying 10 TSM stocks (30 percent
to selling 15 naked puts, 30% to buying 10 high volume ETFs and 15 % to a variety of other strategies). One stock position
ties up 2.5% of my portfolio so even a 50% loss in that position only causes a 1.25% loss to the portfolio. In my situation, I would
rather have hard/fast rules and eliminate the subjective decisions.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Profit for TSM's Dynamic Entry and Exits and the 200-Day Moving Average ... Andre

2010-01-11T19:08:00.000-08:00

Good evening Mr Miller,

One of the entry rule is that the stock price must be above the 200MA. Does it mean you would exit if it crossed under it?

Also, I read your article "Buying weakness and selling strength" with great interest and I have a question.

Regarding the points earned by each of the strategy, can I multiply these by the amount of shares traded to get to the $ gain?

For instance, RSI(2) below 15 two (2) consecutives days is showing a 438.81 points gain in 2009.

Unless my interpretation is false, that means that someone trading 100 shares (each trade) would have had a 43,881$ gain before commissions, right?

Thanks for your help.

Andre

....................

I enter above the 200-day moving average then stay long until I get an RSI(2) >80 signal, even if price falls below its 200 day. Note, until I build a trading history with this dynamic entry and exit, I'm going to take 1/2 position profit at $1 then let the 2nd half run to the RSI>80 trigger.

Yes, if you had made all the trades at 100 shares each, then your profit would have been $43,881. Note, that's a lot of trades (437). Too, it's important to control risk by dividing your capital that you expect to use in this strategy into at least 5 and better 10 positions. Doing this reduces risk dramatically so a stock like today's MELI doesn't impact your account as badly. See my article, "Controlling Risk in Short-Term Trading." (http://www.tradingmarkets.com/authors/all/Richard_Miller).

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

New Exit Strategy

2010-01-10T13:28:00.000-08:00

As we generate trading history for the dynamic exit (RSI(2) >80), I'll take 1/2 position exit when a $1 gain is realized (standing limit order) and the 2nd half with the dynamic exit.

Ric Miller

New TSM Strategy Performance ... Willem

2010-01-10T09:17:00.000-08:00

Hi Ric,

All the best for 2010.

Your last research is very good.

I took the portfolio of the first week of December and tested a 5 position portfolio. The setup: 2 days below RSI 15 and buy the next day open.

Results in Dec 9.59%, dd -2.15%. Number of trades = 16.

Results Dec and Jan 15.84%!!! % winners = 85.71%

If you send me the stocks you tested I could test a portfolio test for you.

When will you send the data from 2004?

Have fun.

Willem

Does TSM Provide Free Trials?

2010-01-09T08:29:00.000-08:00

Unfortunately, I don't provide free trials anymore.

The TripleScreenMethod.com homepage highlights the forecast record over the past 24 quarters, as well as provides sample page information. Essentially, for $25 monthly, I provide the following:

1. Monday--a weekly list comprised of stocks that show up on at least two of 15 fundamental screens and a value
analysis based on the next two years of PEG ratios (from 50 to 70 stocks);

2. Mon-Fri--nightly, at least one (usually more) TSM pick off the above list that is in pullback and ready to rebound higher
with both profit and a dynamic exit criteria based on the 2-period RSI (93% winners in most recent quarter);

3. Mon-Fri.--nightly, a naked Put option for the a TSM pick aimed at providing income (>18% annualized yield) with
10% dowside protection; 47 of 53 profitable positions this year;

4. Various articles detailing strategies for day trading, for deploying money at higher rates of return and for the performance
of technical indicators as they relate to fundamentally sound stocks. (see articles at http://www.tradingmarkets.com/.site/stocks/contributors/?contributor=Richard%20Miller)

Note too, after one month of taking the TSM service, I will provide you a copy of my latest report: "Writing Naked Puts: An Income
Strategy Realizing >20% Annual Returns."

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

How does One Sign Up for TSM's Twitter? ... Andy

2010-01-09T08:26:00.000-08:00

Hi Ric,

How do I sign up for the Tweets list?

Thanks,

Andy

..........

Andy,

A subscriber can go to http://www.twitter.com/TSM_rm and a non subscriber can go to
http://www.twitter.com/triplescreen. You open a free twitter account then submit a
follower application at either site.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Position Sizing for TSM Trades ... Harold

2010-01-09T08:21:00.000-08:00

Do you buy the same dollar amount each trade or the same number of shares 
when following TSM trades ?

thanks,

harold

..........

Harold,

I buy a fixed dollar amount based on a percentage of my account though I usually round off to the
nearest fifty shares. I allot 25% of my account to 10 long positions, another 30% to 15 naked puts and
another 30% to 10 long ETFs. In each case, I'm allocating a fixed dollar amount.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

TSM Strategy for Shorting? ... Richard

2010-01-09T08:17:00.000-08:00

I have followed some of your summaries with interest, and I do realize that even in declining markets there are always some profitable long positions that can be profitably taken.

However, just as it's easier to be long in bull markets it is easier and more profitable to be short in bears.

Do you now have, or are you planning to publish a similar analysis for the bear side when the market does turn?

Thanks,

Richard

...........

Richard,

I find it extremely difficult to make money on the short side with individual stocks. I would prefer to buy inverse ETFs or use a market strategy to short the SPYs. As far as the TSM approach goes, it now uses exclusively a long-side approach. Note, in 2008, the S&P dropped 38.5% while primarily the long TSM strategy returned +110.7%.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Excluding TSM Individual Stocks? ... Andy

2010-01-09T08:13:00.000-08:00

Hi Ric,

I am enjoying your excellent work and I’m working on trying to completely follow your method.

I noticed there are times when not all TSM stocks meeting the “criteria” are listed for the next days trading. In particular, I was curious about NTRI for Friday as an RSI (2) pullback candidate – especially since it has a Power Rating of 10 for 4 days straight now.

Are you skipping some stocks intentionally? If so, can you explain the reasoning?

Thanks,

Andy

...........

Andy,

I'm not skipping any intentionally. NTRI is on the Pullbacks list, which comes from a special Zacks screen that I've created. I list these stocks
because the screen has been powerful, but they don't necessarily meet the TSM criteria (main list), and I only use the main list to look for trades.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Using Options to Trade TSM Stocks ... Jeremy L.

2010-01-09T08:05:00.000-08:00

I am interested to trade the nightly RSI 2-based TSM pick with long options and wonder what you think is the best selection ?

I have always approached long options with a relatively deep ITM option at least 60 days out. However, for a trading style with an average hold of only a few days and a high winning %, would you think that ATM and around 14 - 34 days to expiration might be best ?

Best regards,

..........

I would use deep in the money calls (delta > 0.9) with at least 15 days to expiration (e.g., today, I would buy
Feb calls). Deep ITM calls will trade like the stock itself. You only run a risk of not getting an exit (RSI(2) >80)
before expiration.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Why did you change the TSM trade methodology? ... Andre

2010-01-09T07:51:00.000-08:00

Dr. Miller,

The change of methodology seems to be recent since I can see open trades on which I believed you were using
the prior TSM methodology.

May I ask you why you switched?

Having been through most of the material available on your web site, it appears that the other method was pretty
solid although the new one seems to be very simple in its application.

Thanks for your help,

Andre

..........

The prior approach was solid because of the TSM approach to picking a watch list,
which has not changed. Further, the strategy has always been buying fundamentally
sound stocks in pullback (buying temporary weakness) and then selling into strength.
Again, that has not changed.

What has changed is the qualification of the the two. The earlier method based entry
on pullback to major support (usually a major moving average-the 20-, 50- or 200-day),
a stop-loss criteria based on violation of that support and a profit target based on profit
size (more subjective).

As a scientist, I continue to research various aspects of the approach, and as an avid
follower of Larry Connors' work, I know the power of the 2-period RSI as a trigger for
entry and exit. My work suggests that it even works better for fundamentally sound stocks.

I like the automated nature of the trade (far less subjectivity): (1) TSM stock above its
200-day moving average, (2) 2 consecutive days RSI(2) below 15 (hopefully pulling back
to major suppor), (3) enter next day's open (limit order placed in evening at prior day's
close), (4) exit at next day's open after a close beyond 80 RSI(2) (definitely selling into
strength.

Too, from a risk control perspective, I want to trade from 5-10 of these positions at any one time,
as the average loss for the group has a very small probability of being negative.

Ric Miller, Ph.D.
6-Sigma, Master Black Belt

Buying Weakness and Selling Strength

2010-01-01T19:52:00.000-08:00

My statistical-based work over the years has clearly shown that one is far better off buying weakness (pullbacks) and selling strength (rebounds and breakouts). For example, buying 10-day lows is far more profitable than buying 10-day highs. Find several of my articles here.

Larry Connors reached similar conclusions with far more data and along the way developed the 2-period relative strength as an entry and dynamic exit trigger. I have incorporated this indicator in a new strategy for trading long fundamentally sound, TSM stocks. Further, I've now analyzed all the TSM stocks forecast in 2008 (S&P down 38.5%) and 2009 (S&P up 23.5%) with 80% plus winners in both markets. One simply monitors the 2-period RSI and when it falls below 15 for two consecutive days--buys the TSM stock either at the day's close or next day's open. On the other side, one sells the stock when the RSI rises above 80. I'll be happy to send a summary report on request @ rmiller@triplescreenmethod.com.