Money Manager and Trend Follower Explains How to Stay Dynamic and Balanced in Trading
Being one with your trading takes patience, discipline, and consistency. We brought in a trader who practices all three to answer questions from the StockTwits community.
Cody Freeman graduated from The Evergreen State College in 2006 with a Bachelor’s Degree in Finance and Economics with a Minor emphasis in Business Management. He began managing private investments in 2010 once he developed a price based system following the 2008–09 Bear market. His formal training in no way prepared him for what occurred during that collapse and he knew he needed something more. He now manages client assets, provided educational material, and stock picks at ZenTrendsTrading.com with the discipline he’s learned over 15+ years of stock market experience. His philosophy is to stay dynamic in his mindset and learning, but always remaining disciplined is the core strategy. The core strategy has deeper Trend Following roots but also integrates a longer-term Swing Trading element to capitalize on faster rotations of funds. What follows is a recap of the Q&A. For the full transcript please GO HERE.
To start I’d like to thank StockTwits and the community for letting me share today. I am honored. Thank you.
Can you explain your technical approach and how that fits into your trading strategy? — michaelbozzello
My technical approach makes up roughly 90% of my strategy. I look for turning points in long-term uptrends. I always start with the monthly timeframe. That gives the big picture look and lets me know major momentum is on my side. The 20 Month SMA is my guideline for trend health. Price above that is positive, below negative. I want to see price come into the rising 20 Month SMA after multiple months of consolidation..years even better. The larger the base, the higher the move in space as they say. I look for tight monthly bases near a rising MA. Once we have established the Monthly is in position, I wait for a breakout to begin a position. Stops are placed below the most recent swing point near the 20 Month SMA. This is my risk. Once I have established a Monthly position I will then look for the Weekly chart to show the same pattern. This is when I will add to my position with a Weekly basis stop. I prefer to manage a position with multiple timeframes. The first long-term position is the Monthly basis, meaning stops are on the close of a monthly candle. About 1/3 of my total position will be based on that, then another position will base around The Weekly timeframe with a Weekly closing stop. Two trades for the same position using multi-timeframe.
Here is an example of an ideal monthly signal:
Here are some subsequent Weekly “add” locations:
Stops are always managed based on the timeframe of the signal and placed near the moving average + swing low.
What does your analysis say about $RADA? — BillWilson777
Overall $RADA is in too much of a downtrend for me to be interested. Its a bit sloppy and choppy.
Although if you just look at this recent pullback on the monthly, this is not a bad Bull Flag.
Overall though I prefer a stock that trades well and doesn’t have large unpredictable swings. Ultimately we cant control what the market does, but we can control how easy or difficult we make it on ourselves. I prefer a smooth trading stock on the larger timeframe and then look for chances shorter-term to be aggressive.
How does $REN look from RS and trend standpoint? Chart looks great to me! — BillWilson777
$REN has an interesting look to it and a very tight Bull Flag pattern on the Monthly timeframe.
$REN triggered a Monthly buy signal at the close of January with a stop placed at 28.70 on a closing basis. Drilling down to the Weekly view it is trying to break from a new Bull Flag this week. Over 34.91 would confirm.
Should this hold into Friday’s close, a Weekly position could be added with stops at the key low of 31.35.
Please give your analysis on $TNA. — nakukavali
$TNA is a 3x Small Cap ETF and looks quite similar to $IWM which is bullish on the Monthly chart.
The pullback and rotation off the 20 Month SMA is very positive in my view and wouldn’t want to see it below that. The Daily chart looks like it wants to retest the horizontal resistance from 72.50–70.50.
I think it looks very good above that area and this is normal digestion of the recent run. It would really need to hold above $63 for there to be any intermediate term trend
How can you tell when a stock is about to turn using the RSI? and is the default of 70 and 30 good indicators? — kcpride
I really don’t use RSI. I know some do and it can be useful but personally I don’t get anything from it
Do you suggest $NVDA in a portfolio? What stock is a must for you in this moment? — XanderBaldwin
$NVDA is a tremendous trend, but not ideal for my strategy longer-term here. Proper entry for me was back in 2015. If I had to pick a “must” stock it would be $AMZN, but I also don’t think it is an ideal buy here. In general there are no such things as “must own” stocks for me. I hold as long as my strategy is valid otherwise I move on. If the pattern remains intact and the trend is in my favor I will hold.
What’s your favorite sell signal? — bxvets
My favorite sell signal would probably be a Bear Flag pattern with a stock trading below a declining 20 Month SMA.
When the trend is lower I look for retracements into the falling moving average and then a close below the prior bar. As a “stop” indicator, generally a break below the 20 Month SMA is a pretty solid “get out” signal for me.
What are your relative strength indicators telling you at the moment for the S&P500 Index for the next 6 months? — sautterinvest
As far as Relative Strength is concerned I don’t have a “general indicator”. Relative Strength for me is based on how an individual stock is performing relative to the index. I look for stocks that pullback less for example. Or if the market pulls back to the 50 Day SMA I look for stocks that held the 20 Day an so forth. I don’t believe Relative Strength is a predictive indication, but it shows where money is flowing and that is important. I want to be looking toward the stocks that hold the best and are stronger than the overall market.
How specific should my trading plan be? — bigfry
A trading plan needs to have multiple levels I feel. The main function is to be an outline (buy stocks in uptrends). But it should also include how much you will buy on a new position, where stops are placed, what is the buy trigger and mine includes things like only be long stocks above a rising 20 Month SMA, enter after tight consolidations, The buy trigger is a closing bar above the prior month’s high, Stops are placed below the most recent swing low, Enter new positions with 0.5% of total account risk. For example $100k account can risk $500 per trade in risk per share. Exits will be take based on portfolio re-balance at 50% profit, 100% profit, Tag of key extension target, or stop out That’s pretty much the gist. It needs to be specific for certain details such as entry size, signal, and exit. but then can be more general for overall pattern and price structure you look for. i.e. tight consolidation in a uptrend.
Whose software do you use to chart? And is it more important to look at weekly? — michaelhearn
I use TC2000 for my software. I prefer their layout and simplicity, but it is also quite robust for scanning. I really like the Weekly charts. I feel it is important to give price time to digest rather than make daily knee-jerk reactions to every data point that comes across. With a weekly view you eliminate a huge amount of noise. You are not forced to make a decision every signal day, but can let some things play out a bit and prove themselves. Plus I feel Daily charts are much more likely to be trapped as the majority of traders/media fixate on “today”. Most traders simply do not have the patience to sit through a few days worth of movement yet I find tremendous success in giving the market a little wiggle room to show what it really wants to do. I am also a believer that the larger the timeframe the more robust the signal and the larger potential move.
How can I gain more knowledge on the markets, so I can be able to understand everything better?— Jtobar85
That’s tough to answer simply. I’d say find experienced traders you trust and ask them questions. Often you have to pay for an education. Start by trading small and getting a feel for how the market works, make notes You really have to study the market and find out what works. Look for patterns, put the time in. Journal your thoughts, feelings, trades, and then review that as time goes on. I would also say once you find a trader who you trust and like their style try to reach out to see if they offer more. In the way of a service or mentor-ship. It helps to watch successful traders work and learn from their process I have been mostly self-directed but have worked with a few traders over the years and it helped tremendously I had to pay for their services in most cases, but the education was invaluable. Learning the market is like anything else. You need a mentor, you need to study, and work really hard.
View on oil and gold for 2018 — realitystrikes
Oil continues to emerge from a large base pattern and looks bullish.
Zooming in on the weekly there is a nice consolidation happening to digest the recent rally
Gold is more of a mess but longer-term It appears to be building a large base
If you zoom out the GLD this correction has come back to the 61.8 Fibo
I think there is definite potential in Gold and Gold Stocks, just it is a hair early. Choppy for now = patience. The move when it does occur could be very powerful, but most are too eager and are being beaten up.
Do you believe technical s alone is enough? — jtei
I believe Technical Analysis along “can” be enough. But why limit one’s self to an either/or? The primary factor of the risk management and profitability is the Price action. But fundamentals can help too. I focus on Sales Growth as my metric of choice as I trade mostly growth stocks. I like stocks breaking out w/ strong sales. Often you can find “inefficiency” with a stock price relative to Sales Growth. I use $PANW as an example:
I like to plot 1-year Sales with a monthly chart. In this case PANW hit all-time highs with sales at $928 Million. The stock then digested for 2 years while Sales grew. When I entered on 1/31/18 Sales were $2 Billion and the price was 25% lower than the prior all-time high. That is a place where fundamental strength confirmed my theory on price action. But for exits I will always yield to price. We have to manage risk at all times and price is the cleanest measure of that. Fundamentals can tell you what to buy, Technicals can tell you when to buy. They work well together, not apart.
Do you use A/D line or its divergence with price as an entry signal? If yes, any specific setting or time interval? — Optioneer
I do not use A/D line for signals. Although I look at Breadth for divergence and I think both can be used for that. Its nice to see the confirmation of A/D or Breadth, but if price suggests something I try not to go against it.
Why did it seem as though, the stock price went lower as soon as i sent my order? I watched the chart for 30mins. — OGDollaFieldz
Markets move in mysterious ways, I’ve watched charts for more than a decade and they still do things i dont “get” Its not so much the exact tick that we should focus on, but rather the larger pattern and structure of price.
I have been tweaking RSI. I adjust both support/resist lines, also adjust the period. It’s been good. Comments or personal experience? — LT52
I really do not use RSI. I think it can be helpful for divergence and momentum, but I do not spend time with it.
What do you think of the stock price of Alibaba, especially in comparison with Amazon? Especially considering P/E…? — vegadeluxe
I think both $BABA and $AMZN are tremendous. I own both. BABA is newer as a stock and gives “inefficiency value”. As far as P/E is concerned I rarely look at such things. There is no way to try to value a growth stock in that way. P/E for AMZN has been “unsafe” since it came public. That was 18000% ago. What good has it been? That said, BABA looks much “cheaper” on this metric than AMZN, but there are other factors to consider. AMZN is a US based Co and BABA is Chinese. Maybe some added safety to AMZN in that case? I don’t know. As w/ both I would yield to the overall trend and get involved when I could. I think both will be around a long time. Sales Growth is a much more important metric to gauge in these situations. And both have very strong growth.
What elements of human behavior do you count on the most in your analyses? — Jayhead13
The biggest elements in human behavior I focus on are lack of patience and discipline. Most traders are much too focused on short-term reward and fixate on the Daily and lower timeframes. Due to that, most all struggle with each other and get taken advantage of by media and algos. Long-term trends/swing trades are “too slow” and boring for most, but that is where the big moves come from. I find that to be successful you have to do what most are unable or unwilling to do. In markets that means being more patient, more disciplined, and looking where most are not.
How do you stay calm when it feels nothing is working? Do you practice something personal or learned over the years? — scheplick
Well for me I believe so strongly in the process I put forth that I know there will be inevitable drawdowns. I think we only truly despair when we lose hope. Losing hope from trading to me means we don’t trust what we are doing. There will be times when not as many of our trades work out, but we know that we took the high odds bet. If we take the high odds bet long enough and enough times we will come out ahead. This is a trust we must have. Not all strategies are going to work all the time, this is another realization we need to understand. Probably the best advice I can give on a losing streak is to reduce trade size until confidence comes back. Maybe take 1/2 the normal risk you normally would put on until you can regain that trust in the process. Honestly when I have a losing streak I get sort of excited that I know the pendulum is about to swing back big. The key is to not try to force something to “make it up”. You have to maintain discipline and stay to the process Also I try to trade multiple timeframes so when one isn’t working I can try to compensate by shifting gears. I know that’s not for everyone, but it seems to work for me. If NOTHING is truly working, take a break. Step away from the screen for a week or so. Come back fresh and reevaluate. The market will always be here. We don’t have to trade all the time. If confidence breaks it might be time to recharge
What is your favorite indicator and why? What is the most misunderstood indicator people use? (technicals) — macrochartfreak
I really dont use many traditional indicators other than moving averages. MACD is probably the only other I feel MACD is misunderstood. Too many focus on the “crossover”, if it goes up its bull, down then bear I find it to be most useful as a “trend health” indicator rather than a direct signal generator. The crossovers can matter but its more important if its above or below the Zero line. Above Zero is an uptrend Below the Zero line is a downtrend or choppy market. I also use it to find divergence on lower lows. Although this is a very minor part of my analysis Generally I am not buying off of lows so divergence is more for info than as a signal generator Price, Breadth, and Moving Averages are my primary indicators. With price being 90% of the process.
What tools do you use to manage risk? Can you share with us a trade or investment decision you regret? — Lonesome
To manage risk it really comes down to position sizing and price action. I always keep my position sizes uniform in terms of risk to the overall account (always risking the same % of account). This helps keep the portfolio balanced and doesn’t let any one position get out of proportion. Stop losses are the key to any risk management and must be obeyed. I was thinking about this question a bit in terms of an investment I “regret” and honestly I couldn’t think of one. I can certainly think of a hundred investments or trades I made that lost money, but those are not regrets. If I follow my plan losses are certain to occur, but its only regret if we do something out of the plan.
Hi Cody. I use the 14 and 5 on the RSI, MFI and intermediate plot on the market forecast for strength what do you use? — CMTrading
I really don’t use any indicators. I measure Breadth of the Top 90 stocks in the S&P 500 and track them weekly. I track the $XLY:$XLP ratio and trend as well. These are my main tools for determining “health” in the market. Otherwise I am focused “Bottom Up” to find stocks behaving well and moving out of coiled patterns longer term.
Out of these 6 stocks, would you consider any of these a buy. $TV, $CELC, $CHU, $JT, $BPMP, $AM? — tonyvincent
I looked through these tickers and they are all trading near recent lows. That is not my strategy. I want stocks that are acting well/turning higher out of coiled base patterns. These are breaking down near lows.
How do you decide what to risk on each of your entries? How do you handle bad losing streaks? — JBstock88
Risk for entry is always based on a set amount of risk % of the total account equity. Assuming a 100k account size, and my risk is 0.5% of that amount ($500). I determine the risk/share as subtracting the entry price by the stop price and then divide that number by $500. That’s how many shares to buy. This keeps positions uniform in terms of risk in the account and not left to a whim or decision on “how I feel”. Assume entry at $45 with a stop at $40. Risk per share is $5. 0.5% of 100k account is $500 = buy 100 shares. I will be making a new “position sizing” video for our free educational page at zentrendstrading.com soon. Losing streaks are part of the business. The key is to stick to the process. Can also size positions a little smaller and risk less until confidence returns. In an extreme case take a break from the market for a while and reevaluate.
Risk mgmt: are positions sized alike or differently? If not stopped out/exited, do you adjust position higher/lower as it progresses? — edwardrooster
Positions are sized similarly in terms of % of portfolio risk. Some grow larger due to there performance. I will add to a winning position if it forms a new pattern and triggers, allowing to trail stops and recalculate risk/share. As for sizing down sometimes we will use a faster timeframe to manage risk in the event price extends significantly. In general I like to hold a Monthly, Weekly, and aggressive position in a stock at the same time. This allows for flexibility. If the shorter timeframe fails we will get stopped on the “aggressive” portion, but still hold the Weekly/Monthly. If the Weekly fails we will stop there and still hold the Monthly. This allows us to scale out as risk increases.
What sites do you recommend for a new trader to use for education? — farmerscott
Free resources I would recommend stockcharts.com as they have a lot of info on technical indicators. Investopedia is a good resource for terminology and concepts. Often a higher quality broker like TD Ameritrade will offer a lot of educational resources for account holders. Then of course I recommend our site and services at zentrendstrading.com ; ) A great site for news and fundamental data is finviz.com. One of my go to sites for reference.
If you have any further questions I can be reached on Stocktwits and Twitter @ZenTrends or on our website zentrendstrading.com
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