Essentials of the Crutch Trade

Essentials of the Crutch Trade Structure & Procedure Bright Retreat Primm Valley Presentation By Rob Friesen

Questions • Are you frustrated with the market? • Does the noise chop you around? • Are you looking for rules to frame your trades? • Would you like to reduce the frequency and the $ amount of your losing trades? • Is it really possible to trade with the wind at your back?

Structure for Noise • Noise, News and Tickitus are undermining your Trading • Make Plans when the Market is Closed • Structure and Flexibility • Pairs help control emotion • Expectation, Discipline, and Multiple Samples • Art and Science can be combined through the Crutch Trade

What is a Crutch Trade? • There are different approaches to engaging a crutch trade (so not just one as the right way) • Foundationally; its genesis is a pair trade • It is a trade that is placed on various probability sets • The trade has a back up plan…in the form of a hedge…that’s why it is called a crutch trade • It provides the mechanism to reduce whipsaw and overcome noise • Imagine every trade as a win, win or wash

What it is Not • Not some rogue pair trade • Not an excuse for recklessness • Not originated from a predictive mindset • Not the right to stay in a losing trade indefinitely • Not a justification to average down • Not used as a standalone and exclusive strategy

Structure & Procedure • As the crutch trade originates from pairs, a sound pair biz plan is still necessary. Without this structure, it is too easy to “wing” or “cowboy” the trades. • Choose the pairs you want to trade • Good candidates may include: • Stock Specifics: • Strong Correlation with the SP500 (>80%) • Fundamental Soundness • Prices under $100/share • Stock ATR’s above .75 • Liquidity: Depending on what size you are trading…at least 100,000 shares for each 100 share trade you wish to do.

Structure & Procedure continued… • Gather all pertinent stock information • Gather Pair information • Pair Specifics • Stocks in same industry group • LT Darren’s Ratio should be above .12 • Strong Correlation with each other (>85%) • Ratio should be .50 or greater • Pair ATR should be .50 or greater "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.“ - Warren Buffett

Trading Considerations • Position sizing • Liquidity • Volatility (Greater = Less shares) • Trader Net Liq. • Never More than 6X your equity in any one pair so construct your trades small enough if you will be adding to an initial trade • Risk to Reward Set-up • Market condition or backdrop • Fundamentals • Technical's • News

Trading Considerations continued… • Dollar neutral • ATR neutral • Share neutral

Probability Sets • The Crutch Trade is initiated on a “duck list” of probabilities. (Refer to Bright Duck list) • Moving Averages / Trend lines • Bollinger Bands • Oscillators • ATR’s and STDev • Ticks • Prem • Personalities in the Pit (Squawk Box action) • Time of Day

Example of Bollinger Bands

Overlay Cycles

Hard Side First • As we stated at the beginning of this presentation that the Crutch Trade is not based on “predicting” what the stock was going to do, but rather a trade that was taken as a result of probabilities that lined up. We then need some rules of entry and some hard-side first discussion.

Hard Side Considerations • Spread Number is core decision maker • Don’t Crutch Trade a Correlated Pair without a spread number to watch • Know what the ranges are so you identify good spread numbers • Futures • Context, Engine of Day, Multiday Ranges • Trend • Overall • Intraday • Matrix

Hard Side Considerations cont… • Liquidity • As a general rule, the less liquid stock is the hard side • Watch the bid ask spread • Many crutch traders prefer to trade the less liquid stock as their first trade and use the liquid one as their hedge if they need it. • Relative Strength • How are the stocks performing relative to the market • Relative to each other

Taking a Trade • Live in the moment. Be aware • Identify the probability set-ups • Watch for a good spread price • Enter the Hard Side • In most cases in current market conditions you will look for a pull-back or discount on this trade. (Passive fishing order) • Allow for the noise and chop and maintain your perspective • Make money

The Hedge • If you wanted .25 from your win then be willing to allow .05 to .10 of loss before hedging. • If you see that your trade is wrong, then hedge • Allow at least ½ an Pair ATR before adding a second layer. Remember you are a trader, not an investor • 2 Layer Maximum • Stop Loss or Reduce and Re-trade

Win, Win, or Wash • Win: Original trade Works • Win: Hedge original trade, wait, then take profit • Wash: Don’t want to hedge…wash trade or take a few cents loss and wait for a better entry • Wash: Add Second layer, take average and wash at first chance • Or…you can always trade for production on that second layer using your first one for information

In Closing • Live in the percentages • There is no guarantee on any trade, only the probabilities to place bets on • Keep developing the structure so you can compound your edge • Discipline, Discipline, and more Discipline • Watch for changing market conditions and trade accordingly • Adapt • Love what you do and have fun!

Essentials of the Crutch Trade