Comment on Neely Set-Ups

My Experience with Neely’s System

I’ve posted in the past few days here and here on a Neely crash call.  We have a small bunch of regulars here who have seen me post on Neely enough times that I assumed everyone already knew my general views on him.  But let me restate these views for anyone new who might wander in.

Like everyone, Neely has stronger and weaker trading set-ups.  I posted about this set-up because it is one of his stronger ones.  He has a good record when it comes to a call this strong.

However, even with that good record, I prefer not to use Neely’s entry points and stops, which is why I also posted my own. I subscribed to Neely’s service some years back for a period of a few months because I like his book, The Neely Method.  I’ve gotten a number of valuable trading set-ups from his book.  (Ironically, he didn’t use, or even seem to recognize, many of those trading set-ups himself at the time I subscribed.)

I didn’t continue subscribing to Neely because, after a few months, I felt I knew how to use his trading discoveries better than he did.

Big Fluctuations are Characteristic of Many Trading Systems

At the time I subscribed to his service, Neely tended to jump in to a trade the moment he had confirmation of a trend change, which tended to be far from the top, and then set a stop a big distance away.

This is not an unusual or incompetent way to enter a trade.  The Turtle Traders entered trades on breakouts from 20- or 50-day trading ranges, with stops set according to recent volatility (2 ATRs, or average true ranges, away).  Since tops and bottoms are often characterized by high volatility, the Turtle Traders often used stops as far away as Neely’s, and they made a fortune.

With these types of systems, you have to accept from the start that your bankroll is going to go through huge fluctuations.  It would not be uncommon for someone using the Turtle Trading system to lose 2/3 of his trading bankroll at some point due to normal losses from stop-outs.

The key to surviving a system like this is proper risk management, which means limiting risk by strictly limiting bet size to a small fraction of your bankroll and diversifying your trades.  One problem with the recent tendency to Fed-managed markets is that all markets have tended to move in sync with Fed actions, and that hurt common risk-management strategies.

Without proper risk management, you are virtually guaranteed to go bust with a system like Neely’s or the Turtle system. Jesse Livermore used a similar system without proper risk management and went bankrupt several times.

I recommend reading Way of the Turtle by former Turtle trader Curtis Faith for the best discussion I’ve seen of trading entries, stops and risk.

How I’m Using Neely’s Call

I hate loose stops and I hate big hits to my bankroll and I hate big negative fluctuations.  That’s why I don’t use Neely or Turtle entry points and stops, even though I recognize that for many people they’re the best way to go.

I always post my own triggers.  I don’t post stops because everyone is using different trading instruments, and some people are going to stick with a trend all the way and others are going to hop in and out on small moves.  You can’t set a stop for a trader without knowing these factors, so instead I try to give an idea of what would tell you a trade is going wrong.

I regard Neely calls as something to keep in mind, not act on. I showed my own potential crash set-ups on the long-term charts here. The trading set-ups I post are never predictions.  They are set-ups to bet if the set-up actually triggers.  If the set-ups don’t trigger, we’ll see a different set-up for another move up and I’ll post about that.

Short-term, I still expect the markets to go higher, but I’m very watchful right now for something unexpected.

In Conclusion

Neely’s system is a valuable tool to be used in trading. I have a lot of respect for Neely. I’ve learned a lot from him. Neely has provided trading set-ups that will make money over the long run if used with proper risk management.

No trading system, including Neely’s, can predict the future, and any trading system, used without proper risk management, is a favorite to kill your bankroll.

The Original Turtle System Gives a Short Signal on the SPX

Turtle System Short Signal on SPY

Turtle System Short Signal on SPY

The price on the SPX broke downward out of a 20-day price channel yesterday. The original Turtle System, as described by Curtis Faith in Way of the Turtle (a book I highly recommend), called for traders to enter short positions on a downward breakout from a 20-day price channel.

In fact, the price moved far enough after the breakout for the original Turtle system to have called for traders to add to their original short position. Continue reading