Waverly Advisors publishes our full technical research weekly on Monday, as well as a short daily update Tuesday – Friday that is designed primarily to communicate any necessary changes or adjustments to trades, or any new trade entries. We focus on the technical and tactical structures of all liquid major markets we follow and in which we may execute trades. These are, primarily: stocks (international indexes, domestic sectors and individual names); stock index futures and ETFs; interest futures (Treasuries and euro); currencies, both futures and cash currencies: (EUR, JPY, GBP, AUD, CHF, CAD, and common crosses such as EUR/JPY and AUD/JPY); metals; energy futures (WTI crude, RBOB gasoline, heating oil, natural gas); grains (soybeans, wheat, corn, and oats); and selected softs (sugar, cocoa, etc.).
We are not predictors or pundits. Our reports are designed for both the active trader and portfolio manager who are looking to initiate trades and manage risk in these markets. There is a tremendous difference between tactical trading and predicting the future. Our calls indicate a specific directional bias, within specific price structures, over a specific period of time. Rather than saying “market XYZ is going up”, our calls are structured more like this: “market XYZ, currently at 10.00 has a higher probability of trading to 15.00 than to 5.00 over the next 3 months. We are taking a long position at this price, and price movement to the stop level, 9.00, would invalidate the trade.” Trade management and risk management are crucially important parts of the process.
How Integrate Our Research into Your Process:
Our client base is diverse, and our clients use our research in many ways:
- To replicate and follow the trades we take. It is possible to simply use our published trades as stand-alone trading ideas. You do not have to trade every market we follow, but we do advise that you take all trades in those markets that you do follow. Furthermore, if you choose to not trade a market, then do not take any trades in that market. (If you do not trade soybeans, do not take a random trade in soybeans because it “looks good”.) You may also choose to manage the trades differently than we do (e.g., using different stop points or different exit strategies). This can also work well, but make sure you understand what we are doing and why we do it so you can make reasoned changes to our approach.
- Use our work as an input to your own process. There are many ways to do this. For instance, managers may use our directional biases to inform their own investment processes, using tactical inflections we identify as points to execute. Others may take markets which we flag for potential interest as a top-level screen and then work down from there. Be careful of anticipating market developments that may not happen; we often speak of “setups” or conditions and wait for triggers to actually enter a market. If those trigger conditions are not met, there is no probabilistic tilt. We also offer a number of data tables and quantitative analyses of markets that can augment another investment style or approach to managing risk.
- Use our work to derive return, risk, and correlation assumptions to be used as inputs for models. If you use MPT, multi-factor, or econometric models in your investment process, those models are only as good as their inputs. Our quantitative work offers significant improvements over the typical guesswork that goes into deriving return assumptions between rebalancing periods.
The Waverly Trading Process
For discretionary trades, we typically advise on potential trade entries weeks, or, in some cases, months in advance as we see structural factors align to support the trade. In other words, if we are taking a position in Gold, you will usually know our thought process on Gold because we’ve been writing about it often. System trades also publish entry levels far in advance; readers are advised to check the system tables daily for markets they trade.
Our tactical trades focus on two timeframes: short and intermediate term. Short-term trades can be thought of as trades made on the daily timeframe, with anticipated holding periods of 3 days to 4 weeks. These are trades for more active traders, or at least for traders who can monitor positions on an end of day basis. Intermediate-term trades are essentially on the weekly timeframe, with anticipated holding periods of 1 to 6 months, with some holds extending more than 18 months. These are trades that are more appropriate for portfolio managers, investors, or traders. Some clients choose to take both sets of trades, but it is important to understand the potentially correlated risks that arise in some cases.
Typically, we will discuss a setup and then an actual entry trigger. This entry trigger may take the form of a stop price (e.g., “entering on a move beyond 1,200”), a stop price qualified by a close (“entering on a close above 1,200”), or a level qualified by a specific type of price movement (“entering on strong momentum above 1,200”). The last is potentially the most confusing, and will often result in slippage (where the entry price occurs at a less advantageous price than the reference level), but this is an important tool for traders who can monitor markets intraday. If you are unable to make entries or adjustments intraday, an entry could be made on the close of that day as well. In most cases, precise entry prices are not as important as getting the position on.
We also will list stop prices for each trade—the most important question for a tactical trader is “where am I getting out if I am wrong?” There are two types of stops: the initial stop and a modified stop. The initial stop defines the total risk on the trade and is executed if touched. Barring an unexpected event such as a large gap (which do happen, though they are somewhat rare), a trade should never incur a loss past that original stop level. Modified stops are used to reduce risk in open positions, and are raised in the case of stops on long positions, and lowered from the initial stop level for short positions. Stops generally should work in day session only, as opposed to limits for taking partial profits—these should work GTC in all sessions.
(Read about how to size trades.)