HOW DOES TACTICAL TRADING WORK?

Tactical Trading is a trade management system, not an investment selection strategy. You will see how a simple mathematical algorithm can turn a modest 10% buy and hold return on a position into 100% to 300% or more over the same holding period.

For simplicity, I will be using common stocks in my examples. However, the system you will learn works on stocks, exchange-traded funds (ETF), options, commodities, and mutual funds. The system can be used to go long, sell short, run pairs trading, and for market timing.

I will begin with a history of how this system was developed, then explain in detail how and why it works. You will be able to understand the basics of the system with just a coin toss, pencil, and paper.

The system is based on a proven mathematical algorithm that works with any strategic stock selection or market timing system. Mathematically beating the stock market involves algorithms that work consistently and produce large profits.

Countless efforts have been made by investors and traders to mathematically beat the stock market. Most of the time, these efforts failed, producing instead just another decision-making technique bound by screening rules, probabilities, rankings, and profits offset by losses.

Persistent failures resulted in common thinking that there is no true mathematical solution to beating the market. But they were wrong; it has been done.

The answer was not found in a strategic stock selection system, where everyone was looking, but in a system of trading tactics!

Tactical Trading uses an exact mathematical algorithm that works every time, not a percentage of the time. Tactical Trading includes many of the features of dollar-cost averaging, scalping, swing trading, and trend-following strategies.

Because the underlying algorithm is mathematically perfect, any risk using the system lies in stock selection and market impacts. Drawdowns are minimal, and profits are exceptionally high. Tactical Trading has mathematically beaten the stock market.

The Tactical Trading algorithm produces an exact solution to a two-occurrence random walk, although randomness is not a requirement for the system to be profitable. This two-occurrence random walk is illustrated, for example, by flipping a coin or in the game of roulette, where you can bet on black/red or odd/even.

In the application of the algorithm to the stock market, the two occurrences are when the stock moves up and when the stock moves down.

The algorithm is based on the manipulation of a numerical series; I will use a series of 1 2 3 4 in my example, and we will presume we are betting on black in a roulette game, where black is a win and red is a loss.

The known win amount after concluding the cycle is the sum of the series numbers. Our 1 2 3 4 series will net 10 when all numbers are crossed off.

My bet size of any chip denomination is determined by adding the two end numbers (the first and last numbers) of the series together. If I win, I cross off the two end numbers; if I lose, I add the sum of the two end numbers to the end of the number series. Then I add the two new end numbers together and bet again. When all the numbers have been crossed out, the cycle is completed.

For example, let’s use the number series: 1 2 3 4

The sum of this series 1 + 2 + 3 + 4 = 10. This is your expected win amount for this cycle.

Bet the sum of the first and last numbers: 1 + 4 = 5

Say you lost, so you note the value of your loss (5) at the right end of the series.

The series is now 1 2 3 4 5

Bet the sum of the first and last numbers: 1 + 5 = 6

Now you win. When you win, you remove the first and last numbers in the series. In this case, the 1 and 5.

The series now is: 2 3 4

Add the two end numbers together and bet again. 2 + 4 = 6

You lost again. Remember when a loss occurs you append the previous number to the series, the 6.

The series becomes 2 3 4 6

Again, add the two end numbers and bet. 2 + 6 = 8

A win! Remove the two end numbers, the 2 and the 6.

We now have the series 3 4

The series is down to two numbers, which makes them the end numbers. Our next bet is 3 + 4 = 7

Great luck, a win. When we cross out the two end numbers, the 3 and 4, all the series numbers have been crossed out, and the cycle has finished.

Our bets were: 5 + 6 + 6 + 8 + 7 = 32 units. Our winnings were: 12 + 16 + 14 = 42.

When subtracting the bet units from win units, the result is 10, exactly as expected.

In this example, I simply alternated between a loss and a win. Even if this activity had occurred randomly, when all the numbers in the 1 2 3 4 series are crossed off, I will always win 10 chips in the end. A series of 1 1 1 will net 3 chips. 3 6 9 12 15 will win 45.

You will learn more about this, the foundation of Tactical Trading, in a later chapter. If you can’t wait, go ahead and try this series yourself by flipping a coin, heads a win, and tails a loss. You will see that it works every time.

When applying Tactical Trading to the stock market, the chips are shares of stock. I will introduce you to what’s called the “shares per series” as well as the “trade range.” The shares per series (SPS) multiplier is what will determine how many shares to buy or sell. The trade range tells us when to buy or sell based on price movement.

To provide a quick example of the power of tactical trading, let’s run the 1 2 3 4 series again using shares of stock rather than chips.

Our setup will be on a $10 stock. I’ll use a shares per series of 100 and a trade range of $1. If the stock rises by $1, I will sell, or have a “No Action” (NA). Conversely, if it falls by $1, I will buy.

To figure out our win amount, we sum the series: 1 + 2 + 3 + 4 = $10.

$10 multiplied by the trade range is $10.

$10 multiplied by the share multiplier of 100 gives us an expected win amount of $1000.

Remember that we know what our trade will be by summing the two end numbers of our cycle series. In this case, we are using 1 2 3 4, and the two end numbers add up to 5. The 5 is multiplied by our share multiplier of 100. The system is telling us to buy 500 shares of our $10 stock.

Follow along:

The first order is to buy 500 shares at $10

Referring to the above table, allow me to explain the steps taken.

1) We began by buying 500 shares at $10, creating a cash debit of -$5000.

Summing the two end numbers, 1 + 4 = 5, times the share multiplier of 100, tells us to buy the 500 shares needed to start.

2) The stock went up by the amount of the trade range of $1 to $11.

We cross off the two end numbers, making our updated series 2 3.

The system tells us to own 500 shares when the stock trades at $11, which we already do, so a “No Action” is required. No shares are bought or sold when a no action occurs.

3) Next, the stock falls by $1 back to $10, a loss. The system tells us to sum the two end numbers and add the result to our series, now 2 3 5. This tells us we need to own 700 shares. We already own 500 shares, so we add 200 at $10. Our cash debit is now -$7000.

4) Now the stock ticked up by $1, a win, so we cross off the two end numbers of our series, which now becomes a single number, 3. We own 700 shares, the system says we should hold just 300, so we sell 400 shares at $11. The cash debit is reduced to -$2600.

5) Our stock pulls back to $10, a loss. Our now single-number series is treated as an end number, and our series is now 3 3. We now should own 600 shares but only own 300. We add 300 shares at $10. Our account debit is now -$5600.

6) Our series is now 3 3. The stock goes up by $1 to $11, a win, so we cross off the remaining two numbers. This completes the cycle, and we are to own zero shares. Therefore, we sell our remaining 600 shares at $11 and take in $6600. Subtracting our existing debit of -$5600, we are left with a profit of $1000.

If you took notice, throughout the cycle, the stock only alternated between $10 and $11, and between a win and a loss.

Had we simply bought the initial 500 shares at $10 and sold them at $11 (same ending price as the system), we would have made a buy and hold profit of $500. Instead, the Tactical Trading system produced a $1000 gain; double the buy and hold profit.

The mathematically perfect algorithm, through tactically buying and selling shares at a predetermined price level, will always outperform a buy and hold stock position except in a few circumstances.

Using the Tactical Trading system, we doubled the buy and hold profit and made $1000! Imagine the compounding of profits trading a stock in the system, cycle after cycle..

In the upcoming chapters, you will learn how to choose the best stocks for the system and how to properly adjust share size, trade range, and trade frequency.

In conclusion, Tactical Trading is a powerful and proven trade management system that can generate significant profits in the stock market. By following the mathematical algorithm and tactically buying and selling shares, you can maximize your returns and outperform a simple buy and hold strategy.

The system works consistently, regardless of market conditions, and can be applied to various types of securities. In other help articles, you will dive deeper into the specifics of the system and learn how to apply it effectively for your trading success.