Essentials of the Essentials of the CrutchCrutch TradeTrade

Structure & ProcedureStructure & Procedure

Bright Retreat Primm Valley PresentationBright Retreat Primm Valley PresentationBy Rob FriesenBy Rob Friesen

QuestionsQuestions

Are you frustrated with the market?Are you frustrated with the market? Does the noise chop you around?Does the noise chop you around? Are you looking for rules to frame your Are you looking for rules to frame your

trades?trades? Would you like to reduce the Would you like to reduce the

frequency and the $ amount of your frequency and the $ amount of your losing trades?losing trades?

Is it really possible to trade with the Is it really possible to trade with the wind at your back?wind at your back?

Structure for NoiseStructure for Noise

Noise, News and Tickitus are Noise, News and Tickitus are undermining your Tradingundermining your Trading

Make Plans when the Market is ClosedMake Plans when the Market is Closed Structure and FlexibilityStructure and Flexibility Pairs help control emotionPairs help control emotion Expectation, Discipline, and Multiple Expectation, Discipline, and Multiple

SamplesSamples Art and Science can be combined Art and Science can be combined

through the Crutch Tradethrough the Crutch Trade

What is a Crutch Trade?What is a Crutch Trade?

There are different approaches to engaging a There are different approaches to engaging a crutch trade (so not just one as the right way)crutch trade (so not just one as the right way)

Foundationally; its genesis is a pair tradeFoundationally; its genesis is a pair trade

It is a trade that is placed on various It is a trade that is placed on various probability setsprobability sets

The trade has a back up plan…in the form of a The trade has a back up plan…in the form of a hedge…that’s why it is called a crutch tradehedge…that’s why it is called a crutch trade

It provides the mechanism to reduce whipsaw It provides the mechanism to reduce whipsaw and overcome noiseand overcome noise

Imagine every trade as a Imagine every trade as a win, win or washwin, win or wash

What it is NotWhat it is Not Not some rogue pair tradeNot some rogue pair trade Not an excuse for recklessnessNot an excuse for recklessness Not originated from a predictive mindsetNot originated from a predictive mindset Not the right to stay in a losing trade Not the right to stay in a losing trade

indefinitelyindefinitely Not a justification to average down Not a justification to average down Not used as a standalone and exclusive Not used as a standalone and exclusive

strategystrategy

Structure & ProcedureStructure & Procedure As the crutch trade originates from pairs, a sound As the crutch trade originates from pairs, a sound

pair biz plan is still necessary. Without this pair biz plan is still necessary. Without this structure, it is too easy to “wing” or “cowboy” the structure, it is too easy to “wing” or “cowboy” the trades.trades.

Choose the pairs you want to tradeChoose the pairs you want to trade Good candidates may include:Good candidates may include:

Stock Specifics:Stock Specifics: Strong Correlation with the SP500 (>80%)Strong Correlation with the SP500 (>80%) Fundamental SoundnessFundamental Soundness Prices under $100/sharePrices under $100/share Stock ATR’s above .75Stock ATR’s above .75 Liquidity: Depending on what size you are Liquidity: Depending on what size you are

trading…at least 100,000 shares for each 100 trading…at least 100,000 shares for each 100 share trade you wish to do.share trade you wish to do.

Structure & Procedure continued…Structure & Procedure continued… Gather all pertinent stock informationGather all pertinent stock information Gather Pair informationGather Pair information

Pair SpecificsPair Specifics Stocks in same industry groupStocks in same industry group LT Darren’s Ratio should be above .12LT Darren’s Ratio should be above .12 Strong Correlation with each other (>85%)Strong Correlation with each other (>85%) Ratio should be .50 or greaterRatio should be .50 or greater Pair ATR should be .50 or greaterPair ATR should be .50 or greater

"It's not whether you're right or wrong that's important, "It's not whether you're right or wrong that's important, but how much money you make when you're right and but how much money you make when you're right and how much you lose when you're wrong.“how much you lose when you're wrong.“

- Warren Buffett- Warren Buffett

Trading ConsiderationsTrading Considerations Position sizingPosition sizing

LiquidityLiquidity Volatility (Greater = Less shares)Volatility (Greater = Less shares) Trader Net Liq.Trader Net Liq.

Never More than 6X your equity in any one Never More than 6X your equity in any one pair so construct your trades small enough if pair so construct your trades small enough if you will be adding to an initial tradeyou will be adding to an initial trade

Risk to Reward Set-upRisk to Reward Set-up Market condition or backdropMarket condition or backdrop FundamentalsFundamentals Technical'sTechnical's NewsNews

Trading Considerations continued…Trading Considerations continued…

Dollar neutral Dollar neutral ATR neutralATR neutral Share neutralShare neutral

Probability SetsProbability Sets The Crutch Trade is initiated on a “duck list” The Crutch Trade is initiated on a “duck list”

of probabilities. (Refer to Bright Duck list)of probabilities. (Refer to Bright Duck list) Moving Averages / Trend linesMoving Averages / Trend lines Bollinger BandsBollinger Bands OscillatorsOscillators ATR’s and STDevATR’s and STDev TicksTicks PremPrem Personalities in the Pit (Squawk Box action)Personalities in the Pit (Squawk Box action) Time of DayTime of Day

Example of Bollinger BandsExample of Bollinger Bands

Overlay CyclesOverlay Cycles

Hard Side FirstHard Side First As we stated at the beginning of this As we stated at the beginning of this

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

Hard Side ConsiderationsHard Side Considerations Spread Number is core decision Spread Number is core decision

makermaker Don’t Crutch Trade a Correlated Pair Don’t Crutch Trade a Correlated Pair

without a spread number to watchwithout a spread number to watch Know what the ranges are so you Know what the ranges are so you

identify good spread numbersidentify good spread numbers FuturesFutures

Context, Engine of Day, Multiday RangesContext, Engine of Day, Multiday Ranges TrendTrend

OverallOverall IntradayIntraday

MatrixMatrix

Hard Side Considerations cont…Hard Side Considerations cont… LiquidityLiquidity

As a general rule, the less liquid stock is As a general rule, the less liquid stock is the hard sidethe hard side

Watch the bid ask spread Watch the bid ask spread Many crutch traders prefer to trade the Many crutch traders prefer to trade the

less liquid stock as their first trade and less liquid stock as their first trade and use the liquid one as their hedge if they use the liquid one as their hedge if they need it.need it.

Relative StrengthRelative Strength How are the stocks performing relative How are the stocks performing relative

to the marketto the market Relative to each otherRelative to each other

Taking a TradeTaking a Trade Live in the moment. Be awareLive in the moment. Be aware Identify the probability set-upsIdentify the probability set-ups Watch for a good spread priceWatch for a good spread price Enter the Hard Side Enter the Hard Side

In most cases in current market In most cases in current market conditions you will look for a pull-back or conditions you will look for a pull-back or discount on this trade. (Passive fishing discount on this trade. (Passive fishing order)order)

Allow for the noise and chop and Allow for the noise and chop and maintain your perspectivemaintain your perspective

Make moneyMake money

The HedgeThe Hedge If you wanted .25 from your win then If you wanted .25 from your win then

be willing to allow .05 to .10 of loss be willing to allow .05 to .10 of loss before hedging.before hedging.

If you see that your trade is wrong, If you see that your trade is wrong, then hedgethen hedge

Allow at least ½ an Pair ATR before Allow at least ½ an Pair ATR before adding a second layer. Remember adding a second layer. Remember you are a trader, not an investoryou are a trader, not an investor

2 Layer Maximum2 Layer Maximum Stop Loss or Reduce and Re-tradeStop Loss or Reduce and Re-trade

Win, Win, or WashWin, Win, or Wash Win: Win: Original trade WorksOriginal trade Works Win:Win:Hedge original trade, wait, then Hedge original trade, wait, then

take profittake profit Wash: Don’t want to hedge…wash Wash: Don’t want to hedge…wash

trade trade or take a few cents loss or take a few cents loss and wait and wait for a better entryfor a better entry

Wash:Wash: Add Second layer, take Add Second layer, take average average and wash at first and wash at first chancechance

Or…you can always trade for Or…you can always trade for production on that second layer production on that second layer using your first one for informationusing your first one for information

In ClosingIn Closing Live in the percentagesLive in the percentages

There is no guarantee on any trade, only There is no guarantee on any trade, only the probabilities to place bets onthe probabilities to place bets on

Keep developing the structure so you Keep developing the structure so you can compound your edgecan compound your edge

Discipline, Discipline, and more Discipline, Discipline, and more DisciplineDiscipline

Watch for changing market conditions Watch for changing market conditions and trade accordinglyand trade accordingly

AdaptAdapt Love what you do and have fun!Love what you do and have fun!