2015

THE BOH WAY

A MULTI-FACTOR APPROACH
JET MOJICA
A GUIDE TO THE BOH WAY

Contents

A GUIDE TO THE BOH WAY ............................................................................................................................... 1

Introduction ...................................................................................................................................................... 2
Multi-Factor Approach ..................................................................................................................................... 3
Price and Volume........................................................................................................................................... 3
Volume Buzzes............................................................................................................................................... 5
Moving Volume Weighted Average .............................................................................................................. 5
Volatility......................................................................................................................................................... 6
Investment Time Horizon Model...................................................................................................................... 8
Price and Time Stops ..................................................................................................................................... 9
Qualifying and Conditional Statements ......................................................................................................... 11
Newbies and New BoHemians ....................................................................................................................... 12

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Introduction

The spectacular bull-run since 2009 has exposed investors to the opportunities in equity markets.
During this six year run, we have also seen the rise of financial blogs, social media groups, and gurus
whose orientation ranges from the more traditional focus on valuation analysis to the less mundane
world of technical analysis.

For better or for worse, investors today are savvier because of better access to information.
Corporate disclosures are timely and relatively easy to get. Research from various entities are widely
distributed to end-users on different platforms so its very hard to miss out on market moving
developments. Theoretically, easier access to information should translate to better portfolio
returns for individual investors. In reality, this has not been the case. While investors know more
about trading and investing now than at any time in history, investors, particularly the retail
investors, have not been able to put everything they know into a unified investment process.

A process oriented overlay involves being able to generate ideas, construct a portfolio out of those
ideas, put together trading plans, and executing said plans. More often than not, retail investors
gloss over key steps necessary to successfully generate consistent returns from investing. We
continue to note, for example, preference for tips even though results clearly go against trading
by tips. We see people blindly follow the herd thinking that if everyone is on that trade then thats
where I have to be. The objective of an investment process therefore is to attempt to limit trading
losses while participating in trades with the highest potential return.

There are different types of approaches to defining an investment process but any approach should
be grounded on ideas generation, portfolio construction, trade planning and execution. The easiest
component to learn is trade planning and execution since this is what you can control. But it is also
the component thats often the most neglected. BOH is focused on generating ideas and providing
you tools that will help you come up with the best ideas best suited for you. Your job is to improve
your ability to plan and execute your trades.

This documentation outlines our framework on trade planning and execution, and how retail
investors should think about trading. It considers what you already know about trading but adds
elements you should know about good trades. We describe a framework that will allow you to
decide what kinds of trades are for you, the steps needed to minimize losses while participating on
gains, and key concepts on planning and execution that will help you improve your trades.

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Multi-Factor Approach

Every retail investor knows that market timing has a big impact on investment returns. This belief is
so prevalent that most focus on being able to time the market very well (i.e. being able to buy at
the lowest possible price and selling at the absolute top), which has meant focusing solely on PRICE
and ignore everything else. Some may even analyze volume but not to the degree necessary to
understand accumulation and distribution the way its supposed to be understood. The
conventional view is to define some value turnover requirement for a stock to be included in a watch
list but not much else.

In this section, we consider a more holistic framework for analysing a potential trade. Specifically,
we highlight that although PRICE plays a very big part to good trades, broader consideration of
VOLUME and/or FLOWS, and VOLATILITY are equally necessary. We outline how a MULTI-FACTOR
APPROACH tend to lead to better trading decisions.

Price and Volume

In our view, the study of PRICE and VOLUME are essential components for formulating expectations.
After you study a chart, you should be able to say in no uncertain terms where prices can go to next
or if not, you shouldnt be in the trade. Another way of stating the same point is that it does not
matter what method of technical analysis you apply (i.e. basic support/resistance, Elliott wave, or
Harmonics), as long as you are able to say where you expect prices will go to next. Being able to say
where you expect prices to go to next is what guides your investing decision. The question becomes
binary: are you bullish or bearish, and then you trade accordingly.

If you study PRICE to define your bias, you should analyze VOLUME to qualify your expectations. For
example, if the price of a stock has already risen +10% over the past five days, what makes you think
that prices can rise by another +10% over the next five or more days? Usually, VOLUME provides a
good description of confirming price action as well as marking potential turning points. So even
when we say that PRICE is our final arbiter for a trade, we can only be more confident on a trade if
VOLUME are supportive of your view.

While you often hear people cheer stocks whose prices are going up, the unspoken truth is that you
can only make money if youre able to sell at that higher price if there is ample liquidity (which
explains the cheering part). If there is not enough volume traded, you wont be able to sell at the
price you like and most of the time you just wont be able to sell at all.

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Most retail investors are obsessed with price action (i.e. higher highs, higher lows, lower highs, lower
lows). But you need to analyze volume to see if it is confirm (rising volume) an uptrend or puts it
into question (decreasing volume). You get strong, consistent volume and trend continuation is
assured. Blips and spikes in volume on the other hand can mark turning points. A stock going up on
decreasing volume has a good chance of trapping bulls and trigger sharp corrections. Outsized
volume buzzes on rising price should confirm a breakout to new price levels. Table 1 provides a good
summary of PRICE and VOLUME phases. This is the descriptive element of volume analysis.

Table 1: DIFFERENTIATING PRICE and VOLUME PHASES

Source: Investing with Volume Analysis by Buff Dormeier

Volume is your barometer for price action. If we measure momentum via price, we attempt to
approximate buying and selling pressure by understanding volume in nuanced way. To measure
volume, you need to understand a stocks volume history. You need to compute for volume
averages and watch out for deviations from the mean to signal that a stock merits closer inspection.
There are other ways too and this includes defining a specific time horizon for finding volume spikes
and blips.

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Some useful volume statistics are:

Max one day volume in ten days

Average volume over 20 days
Average volume over 50 days
Max volume over 250 days

The above volume statistics can be used as benchmarks. For example, you can compare current
volume against how it has traded over the past 50 days and see how prices have behaved over the
same 50 days. You see, which statistic you use to analyze volume depends heavily on context. You
need to ask yourself what price structure you are overlaying volume analysis against. Is the stock
breaking out of a range? Is the stock in a smooth uptrend or has the stock been in a continuous free
fall over the past 10 days? Its only then will you be able to analyze volume in an actionable way.

Volume Buzzes

The way we track unusual volume is through our volume buzz calculations. What we do is we
compare the stocks current day trading volume against the number of shares traded on average
daily over say 50 days. We also track volume intraday by comparing volume action against
benchmarks like ten day max volume and the 20- or 50-day average volume, depending which is
larger. We say volume is buzzing if current volume exceed average volume by 1.5x or more over
a specified time horizon.

If for example you see a stock normally trading by 5 million shares a day and it suddenly doubles to
10 million, thats a call for you to pay attention. You may not know the underlying reason for such a
surge in volume but you who cares when you know that that kind of volume is unusual and should
therefore be followed.

Volume buzzes is our way of tracking foot prints. We look for unusual volume whether unusually
heavy or unusually light. Similarly, we track accumulation and distribution in this manner.

Moving Volume Weighted Average

As an aside to this section, we discuss the use of MOVING VOLUME AVERAGE PRICE (MVWAP) to identify
potential support and resistance. For example, we assume that when the MVWAP is above the Current
Price then investors are out-of-the-money and when it is below investors are in-the-money.

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From a trading perspective, when MVWAP is above the current price, then you are technically getting it
cheaper than everyone else who has bought the stock the past x-days. But you should also know that when
the distance between your purchase price and MVWAP is wide enough then you can expect MVWAP to act
as resistance levels.

If MVWAP is below the current price you are technically buying it at a higher price compared to those who
bought the past x-days. Technically, you can justify buying at a higher price since you are buying into a
trend and there should be no known resistance above MVWAP. At least until the distance between the
current price level is enticing enough to make investors take some money off the table.

Bottom line, you should know where MVWAP is at all times since it will help you put trading approach into
context. While there are no hard and fast rule on how to use MVWAP, the above discussions are common
sense definitions.

Finally, picking out bombed out MVWAP stocks is the correct approach when the market is correcting
sharply. But when the market has already rebounded off support, you need to start paying attention to
stocks that have narrowed the gap against MVWAP or have even taken back MVWAP because the market is
already telling you which ones it is looking at and theres no sense sticking to bombed out ones that
continue to lag despite a rebound in the market.

Volatility

VOLATILITY is a very important component of trading but not a lot of people pay attention to it like
we do. VOLATILITY is the statistical dispersion of prices of a security or an index measured as either
the variance or standard deviation of prices of the security.

The higher the VOLATILITY, the greater the price uncertainty of a position. We recommend reducing
exposure when current volatility is greater than historical volatility and adding to exposure (even
take on leverage) when the reverse is true. Trading decisions based solely on volatility will never be
100% correct but the decision process is sound and will keep you out of trouble more often than
not. Besides, you should not trade solely based on your appreciation of volatility condition. Instead,
you need provide context based on your appreciation of price and volume.

Does the above point imply that VOLATILITY is BAD? No but what it does say is that you need to take
it into account if you want to improve your buy and sell timing.

Finally, from a portfolio point of view, understanding volatility of the different stocks you include in
your portfolio will save you the heartache of holding stocks that have the same volatility profile.

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Unless you know what you are doing, the last thing you want is to hold names that are highly volatile
or to hold names that have near zero volatility. Often, having the right mix of high volatility and low
volatility stocks in your portfolio will provide better risk-adjusted results.

Gamblers are drawn to volatility because of the excitement. However, it has no place at all if you
want to generate consistent portfolio returns.

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Investment Time Horizon Model

The length of time you hold onto an investment is your time horizon.

In fixed income, the longer the time it takes for a bond to mature, the higher the duration risk of
holding the instrument. You see, between the time a bond is issued and its maturity, a lot of things
can happen to the issuer as well as other factors that would influence the price of the bond.

In equities, this view is distorted because of the long-term history of price appreciation across global
equity markets. The common attitude and view is that to make money in the market, you need to
take a five year perspective and that it is time in the market and not timing the market that
helps you make money in the stock market. The logic assumes that over time, price changes get
smoothened out by the tendency of stock markets to rise. And for the past 20 years or so, this
argument has been justified despite bouts with huge losses in various equity markets.

The way bonds define duration risk is more reflective of the risks in the stock market. What this
means is that people who are long-term investors are actually assuming more risk than people with
shorter investment time horizons. The correct view is for investors to align their investment time
horizons against broad market and economic cycles in order to avoid negative surprises. In other
words, you cannot continue to be a buy and hold investor when the market has been in a six year
bull market.

One way to break your investment time horizon is to divide it into three core durations:

ENTRY/EXIT the next five days or less

TRADE the next three weeks or less
TREND the next three months or more

In ENTRY/EXIT, you make a determination on how viable a trade is. Upon completing your target
allocation, you give yourself five days or less to determine if the trade is right for you regardless of
what kind of investor you are. If youre a day-trader, you just shorten your holding period
consideration.

In TRADE, you have already passed the ENTRY/EXIT duration and have decided you will see the
trade through. Over the next three weeks or less, you are giving the trade an opportunity to validate

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your expectation. Unless youre making a high conviction call on the trade, you will need to make a
call after three weeks on whether to continue holding or to move on from the trade already.

In TREND, price action has validated your bullish bet on the name for three weeks and youve
decided to continue holding onto the name. Usually, unless your trailing stop gets hit, you should
be prepared to hold onto the name for three months or more already, which is the sweet spot for
most trend following approach.

At any given moment, every position in your portfolio will exhibit characteristics in each of these
three durations. For example, a stock you are holding can be in a TREND for three months plus
already but has exhibited toppish behaviour over the past five days. What this means is that you can
be in TRADE mode over the near-term but bullish over the TREND duration. The point here is that
you should manage your positions based on how trends are evolving. So instead of focusing on
target prices, you should focus on every aspect that can potentially go wrong in a given trade.

Your thinking should be to plan your trade but to be always ready to change your plan when facts
change. In short, define time horizons in terms of TRADE and TREND where we delineate between
immediate and intermediate time horizons for our investments.

Price and Time Stops

A PRICE STOP is a cut loss point or points used to stop losses. When the price of a stock moves
against your expectation and fall below key support levels, you have to get out of the trade to
minimize losses.

There are no fixed rules for setting stops. The most common are (1) a pre-set percentage rule versus
an entry price and (2) a fixed nominal amount one is willing to give up on any trade regardless of
size of investment. Others use arbitrary rules based on expert opinion, volatility, and even technicals
but all are designed to minimize losses when trades go against expectations.

The other kind of stop is TIME STOP. Time stops are not as straight forward but weve alluded to this
in the previous section. You see, when you take a trade, your tendency is to wait to be proven that
youre correct. So you wait and wait and sit on the name as long as the name is comfortably above
pre-planned price stops. However, through a time stop, you can save yourself from waiting too long
for a trade to materialize since it acknowledges the fact that to be early on a trade is to be wrong.

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Whether one is pre-disposed to trade names one at a time or within the context of a portfolio, you
should have a well-defined time stop rule especially when the market is trading within broad range.
In the previous section, weve already outlined how more active traders can have a time stop of 5
days after completing a target allocation. Positional investors are encouraged to evaluate dynamics
after a three week holding period. Bottom line, no need to hold onto positions that fail to develop
over the time we expect it to move.

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Qualifying and Conditional Statements

In this section, we define what qualifying and conditional statements are and how to use them to
keep yourself safe in any trade. Even on your own, you should characterize what you see on the
chart in this manner since it would help you define your decision points better and how to fit this
within the context of your trading system.

So what are qualifying and conditional statements? In a nut shell, they are IF THEN statements. In
general, they should read something like this.

IF so and so stock holds, breaks, or move above/down xxx pesos, then itll do this, that, and
what not. If does this or that, then expect this to happen.

Often, you will read us make qualifying statements about time, which reads in this manner.

Must hold xxx pesos by end of week, month, or year, otherwise this and that or even olats.

By stating trade ideas in this manner, you can remind yourself what to do at each swing of a
developing trade. At the end of the day, you need to own the trade. And you can own the trade by
understanding what it is you expect the stock to do once it hits or breaks a particular price point.

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Newbies and New BoHemians

We suggest you concentrate on the following before moving on to the complete suite of tools and
filters available to you.

First, focus on ELEMENTS OF CHART NARRATIVES. How we define support and resistance. How to
trade around these very important levels. And how to observe both price stop (i.e. line in sand) and
time stop (when things dont work out as quickly as youd like the trade to materialize).

Second, study our INVESTMENT PROCESS. From how we generate ideas for trading using our outlier
models (scatter plot, volume buzz, and flows report) to the BOH Black Box which we use to look for
leaders and laggards with ideal characteristics and traits.

Finally, try to work out how to use REAL-TIME COMMENTARIES. The things I say there are not signals
per se. Instead, your key take away from there is my thought process when analysing price action
intraday.

Good luck out there and welcome again to BoH Society!

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