Essentials of the Crutch Trade Structure & Procedure Bright Retreat Primm Valley Presentation By Rob Friesen

Questions 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 trades? Are you looking for rules to frame your trades? Would you like to reduce the frequency and the $ amount of your losing trades? Would you like to reduce the frequency and the $ amount of your losing trades? Is it really possible to trade with the wind at your back? Is it really possible to trade with the wind at your back?

Structure for Noise Noise, News and Tickitus are undermining your Trading Noise, News and Tickitus are undermining your Trading Make Plans when the Market is Closed Make Plans when the Market is Closed Structure and Flexibility Structure and Flexibility Pairs help control emotion Pairs help control emotion Expectation, Discipline, and Multiple Samples Expectation, Discipline, and Multiple Samples Art and Science can be combined through the Crutch Trade Art and Science can be combined through the Crutch Trade

What is a Crutch Trade? There are different approaches to engaging a crutch trade (so not just one as the right way) Foundationally; its genesis is a pair trade It is a trade that is placed on various probability sets The trade has a back up plan…in the form of a hedge…that’s why it is called a crutch trade It provides the mechanism to reduce whipsaw and overcome noise Imagine every trade as a win, win or wash

What it is Not Not some rogue pair trade Not some rogue pair trade Not an excuse for recklessness Not an excuse for recklessness Not originated from a predictive mindset Not originated from a predictive mindset Not the right to stay in a losing trade indefinitely Not the right to stay in a losing trade indefinitely Not a justification to average down Not a justification to average down Not used as a standalone and exclusive strategy Not used as a standalone and exclusive strategy

Structure & Procedure As the crutch trade originates from pairs, a sound pair biz plan is still necessary. Without this structure, it is too easy to “wing” or “cowboy” the trades. As the crutch trade originates from pairs, a sound pair biz plan is still necessary. Without this structure, it is too easy to “wing” or “cowboy” the trades. Choose the pairs you want to trade Choose 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 Soundness Fundamental Soundness Prices under $100/share Prices under $100/share Stock ATR’s above.75 Stock ATR’s above.75 Liquidity: Depending on what size you are trading…at least 100,000 shares for each 100 share trade you wish to do. Liquidity: Depending on what size you are trading…at least 100,000 shares for each 100 share trade you wish to do.

Structure & Procedure continued… Gather all pertinent stock information Gather all pertinent stock information Gather Pair information Gather Pair information Pair Specifics Pair Specifics Stocks in same industry group Stocks in same industry group LT Darren’s Ratio should be above.12 LT Darren’s Ratio should be above.12 Strong Correlation with each other (>85%) Strong Correlation with each other (>85%) Ratio should be.50 or greater Ratio should be.50 or greater Pair ATR should be.50 or greater Pair ATR should be.50 or greater "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.“ - Warren Buffett

Trading Considerations Position sizing Position sizing Liquidity Liquidity Volatility (Greater = Less shares) Volatility (Greater = Less shares) Trader Net Liq. Trader Net Liq. Never More than 6X your equity in any one pair so construct your trades small enough if you will be adding to an initial trade Never More than 6X your equity in any one pair so construct your trades small enough if you will be adding to an initial trade Risk to Reward Set-up Risk to Reward Set-up Market condition or backdrop Market condition or backdrop Fundamentals Fundamentals Technical's Technical's News News

Trading Considerations continued… Dollar neutral Dollar neutral ATR neutral ATR neutral Share neutral Share neutral

Probability Sets The Crutch Trade is initiated on a “duck list” of probabilities. (Refer to Bright Duck list) The Crutch Trade is initiated on a “duck list” of probabilities. (Refer to Bright Duck list) Moving Averages / Trend lines Moving Averages / Trend lines Bollinger Bands Bollinger Bands Oscillators Oscillators ATR’s and STDev ATR’s and STDev Ticks Ticks Prem Prem Personalities in the Pit (Squawk Box action) Personalities in the Pit (Squawk Box action) Time of Day Time of Day

Example of Bollinger Bands

Overlay Cycles

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

Hard Side Considerations Spread Number is core decision maker Spread Number is core decision maker Don’t Crutch Trade a Correlated Pair without a spread number to watch Don’t Crutch Trade a Correlated Pair without a spread number to watch Know what the ranges are so you identify good spread numbers Know what the ranges are so you identify good spread numbers Futures Futures Context, Engine of Day, Multiday Ranges Context, Engine of Day, Multiday Ranges Trend Trend Overall Overall Intraday Intraday Matrix Matrix

Hard Side Considerations cont… Liquidity Liquidity As a general rule, the less liquid stock is the hard side As a general rule, the less liquid stock is the hard side Watch the bid ask spread Watch the bid ask spread Many crutch traders prefer to trade the less liquid stock as their first trade and use the liquid one as their hedge if they need it. Many crutch traders prefer to trade the less liquid stock as their first trade and use the liquid one as their hedge if they need it. Relative Strength Relative Strength How are the stocks performing relative to the market How are the stocks performing relative to the market Relative to each other Relative to each other

Taking a Trade Live in the moment. Be aware Live in the moment. Be aware Identify the probability set-ups Identify the probability set-ups Watch for a good spread price Watch for a good spread price Enter the Hard Side Enter the Hard Side In most cases in current market conditions you will look for a pull-back or discount on this trade. (Passive fishing order) In most cases in current market conditions you will look for a pull-back or discount on this trade. (Passive fishing order) Allow for the noise and chop and maintain your perspective Allow for the noise and chop and maintain your perspective Make money Make money

The Hedge If you wanted.25 from your win then be willing to allow.05 to.10 of loss before hedging. If you wanted.25 from your win then be willing to allow.05 to.10 of loss before hedging. If you see that your trade is wrong, then hedge If you see that your trade is wrong, then hedge Allow at least ½ an Pair ATR before adding a second layer. Remember you are a trader, not an investor Allow at least ½ an Pair ATR before adding a second layer. Remember you are a trader, not an investor 2 Layer Maximum 2 Layer Maximum Stop Loss or Reduce and Re-trade Stop Loss or Reduce and Re-trade

Win, Win, or Wash Win: Original trade Works Win: Original trade Works Win:Hedge original trade, wait, then take profit Win:Hedge original trade, wait, then take profit Wash: Don’t want to hedge…wash trade or take a few cents loss and wait for a better entry Wash: Don’t want to hedge…wash trade or take a few cents loss and wait for a better entry Wash:Add Second layer, take average and wash at first chance Wash:Add Second layer, take average and wash at first chance Or…you can always trade for production on that second layer using your first one for information Or…you can always trade for production on that second layer using your first one for information

In Closing Live in the percentages Live in the percentages There is no guarantee on any trade, only the probabilities to place bets on There is no guarantee on any trade, only the probabilities to place bets on Keep developing the structure so you can compound your edge Keep developing the structure so you can compound your edge Discipline, Discipline, and more Discipline Discipline, Discipline, and more Discipline Watch for changing market conditions and trade accordingly Watch for changing market conditions and trade accordingly Adapt Adapt Love what you do and have fun! Love what you do and have fun!