“The reason to trade index funds is summed up in one sentence: 92% of professional money managers do not beat the index. Why do you think you can as an amateur?

It is a legitimate question and a clever soundbite. It sounds prudent, data-driven, and final. But it relies on a fundamental misunderstanding of portfolio theory and institutional reality: it confuses raw total return with risk-adjusted return.

When an amateur looks at an equity curve, they often ask only one question: “How much money did it make?”

When a professional risk manager or institutional allocator looks at that same curve, they ask a very different question: “How much risk did you take to generate that return?”

I’m not certain all those 92% of money managers that were not beating the S&P 500 were actually failing. My belief is many have managing mandates designed to avoid catastrophic drawdowns while seeking an adequate return on excess risk?

If you want to evaluate any trading strategy—whether an index fund, an active fund manager, or your own systematic framework—you need to look past nominal returns and understand one of the most important metric in quantitative finance: The Sharpe Ratio.

What Is the Sharpe Ratio and Who Uses It?

Developed by Nobel laureate William F. Sharpe in 1966, the Sharpe Ratio measures the excess return of an investment asset or portfolio above the risk-free rate, divided by its standard deviation (volatility).

R _p= Expected Portfolio Return

R _f= Risk-Free Rate (e.g., short-term US Treasury Bills)

σ_p= Standard Deviation of Portfolio Excess Return (Volatility)

In plain English: It tells you how many units of return you receive for every unit of volatility you endure.

How Institutional Allocators Interpret the Numbers:

• < 0.50: Suboptimal / Poor. You are accepting substantial volatility without proportional compensation.

• 0.50 – 0.99: Acceptable / Average.

• 1.00 – 1.99: Good to Very Good. The gold standard threshold for systematic strategies.

• ≥ 2.00: Exceptional (rarely sustainable long-term without heavy structural edges).

Who Uses It and Why?

Pension funds, sovereign wealth funds, hedge fund allocators, and family offices rarely hand capital to a manager based purely on double-digit annualized returns. If a fund returned 20% last year but suffered a 45% intra-year drawdown with wild volatility, its Sharpe ratio is poor. That manager is one market shock away from insolvency.

Institutions use the Sharpe Ratio to determine skill versus luck (leverage). Anyone can boost nominal returns by applying 3x leverage to the S&P 500, but leverage magnifies volatility at the exact same rate—leaving the Sharpe Ratio unchanged while dramatically increasing the risk of absolute ruin.

The S&P 500’s Secret: A Suboptimal Sharpe

Buy-and-hold indexing advocates present the S&P 500 as the ultimate investing vehicle. While the long term gains are most definitely positive when looking at those gains compared to risk, present another picture. Historically, the S&P 500 delivers an annualized Sharpe Ratio hovering around ~0.70 to 0.80 over long cycles (and significantly lower during secular bear markets or high-rate environments).

Why? Because 100% equity exposure subjects you to the full brunt of market variance:

1. Unmitigated Drawdowns: Market cycles routinely produce 20%, 30%, and 50% drawdowns (2000–2002, 2008, 2020, 2022).

2. Capital Inefficiency: To capture the index return, 100% of your capital must sit exposed to equity market beta 100% of the time.

A Sharpe of ~0.70 means passive equity investors are enduring significant volatility for an unoptimized return profile.

How to Improve Sharpe: Capital Efficiency & Asymmetric Allocation

There are mathematically two ways to engineer a Sharpe Ratio above 1.00:

1. Reduce Portfolio Volatility: Dampen drawdowns and portfolio variance.

2. Maximize Return on Invested Capital (ROIC) on Active Exposure: Generate high velocity and high return on a fraction of the total portfolio, while parking the remainder in risk-free or low-volatility yield instruments.

This brings us to how a quantitative, rule-based approach solves the indexer’s dilemma.

Engineering a >1.0 Sharpe: The Fibonacci Scale System™

The Fibonacci Scale System™ was designed from the ground up to address the structural inefficiencies of passive buy-and-hold investing.

Instead of deploying 100% of capital into market beta and riding drawdowns to the bottom, the system operates on a quantitative barbell framework:

TOTAL PORTFOLIO

Active Campaign Engine (Limits on total cash used for new and trend following campaigns)

• Wide-Moat Dividend Stocks

• Tiered Fibonacci Scaling (1, 1, 2, 3, 5, 8)

• Beta Volatility Spacing

• Trend Capture Exits (Donchian / SAR)

Risk-Free Portion

• T-Bills / High-Yield Cash Equivalents

• Zero Volatility Sleeve (σ = 0)

• Dry Powder & Drawdown Protection (20% cash minimum)

Here is how the mechanics systematically compress the denominator (σ) while expanding the numerator (R_p-R_f ):

1. High Velocity on Employed Capital

The system does not commit 100% of portfolio capital to active risk. By deploying capital only into high-conviction, wide-moat, dividend-paying equities during defined pullback zones, then churning those stocks through the scaling tiers, the Return on Capital Employed (ROCE) on the active sleeve is high.

2. Scaling via Fibonacci Math (1, 1, 2, 3, 5, 8)

Rather than suffering standard equity drawdowns on a full, lump-sum position, initial exposure starts small (1 unit). If price pulls back through beta-based volatility tiers, the grid scales down in both unit size and spatial spacing.

• The Math: Your average cost basis drops non-linearly toward the current market price. A minor structural rebound recovers the campaign to profitability without requiring the stock to reclaim its previous all-time high.

Once a scaling tier is initiated, scaling out of that tier generates “production” effectively lowering the average cost per share of the campaign.

3. The Baseline Yield Buffer

Because the system mandates a strict 50% cash floor circuit breaker for new campaigns, and caps total active deployment to leave at least 20% cash, a substantial portion of the portfolio sits in risk-free instruments (Treasury Bills / Cash Equivalents earning the prevailing risk-free rate).

• This creates a volatility drag in reverse: the cash sleeve has near zero volatility, directly suppressing total portfolio standard deviation.

• Meanwhile, active positions collect continuous dividend income, adding an incremental buffer to downside movement.

4. Asymmetric Exit Strategy (Transition to Trend Mode)

Once a campaign recovers through its scale tiers and production and establishes a campaign price below a risk a trailing stop, the system transitions to Trend Mode—locking in a now risk-free trailing stops (via indicators like the 10-day Donchian Channel or Parabolic SAR) to let winners run. Once in trend mode no more purchases or scales are made. We scaled into pullbacks with mathematical edge and now we will ride a risk free trade with trend following mechanics.

The Bottom Line

When someone asks, “Why do you think you can beat the 92% of money managers?”, the answer is: I don’t.

The answer is that you are not playing the nominal return game—you are playing the risk-adjusted return game.

Passive indexing accepts 100% market variance for a 0.70 Sharpe. By being an active trader combining a structural risk-free cash base with mathematically scaled, high-ROIC active campaigns in wide-moat assets, a systematic framework, you can target an institutional-grade Sharpe Ratio (>1.0): providing adequate returns, minimal drawdowns, and structural peace of mind.

Data collection and forward-testing campaign logs are ongoing. Subscribe to follow the real-time campaign performance and mechanical breakdowns of the Fibonacci Scale System™.

Stay tuned!!

See trading journal at Public Trading Journal.xlsx

📘 1929: Inside the Greatest Crash in Wall Street History - and how it Shattered a Nation. (Andrew Ross Sorkin)

• Core Value: Andrew Ross Sorkin does a great job of bringing the characters to life and highlighting the hubris and misuse of leverage that gave rise to the market crash (and subsequent Great Depression).

• How it shaped my trading: Your system must have guardrails to make something as catastrophic as the Great Depression not existential.

As an Amazon Associate or other affiliate, I earn from qualifying purchases.

Get your copy at Amazon Today

Some publishers take a different angle. They fill your newsfeed with endless macro-economic hand-waving—debating interest rate cycles, predicting recessions, or teasing super indicators that promise to solve the market. Yet for all their commentary, they still lack the operational rules for running a portfolio. They may offer entry triggers and initial stop losses and even trailing stops if you don’t get whipsawed out of the position. But these are just basics. They don’t discuss mathematical position sizing models and portfolio risk circuit breakers. When their predictions inevitably fall flat, they move the goalposts and issue another essay, leaving you to guess how to manage real risk with real money. It’s fair to say, in deference to John Maynard Keynes, that when facts change one can change their opinion. The problem is, opinions are free. When you lose money, that money is gone.

This publication is built on the exact opposite principles.

Foundational Truths

First principle: No one knows what the market is going to do tomorrow. I assure you, if I knew with 100% certainty, I’d take every asset I had, leverage it to the hilt, cash in the big win, and call it a wrap. The truth is no one knows for certain... hard stop.

Second principle: Markets move. Even in a “sideways market,” prices fluctuate up and down.

Third principle: While not a mathematical absolute, the chances of the equities market—along with wide-moat blue chip stocks—going to zero is practically zero. At some point, the fundamental reason for owning a stock (a legal ownership claim that derives its value from the business’s ability to generate cash) will attract value investors. This is particularly true of wide-moat dividend payers. (And if the whole market does go to zero, none of this matters anyway. There may be a 90% drawdown as in the Great Depression, but that is not zero.)

Based on these core truths, the Fibonacci Scale System™ (FSS-1™) was created.

This is not an effortless “set-it-and-forget-it” system. It is an active, quantitative, rules-based engine designed to govern risk, eliminate emotion, and capitalize on market movement. (Note: This is not day trading, but orders/trades can happen most days. They can easily be managed before the open, at lunch, or after the close.)

The philosophy: Embrace Volatility.

Volatility is Not Risk, It is Opportunity

When many traders encounter market drops, they get stopped out of initial positions only to watch a reversal. When you operate with the Fibonacci Scale System™ (FSS-1™ Scale to Trend), we begin a campaign with no stops. There are other protections in place. Stops are used to protect a win. You will use the natural movement of the markets to execute a systematic scale campaign, drive down average costs and when the timing is right move to a trend following mode to capture any potential major move.

The framework is anchored by four non-negotiable principles:

1. Cash Only (Zero Margin): Eliminate forced liquidations. By trading strictly cash-settled positions, market fluctuations can never force you out of a campaign. Time and patience remain on your side.

2. High-Quality, Cash-Flowing Assets: Campaigns are executed on durable, dividend-paying equities and established ETFs. When price drops, you are paid to hold while the mechanics take over.

3. Scale In: Instead of making binary “all-in” bets, you build positions dynamically across mathematically designed tiers. Every campaign is designed to navigate deep drawdowns and lower your overall cost basis.

4. Transition to Trend: The ultimate objective of every campaign is to absorb volatility, lower your average cost, and transition at least 1 unit into Trend Mode—riding potential extended upside with a trailing stop to capture gains.

Strict Risk Control & Circuit Breakers

Systematic scaling requires absolute discipline. To protect total portfolio capital and prevent runaway losses, the FSS-1™ framework enforces rigid, mathematical risk parameters:

• The 2% Campaign Loss Invalidation: A campaign is not held blindly into oblivion. If total portfolio capital suffers a 2% loss on a single campaign, the setup is invalidated, and the position is closed.

• The New Campaign Circuit Breaker: If overall portfolio cash is reduced to 50%, no new campaigns are initiated. Remaining cash is held to fund existing campaigns.

• The Risk of Ruin Circuit Breaker: If overall portfolio cash drops to 20% no new positions are taken on any existing campaign. At this point it’s time to step back and wait. Dividends will pay us to wait and no matter what the market does we are not ruined and still in the game.

System Mechanics: The FSS-1™ Execution Sequence

1. Screening & Technical Confluence

Campaigns launch strictly when high-quality assets hit some type of oversold condition. This could be a pullback in a structural uptrend or a value play based on what is believed to be a deeply discounted stock or ETF.

2. Dynamic Fibonacci Scaling (1, 1, 2, 3, 5...)

Capital deploys using the Fibonacci sequence. As price drops, the system applies a dual-layer progression: both the number of units and the spatial distance between tiers increase proportionately relative to the initial anchor price.

As price reaches progressively wider extension levels from the anchor, position sizing expands exponentially—significantly pulling down the average cost basis with each progressive tier while preventing premature capital deployment:

· Tier 1 – Initial purchase, 1 Unit

· Tier 2 – 1 Unit at 1 scale width below Tier 1

· Tier 3 – 2 Units at 2 scale widths below Tier 2

· Tier 4 – 3 Units 3 scale widths below Tier 3.

· Tier 5 – 5 Units at 5 scale widths below Tier 4

· Tier 6 – 8 Units at 8 scale widths below Tier 5

Note: Scale widths are determined based on the beta of the stock.

3. Harvesting & Trend Transition

• Cost Basis Recovery: As price mean-reverts scaled tiers are harvested to lock in capital and reduce risk exposure. Buying and selling will continue based on an inverted Fibonacci scale.

• Trend Mode Activation: Once the average cost of the campaign is below the price levels of a trailing indicator (the two primary indicators are the lower 10-day Donchian Channel or the Parabolic Stop and Reverse) at least 1 core unit is maintained in Trend Mode. This locks in a profit for the campaign and provides some additional upside potential.

What You Receive as a Free Subscriber

This publication exists to teach the system while at the same time documenting performance in real time. No back-tested anything here. Toward those two ends you will receive:

• Link to a Live Campaign Ledger: Clear, transparent, record of active FSS-1™ positions along with a history of closed campaigns. Daily Substack Notes will include activities for that trading day.

• Methodology: Periodic educational articles (emails) teaching you how to apply mathematical scaling, calculate unit sizes, and manage strict circuit breakers.

• System Commentary: Objective analysis focused purely on system performance and any changes/improvements.

I’m sure I don’t know what the market will do tomorrow but certain that there will be skin in the game. Is it Monday yet?

Stay tuned!

Campaign Ledger Link

Public Trading Journal.xlsx

Disclaimer: The Fibonacci Scale System™ is published strictly for educational, informational, and research purposes. The author is not a registered investment advisor or broker-dealer. Nothing published here constitutes financial, investment, or legal advice. All trade logs, campaign ledgers, and commentary represent personal research and operational tracking. Investing involves substantial risk of loss. Always conduct your own due diligence or consult a licensed professional before deploying capital.

One of the books that shaped my thinking in developing the Fibonacci Scaling System is James Altucher’s Trading Like a Hedge Fund: 20 Successful Uncorrelated Strategies and Techniques to Winning Profits. (As an Amazon Associate, I earn from qualifying purchases if you buy through my link). If you have any interest in expanding your horizons beyond buying breakouts or finding the cup with handle buying zone as touted in Investors Business Daily, you should read this book. Chapters/Systems that made me think were:

· The Bread and Butter Trade – Playing Gaps: No buying high/selling higher here. This is a system where when a stock gaps down pros move in (even in down markets) Buying fear.

· The QQQ Crash System – Buying the QQQ after a major move down.

· The Ten Percent Down – Panic 101 – Buying a stock that is 10 percent lower than yesterday’s close. A lot of the “gurus” will tell you to run.

None of these were based on buy high/sell higher. There was not 1 buy the breakout strategy.

Finally, just as influential as the systems he runs was the chapter titled “What Does Not Work”. He has an interesting take on the following:

· Gut

· Confirmation

· Candlestick Patterns

· Seasonality

· Low P/E High P/E

· Buying and Selling Options.

Get your copy at Amazon

Happy Trading and Stay Tuned!

Al

Below is a look at one of the trades that closed this week. It is high level and most of the concepts have not been discussed in detail in any earlier post. The annualized 130.41% return on capital employed (ROCE) should be a concept you are familiar with!

Entry and Unit Size

On July 23 one of the scans noted that Constellation Brands (STZ) was oversold. STZ is a wide-moat dividend paying stock that is a leader in the high end Mexican imported beer market. Entry was made at $137.42. The unit size for purchase is $1,000 so all calculations are based on a per-$1,000 basis. Share purchases are rounded either up or down from there. On 7/23 the purchase was 7 shares.

Anchor Point & Scale In/Out

Based on the $137.42 purchase price the Anchor was set at $137.00. In this case the rounding to $137.00 was down but note this is not critical to the trade. The anchor just needs to be set near the entry price of the first unit. Now comes the scaling.

As you know the Fibonacci sequence begins 0, 1, 1, 2, 3, 5, 8. Here’s how the sequence fits into the system. At 0, no shares are owned. At the initial purchase, 1 unit is bought and establishes the anchor. The next purchase is 1 unit at 1% less than the anchor rounded to $0.25. This is the scale width. For the STZ campaign the width is $1.25. There will be more on the scale width in future posts but for this system it is either 1 or 2 percent. The next number in the sequence is 2. The next scale level is 2 units at 2 “widths” below the earlier buy level. So the buy is 2 units ($2,000) at $133.25. This would be 15 shares. The next number in the sequence is 3. That would be 3 units at another 3% discount to the earlier purchase, which was $129.50. This is as deep as the scale went for this campaign. On 7/6/2026, STZ had a huge range, and shares were bought all the way down to the $129.50 tranche.

At this point the Fibonacci sequence was reversed for the scale out beginning at $130.75. As you can see there was buying and selling between 7/7/2026 and 7/13/2026. This generated some nice production, lowering the cost of the campaign. On 7/13/2026 STZ hit $138.25 (1% above the anchor). Rather cash out the remaining 22 shares, this system strives to get the campaign cost of 1 unit below some trailing stop loss. This locks in a profit for the campaign and looks to catch large trend (at no added risk) for the remaining unit. So 15 shares were sold and campaign cost for the final unit of 7 shares was $108.07.

For this campaign J. Welles Wilder’s Parabolic Stop and Reverse is the indicator of choice (discussed in detail in an earlier post). See Chart (courtesy of StockCharts). The stock trailed up for a couple of days but was stopped out on 7/23/2026 at $129.12.

Return On Capital Employed (ROCE)

This is where the swing or short-term system passes muster. The only reason to trade short term is to capitalize on the turnover and velocity of money. To calculate, the amount invested each day is aggregated into the Sum of Capital days then divided by the number of days in the trade to get to the Average Debit. This is the average daily dollar amount tied up in this campaign. From there we get a Total Return of 7.5%, a daily return of 0.357% (Note: a prop firm mentor used a target of 0.1% for a daily ROCE) and an annualized return of 130.41%.

This is an example of a campaign that closed at lower price than the entry yet returned 130.41% annualized. It’s a robust system anyone can learn. Subscribe and change your trading mindset.

Go to the Public Trading Log for more details.

Stay Tuned!

Subscribe now

Disclaimer: This is not advice and is for information and educational purposes only. All trades are made under strict position sizing rules.

The Turtle Universe: Rules and Broad Diversification

In the early 1980s, legendary commodity trader Richard Dennis set out to prove a controversial thesis: successful trading could be taught. To settle a debate with his partner Bill Eckhardt, Dennis recruited and trained a group of novices—the “Turtles”—turning them into multi-millionaires.

A cornerstone of Dennis’s methodology was not some secret indicator or gut intuition. It was a tightly defined universe of instruments paired with strict, mechanical rules. Dennis chose highly liquid, trending futures markets that could absorb large institutional positions without distorting the price.

Crucially, broad diversification was baked into the very definition of the Turtle universe. Dennis knew that trends are unpredictable and that one didn’t know in which markets trends, up or down, would emerge. The Turtles didn’t just trade one market; they diversified across entirely unrelated asset classes, including:

• Grains (e.g., wheat, corn, soybeans)

• Precious and Base Metals (e.g., gold, silver, copper)

• Energies (e.g., crude oil, heating oil)

• Financials and Currencies (e.g., Treasury bonds, Eurodollars, Japanese Yen)

This cross-sector diversification was vital to their system. If the grain markets were flat and chopping sideways, a massive breakout in crude oil or a sudden crash in gold could carry the entire portfolio to profitability. By removing emotion from the equation and spreading risk across distinct economic sectors, Dennis showed that structural diversification is what creates a better trader.

To learn more about the Turtles and their story consider picking up a copy of The Complete Turtle Trader by Michael W. Covel (As an Amazon Associate, I earn from qualifying purchases). It’s a good addition to any trader’s bookshelf.

The Scale Trader’s Dilemma: Why Equities Outshine Futures

While Dennis’s Turtles thrived by riding massive trends in commodities and currencies, scale trading requires a completely different structural vehicle. Scale trading—the process of buying into weakness at predetermined depths—is fundamentally incompatible with the mechanics of the futures market for three primary reasons:

• High Cost and Margin Friction: Futures require constant capital allocations for maintenance margins and data fees, severely limiting your flexibility to scale in micro-increments.

• Aggressive Leverage: The inherent leverage in futures contracts amplifies drawdowns. If your scale trading depth takes you into a prolonged correction, the margin requirements can force a catastrophic liquidation.

• The Rollover Trap: Futures contracts expire. If you are scale trading into a long-term macro move, you continuously face contango (when the futures price is higher than the expected spot price) and frictional costs as you roll your positions into further-out months. [1]

Equities solve these structural headaches. Stocks represent permanent equity ownership with no expiration dates, eliminating rollover costs entirely. Furthermore, because equities do not enforce mandatory overnight maintenance margins like futures, a scale trader can weather a protracted downward move without the fear of a margin call or a forced liquidation.

The Hidden Landmines within the Equity Universe

However, moving from futures to equities does not mean you can simply throw a dart at the stock market. Scale trading is an aggressive bet on mean reversion; you are intentionally buying an asset as its price drops. If you apply this methodology to the wrong universe of stocks, you will quickly destroy your capital.

Unfiltered equity markets are littered with structural hazards that make them unusable for scale trading:

• The Small-Cap Liquidity Trap: Small-cap stocks often lack the institutional liquidity that Richard Dennis prioritized. During market panics, their bid-ask spreads widen drastically, and a scale trader can find themselves unable to execute precise entries.

• The Danger of Negative P/E Companies: Speculative growth companies with negative price-to-earnings (P/E) ratios survive on cheap debt and narrative hype. When the market turns against them, they have no underlying fundamental floor to catch them.

• The Risk of Going to Zero: Penny stocks, highly leveraged biotechnology firms, and speculative tech companies can—and frequently do—go entirely bankrupt. If an asset’s ultimate destination is zero, scaling into the position on weakness simply means you are aggressively accelerating your losses into a permanent capital destruction event.

To make yourself a better trader, you must narrow your equity universe down to assets that possess a near unbreakable fundamental floor. You need an elite class of equities that cannot go to zero, possess deep institutional liquidity, and reward your patience mathematically.

Why Wide Moat Dividend Stocks Are the Ideal Vehicle

To make yourself a better trader, your strategy must align with the realities of compounding and risk management. Wide-moat dividend stocks—companies with insurmountable competitive advantages, pricing power, and resilient business models—are the perfect instruments for scale trading.

Just like the Turtles, scale traders must prioritize diversification when selecting their equity universe. Instead of clustering your capital into a single sector, a robust scale trading universe spreads across entirely independent economic drivers:

• Consumer Staples (e.g., cash-flowing consumer goods giants with immense brand loyalty)

• Healthcare and Pharmaceuticals (e.g., medical suppliers protected by heavy patent moats)

• Utilities and Infrastructure (e.g., energy providers with government-regulated monopolies)

• Financial Services (e.g., dominant payment processing networks and credit card rails)

• Dividend-Paying Technology (e.g., legacy software giants and infrastructure firms with massive cash hoards and recurring enterprise revenues)

This equity diversification mirrors the Turtle strategy. If regulatory pressures temporarily depress your healthcare anchor positions, your consumer staples, utilities, or technology positions can keep paying your portfolio’s bills. Here is exactly why wide-moat dividend stocks outshine futures and speculative equities within a diversified scaling system:

1. True Value is Grounded in Cash Flows

The fundamental value of a stock is a long-term function of its cash flows (the present value of all expected future cash distributions). Unlike futures, which are simply derivative contracts based on raw materials, or negative P/E stocks built on hype, wide-moat stocks represent partial ownership in real, cash-generating businesses.

2. They Are Not Likely to Go to Zero

When you scale into a position, you are preparing to buy weakness. By targeting industry giants protected by deep economic moats, you significantly mitigate the risk of bankruptcy. These companies are heavily supported by massive institutional investors. When the stock price drops, institutions like pension funds, endowments, and sovereign wealth funds step in to buy the discount. This strong institutional floor creates an active cushion, ensuring that buying into a declining level is a calculated value play backed by big money, not a value trap or catching a falling knife.

3. They Pay You to Wait

Scale trading requires immense patience because your anchor entry point might suffer a temporary drawdown before finding a bottom. Wide-moat stocks offset this psychological hurdle by paying a steady dividend. You aren’t just crossing your fingers and hoping for price appreciation; you are collecting passive income across multiple diversified sectors while the market realigns with each company’s intrinsic value.

4. You Can Start Small

Thanks to modern zero-commission brokerages and fractional shares, you do not need Richard Dennis’s millions to build a broadly diversified universe. You can start with as little as one share per company. This allows you to precisely map out your sequence across multiple sectors—planning exactly how deep from the anchor point you will add to each position, and exactly how many shares you will purchase at each level without over-allocating capital.

Becoming a great or even good trader doesn’t happen overnight, but by applying the Fibonacci Scale Trading framework I am teaching, shifting your universe to wide-moat dividend stocks and applying strict position sizing and risk management discipline, you are actively choosing the path of a resilient trader. We will continue to discuss the tools, the framework, and the strategy to navigate any market environment. If you found this discussion valuable and want to continue developing your trading edge, consider signing up for a free subscription or making a purchase. Your backing supports this work: helping you become a highly disciplined, successful trader.

We’ve all been there. The market moves beautifully in your direction, and then—paralysis. You don’t want to cut it too early and miss the big run, but you don’t want to hold too long and watch your hard-earned green turn back into red.

Enter the Parabolic Stop and Reverse (SAR).

While originally designed as an entry and exit system, its true genius lies in its design as a dynamic, accelerating trailing stop-loss. It might just be the most elegant piece of exit engineering ever conceived.

Let’s look at where it came from, why it works, and how it can improve your trading.

The Mastermind Behind the Dots: J. Welles Wilder Jr.

To understand the brilliance of the Parabolic SAR, you have to meet its creator.

In 1978, a mechanical engineer turned real estate developer and technical analyst named J. Welles Wilder Jr. published a legendary, slim book of just 130 pages titled New Concepts in Technical Trading Systems. (Note: As an Amazon Associate, I earn from qualifying purchases if you buy through my link).

To say Wilder revolutionized modern trading is an understatement. If your charting software has a pre-built list of indicators, Wilder probably wrote the math for a lot of them. He is the mastermind behind:

• RSI (Relative Strength Index)

• ATR (Average True Range)

• ADX (Average Directional Index)

• The Parabolic SAR

Wilder approached the markets not like a speculator guessing where prices would go, but like an engineer trying to solve practical, mechanical problems. He wanted to remove human emotion, hesitation, and greed from the equation.

How it Works (Without the Head-Scratching Math)

Most technical indicators look backward, averaging out past prices. The Parabolic SAR is different: it factorizes both price and time.

Visually, it appears on your chart as a series of dots trailing above or below the price.

• Dots below the candles mean you are in an uptrend (protect your long position here).

• Dots above the candles mean you are in a downtrend (protect your short position here).

But here is the magic of how it moves: it is incredibly impatient.

Instead of moving at a linear, fixed distance behind the price, the Parabolic SAR utilizes an Acceleration Factor (AF).

1. The Starting Line: When a new trend begins, the dots start far away, giving the trade some breathing room to establish itself.

2. The Acceleration: Every single time the market makes a new high (or low for shorts), the indicator ratchets closer to the price.

3. The Max Speed: The speed continues to accelerate until it hits a pre-defined speed limit.

The Big Takeaway: Even if the price does nothing but move sideways, the time-decay aspect of the indicator ensures that the dots will continue to creep closer to the current price. Wilder put a premium on time. If the trend doesn’t continue moving in your favor, the SAR assumes the momentum is dying and marches right up to meet the price, locking in your gains.

Why Its “Original Design” Fails—But Why Its True Purpose Wins

Wilder originally designed this as the Parabolic Time/Price System. The “Stop and Reverse” (SAR) name meant exactly what it said: when the price hit the dot, you were supposed to close your long position and immediately open a short position (and vice-versa). It assumed you should always have an active position in the market.

Here’s the catch: That strategy works beautifully in a roaring, highly trending market (which Wilder estimated occurs only about 30% of the time).

But in a choppy, sideways, or consolidating market? It’s a complete disaster. It will whip-saw your account to death, cutting you long, flipping you short, and chopping up your capital.

The Ultimate Pivot: The World’s Best Trailing Stop

While the “Stop and Reverse” entry strategy is outdated for modern, noisy markets, its mechanism for trailing a winning trade is unmatched.

When you are already in a highly profitable, runaway trend, standard trailing stops are either too loose (giving back too much profit) or too tight (getting shaken out prematurely).

Because the Parabolic SAR’s acceleration factor mirrors the compounding speed of a true market breakout, it acts as a tight, protective safety net that behaves exactly how you feel: as the trade gets more extended, your tolerance for a pullback should get smaller.

Why Wilder’s Book Belongs on Every Trader’s Bookshelf

If you want to transition from a retail hobbyist to a systematic trader, you need to read New Concepts in Technical Trading Systems.

It is not a book of vague theories, “mindset” platitudes, or complicated academic jargon. It is a highly specific, step-by-step blueprint. Wilder wrote it in an era when traders calculated indicators by hand with pencil and paper. Because of this, his explanations of why markets move, how volatility behaves (ATR), and how momentum shifts (RSI and SAR) are exceptionally grounded.

Studying his original work won’t teach you how to copy-paste settings. It will teach you how to think like a mechanical designer. It forces you to ask: What is my exit rule? How am I accounting for time-decay in my trades?

Stop letting your winning trades turn into break-evens. Put down the fancy new AI indicators, open up a chart, turn on the Parabolic SAR, and watch how beautifully it protects a runner. Your PnL will thank you.

First a portfolio update:

At present we have 4 stocks in the portfolio.

NKE - NKE made a quick pop the day after purchase. Sold 0.5 units at $42.00 for a 5% gain. Average cost for remaining 0.5 unit is $37.42. In trend mode. Stop loss for Monday is $40.39. Current gain per unit is $6.95.

AVGO - After 1 scale AVGO made a 5% move from the buy point. Sold 0.5 units for $388.00 for an average cost of 327.06 on the remaining 0.5 unit. Stop for Monday is $357.20. Current gain per unit is $72.91.

STZ - STZ made 10 trades this week. The original buy in was 137.42 for 1 unit. The scaling has increased the number of units to 3 and reduced the average cost to $128.94. Orders in for Monday to buy 2 units limit $132.00 and sell 2 units at $138.25 holding 1 unit for trend mode. Current gain per unit is $5.12.

APH - APH was a new add this week. Bought 1 unit at $156.90. Orders in to buy 1 unit at 153.75 and sell 0.5 units at $165.00 and retain 0.5 units for trend mode. Current gain per unit is $2.16.

For public tracking, the portfolio management count is 5 stocks or ETFs in scale mode with no limit on trending. Unit sizing and campaign count in an actual account will be discussed in a later post. All trades can be tracked on my Trading Journal.

Now on to Scale Trading with the Fibonacci Sequence.

Scale Trading

I would guess that most active traders are familiar with the concept and process. but as an intro to the post or for those not familiar with the process, scale trading is a risk-managed approach to building or exiting stock positions incrementally rather than all at once. Instead of committing full capital at a single price, a trader buys (or sells) smaller “scales” or portions of the intended position at predetermined price levels as the market moves in their favor or against them. This technique is especially popular in volatile or trending stocks because it lowers average entry cost on pullbacks, reduces emotional decision-making, and allows traders to stay active across a range of prices while controlling overall exposure. In practice, a scale trader starts a position at the initial entry with a fraction of their total commitment. If the stock drops add to the position, turning what could be a single high-stakes bet into a series of measured, probability-weighted steps. Scaling out capitalizes on volatility to capture small profits, reducing the trader’s average cost of the campaign. There are as many ways to exit the campaign as there are traders. I prefer to work a campaign until the average cost is at a point where I can lock in a win and let the rest ride and see if a nice trend emerges. If not, I’ll get stopped out for a small gain.

Something to note, scale trading has its risks which must be managed. While in scale mode I do not trade with a conventional price stop. I set a dollar stop on the campaign based on a percentage of my account size. I use the classic 2% (of account size) as the maximum loss per campaign. This and unit sizing are the ultimate weapons against getting whipsawed - the enemy of many trading strategies.

The Fibonacci Sequence

As with the method of scale trading most active traders are familiar with Fibonacci retracements. What I’m talking about is the actual sequence. The Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …) is the simple additive series in which each number is the sum of the two numbers before it. In scale trading, the sequence itself provides a natural, accelerating progression for building stock positions. A trader can allocate shares or capital according to the numbers in the series—starting with a small 1-unit scale, adding another 1-unit scale, then 2 units, 3 units, 5 units, and so on if price continues to drop. This creates an organic, mathematically elegant way to increase exposure gradually: early scales remain modest to limit risk, while later scales become larger only after the trade is proving itself. Because the sequence grows at a rate that mirrors many market momentum patterns, it helps traders size their entries in harmony with the accelerating or decelerating nature of a stock’s move, turning position building into a disciplined, self-similar process rather than arbitrary increments.

In addition to the size of the allocation, the Fibonacci sequence can also govern the distance from the anchor (original purchase price). This creates an especially powerful compounding effect on the cost basis when scaling down. A trader might begin with an initial purchase at the anchor price, then add the next scale 1% lower (1 unit), the following scale 2% lower (2 units), then 3% lower (3 units), 5% lower (5 units), 8% lower (8 units), and so on—using the sequence numbers simultaneously for both the percentage distance and the relative size of each new tranche. This dual application means the largest purchases automatically occur at the deepest, most discounted levels farthest from the anchor. The exponential growth in both spacing and volume heavily weights the overall position toward cheaper shares, dramatically lowering the blended average cost basis compared with equal-sized or equally-spaced averaging. Early risk stays contained by the small initial scales close to the anchor, while the mathematics of the sequence ensures that any recovery needs to travel a shorter distance to reach breakeven and generate outsized gains on the larger, lower-priced portions of the campaign. The combination of size and distance make scaling in with the Fibonacci sequence mathematically superior to conventional scaling grids.

Hypothetical Case Study

Below is a comparison of 3 methods of scaling in and out of a stock. It assumes an initial purchase of stock at $100/share, a unit size of $1,000 and each day declines 1% in value until it reaches $81, a 19% drop (the 19% drop is where we would reach the 8-unit layer in the Fibonacci sequence). Subsequently it recovers and we sell at $101. The stock has gone virtually nowhere but in all 3 methods the trader has walked away with a gain. Note: I know stocks don’t perform this symmetrically, but it is sufficient to illustrate the differences of the Fibonacci scale in.

Method 1 - Conventional scale in and out. When the stock drops 1% another unit is purchased. As the stock recovers 1 unit is sold at 1% more than it’s purchase price. The unit size is $1000. Total shares bought - 221. Total cash outlay - $19,921. Average share cost at bottom - 90.14. The result, a gain of $221.

Method 2 - Scale in with the Fibonacci sequence and scale out with a conventional scale out. Total shares bought - 228. Total cash outlay - $20038. Average share cost at bottom - $87.89. The result upon recovery, a gain of $741.

Method 3 - Scale in and out using the Fibonacci sequence. Total share bought - 228. Total cash outlay and average share price at bottom will be the same as Method 2. The total gain, however, is $1,222. Better than Method 2 and substantially better than Method 1.

Method 3 does, however, have a slight drawback. By holding onto more shares for longer the return on capital employed each day is fractionally reduced compared to Method 2. The figure below is a comparison of return of capital employed (ROCE).

As you Method 1 had an annualized ROCE of 20.34%. Methods 2 and 3 were both over 3 times that amount (76.93% and 68.51% respectively). Method 2 outperformed Method 3 by a slight amount but that too, has a drawback. Scaling at 1% increments over a portfolio of stock turn into a day-trading activity unless automated. Most people don’t have time for that. Limit orders for Method 3 can be placed before or after trading starts and not interfere with the day job. A quick look and maybe some entries/adjustments at lunch maybe optimal but the wider scales make for a more swing trading feel.

Conclusion

Obviously this was a simplistic comparison. Stocks don’t move with that symmetry. There is an infinite number of potential prices moves within that range. It is, however, a certainty that those moves will be either up or down. Scaling in and out will capture harvest that volatility. The purpose of this post was twofold: 1)to introduce the framework of scale trading using Fibonacci sequence and 2) to provide an example of it’s mathematical superiority to conventional scale trading.

Hit Subscribe if you want to read about I deal with unit sizing, scale width selection, cash management and risk management in total. We’ll also review some trades in detail. It’s free!

Stay tuned!!

Al

Disclaimer:
This article is for educational and illustrative purposes only. It is not financial advice, investment advice, or a recommendation to buy or sell any security. Trading stocks involves substantial risk of loss and may not be suitable for all investors. Always conduct your own research and consult a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results.

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A Learned Reality

Many swing and short-term traders make the game harder than it is because they feel with the right set of indicators, tools or information that somehow the short term is predictable and tradable. I was one of those traders. I’ve been at this a long time (I’ll save the history story for a later post) and read who knows how many books about trading and investing. I’ve tried all kinds of systems, methods, indicators, guru stock pickers and anything else I thought might give me an edge. I finally came to the reality that trying to predict the near term in the market was not for me. That, however, did not mean it was not tradeable. I learned to let the movement work for me.

I quit trying to predict the future. Instead, I capitalize on the noise.

Welcome to my Substack. This publication is dedicated to one clear goal: building and maintaining a systematic trading edge using a structured scale-in and scale-out position model.

My Core Framework: Scaling into the Noise

I don’t buy or sell entire positions all at once. Entering a position in one chunk exposes capital to immediate, unforced risk.

Instead, my system uses a highly structured mechanical model:

• Scale-In Phases: I build into active positions incrementally using mathematical tiers. This allows me to capture a lower average cost basis during choppy, range-bound behavior.

• Scale-Out Windows: As volatility pushes prices up into short-term extensions, I extract profits methodically. This systematically de-risks the capital left on the table.

• Trend Capturing: By constantly harvesting small wins inside the noise, the core position pays for itself. When a trend emerges, I ride the remaining position for maximum gains.

This approach removes emotion, forces disciplined risk management, and turns market turbulence into a structural advantage.

Real-Time Transparency: The Tracking Sheet

A systematic edge is nothing without data. Yet any history I have trading this framework is not transparent. Last week I recently began posting my trades on X (@APulliamTrades) and have provided an accessible Google spread sheet. Results will speak for themselves.

You can track my active positions, scaling tiers, and historical performance live in my [Google Tracking Sheet - Click Here to View].

Tip: Bookmark this link to monitor each campaign.

What You Will Get as a Subscriber

This is not a “get rich quick” stock-tipping service. This is a transparent look inside a repeatable, rule-based process. By following along, you will receive:

1. Systematic Trade Breakdowns: Real-time looks at how I am scaling in and out of active stock/ETF positions.

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Disclaimer: Content published here is for informational and educational purposes only. Trading stocks involves substantial risk of loss and is not suitable for every investor. Past performance is not indicative of future results.