Trading Game Plan

a.k.a Stock Trading Play Book

Introduction

The objective of this stock trading strategy is to build a high-quality, diversified and low-maintenance portfolio. This trading game plan was developed to include three basic trading fundamentals: First, using simple analysis to boost profits; Second, protecting earnings and preserving capital (minimizing risk); And last, managing trades from start to finish. When reading the following plan, one may find it complicated at first.  But I can assure you, in no time one will find it straight forward, simple and best of all, it will take just minutes a day to apply the stock trading skills.

The Stock Market is up, is down or just goes sideways. It's ease to be invested when the market trends in a strong direction. But what to do when the market goes sideways? Just remember, "when in doubt, stay out". It is generally better to lose out on profits than to lose money.

Game Plan Outline

1. Use of two technical indicators:  Exponential Moving Average and Parabolic SAR.

2. Buy Exchange Traded Funds (ETFs) with high liquidity (high volume).

3. Hold just enough ETFs as outlined on page Asset Allocation.

4. Place stop orders to exit when signaled by technical indicators (down trend).

5. Buy securities in increments - optional, depending on account size.

6. Maintain a log (keep notes) for every purchase and sale of securities.

7. Don’t calculate profits daily or weekly, just review month-end portfolio results.

8. Let the game plan do its task as outlined, never buy on emotion or sell on fear.

Please review these game plan rules frequently. If things don’t work out, try to determine where you have failed to follow the rules or vice-versa.  It does not mean you can’t change the plan, but don’t do it in middle of the game.  The game plan is simple, making it more complicated by adding more technical indicators or some fundamental analysis may not change the results significantly in either direction.

In a bull market everybody makes money, but in a bear market it’s more difficult especially for long-term investments. In 2008, most long-term investors have lost many years of paper profits.  My game plan is trying to reverse the long-term investment trend and concentrate on capital preservation.

Game Plan Detail 

[1] Two Technical Indicators - the 20-day Exponential Moving Average EMA(20) and the Parabolic SAR (AF 0.05 0.20) Stop And Reversal indicator. These 2 indicators are used for our swing trades buy and sell points.

Exponential Moving Average – the 20-day moving average was determined after different tries with long term like 50-day or even 200-day moving average.  The change of the 20-day moving average responds quicker to price swings in strongly trending markets. More details are given at the “trading strategy” page.

Parabolic SAR - the Acceleration Factor increase 0.05 and max 0.20 has been slide modified from the default values. This technical indicator is used by many traders to determine the direction of an asset's momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. Sometimes known as the "stop and reversal system", the parabolic SAR was developed by the famous technician Welles Wilder, creator of the relative strength index. More details are given at the “trading strategy” page.

[2] Exchange Traded Funds – ETFs trade just like stocks and have a prospectus where you can check the holdings.  They can be sold rapidly, with minimal loss of value, any time within market hours. Currently, all ETFs seek to achieve the same return as a particular market indexes. Such an ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index.  The ETFs I prefer provide a perfect mix of diversity across all sectors. No research of fundamentals is required because these funds include hundreds of excellent large cap companies. More details are given at the “trading ETFs” page.

[3] Portfolio Value – I focus on a limited number of ETFs to achieve certain objectives and never use more then 4 non-leveraged funds for my long positions. These funds are equally allocated and include the S&P 500 Index, the Nasdaq 100 Index and an international Emerging Market fund. The combination and diversity of these funds have the best chance of beating the return of the S&P 500 index. More details are given at the “asset allocation” page. 

[4] Exit Point - Stop Price – Updating the stop price (exit) for each position is the most important task to preserve our capital. This task takes only a few minutes and is performed after the stock market is closed. Exit points are set different for long positions (investments) and swing trades (3 to 8 days holding period).

Long Positions - when the stock trades below the moving average EMA(20), then we place a 7% stop order which is calculated from the last highest closing price for each holding.

Swing Trades - there are 2 exit points. One exit point is the Parabolic SAR indicator and the other is a 3% stop order. Usually the 3% stop order will be used for 1/2 of the holdings and usually executes first. However when the Parabolic SAR signals a sell, we exit all our swing trade positions immediately. 

[5] Cost Averaging – I do not follow the traditional approach to cost averaging by investing equal amounts at monthly intervals. Instead, I am buying in in 2 or more increments depending on the account value. In general, a position gets added only when the stock moves up. Since I am buying only baskets of stocks (ETFs), there is no concern about a 52-week high, usually watch buy investors. After funding your brokerage account, start trading in small amounts at first to get used to applying your new trading skills. You may do some paper trading (simulated trading that investors use to practice).

[6] Trading Action Log – Discipline and some homework is the key to successful stock trading. One effective way to control impulse buying and selling is keeping a simple log of all the trading activities. Knowing why one entered or exited the trade instead of letting the mental (emotional) aspect take over the trading decisions. Do your homework weekdays and enjoy your weekends by not thinking about your stock trading activity. I use a MS Excel spreadsheet to keep a trading log. More details are given at the “trading action log” page. In addition to my spreadsheet, I have a small notebook, where I keep additional notes I feel are important to keep track of and warrants reviewing occasionally.

[7] Capital Preservation – The objective of my trading plan is capital preservation via controlled buying and selling. My strategy includes some profit taking, especially after a significant upward movement. We recommend not to calculate daily or weekly profits – the monthly brokerage summary is all you need to track a portfolio. More details are given at the "profit target" page.

[8] Game Plan Review – It takes a lot of discipline to adhere to a game plan. It takes time not to get emotional with every purchase. There are expectations for the DOW Jones index to be up, but then the opposite happen more frequently in a very volatile market. Trading is not for everybody, but little patients will pay off at the end and proven to be very rewarding and exciting. When in doubt, review the plan. Don’t try to tweak it to improve it to achieve even greater result. Never try to hit over the fence, to score with a series of hits will always make the difference in a winning game. "Cheers to happy trading!"