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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
Relative Strength Index (RSI).
2. Buy Exchange Traded Funds (ETFs)
with high liquidity (high volume).
3. Hold
just enough ETFs as outlined on page Sector and Index funds 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 Wilder's Relative Strength Index RSI(14). These 2 indicators are used
to evaluate continued strength or weakness using simple yet
extremely powerful price action analysis.
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.
Wilder's Relative Strength Index RSI - RSI is a momentum
oscillator that measures the speed and change of price
movements. RSI oscillates between zero and 100. Traditionally,
and according to Wilder, RSI is considered overbought when above
70 and oversold when below 30. Signals can also be generated by
looking for divergences, failure swings and centerline
crossovers. RSI can also be used to identify the general trend.
[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.
When the stock trades below the moving average
EMA(20) I place a 7% stop order which is calculated from
the last highest closing price for each holding.
[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
increments. 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!"
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