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a.k.a. Trading Strategy
Trading Model:
My trading model is very simple and consists of
four components, namely the Exponential Moving Average (EMA),
Parabolic SAR (Stop And Reversal), Asset
Allocation - Risk Management, and trading Exchange Traded Funds
(ETFs).
(1) Exponential Moving Average (EMA) explained
Period: 20
Offset: 0
Average Type: Exponential
Average of : Last (Price)
The Exponential Moving Average gives the recent prices an
equal weighting to the historic ones. The calculation does not refer
to a fixed period, but rather takes all available data series into
account. This is achieved by subtracting yesterday’s Exponential
Moving Average from today’s price. Adding this result to yesterday’s
Exponential Moving Average, results in today’s Moving Average. Like
an Simple Moving Average, it smoothes out a data series, making it
easier to spot trends.
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My trading
strategy follows the exponential moving average for a period of 20
days. When the equity trades above the trend line it's a bullish
signal while trading below it's a bearish signal - it's simple and
it works.
Bullish Signal
- when the closing price closes above
the EMA(20) trend line. It's a signal only and does not
necessarily mean it's a bull market rally. I use it as a buy
signal for my long and swing trades.
Bearish Signal
- when the closing price closes below
the EMA(20) trend line. I use this signal to set my stop loss
exit for my long positions. |
(2) Parabolic SAR (Stop And Reversal) Indicator explained
Acceleration Factor: increase 0.05
Acceleration Factor: max 0.20 The
parabolic SAR is a technical indicator that 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, and it is
shown as a series of dots placed either above or below an asset's
price on a chart.
One of the most important aspects to keep in mind is that the
positioning of the "dots" is used by traders to generate transaction
signals depending on where the dot is placed relative to the asset's
price. A dot placed below the price is deemed to be a bullish
signal, causing traders to expect the momentum to remain in the
upward direction. Conversely, a dot placed above the prices is used
to illustrate that the bears are in control and that the momentum is
likely to remain downward.
The first entry point on the buy side occurs when the most recent
high price of an issue has been broken; it is at this time that the
SAR is placed at the most recent low price. As the price of the
stock rises, the dots will rise as well, first slowly and then
picking up speed and accelerating with the trend. This accelerating
system allows the investor to watch the trend develop and establish
itself. The SAR starts to move a little faster as the trend develops
and the dots soon catch up to the price action of the issue. As you
can see on the chart below, the indicator works extremely well when
a stock is trending, but it can lead to many false signals when the
price moves sideways or is trading in a choppy market.
(3) Asset Allocation - Risk Management
My trading strategy embraces both, investing
and swing trading. Using both concepts reduces risk when properly
managed. Depending on the portfolio value, about 70-80% of the portfolio is allocated to long
positions and the remaining allocation of the portfolio is used for swing
trading.
Investing (Long
Position) - 70-80% of the total portfolio is allocated
to non-leveraged ETFs. Buy, hold and manage
equities using a 7% Stop Loss Exit. Holding index
funds long has produced excellent profit results in the past.
Swing Trade (Trend Trade)
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20-30% of the total portfolio is allocated to leveraged ETFs.
Buy and hold equities for 3-8 days using 3% Stop Loss Exit. This allocation is used to hedge during a market down trend
as well as to boost profits in a market uptrend.
(4) Exchange Traded Funds
ETFs Are Safer Than Stocks -
There is less single stock corporate risk as ETFs are a basket of
underlying securities. With multiple securities, you aren't subject
to the wide array of risk including corporate scandals, after market
earning reports, and other factors that affect individual stocks.
Trade ETFs On Both The Long And Short Side - This enables the
opportunity to profit in both rising and declining markets.
Trade ETFs With or Without Leverage - Many traders like the
idea of getting added leverage in their trading and the newly
released leveraged ETFs have seen tremendous volume growth as active
traders have gravitated to them.
ETFs Are One Of The Fastest Growing Financial Vehicles - ETFs
are growing quickly as money managers and traders find them to be
more convenient and have the added benefit of less risk than
individual stocks.
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