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Stock Trading Strategy
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a.k.a. Trading and
Investment Model
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Stock
trading & investing is all about strategy,
and strategy is
all about information,
a game plan and managing risk!
Trading Model
My trading model is very simple and consists of
only a few components, a market timing model consisting of technical
indicators like Simple Moving Average (MA), Wilder's Relative Strenth
Index (RSI) and Fibonacci Retracement.
My small portfolios are long positions and are held
above the 20-day simple moving average. Positions are funded in 3
increments with at
least $5,000 but not exceeding $35,000. Exchange Traded Funds (ETFs) are
selected from my watch list based on market
conditions. Leveraged (2x) ETFs are traded only when the CBOE market
volatility index is at least below 30.
Note: the Trading Range/Channel must be drawn for
each Exchange Traded Fund (ETFs).
current trading range for my favorite ETFs |
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Simple Moving Average (MA)
explained
Period: 20
Offset: 0
Average Type: Simple or Exponential
Average of : Last (Price)
The 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
Moving Average from today’s price. Adding this result to yesterday’s
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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A moving
average is commonly used with time series data to smooth out
short-term fluctuations and highlight longer-term trends or
cycles. The threshold between short-term and long-term depends
on the application, and the parameters of the moving average
will be set accordingly. For example, it is often used in
technical analysis of financial data, like stock prices, returns
or trading volumes. It is also used in economics to examine
gross domestic product, employment or other macroeconomic time
series. Mathematically, a moving average is a type of
convolution and so it can be viewed as an example of a low-pass
filter used in signal processing. When used with non-time series
data, a moving average filters higher frequency components
without any specific connection to time, although typically some
kind of ordering is implied. Viewed simplistically it can be
regarded as smoothing the data. |
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Wilder's Relative Strength
Index (RSI) explained
Period: 14
Moving Average: 5
RSI is a versatile momentum oscillator that
has stood the test of time. Despite changes in volatility and the
markets over the last 10 years, RSI remains as relevant now as it
was in Wilder's days. While Wilder's original interpretations are
useful to understanding the indicator, the work of Brown and
Cardwell takes RSI interpretation to a new level. Adjusting to this
level takes some rethinking on the part of the traditionally
schooled chartist. Wilder considers overbought conditions ripe for a
reversal, but overbought can also be a sign of strength. Bearish
divergences still produce some good sell signals, but chartists must
be careful in strong trends when bearish divergences are actually
normal. Even though the concept of positive and negative reversals
may seem to undercut Wilder's interpretation, the logic makes sense
and Wilder would hardly dismiss the value of underlying price
action. Positive and negative reversals put price action of the
underlying security first and the indicator second, which is the way
it should be. Bearish and bullish divergences place the indicator
first and price action second. By putting more emphasis on price
action, the concept of positive and negative reversals challenges
our thinking towards momentum oscillators.
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.
Fibonacci
Retracement explained
Fibonacci retracement is a very popular tool among technical
traders and is based on the key numbers identified by
mathematician Leonardo Fibonacci in the thirteenth century.
However, Fibonacci's sequence of numbers is not as important
as the mathematical relationships, expressed as ratios,
between the numbers in the series. In technical analysis,
Fibonacci retracement is created by taking two extreme points
(usually a major peak and trough) on a stock chart and
dividing the vertical distance by the key Fibonacci ratios of
23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are
identified, horizontal lines are drawn and used to identify
possible support and resistance levels.
Moving Average
Convergence-Divergence (MACD)
MACD 12 26
Moving Average 5 Offset +2
I use it as Buy
and Sell Signals
Developed by Gerald Appel in the late
seventies, the Moving Average Convergence-Divergence (MACD)
indicator is one of the simplest and most effective momentum
indicators available. The MACD turns two trend-following indicators,
moving averages, into a momentum oscillator by subtracting the
longer moving average from the shorter moving average. As a result,
the MACD offers the best of both worlds: trend following and
momentum. The MACD fluctuates above and below the zero line as the
moving averages converge, cross and diverge. Traders can look for
signal line crossovers, centerline crossovers and divergences to
generate signals. Because the MACD is unbounded, it is not
particularly useful for identifying overbought and oversold levels.
Risk Management
see my rules
that explains my trading stategy - porfolio funding and risk
management.
Asset Allocation - Portfolio
Diversification
Asset allocation affects both the risk and return of investors, and
is often used as a core strategy in basic financial planning. To
achieve portfolio diversification, I have modeled 2 portfolios using
Exchange
Traded Funds. I don't have any preference, both model porfolios achieve my
objectives.
For my large portfolio (plus $75k), I am using a balanced portfolio for
current investment income along with capital preservation and modest
growth. I use my age as an allocation guide. For example, when my
age is 60, I invest 60% in fixed income securities and the remainder
(40%) in ETF diversified equities.
more... information about my balanced portfolio
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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