03 March 2007
The best, most profitable and safest strategy / trading system in a bull market
spot a counter with firm intermediate to long term uptrends (SMA50, 100, 200 all up and MA50>MA100>MA200),
when the market begins to correct itself due to being overbought, wait for correction to run its full course like in current market (TA language: 14 day RSIs of major indices and index stocks drop to around 30),
patiently wait for the bottom consolidation pattern (usually small- to intermediate-sized double bottoms) to develop and complete,
wait for price breakout of neckline of the double bottoms,
never attempt to guess / speculate a market bottom - This is dangerous! since no one knows where the bottom is, we'd rather let Mr Market tell us in due course. Fortunately, Mr Market always does that.
buy at the very moment of either the breakout using buy stop limit order or buy stop order or at short term support during pullback after breakout if missing boat at breakout - this needs good and reliable alert system and trading discipline. iocbc's alerting system is not reliable and I missed a lot of ideal opportunities. I'll subscribe a good alerting system for reaping handsome profit in future.
Risk management
Initial Stop = price below lowest point of double bottoms
R = Risk = Initial stop - entry price
Normally R should be around 10% of the price.
Use Trailing Stop when price after entry is > or = entry price + R
Trailing Stop = Highest price after entry - R
Buy Stop and Trailing Stop has to be manually calculated and mentally applied daily if the trading platform of the broker does not allow this type of orders.
How many shares to buy?
Use Position Sizing technique to determine position size to take.
Assume total trading capital is TC, usually we are only willing to risk 0.5% of our total trading capital per trade (in this way we can play 200 trades and lose all before becoming bankrupt, 0.5% can be revised to 0.75% or 1.00% up to personal risk appetite), that means the maximum amount of risk we are willing to take is TC x 0.5%. Assume one's total trading capital is $300,000, then the maximum risk he / she is willing to take per trade is $1500 (=$300,000x0.5%).
Number of shares to buy = (TC x 0.5%) / R
Assume R = $0.05, then he / she can buy 30,000 shares (=($300,000x0.5%) / $0.05 per share).
Below is an article addressing Position Sizing,
http://tradermike.net/2005/07/position_sizing
Below is an article addressing R-Multiples,
http://tradermike.net/2006/09/r_r-multiples_defined
spot a counter with firm intermediate to long term uptrends (SMA50, 100, 200 all up and MA50>MA100>MA200),
when the market begins to correct itself due to being overbought, wait for correction to run its full course like in current market (TA language: 14 day RSIs of major indices and index stocks drop to around 30),
patiently wait for the bottom consolidation pattern (usually small- to intermediate-sized double bottoms) to develop and complete,
wait for price breakout of neckline of the double bottoms,
never attempt to guess / speculate a market bottom - This is dangerous! since no one knows where the bottom is, we'd rather let Mr Market tell us in due course. Fortunately, Mr Market always does that.
buy at the very moment of either the breakout using buy stop limit order or buy stop order or at short term support during pullback after breakout if missing boat at breakout - this needs good and reliable alert system and trading discipline. iocbc's alerting system is not reliable and I missed a lot of ideal opportunities. I'll subscribe a good alerting system for reaping handsome profit in future.
Risk management
Initial Stop = price below lowest point of double bottoms
R = Risk = Initial stop - entry price
Normally R should be around 10% of the price.
Use Trailing Stop when price after entry is > or = entry price + R
Trailing Stop = Highest price after entry - R
Buy Stop and Trailing Stop has to be manually calculated and mentally applied daily if the trading platform of the broker does not allow this type of orders.
How many shares to buy?
Use Position Sizing technique to determine position size to take.
Assume total trading capital is TC, usually we are only willing to risk 0.5% of our total trading capital per trade (in this way we can play 200 trades and lose all before becoming bankrupt, 0.5% can be revised to 0.75% or 1.00% up to personal risk appetite), that means the maximum amount of risk we are willing to take is TC x 0.5%. Assume one's total trading capital is $300,000, then the maximum risk he / she is willing to take per trade is $1500 (=$300,000x0.5%).
Number of shares to buy = (TC x 0.5%) / R
Assume R = $0.05, then he / she can buy 30,000 shares (=($300,000x0.5%) / $0.05 per share).
Below is an article addressing Position Sizing,
Below is an article addressing R-Multiples,
Labels: Stock Trading System
