Trade Plan

I am a trader that uses technical indicators and my ability to identify patterns in order to establish trades. I view risk management as the most essential piece to becoming a successful trader; every trade I place has a predetermined stop.

Sell signals will generally define themselves, but I will raise my stops dependent on technical indicators to maximize my number of winning trades and lock in profits. I typically form a target for every trade in order to assess risk/reward of a trade, but I will not sacrifice profits to wait-out a position that begins to retrace.

I am becoming more and more of a believer in scaling-in on trades to obtain the best average share price and limit risk when first establishing a position. If my hypothesis on a trade is proved correct, I will scale-in to that trade according to my trading plan.

 

Trading Capital is divided into the following categories:

  • (25%) Swing trading small cap stocks
  • (35%) Long term investments of bargain priced stocks – dividend darlings
  • (40%) Sector allocation strategy – I monitor sectors to rotate the majority of my wealth into the strongest performing sectors of the S&P500

This strategy means a lot of in and out of small caps, while consistently moving majority of wealth into strong performing sectors of the S&P, and picking up long term value stocks whenever they fall to levels I believe are bargains.

 

My Thoughts on Fundamental vs. Technical Investing

I once read that a person can see all they need from a chart to know whether that particular investment is a buy or not. I believed this whole-heartedly…until my heart was ripped out of my chest.

Every trader should engage in his/her necessary due diligence fundamentally to ensure the technical indicators being used correlate to each other. I was once thought I could buy and sell based solely off of the way a chart looked. I mean why would you not want to back test your theory by looking at the 10K? I am not an accountant by trade, but I have learned enough to help me decipher whether the company is headed in the right direction or not.

But let me back up for a minute, because I am MOSTLY A TECHNICAL TRADER. I enjoy the charts much more than I enjoy reading. I am a visual learner, so I do believe there is a lot you can immediately learn about a company from the chart. I am only trying to make the point that investing the time in research, both fundamentally and technically, is essential to becoming a profitable trader.

TECHNICAL TOOLS

RSI (7):

The Relative Strength Index is an oscillator which I will mainly use to determine when the market is overbought. An RSI above 70 indicates overbought conditions and would have been a very good study to use over the past 100 trading sessions to identify when the market was ready for a downturn. RSI can also be used to identify oversold conditions, indicating the market is ready for an uptrend, but from personal experience I like to see the RSI below 30 for several sessions in a row before buying.

An oscillator is a technique that smooths out various moving averages to give you a measure between 0 to 100 percent for closing prices relative to a specific number of bars on a chart being studied.

RSI = 100 – (100 / (1+RS)

Where: RS = Average of X days’ up closes / Average of x days’ down closes

The number of days (x) I have chosen (for a more volatile line due to weekly trades) is 7

SMA(20):

The Simple Moving Average is the arithmetic mean and gives each day’s price equal weight. This is a basic moving average that I will use to help identify a buying opportunity. I have chosen a time period of 20 to shorten the calculated average and give me a more volatile line for weekly trading patterns – but not as volatile as possible with this average as I still want a smooth, longer term, pattern. The SMA will be used in conjunction with the EMA.

EMA(5):

The Exponential Moving Average (5 day) is a weighted moving average that assigns more weight to the more recent price. I will sell when the EMA crosses below the SMA. I will buy when the EMA crosses above the SMA. I will also look to sell when the last session’s closing price closes below the EMA.

MACD:

The Moving Average Convergence / Divergence system will be used because it offers an oscillation style technique in combination with two exponential moving averages. The system is useful because it will offer me additional insight as to when to buy and sell (based on the slower signal line being crossed by the faster MACD line for a buy or the opposite for a sell indicator) as well as helping to indicate overbought/oversold conditions based on where the lines are tracking above/below the zero line (overbought would be well above the zero line and oversold would be well below). “The MACD line is the difference between two exponentially smoothed moving averages of closing prices” (Murphy, 253).

Slow Stochastic:

The Slow Stochastic is an oscillator which uses two lines, the %K and the %D to help determine where the most recent closing price is in relation to the range of prices for a certain amount of time.

The %K line is the more sensitive of the two lines and the formula is as follows:

%K = 100 [(C-L14) / (H14 – L14)]

Where:

C = Latest close

L14 = Lowest low for past 14 periods (days, weeks, or months)

H14 = Highest high for past 14 periods

The %D line is a 3 period moving average of the %K line and when used in conjunction with each other, they help to identify buying or selling points when they cross. The lines oscillate between 0 to 100 and I will be using them as a reference for buying/selling based on whether they are both above or both below the 20 or 80 mark. A cross by the faster %K line while both lines are below the 20 mark will identify a buying opportunity. A cross by the faster %K line while both lines are above the 80 mark will identify a selling opportunity.

 

Source for Technical Analysis: Murphy, John J., Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance). Penguin Group, 1999. ISBN: 978-0-7352-0066-1