This post is a long overdue outline of my equity trading strategy for those of you who are interesting in better understanding my equity style.
I am a swing trader. This is to say that I buy and hold stocks from a few days to weeks or months. However, I will not hesitate to drop a position the same day I have entered if it no longer warrants holding. I use mostly technical analysis in my swing trades, but I do have a background in fundamental analysis and will incorporate some fundamentals when appropriate. I also use primarily fundamental analysis in my longer term investments.
TECHNICAL ANALYSIS - INDICATORS AND TIME FRAMES:
I use a combination of Candlestick signals, Moving Averages, Chart Patterns, Stochastics and Volume at Price. I use the 8 exponential moving average as my trigger line. I only go long when a stock is above the 8 ema and will close a stock that closes below the 8 ema. Most stocks tend to go up when above this moving average and down when below so it's a no-brainer for me. The other MA's I use include the 50 and 200 simple moving averages. These are my primary indicators.
Secondary indicators I may use include Fibonacci retracement, MACD, Bollinger Bands, Donchian Channels, VWAP, & Pivot Points as well as the 21 sma and the 34 ema.
My general theory is that too may indicators spoil the chart as do too many chefs spoil the soup. I keep it simple and generally stick with my primary indicators only checking the secondary indicators for confirmation should I find the need. Often traders will become overwhelmed by too many indicators which begin to contradict one another, often causing the trader to lose confidence and question his resolve. This leads to hesitation and fear which only hampers the trader.
As a swing trader, I chart the daily chart first and foremost and I make most of my trading decisions based on the daily chart. I then move on to the weekly and even longer time frames to get an idea of how the chart looks on longer term. I will look at shorter time frames, mostly for exits but also to get an idea of where a chart is going intra-day.
BUY SIGNAL / SELL SIGNAL
I go long or short based on candlestick buy and sell signals. I use stops mostly as a marker as I try to give positions to the end of the day before deciding to close them out. (Note: if I have to leave my office for an appointment and am not able to watch my positions, I do set hard stops.) If a position is selling off with volume, I will close it early to avoid further losses but I try not to get shaken out of a position that is only seeing some profit taking but for which the bullish trend is still in tact. How the candle closes determines the signal. A candlestick is not a sell signal on a daily chart in the middle of the day. The 12 major signals are listed below. Each signal is linked to a page that will provide a simple description or image of the signal. Once you are able to recognize the major signals, you can continue your education and learn the secondary signals.
Bullish Engulfing Signal
Bearish Engulfing Signal
Hanging Man Signal
Dark Cloud Cover
CATCHING THE TREND
I am a firm believer in respecting the trend. That is to say, I will tend to go long in a bullish environment and either stay on the side lines or lean short in a bearish environment. Longs have a harder time working in a distributive environment and vice-versa, so if I determine that the overall indices go into a down-trend, I will refrain from adding longs. I often refer to this as my internal Market Timer. When it is green, I will add longs when it is red, I will refrain. I do not, however, close all longs in my port the moment I believe the market to be reversing to the downside. Once I am in a position, I manage it on its own merit, individually. I may start adding shorts once I confirm that the market is in a downtrend.
A full sized position for me is 10% of my portfolio. I will sometimes take a half-size or starter position in stocks that have not yet confirmed then add to them as they do or I may take smaller size while the markets are turning bullish but have not yet confirmed. I will also often scale out of a position to lock in gains along the way so my portfolio is rarely filled with only full-sized positions. I try to never take more than 12 positions at any one time as I find more that 12 is difficult to manage. But I do try to have several positions on because too few and I lose diversification.
All that said, if I am struggling or in a slump, I don't hesitate to go very small in position size, even paper trading for a couple of weeks until I get my mojo back. Likely I am struggling due to some emotional trigger that I have not kept at bay. More on that later. But going smaller size, even a quarter of my normal size, can often keep those emotions away by reducing my risk to a point where losses are less painful and I trade objectively.
KEEPING THE ODDS ON MY SIDE
Trading is a numbers game. Everything I have mentioned thus far comes down to one thing, keeping the odds in my favor. I just mentioned that having too few positions can keep me from being diversified and diversification helps to keep the odds in my favor but statistics are also a factor. The best traders on Wall St., statistically, only get their picks right about 50% of the time. Somehow they manage to be profitable even though half of their picks are losers. In other words, how they trade is more important than what they trade.
If I know that I am statistically likely to only be right about my stock picks half the time, then only taking one position will give me a 50/50 chance of having a winner. This does not keep the odds on my side. However, if I take two positions, I know that chances are that one of them will work while the other one doesn't. As soon as I recognize that I have a loser, I can drop it early and let the winning position ride, taking more in gains than I do in losses. This keeps the odds on my side. It's like being the casino, the house has the odds. Fortunately I also have my knowledge of candlestick signals which tends to give me better stock picking percentages and also helps to keep the odds in my favor.
RULES RULES RULES!!
This is the most important section herein. None of the ideas I have described above would do me any good without my rules. I keep them in bold black ink on 8x10 sheets of paper on the wall of my office and add new a new rule whenever I make a mistake that is not already covered by a current rule or I adjust them as needed. If I don't keep my emotions at bay, I will never be profitable. This speaks to the idea of how I trade being more important than what I trade.
I have been working on a Power Point presentation for weeks now about writing rules but I find it is a complicated task. Each and every trader has to derive his/her own set of rules that addresses his/her own risk profile and emotional triggers. You may get upset when you lose $1000 or you may get upset when you lose $100 or maybe you have no issues with losses until you lose $10,000. Perhaps it really bothers you when your gains turn to losses or maybe you can't stand it when you leave money on the table.
Whatever YOUR individual emotional triggers are, you need to have rules to keep them at bay. Emotions are important in our daily lives. They keep us safe but they can be detrimental to a trader. And this includes the emotions that may be affecting your personal life. You are in no position to trade when you are fighting with your boyfriend or your wife is having a baby. Stressful situations can hinder your ability to make objective, unemotional decisions. I am the most emotional person I know but I manage to keep those emotions out of my trading with my rules.
I also keep myself accountable by sharing my positions and performance with the world on my site. My site is my trading journal and every trader should have one...a journal not a website. You don't need to share your trading ups and downs with the public but you should write it down in a personal journal at the least so that you can catch your mistakes and create the rules that will keep you on the right side of the tape.
For more on Trader's Psychology, be sure to check out websites by Dr. Doug Hirshhorn who is an elite Wall St. trader's coach at www.drdoug.com AND Norman Hallett who's 4 minute drills are a must listen for any trader at www.thedisciplinedtrader.com. And stay tuned for my Power Point on rule writing. I promise to get it out before long.