This post and trading system is EXCLUSIVE to Aussie Stock Forums. I am going to show you a complete share trading system, back tested performance and something that any trader can take away and use.
The following post outlines a share trading system that is designed for trading stocks that meet a specific scanning criteria that reduces the stocks you are trading down to a basket of say 20 shares. It is to active to trade across an entire index, say the ASX200. As a part of this article I am going to also include some exceptional (and backtested) screening approaches, along with some shortcuts on how to choose stocks to trade.
Have you ever run your favorite scan based upon either fundamental or technical criteria, come up with a group of stocks and then struggled for entry and exit criteria to get you into and out of a stock. This system addresses that very problem. It is designed to give you an efficient way to get you into and out of trades that is profitable across the majority of stocks.
A warning first. This system, like the stockmarket and most systems suffers from large drawdowns. In other words leverage at your own risk. It does however offer a highly profitable method for entering and exiting the market.
A second warning. The scanning criteria is the way to tilt the market well and truly in your favour. If your stockmarket scans give you a group (or basket) of stocks that are most likely to outperform the market you can really tilt the playing field in your favour before even applying a technical trading system to the stocks. Let me ask you this.. would you rather trade stocks that belong to an index and average say 8-10% per annum or a basket of stocks, if you re-weight the basket every so often returns 20-40% per annum. The right answer is trade the basket that average 20% plus..not just the stocks that make up an index.
This trading system is designed to work across just about any stock and is designed to be in the market a lot.
In building a trading system that works across almost anything we need to analyse the charactertics of the stockmarket itself.
The stockmarket has two characteristics, it regresses to the mean after a downturn, in other words turns up and doesn't trend very often to the downside and it shows momentum after breaking to new highs or in other words shows trending characteristics on the upside. The result is that two types of signals should work, an oversold signal and /or a breakout signal. This system uses both.
Before I disclose the entry rules, I emntioned earlier that it is the scanning criteria for your portfolio that really stocks the odds in your favour. If you get your scanning criteria right and the criteria has a history of market outperformance the best way to enter the market is during a dip.
There are lots of ways to do this for example buy when price goes BELOW a moving average. You could use an oscillator like an RSI and buy when it shows an oversold reading etc.
Our technique simply uses the parabolic indicator. If the price of the stock is BELOW (Note I said BELOW!, not above) and the 4 period RSI is below 25 we will buy at market.
Rule 1: If Close< Parabolic Indicator (AF 0.01, maxAF, 0.2) and RSI(close,4)<25 then buy the next bar at market.
The second rule kicks in if the first one does fill. If close is below the Parabolic buy at the 15 period high price on stop.
Note that traditional technical analysis say to buy above the Parabolic indicator, I disagree, it's not as effective as anticipating a trend change, although does leave you bruised at times (like anything).
This chart demonstrates the entry rule 1 in action.
Entry Rule 1.png
This chart demonstrates entry rule 2 in action
Entry Rule 2.png
Note that the shaded green boxes illustrate when price is trading below the Parabolic SAR....
If you think I'm cherry picking the good trades, you'd be RIGHT! I'll show some of the uglier trades later.
Let's look at the exit rules:
The first one is as follows:
Once we are in uptrend, which in this case is established when the Parabolic indicator flips so it is below the closing price.. as shown above when the close is ABOVE the red dots we will use the Parabolic indicator to trail the stop.
This exit works great in strong up trending markets as you can see in the previous trades shown, but what about when the market is trending lower... the second exit shunts us out of the market more quickly. Basically if the index (we are using the S&P500 Cash Index (SPX) in this example is below where it was 100 bars ago we will exit as soon as the parabolic flips to uptrend and the close is ABOVE the Parabolic indicator.
Exit Rule 2.png
YES.. still cherry picking
Here's a BAD trade:
Bad Trade 1.png
And here's an UGLY one... followed by two mediocre trades
In the next post we'll look at the backtesting history and the use of stops.
For the FUNDAMENTAL guys out there, you've probably already guessed but our screening techniques we use to pick stocks are based almost exclusively on fundamental analysis and yes, unlike almost everybody else we backtest our screening techniques as well.. until tomorrow, enjoy your evening. I've written a book on how to trade BHP as well, click the link in my signature to go the the landing page.