Developing my first Strategy/System

johenmo · 21 September 2008

Previous shares have been gambles (no plan) So from ASF and various books I am building something - more for longer term at this stage. I don't have the time and depth of skills/experience yet for trading. And with the market as is, I have time to build and test. So below is what I have put together as the building blocks upon which to work - almost like a checklist for a newbie to go thru to make sure they don't forget anything. Hence no detail yet as to indicators, % etc etc. I have to have an overall idea before working on the specifics. Aim to commence with up trend stocks only. Nat ready for shorting at all.

Constructive comments please - what have I missed. My terms may not be the same as yours. What have I forgotten. Tks to the many people on ASF who have influenced/contributed - too numerour to mention

Trading Setup
• Time allocation to manage – when/ how often & how long (>12 mnth for CGT, unless exit triggered)
• Resources – what, where, capital
• Back test below system before executing for real – up, sideways and down market
• Forward test in real time below system before executing for real
• Trading in ASX only.
• Determine which sectors won’t trade in

Conditions
• Trade in up trend
• Define the trend – what constitutes a trend
• How to determine if a trend changes direction
• Trend on areas – AOX, sector

Stock Research
• stock fundamentals
• director history
• sector/sphere situtation (e.g. ASX 300) – present/future
• TA of chart – daily, weekly

Money Management & Risk analysis
• Fixed fractional positing sizing - Risk per trade (% of capital) & position size (% of account)
• Profit target & reason
• Potential gain
• Breakeven level
• Risk/Reward ratio
• Bookkeeping – incl evaluation of system

Trade Management
• Initial Stop loss
• Trailing stop loss
• Time stop??
• Entry setup/signal
• Entry confirmation
• Entry trigger
• Exit trigger

jersey10 · 21 September 2008

johenmo said:
Previous shares have been gambles (no plan) So from ASF and various books I am building something - more for longer term at this stage. I don't have the time and depth of skills/experience yet for trading. And with the market as is, I have time to build and test. So below is what I have put together as the building blocks upon which to work - almost like a checklist for a newbie to go thru to make sure they don't forget anything. Hence no detail yet as to indicators, % etc etc. I have to have an overall idea before working on the specifics. Aim to commence with up trend stocks only. Nat ready for shorting at all.

Constructive comments please - what have I missed. My terms may not be the same as yours. What have I forgotten. Tks to the many people on ASF who have influenced/contributed - too numerour to mention

Trading Setup
• Time allocation to manage – when/ how often & how long (>12 mnth for CGT, unless exit triggered)
• Resources – what, where, capital
• Back test below system before executing for real – up, sideways and down market
• Forward test in real time below system before executing for real
• Trading in ASX only.
• Determine which sectors won’t trade in

Conditions
• Trade in up trend
• Define the trend – what constitutes a trend
• How to determine if a trend changes direction
• Trend on areas – AOX, sector

Stock Research
• stock fundamentals
• director history
• sector/sphere situtation (e.g. ASX 300) – present/future
• TA of chart – daily, weekly

Money Management & Risk analysis
• Fixed fractional positing sizing - Risk per trade (% of capital) & position size (% of account)
• Profit target & reason
• Potential gain
• Breakeven level
• Risk/Reward ratio
• Bookkeeping – incl evaluation of system

Trade Management
• Initial Stop loss
• Trailing stop loss
• Time stop??
• Entry setup/signal
• Entry confirmation
• Entry trigger
• Exit trigger

what is the biggest position on any one stock you will take based on % of trading capital.

For example, if you have a trading capital of $50 000 what is the maximum amount you would put on any one stock?

johenmo · 21 September 2008

jersey10 said:
what is the biggest position on any one stock you will take based on % of trading capital.

For example, if you have a trading capital of $50 000 what is the maximum amount you would put on any one stock?

Tks jersey10...At this stage I'm looking to make sure I have a "list" of everything I need to consider rather than the next stage of what are the specific numbers etc. So your question is the next round of thinking.

I am considering fixed fractional position sizing so that should determine the size of the position - so If I am using the 2% rule it'll be based on 2% of 50K = 1K at risk. Am I right? Maybe this isn't right for "investing". I will work on various stop loss levels but one book mentioned 1% with 10% stop loss. So if I went 2% with 10% stop loss then my position would be 10K each. Right?

From a practical (c.f. theoretical) POV, is fixed fractional position sizing suitable/best for longer term holds?

Tks

tech/a · 21 September 2008

You'll never satisfy everything in a checklist.

Its far simpler than most people make it.
Humans have a terrible habit of making the most simple the most complex.
Sorry but that's what your doing.

(1) Trading setup.
This is simply an Entry and an Exit all they are are beginning and end points.
• Time allocation to manage – when/ how often & how long (>12 mnth for CGT, unless exit triggered)

Its been my experience that longer term systems are easier to design than shorter term if wanting to trade portfolios.If trading shorter term I would suggest single entities like Indexes/Currencies or Futures.

• Resources – what, where, capital

Id suggest $25-30,000 otherwise in my view your under-capitalised--the more the better.

• Back test below system before executing for real – up, sideways and down market

A common error,you wont find the holy grail---don't expect your or any method to work in every market.The market trends the greater majority of the time---start there.

• Forward test in real time below system before executing for real

I don't see a "system" below?
• Trading in ASX only.

Maybe so but test other bourses as well.

• Determine which sectors won’t trade in

Wouldn't it be wiser to say "When" than WONT.

(2) Conditions
• Trade in up trend
• Define the trend – what constitutes a trend
• How to determine if a trend changes direction
• Trend on areas – AOX, sector

All these are simply filters in you "System" not conditions.

(3) Stock Research
• stock fundamentals
• director history
• sector/sphere situation (e.g. ASX 300) – present/future
• TA of chart – daily, weekly

These are all part of the "Universe selection process.
Beyond that all will have little relevance to your trading as it will trigger a simple buy or sell with NO consideration of the CURRENT fundamentals or director performance.
Survivorship is less important that the reason WHY your method will consistently profit.

(4) Money Management & Risk analysis
• Fixed fractional positing sizing - Risk per trade (% of capital) & position size (% of account)
Investigate fixed capital position sizing,Pyramiding and Compounding profits.

• Profit target & reason
With a syste you dont need a "Reason" if its triggered--buy or sell then you buy or sell.
• Potential gain

I think you mean reward to risk again not necessary to know in advance for a "System",your results from testing will lay out for you your "Systems" R/R and $ return for $ Risked.
• Breakeven level

Not needed in a system

• Risk/Reward ratio

See above

• Bookkeeping – incl evaluation of system

Best Ive seen is STATOR you'll be able to mirror your blueprint.

(5) Trade Management
• Initial Stop loss
• Trailing stop loss
• Time stop??
• Entry setup/signal
• Entry confirmation
• Entry trigger
• Exit trigger

These are your conditions.

This is an excellent Power point presentation from Howard Bandy.
I'll bet it cost his attendies far more than us.

http://www.blueowlpress.com/NAAIM.html

fimmwolf · 21 September 2008

I like the way you have broken it down into sections. It makes it seem far more manageable when viewed as several small problems, rather than one large one.

I found an example of a trade plan which appears very simillar, perhaps you will find it useful.

Example trade plan

Trade Details:

Date
Market
Stock Code
Entry Signal
Confirmation

Risk Analysis:
Entry Price
Stop loss Price
Initial trade risk (%)
Profit Target(s)
Reason for Target(s)
Potential gain (%)
Risk/Reward Ratio

Money Management:
Total Account Size
Amount for this trade
Position size
Breakeven level

Order for Broker:
no. of shares
Buy Stop / Limit
Stop loss
Take Profit Order Y/ N

Trade Management:
Trailing Stop Rules
Pyramid Winner
Profit Taking

Exit Strategy for Trade:
Time stop
other

johenmo · 21 September 2008

Tks Tech/a and fimmwolf.

Tech/a - I've read a lot of your posts and you consistently say keep it simple. I can take what you've said and work with that. I did sort something out but it seemed too simple and as I read more, I obviously got confused - still in the learning (knowingly incompentent) stage. I have seen vague references/examples and they seemed pretty simple. I shall go back and read that post (the best I've ever seen).

Re the sectors won't trade in - I recognise I have a better "understanding" of some sectors (food companies, transport companies) than others (exploration). This was about getting a better understanding of the sector before investigating. I relate to the Aust and NZ exchanges due to living in them - I can see that I am limiting potential opportunities.

Back test in different markets is to show to myself that the (eventual) system is for a specific market. I did some playing with AB and found that the simple system profited in up , and didn't in everything else.

I'll go straight into the link.

Fimmwolf - tks for yr example. I did use this to build the list.

You've saved me a lot of time and work. The comments are really appreciated.

Johenmo

johenmo · 12 February 2009

tech/a said:
You'll never satisfy everything in a checklist.

Its far simpler than most people make it.
Humans have a terrible habit of making the most simple the most complex.
Sorry but that's what your doing.

Tech/a - 5 months later and I can say it fell into place. It really is so simple - not easy - but simple. I have been paper trading a very simple system and it's OK. But it is revealing a lot to me in terms of trading in timeframes of days/couple of weeks.

Canaussieuck wasthe catalyst that converted your message into understanding.

Many thanks for getting me past barrier number one - me. Now for barrier 2 - the rest of me!!
J

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