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Need Guidance - TA/Momentum Based Strategy

Discussion in 'Trading Strategies/Systems' started by Rypieee, Jan 23, 2017.

  1. Rypieee

    Rypieee Newbie Keen Beans

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    Good Afternoon fellow ASF Members,

    I wanted to get some help on fine-tuning my trading plan, in particular the following topics:

    1) Position Sizing (including how many positions can be taken up within a portfolio)
    2) Stop-loss analysis/ how to find the optimum level to set my stop loss targets
    3) Filtering out optimum trades to take
    4) Risk Management

    If you could elaborate on your methods or provide any advice to me that would be very much appreciated!

    1) Position sizing

    Based on my current trading plan, I am allowed to have a maximum of 15 open positions at any given moment. I am setting up my position size through the maximum risk allowed (between 0.5% to 1%) based on total portfolio value at the given time (rounded to the nearest hundred). A starting position cannot be more than 10% of the portfolio value.

    Example:
    Portfolio value = $50,000
    I wanted to buy into stock ABC and my entry price is $1.00, my stop loss is $0.90 and my maximum risk allowed on the trade is 1% of the PV which is $500. I would take $500 divide by the difference in the entry and stop loss price ($0.10) in order to get to the number 5000, which is the number of units I can buy in the stock. I would then end up with $5000 worth of stock ABC at the entry time. $5000 is also 10% or less than the PV so I'm still within bounds. Should the position size be more than 10% due to a wider range in entry and stop loss levels, I would scale the position size to 10% or below.

    2) How to find stop loss levels

    When I find a trade that I like, I would allocate my stop loss levels between 2 support levels below it's current price. I also use the ATR indicator to allow my chosen stock to weave about between x2 and x4 of the ATR.

    Example:
    Stock ABC had a recent breakout above $2.00 and the two support levels below that breakout is at $1.80 and $1.60. The ATR on stock ABC is $0.08 which I would then quantify based on my trading plan that I am looking for a stop loss target $0.16(x2 ATR) and $0.32(x4 ATR) from my entry price ($2.00). That means that my stop loss level has to be between $1.84 and $1.68 and in this example. I would set my stop loss to be $1.75.

    3) Filtering out optimum trades to take

    I tend to filter my stocks based on the following measures first:
    -Market Cap above $50million
    -Share price above $0.10
    -Average daily trade above $75,000 (x10 of maximum position size or my current portfolio value)

    I do my scans to create my watchlist weekly, on the weekends, rather than daily(due to my FT job).
    Once I compile a list to scan, I would manually eyeball each chart to find setups that I am looking for. I can use a technical filter, however, I am just starting out and I want to train my eyes on looking for certain set ups manually.

    I tend to eyeball on average 500-600 charts on a weekly basis and I look for stocks that are making new highs with recent breakout over resistance OR stocks that look like they are reversing from their downtrend.

    My charts display the following criterias:
    -3 year time frame on weekly OHLC
    -10 EMA
    -30 EMA
    -150 WMA (Price action needs to be above 150 WMA to be consider - Thanks Stan W.)
    -Volume histogram
    -ATR
    -RSI
    -Guppy's long and short term MMA (I dont use this indicator, I just like it there hehe, I used to use the GMMA but decided to not rely on it anymore)

    I would then create my watchlist from the stocks found and go through my analysis from there on to find things like recent breakout above resistance with supporting volume and candle stick analysis.

    4) Risk Management

    I am fairly good with keeping to my trading plan and abiding by my stop losses, however, I recently compiled my open trades into an excel spreadsheet to see my stats and my open trades at the moment is risking 8% of my PV. Do you have a level or % of maximum drawdowns? If so, what is it?

    I feel like the 8% risk that I am current expose to feels a tad too high but then again, it could be because I am looking at this for the very first time!

    As for Diversification, I adopted Peter2's diversification strategy which is to only have 2 stocks at the very most in a given industry/sub-industry. Only two stocks can be in "metals & mining-steel" at the same time for example.

    Conclusion:

    I have recently seen some weakness (past 2 months) in my portfolio as the overall market has slumped and I have noticed my profits are starting to be taken away. Out of the 4 topics that I have outlined, is there any issues that you experienced folks could point out for me that could be causing a fall in my PV?

    I believe the culprits for my recent drawdowns are from my stop-loss setting strategy and at times, I feel like I am being overly generous with the stop loss range. I also believe that my position sizing strategy can be brushed up on as I use a range between 0.5% and 1% of maximum risk, depending on how risky the stock looks to me. This is also based on discretion and not a systematic process based on various indicators (E.G I found a real estate stock that I like but the macro factors are not supporting real estate stocks so I allocate 0.5% of max risk to that stock).

    Thank you for your time in reading my queries and I look forward to hearing from you!
     
  2. tech/a

    tech/a No Ordinary Duck

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    How do you know you have a long term profitable trading plan?

    These ideas seem to be just that----ideas with no
    Basis for positive expectancy.

    Any answers to your questions would need to then be tested
     
  3. Rypieee

    Rypieee Newbie Keen Beans

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    How do you know you have a long term profitable trading plan?
    I don't know if I have a profitable trading strategy but what I have is drawn from different authors and perspectives + my own. Ultimately, I will be optimising my TP as I go through different experiences to teach me about trading. I'm afraid that I don't have a real person to guide me through every step of the way and the only sources I can get are from books and forums such as ASF.

    Specifically on my risk management, I believe that I have sound risk management techniques - or at least the underlying idea of them are in tact, I just need to find out how to fine-tune the techniques in order to optimise my returns.

    And on my scanning, I haven't found a particular set up or pattern that I am familiar/comfortable with and it is a very broad filter at the moment but I do intend to narrow it down to find things I am comfortable with or niches I can take advantage of... Obviously that would come with time and experience once again I suppose...

    These ideas seem to be just that----ideas with no basis for positive expectancy.
    Any answers to your questions would need to then be tested

    The only positive expectancy that I have are that popular authors have support them and that on forums such as this, part and parcel of my techniques have been echoed across different threads as a good way to "manage risk" for example or "scan charts".

    Other than that, I have no other avenue for knowing the positive expectancy of my TP unless I do it and review it accordingly.

    As mentioned as well, there is a level of discretion applied to my TP to the point of gut feeling at times. I don't believe those variables can be quantified into a systematic TP viable for back testing? My main priority is to control the constants such as "having total Open risk below 10% of PV" or "building a position size based on maximum risk" while letting my discretionary side be itself - developing constantly through experience.
     
  4. tech/a

    tech/a No Ordinary Duck

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    Enjoy the journey
     
  5. Wysiwyg

    Wysiwyg Everyone wants money

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    My 2 cents. You're position sizing method is a solid base, gut feel is better stated as action based on experience, each stock has its own nuance, stock index context (e.g. direction, run) is influential, consider limit orders rather than at market, identify (experience/testing) higher probability trades although this is easier posted than done.
    If success was guaranteed with a buy when this happens and sell when that happens rule then everyone would be doing it Be probably right often.
     
    Last edited: Jan 23, 2017
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  6. peter2

    peter2

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    Ryan, there's too much in your first post to discuss in depth. I first think you need to simplify what you're trying to do. You haven't mentioned what your underlying strategy is. Are you looking to trade a trend or a swing (momentum)? Are you going to buy break-outs or buy pull-backs into an existing trend. Are you trading price charts or a group of pre-selected companies with acceptable FA ?

    Once you understand what you're trying to do I think you'll be able to simplify many details. For example, you've got four prices for your iSL. You only need one or do you even need one? Why is an iSL important to you?

    Using a wide iSL and 10% limit you could end up with 15 - 18 trades. How do you know you can handle so many trades?
    Hint: You won't, because you've already mentioned the loss of open profits as the market falls.

    I'd like to ask why trade individual stocks, why not a few ETF's?

    This is really important. You've got to examine your beliefs about market behaviour and create something that fits your beliefs.

    Once you've established your TP and it doesn't matter what it is. How are you going to have the confidence to trade it exactly as you've written it?
     
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  7. Triathlete

    Triathlete Keep it Simple..!

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    I think having 15 open position to trade when starting out is way too much.
    I would stick to 6 positions.
    Since you are not sure if your plan has a positive expectancy ,maybe you should put your current plan through some backtesting to see if it would have worked previously with your rules.

    Pick the stocks that you are interested in and go back a minimum 5 years and longer the better and trade them as if you were live and see what you come up with, at least you will have some idea of what would have happened before....still nothing is guaranteed going forward in trading...good luck..!!
     
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  8. Rypieee

    Rypieee Newbie Keen Beans

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    Hi Peter,

    To answer your questions in order to give you more insight to my TP (sorry I didn't give those information out as when I was writing up the post, the topics listed were the areas I was seeking advice for, hence, not providing the bigger picture).

    1)You haven't mentioned what your underlying strategy is. Are you looking to trade a trend or a swing (momentum)? Are you going to buy break-outs or buy pull-backs into an existing trend. Are you trading price charts or a group of pre-selected companies with acceptable FA ?

    I am trading with the trend and I am buying on break-outs for both existing trends and trend reversal set ups - buying on the pullback makes me feel uneasy as it does not provide that level of confidence in comparison to a breakout. I used to filter out companies via FA before doing my analysis on them but I have changed the tone in December when I was putting my head down to write myself up a trading plan that I follow [I have not deviated from it yet - some good news I suppose]. Now I select a pool of stocks based on simple metrics, wouldn't consider it FA, such as market cap and avg daily trade to ensure that liquidity is readily available in the pool of stocks. After that, I apply chart analysis to that pool and create my watch list.

    2)Once you understand what you're trying to do I think you'll be able to simplify many details. For example, you've got four prices for your iSL. You only need one or do you even need one? Why is an iSL important to you?

    I have one iSL for every opportunity I find, I think you might be getting confused with my initial statement. I use the ATR and the Support levels I see as a range as to where my iSL would sit between.

    "Example:
    Stock ABC had a recent breakout above $2.00 and the two support levels below that breakout is at $1.80 and $1.60. The ATR on stock ABC is $0.08 which I would then quantify based on my trading plan that I am looking for a stop loss target $0.16(x2 ATR) and $0.32(x4 ATR) from my entry price ($2.00). That means that my stop loss level has to be between $1.84 and $1.68 and in this example. I would set my stop loss to be $1.75." (Snippet from initial post)


    I just wanted to get people's opinion on how they determine what iSL they would use such as "placing iSL below recent support levels". Because my trades tend to be weekly based and with a longer time frame in mind, setting a iSL just below recent support level might not be so viable and can at times, kick me out of trades when it is just the stock's natural movements.

    An iSL is very important to me because I know that I need a determined price point to execute a decision set prior to entering a trade. I have tried managing my open trades without iSL and that failed miserable so I don't believe that I am suited to that. It also provides me a sense of direction and conviction in an emotional phase (deciding to sell the stock).


    3)Using a wide iSL and 10% limit you could end up with 15 - 18 trades. How do you know you can handle so many trades?
    Hint: You won't, because you've already mentioned the loss of open profits as the market falls.


    Since inception of my strategy in early December, backed with a trading plan that still needs fine-tuning, I am sitting on a net return of -2%. I am sticking to my trading plan and managing my open risk as best as I can, but I am still definitely learning from the likes of you in how to better manage my portfolio and adding components of your strategy that I find would add a significant advantage to me. For example, your "total capital risk exposure of 5% on the Mom Book" was something that was lacking in my strategy and I will be adopting it going forward as I can see the benefits of that and how it can control my open risk to a manageable level.

    I wasn't concern about the loss that I have incurred on my stocks as they are all sitting within their parameters and was comfortable to continue holding them. I was more unsure on how to ensure that I don't over expose myself - thanks to you, I have a solution to the problem now and expect that issue to subside once I ensure that my total open risk is below my maximum threshold:) This strategy will control the number of trades within my portfolio based on the risk at the time :p

    4)I'd like to ask why trade individual stocks, why not a few ETF's?
    This is really important. You've got to examine your beliefs about market behaviour and create something that fits your beliefs.


    Never actually considered trading ETFs before... Should something happen to me further down the road and I pull the plug on trading because of failure, I might decide to start back again in the ETFs, thanks for the suggestion :)

    5)Once you've established your TP and it doesn't matter what it is. How are you going to have the confidence to trade it exactly as you've written it?

    I am going to trade based on my TP that is still developing and I am going to do monthly reviews on my actions and selection to see if there is any activity that causes me weakness. I started keeping a record of what I do and why so that future me can reference to it and decide what needs fixing:) In fact, since December, I have a trade book that I manually write my notes in and its taken up 12 full pages (doesn't sound like much but there is a lot for me to review when the month is up:p).

    In the long run, I hope that I manage to develop my TP according to my personality and tolerance to the point that I am comfortable in running the strategy. The monthly reviews are also in place to ensure that the TP is improving and not destroying my capital and myself.

    Thanks Peter!!
     
  9. Rypieee

    Rypieee Newbie Keen Beans

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    Hey Wysiwyg,

    Thanks for the reply,

    Also thanks for the acknowledgement in my position sizing, it is comforting to know that what I have learnt from authors are widely accepted (by 1 person so far anyways).

    Yes, I utilise at limit order and I made the conscientious effort to make sure that I never chase the price, buy orders tend to be left on the market until filled OR after 5 days whereby it is retracted and I will re-analyse the stock to see if the situation is still the same (I would analyse that scenario on a daily chart to see if a pullback could potentially becoming).

    I still need to work on my scanning ability to find high probability trades with acceptable risk/return ratios and I hope that comes with experience. At the moment, I seem to be getting about 25% good trades on my scans, with the remaining 75% being a weak or failed setup - risk managed though. Ideally, I would like to start being able to reach a "winning" ratio of 50-60%.
     
  10. tech/a

    tech/a No Ordinary Duck

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    There is quite a bit in the trueisms presented here that I don't agree with.

    Let's start with chasing price.
    What does that mean to you all
    Why is it bad?

    Do you think price moving strongly in your direction--long or short could be Easier to trade than attempting to anticipate price direction?

    If not why not??
     
  11. Rypieee

    Rypieee Newbie Keen Beans

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    Hey Tech,

    Thanks for the reply,

    I shall use an example to explain my theory:
    I have set a entry price after a breakout that I deem is worthy to be bought into - lets say the price breaks out at $2.00 and I set my entry at $2.10 with a iSL of $1.80. The risk I put onto the trade is $0.30 and the risk-return that I am seeking is x2 of my risk. If the price shot passed $2.10 and landed at $2.30, the risk (based on my stop loss conditions) is now expanded to $0.50 and has increased my open risk. Hence, adding more risk onto the trade that I will need to achieve higher target price to have the same Risk/Return .

    I would love to hear your thoughts on price chasing though, there will definitely be something that I can learn from the chart master:)

    Yes to the fact that a leap in price normally represents strong momentum behind the trade and the probability of that continuing is enhanced - I am thinking of stocks that open with a Gap tend to run strongly for the next few trading days and tend to create a resistance below the level that the gap started from. (Correct me if I am wrong).

    In a situation where I see a gap forming, I am happy to pay for the price of the stock at the occurrence of the gap.

    If its a standard breakout above horizontal resistance or a ascending triangle breakout (no gaps), I would normally set my entry price just above the breakout range, even if it means that the stock has run pass my entry price and my parcel isn't filled - I am not fuzzed too much by it, if a pull back does occur from the breakout and my parcel gets filled, then I can trade the stock according to my settings.

    **I mentioned to P2 that I do not like buying into a pullback - which explicitly means that I won't be looking for stocks with pull back potential. Should I intend to buy a stock after a breakout and it pulls back to fill my order, I still consider that as a breakout trade - albeit a different entry point on the charts (in terms of time wise, $ is the same).
     
  12. Triathlete

    Triathlete Keep it Simple..!

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    One thing in your example that I do not see is where is your strongest resistance levels above your breakout and entry point????.....

    What if their was a very strong level at $2.15 would you still take your trade at $2.10 as per your example ...

    I would think not since their would be a high probability that the trade would reverse very quickly......

    Not every resistance level is the same and a trader needs to know which ones are the strongest this way you have a vey good idea of how much price is likely to rise before reversing...

    I personally like to see at least 15% from my entry price to my strongest levels to give myself some breathing space.
     
  13. tech/a

    tech/a No Ordinary Duck

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    Chasing price.
    I presume (correct me if wrong) That this means you don't place an order or buy if price trades over a pre determined entry price before you've taken a trade.

    When discretionary trading having a hard and fast rule that could leave you at a disadvantage I personally think is not the best policy.

    Pixel changed my mind when one day he told me about a friend of his who relished finding stocks that had taken off. They wouldn't be put off by a move above a resistance area.
    I had to admit that I had watched many fly past me --- so I investigated.

    I came up with the following rules for trading price which had moved away from an ideal entry.
    Often this happened and Ill bet you'll be nodding when I say your nightly scan turns up a runner that you seemingly missed.
    Firstly I'm not advocating taking every trade where you have to do some chasing.

    (1) Never trade a price that has risen 30% or more (From your ideal buy price) before you see it.
    (2) Gaps are good.
    (3) Be aware of close resistance less than 6 mths.
    (4) Beware of Massive volume-- moderate volume is preferable.
    (5) Look for past price action which indicates effort to get price moving long term in your direction.

    Here is a chart with all of the above.(Bottom Chart)

    And then there is the question of position sizing and risk management.
    The chart below is how I like to do it.(Top Chart)Chasing price 1.gifChasing Price.gif
     
  14. Triathlete

    Triathlete Keep it Simple..!

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    That is sort of what I mean.
    I like to know where my strong levels are as this gives me an idea if I will take a trade or not if their is enough in the move or not.

    If we are too close to a strong resistance area I will wait until their is a break and hold above this strong resistance level area even though we have had a breakout,it could still be false if we are very close to the strong level so need to wait before I take the trade.

    Lets look at the above example again from Rypieee.

    I look at the chart and see there was a move from $1.00 to $2.00 and now price has pulled back and consolidating so now I am waiting for the next breakout at above $2.00

    I have also worked out that there is strong price levels at $2.15 and the next strong level at $2.60 which I have marked on the chart, also remember that there are other resistance levels between these prices but they are not significant in my analysis.

    So now price has begun moving again after pulling back to $1.60 this is less than 50% of the previous move which indicates to me that the stock is strong and likely to rise 100% this would bring price around $2.50 and we know there is a strong resistance area just above at $2.60 there is a very good chance we will get a move to this level if price breaks and holds above $2.15. At this price I would take my trade.
     
  15. Rypieee

    Rypieee Newbie Keen Beans

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    Hey Triathlete,

    I would run my charts for over a period of 3 years and majority of my trending stocks have to be trading at it's highest high at the moment - hence the lack of resistance in that instance. My trend reversal stocks are also scanned across 3 years but I like to see support building and trend reversing in the recent 12 months of the chart. When I do analyse stocks like that, I will always consider the potential resistances that I might be facing with a stock and at times, may decide against taking a position because the Risk/Reward diminishes with resistance blocking the trend/momentum.

    Do I look at resistance levels in a stock beyond the 3 year time frame? No I do not include that into my scans or analysis - however, I am aware of any major resistances or supports going back 10 years. We may be looking at 2 stocks with the exact same movement over a recent 3 year time frame and if it comes down to choosing between the two to take a position in (if i can only cover one position) then I would have a quick glance at the 10 year history and see if any major resistance/support levels may posed as a threat.
     
  16. Triathlete

    Triathlete Keep it Simple..!

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    Ok....I was just making the point to be aware that before taking a trade understanding where the strong levels are because these are points at which price can stop at and reverse and again it depends on the type of trader you are some are more aggressive than others......
     
  17. tech/a

    tech/a No Ordinary Duck

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    Blue sky will eventually see resistance
    How would you spot it?
     
  18. Triathlete

    Triathlete Keep it Simple..!

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    We need to be able to spot and be able to read the market in context,When a stock finds resistance and stops rising we either have:

    Equilibrium....where the buyers and sellers are equal in number resulting in the stock trading sideways.

    or it is in

    Disequilibrium, where we have more sellers than buyers causing the price to stop rising and fall again.

    However having the skill to work out where the price is likely to reach prior to your trade is what is needed,this way you are being proactive with your trading and can take the relative steps if it is not working out as you had anticipated.

    I use a combination of Price, Pattern and Time analysis with this as it gives me the points on a chart that I should be watching before the trade and during the trade.
     
  19. tech/a

    tech/a No Ordinary Duck

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    For me there are 3 things to watch for
    Attempting to predict where they could fall I have found to be as effective as swimming against a rip.

    (1) Volume
    (2) Range
    (3) Tests

    I have found you can pick the rip and see how to get out if it.
    There are some key things to look for within the 3 indicators.
    Often 1 and 2 will be very clear
    At other times 3 may come into play

    Perhaps you or someone could work through 1-3
    If their findings are similar to my own
     
  20. Triathlete

    Triathlete Keep it Simple..!

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    Here is what I think and I keep going back to the strong levels which can be calculated.

    Now if your stock has had a good run up and is now consolidating in a sideways movement we can recalculate further strong levels both on the upside and downside and these are marked on the chart.

    From here I we need to wait to see which way the stock is likely to break.

    I will also try and work out what EW we are currently on if I can..... as it is not always obvious , this would give me some confidence as to where I am now and which way it is likely to move and how far it is likely to fall using EW Theory and in combination with the strong levels which have been calculated. As I have said previously I need to see at least 15% if not I stay out.

    If I cannot work out the EW I may use Cycles Theory and in what phase I am in to make a trading decision,it just all depends.
     
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