Strategies and Trading Rules
When you are following a strategy with a solid set of rules you will be psychologically prepared to execute any trade with the confidence knowing why you are buying or selling. After using this strategy for a few weeks you will notice that you are more relaxed, confident and not panic selling when others do.
Rember - trading does not have to be exciting. If you are looking for excitement or an adrenaline rush – go and do something else like bungee jumping or visit a casino. You are here because you have a plan and want to succeed.
The important things to reiterate are to follow the rules, cut out the noise from the media and not to get emotional.
Although the strategy described here is based on the momentum ranking of each index (Dow Jones 30, S&P 500, Nasdaq 100, Russell 2000, US 5000) the same principles apply for any other ranking.
If you have not set your Account Size and the Risk factor, go to the Profile ⇨ Trading Profile Settings page and make the necessary adjustments. In the trading profile settings section enter your Account Size in US dollars 5000, 21500, 100000 or any other value and the Risk Factor. We personally use 0.003 which targets a daily move of 30 base points, others prefer 10 basis points which is (0.001).
Common rules for all strategies
1. Trade only on Wednesday
You could choose any other day, but statistically this is the best week day to trade. It does not matter if the stock moves 20% down – we do not trade unless it is our trading day. By trading only one day a week we achieve a few things:
- 1. We avoid acting too fast – (panic buying/selling)
- 2. We reduce work load
- 3. We cut our trading fees which could be $15 per trade (in UK), in USA ($0-4.95) plus any currency conversion fees if you don’t have a USD account
2) Is the Index used for ranking is Trending?
You are only allowed to open new positions (buy stock) if the Index used for ranking is Trending (above its 200 days moving average).
3) Current price greater than $5.
4) Market Capitalization greater than 1bn to ensure strong liquidity.
5) Daily volume greater than 100,000.
A substantial trading volume ensures that the stock is easily tradable.
6) Avoid selling stocks on Friday afternoon or Monday morning (unless that is a part of your strategy).
Friday is the day when most of the traders close their positions and Monday morning is when the amateurs take profit.
Momentum Strategy 1 based on 100 Days Price Performance
- Highest momentum in the Index based on the last 100 trading days
- Ranked in the top 20% for the selected index
- The stock is trading above its 100 days moving average (MA) – trending is ticked
- The price GAP is lower than 15%
Select one of the indices. In our example we will be using S&P 500. That will retrieve the momentum ranks table for all 500 stocks in the S&P 500 index.
Start from the top of the ranking table (Rank 1, 2, 3...) and pay attention to two columns:
- Trending – if there is a no check that means that the stock is trading below its 100 day moving average (MA), so this stock is disqualified
- GAP - if higher than 15% - disqualified
Click on the little triangle icon at the start of each row to further examine the stock (or click on Symbol link to open a new page). This will bring up a tab page with more stock details like: the latest price, a chart with 100 days closing prices, company information...
At the time of writing KLAC had the highest momentum rank of 1 and AAPL (11).
We do our checks:
- 1) Is S&P 500 Index trending? Yes
- 2) Ranked in top 100 (which is top 20% for the S&P 500 index)? Yes
- 3) Is stock trending? Yes
- 4) Is GAP below 15% Yes
After a quick scan over each tab, we decide that the stock KLAC fits into our stock picking strategy. The next step is to see how many shares we can buy depending on our Account Size and Risk Factor set in our registered Profile. With an Account Size of $100,000 and a Risk Factor of 0.003 we can buy 26 shares.
At this point we decide that the stock KLAC passes all the checks above so we add it to our Watchlist to review later and move on to the next stock in the momentum ranking table. To add stock item to Watchlist - click on the check box in the first column.
Repeat the stock selection process until you have run out of money and have built your initial portfolio.
Once the initial portfolio has been constructed the main weekly tasks will be:
- Rebalance the portfolio every Wednesday - buy or sell stocks.
- Rebalance positions every second Wednesday - position size rebalancing in order to avoid random risks
Rebalance portfolio every Wednesday
Once a week we check if any positions needs to be closed. The easiest method is to use our trade checks:
- 1) Is the stock in top 20% of the index (S&P 500)? If it is ranked at 101 or higher – we sell it
- 2) Is the stock trending (trading above its 100 SMA)? If No we sell it
- 3) Was there a GAP higher than 15%? If YES – we sell it
- 4) The stock is no longer in the S&P 500 Index? If Yes we sell it.
If we have sold any stocks, we will have some spare cash. Check the S&P 500 Index – if it is above its 200-day MA (trending) we can start looking for new stock to buy which fulfil all the checks from our trade checker.
Rebalance positions every second Wednesday
Positions resizing is done twice a month. We must go through this process of position size rebalancing to avoid random risks. Position sizing is calculated automatically every time you view the stock ranking table or your Watchlist table depending on your Account Size and Risk Factor. The ATR (Average True Range) is calculated daily. You could edit your Account Size and the Risk Factor at any time in the Profile page.
If the difference in the shares number is minor, there is no need to do anything. For example, let’s assume that you have bought 100 shares of some stock. Two weeks later the ATR has changed and the position sizing calculation in the Shares column shows that you need to have 95 shares. If the share value is $15 we would not sell any shares, but if the share value is $150 we will sell 5 shares.
Your monthly trading calender
Momentum Strategy 2 based on highest 52 weeks percentage price change with 5 days percentage pullback
- Highest Percentage Change in Price for the last 52 weeks. This parameter ensures we get stocks that have made maximum gains over the past year. We retrieve the top 50 with the highest %.
- Worst Percentage Change in Price (1 week). From the above top 50 stocks, we then choose those that are also among the 10 worst performers over a short one-week (5 trading days) period.
- Analyst Recommendations – STRONG BUY or BUY
- Momentum vs Industry – momentum relative to its peers. Score above 60
- Current Price greater than $5. All stocks must be trading at a minimum of $5
- Market Capitalization greater than 1B. We pick stocks that are among the top 2000 in terms of market value to ensure strong liquidity
- Average 20-Day Volume greater than 100,000. A substantial trading volume ensures that these stocks are easily tradable
From Momentum Ranks menu select All Short Term Pullback menu item:
This will retrieve about 50 stocks as described in our screening parameters, with the highest percentage change in price for the last 52 weeks (1 year) and the worst 5 days percentage change in price. We are interested in the first 10 stocks which have the worst performance for the last 5 trading days.
We do our checks:
- 1) 52Wk Price Change – greater than 100% preferable
- 2) 5D Price Change - pullback – usually negative percentage
- 3) RSI14D - the relative strength index (RSI) for the last 14 days. Ideally around 50 (30 to 55)
- 4) Avg Daily Volume 20D - the Average 20-Day Volume. Volume greater than 100,000 indicates that the stock is easily tradable.
Examine the stocks in more details as you would do with any other stocks. Click on the little triangle icon at the start of each row to further examine the stock (or click on Symbol link to open a new page). This will bring up a tab page with more stock details like: the latest price, a chart with 100 days closing prices, company information...
Search the web for any upcoming or past events, the latest news to understand why the price has dropped/pulled back. Also, you could visit the company’s website – Investor Relations section and look for clues.
Remember, you could only buy the stock if the index the stock belongs to is trending.
Once you have decided to buy, check how many shares you could afford and look for an entry point. We always use limit orders when buying or selling.