Developing a Strategy - Opinions required?

[TouchingSkies]

Folks,

Work full time and made a lot and lost a lot, which has finally led me to develop a strategy. Below is one I am developing, it is fluid and open to suggestions. It has taken "inspiration" from more than one source and I would like your feedback :

1. The step by step small to mid-cap analysis:
a>Spread under 10%?
b>What is the company’s plan to make money?
c>What is the the game changing catalyst(s)?
d>Is the cash-flow a likely issue for the price?
e>How many shares in circulation and their make-up?
f>Quality of management?
g>It’s relative strength to the overall market?
h>Glance at upcoming macro economic events?

2. Money Management - (100% investment capital divided into 80% for 8 stocks (8x10%) updated daily to reflect actual portfolio)

3. Always Use a Trailing Stop Loss - with support/resistance, once moving using swing low and high points taking into account bid-ask volatility spread, to lock your profits and stop your losses, with initial trailing stop under a support base,a swing point low and lowest bid. [or could I use ATR of 5 instead?]

4. To Buy - (1)Buy on first pullback from breakout from a base (bigger the base the better) OR (2) Buy when in consolidation base near support OR (3) Buy on breakout from base(remember bigger the base the better ) - It all depends on upon how well you know the stock and sometimes the GAP up or down reaction.
Buy always before closing bell (unless it looks very convincing -i.e. fantastic RNS/rapidly increasing bid) if it is finishing higher than open for (1|2|3) in half's (again unless it looks very convincing)- tranches of 50% and 50% on the declining/rising swing low|high pullbacks) - taking into account bid-ask volatility spread[or could I buy in thirds instead?]

5. Initial Profit Target - This can be done by checking previous resistance or for new highs, by measuring the distance between support and resistance of the consolidation base, though remember to allow profits to run and look for stocks that can at least double your money.

6. Keep TA Simple - support/resistance/trends and patterns taking into account bid-ask volatility spread price and nothing else [indicators merely confirm afterwards -thus useless]

7. No Holy Grail and Patience - Accept there is no holy grail strategy, only discipline and patience is vital for entry and exit


Any opinions?

[geezer]

Folks,


Any opinions?

Well, it seems to me that it is a valiant effort, but it requires more work. I say this because I've made these sort of stragegy memos many times and got to find out from experience some of the things that were wrong.

The basic problem I see is that you are not specific enough in the various elements of your plan to know what they mean and what to do when you are trying to make buy/sell decisions in practice.

For example, trailing loss "with support/resistance, once moving using swing low and high points taking into account bid-ask volatility spread, to lock your profits and stop your losses, with initial trailing stop under a support base,a swing point low and lowest bid. [or could I use ATR of 5 instead?]" Just how are support/resistance determined? How are swing low/high points determined? What does it mean exactly to take bid-ask volatility spread into account? What is 'bid-ask volatility' anyway? When do you use ATR 5 instead? And why would you use ATR 5 anyway? You may know the answers to these questions, but they don't appear in your post.

These indeterminacies run throughout your plan, I think. What I found in my trading from plans of a similiar sort is that when it came right down to it, I couldn't make a decision in practice. Or, really, I could justify any decision depending on how I evaluated each factor, but I had no objective criteria for the evaluations.

The second thing is that it seems to me that you may have a more complicated plan than is needed, and it may work against you. But I'm not sure because I don't know what time frame you are planning to trade. I

For example, your item 1 makes it look like you have a long term position in view. The company's plan for making money is almost totally irrelevant, for example, if you are day or swing trading. And a trailing stop based on the last swing high/low is a bad idea if you are position trading or long term investing. It's difficult to evalute the plan without knowing your intended trading time frame.

There are other things that need greater specification. Your money management plan is very weak, I believe, partially because I don't even see how it is a money management plan.

And your initial profit target suffers especially from the sort of vagueness that I am criticizing. You say it "can be done," but you don't say that is what you are going to do or explain just how it can be done. In my view, this is an especially egregious error, because knowing when to exit is at least ten times more important than knowing when to enter.

I do think you are hitting on all the areas you need to, and your ideas are good. But it looks to me as though you really need to work on specifying exactly what all these thing mean and eliminating those that are not useful for your type of trading.

[useless]

I dont like mixing technical analysis with "the cramer method" which is sort of what you describe there.

I either look at the technicals - or i find a fortune 500 type company who is making money with a positive P/E that looks beat down.

[TouchingSkies]

Sincere thanks for the latest feedback... more needed though.

When I mention ATR, it is in view to replacing support /resistance, rather than in addition. Regarding bid-ask volatility, I have noticed using ADVFN, for market maker stocks, it is just the higher highs that matter, but higher highs of the bid.

Also I am looking for promising companies breaking out and follow the trend (like Livermore and Canslim), so a long or short term really does not apply, I just want to catch the trend in stocks that are promising fundamentally also

The intention is to follow the trend with trailing stops and if it fails..bail out.

I know only little about Cramer, since he isn't popular in the UK, though I believe in TA (for entry and exit) and fundamentals complementing each other.

In regard to money management, I though it was simple, though admittedly above the quoted "2%" max of portfolio......with maximum holdings listed to 8.

Anyway feedback sought and again appreciated for myself and others.

[geezer]

It occurs to me that you might be looking more for feedback on the elements of your plan than on the coherence of the plan as a whole, so I’m going to offer a few observations about that.

As I suggested before, it really isn’t possible to judge the various factors without knowing the time-frame you are trading. There is a big planning difference between entering a trade you plan to get out of in seconds or minutes from one you are willing to hold for months or years. In your second post, you mention that your overall idea is to locate “promising” companies “breaking out,” and then you intend to “follow the trend.” And you note, “so a long or short term really does not apply.”

Ok, so this is what I hear you saying. You intend to evaluate companies on the basis of their fundamentals and make a judgment about whether their economic prospects are good. Then you will watch the shares price, and if the price is in a long term consolidation or range, when it leaves this base, you will enter the trade. You will use a trailing stop to limit losses and protect profits. You will take profits at a significant resistance level or else, in case there isn’t a nearby resistance, you will use a level determined by the distance between support and resistance of the consolidation base. You will practice risk control by allocating only 10% of capital to any one trade, and you will allocate a maximum of 80% of capital to all trades.

For me, this is a long term trading plan. What you mean when you say long or short term doesn’t apply, if I understand correctly, is that you aren’t making a prior commitment to how long you hold a trade but allow that to depend on the development of the trend. But the thing is, you are prepared to hold the trade for as long as it takes. You are not going to be out by the end of the day. You are not trading swing highs and lows. Essentially, you are a value trader using charts to time entries and exits. That’s a long term trader. I.e., your view is long term, whatever the time of a particular trade. Going over your plan from this perspective, I would make the following suggestions.

First, your step one is ok as far as it goes, but it isn’t an adequate description of the basics of value analysis. Remember, a critical part of your plan is identifying companies that are “promising fundamentally.” Perhaps you should study value analysis a bit more and refine this list.

Second, as for money management, in addition to your diversification plan, you might want to look at other ways to allocate funds. I’m partial to fixed-risk calculations myself.

Third, I suspect that using swing low/high or ATR as a trailing stop level will prove unsatisfactory. I think you will get stopped out too often, and it conflicts with your expressed intention to allow profits to run.

Actually, I don’t like stops very much, and so I might be prejudiced. The thing is, I’ve run countless simulations testing various stop algorithms, and I’ve never once found a system with stops that did not do worse than the same system without stops. I say this while at the same time insisting that one must know when a trade has failed and he must exit. I just don’t think that stops are the optimal answer. They are useful only when the trader doesn’t know when to get out or doesn’t have the psychological fortitude to get out.

Fourth, your buy signals look good to me. I think they need to be specified with greater precision, but it should be possible to do that.

Fifth, your profit target is really unclear, and this is part of exit strategy, the single most important thing in trading. So it needs some work. I think. In my infinite wisdom.

Sixth, “Keep TA Simple.” Couldn’t agree more. If you do use patterns, I suggest Bulkowski’s work, if you don’t know it already. He is also helpful on profit targets.

Seventh, exactly correct.

Good plan! Good luck!

[TouchingSkies]

Ok, so this is what I hear you saying. You intend to evaluate companies on the basis of their fundamentals and make a judgment about whether their economic prospects are good. Then you will watch the shares price, and if the price is in a long term consolidation or range, when it leaves this base, you will enter the trade. You will use a trailing stop to limit losses and protect profits. You will take profits at a significant resistance level or else, in case there isn’t a nearby resistance, you will use a level determined by the distance between support and resistance of the consolidation base. You will practice risk control by allocating only 10% of capital to any one trade, and you will allocate a maximum of 80% of capital to all trades.

Spot on Geezer....your feedback has been much appreciated by myself and others who are reading this.

Also the thing is, I don't enjoy baggage of labelling myself value or growth or techie etc.... I'm interested in areas where I believe the share price can rise and nothing else.....may be I am being naive.....