My trading strategy for profitable stock trading

There is an old adage in business “If you fail to plan, you plan to fail” this advice applies to many choices we make in life including trading. If we don’t take this message to heart, then lack of planning can be costly. Developing a trading plan or methodology that works for you can take a lot of time, effort, and experience while it cannot guarantee success, having a trading plan makes all the difference for achieving higher heights. The market is driven by people’s emotions, a solid trading strategy will help you make logical decisions and protect you from impulse trade. In this blog I am going to share my own simple trading strategy, I will discuss how I select and manage my trades. This is not going to be very technical so if you are new to trading this is also for you. By the way, I created an android app where you can learn about candlestick patterns and take challenging quizzes checkout Candlestick Patterns for stocks on Google Play Store

My trading plan asks the following questions

1. What is worth trading?
2. When to trade?
3. How much to trade?
4. When to exit the trade?

What is worth trading?

The market moves in 3 different directions, up, side, and downtrend. In the Philippines stock exchange, we are only long market meaning traders can only go long position and earn when a stock price goes up. As you probably heard the saying “the best way to trade is to follow the trend”. This is the advice you can follow as long as you know that the trend can end and you will no longer be friends. There are different ways to identify a trend the most common way is by drawing a trendline. You can draw an uptrend line by connecting a series of low price points sloping upward then you have an uptrend. An uptrend is made up of higher highs and higher lows.

In the example above, Nickel Asia Corporation from July 2020 to March 2021. After connecting three successive trend line points it continued to go up 90% from the third low point. In a long market like the Philippines stock exchange, an uptrend stock is definitely the most worth trading

When to Trade?

As I have mentioned earlier the market is driven by people’s emotions and if you let your emotions guide you it can be costly. One thing that can help you is by getting quality sleep, it’s scientifically proven that when you lack sleep you can take on a larger risk. It is important that you have a clear mind and understand how much you can stomach large swings in the value of your portfolio. If you take on too much risk, you might buy on the market tops or panic sell at the wrong time. The worst-case scenario is that you are unable to sell because of the too large amount that you risk while hoping to break even until you can’t stomach the losses anymore and ended up with a bigger loss. Always remember that the ups and downs of the market are part of the journey. Take a deep breath and follow your trading plan.

So much from the emotional side of trading now it's time for the technical side. There are different types of indicators used in trading. As a general rule of thumb keep yours as simple as possible, having multiple indicators on the chart does not improve performance. On the contrary, It can confuse you and give you wrong signals. I used different combinations of indicators but these 3 are my favorite.

1. Moving average — Moving averages are simply the average price of a stock in a given period of time. It is the most versatile and widely used among technical indicators and can be easily tested. Moving averages can also act as support or resistance and may not work well with small-cap stocks as this type of stock are tend to be very volatile.
2. MACD — Moving average divergence convergence (MACD) is a lagging indicator, it basically gives a signal when a trend has started. It also helps traders to understand whether the bullish movement in the price is weakening or strengthening
3. RSI — The relative strength index is a momentum indicator used by technical traders that measure the movement of the price. RSI is plotted on a vertical scale of 0 to 100. Movement above 70 is considered overbought, while oversold conditions would be under 30. An RSI of 70 and above means that more supply is coming into the market and the price would likely go down while if the RSI falls below 30 signals oversold and the price would likely bounce up.

The reality is, that there is no 100% guarantee in trading therefore as much as possible I would turn things in my favor. If not all these indicators turn up, I would pass on that trade. Remember there is plenty of fish in the sea, never settle for half-bake trades. Be optimistic and realize that there are always opportunities in the market and those who wait will be rewarded.

In the example above AC, Energy Corporation broke its year-long resistance. MACD is above the MACD Line (showing the uptrend is strengthening), price is above its 20, 100, and 200 Moving averages (confirmation of a long-term trend) This is a breakout play that I will be discussing in future blogs.

How much to trade

When we are starting in trading we tend to focus on charts, technical analysis, and profits while these are indeed important things to spend time on. It’s like playing basketball with the only offense, a team with no defense and only offense seldom wins the game, we forget one of the most important aspects of trading, risk management. As a trader it is your job to protect your capital, the right position sizing will allow you to stomach those losses and allow to let your winners to run wild while actively finding opportunities in the market and having the ability to grab them.

Position sizing differs for every person depending on their account size and risk tolerance. As a momentum trader and trend follower like me, I risk no more than 2% of my portfolio. Therefore, even if I lose 10 times in a row, I would only lose 20% of my total capital. Unless you have a strong defense to protect yourself against large losses, it’s likely impossible to win in the game of trading. Therefore, as retail traders, we should set firm rules on where we put our stop loss and limit our risk to 5 to 10 percent on every trade. The question is when do we know we are wrong? I know when I’m wrong when the stock price I bought dropped 5 to 10 %. There is no room for hope in the market. The market goes its own way without regard to you or your position so I cut my losses short and move on to the next trade.

When to Exit a trade?

When I started trading I focused all my energy on learning how and when to buy using technical analysis. I honed my selection criteria until I gained the confidence to risk my hard earn capital on the line of trading. The next challenge is when to sell. Selling is never easy we fear that If we sell too soon we might miss out on future profits and if we sell too late we might regret giving our profits back.

To lessen my emotions of trading I get into the habit of timing the market, calculating the risk and reward ratio, and making sure that the reward outweighs the risk. An appropriate risk-reward ratio for a momentum trader like mine is 1:2 or greater. Our objective as a trader is to make a profit. To retain them we must protect ourselves and lock In profits. The key is knowing when to do just that.

There are different types of selling strategies but I adhere to the most basic one which is selling into strength and selling into weakness while the stock is moving in the direction of my trade. This is contrary to what everyone does. When a stock goes up I trim my position and lower my exposure to the market or sell all of my position as it approaches the resistance level. Taking profit is never wrong and every trade is just one of my thousands of upcoming trades.

Thanks for reading this article! Leave a comment below if you have any questions, and make sure to follow me here on medium :) https://medium.com/@algerwrites