Foreword
Just started on a book about the turtle way, aka trend trading. Browsing through it had inspired me to document my trading rules in a more concrete way, allowing me to stick to them with more discipline. The fundamental framework of time tested trading/investment strategies always involves a set of rules that tilts the odds favourable to the traders; while it often involves having discipline that overrules your emotions.
This is true for technical analysis(which i will be sharing today) and even for fundamental analysis. In fundamental analysis, the rules are a set of filters which work on the PE, NAV, market outlook and some sort of matrix that gives confidence score to the investor (which my not be apparent) and the counter invested in is always "reviewed" through this filter..... hence when the confidence holds true for the counter, discipline must be had to continue holding/stopping you from selling off.
As pointed out by the book, once a strategy has been formulated and back tested with large percentage of success, the only ingredient left for it to be successful would be for the trader to not let emotions get the better of things. and there are ways to prevent yourself from falling prey to your own emotions, such as position sizing, stop loss and etc.
Reminding myself, the ultimate aim of this entire exercise ( of achieving financial security) is to eventually do things i enjoy. I view active trading as a way to upsize my capital before i transit into more passive income investing and eventually working in a job that i enjoy thoroughly.
Framework of strategy
Bottom The basis of my strategy is to first identify a set-up: higher highs & higher lows for trending counters, or consolidation followed by volume for breakouts, or change in trend for reversals. by identifying what you are trading for, it allows one to narrow down how the trade is suppose to be like.
Middle then comes the entry and exit plan which each has its pros and cons. the reason why this is important because we want to make use of the inherent market behavior that give rises to certain prices.
For breakout trading, narrowing of the price range gives some sort of "structure" in the market, and we can exploit these structures to trade with lesser risk. illustrate left-below, we want to trade in the first instances where the range consolidates a bit prior to entering the breakout trade, because this gives us price support closer to entry where we can put a SL point just below it.
Above- right, is how to trade on pullbacks/dips/bullflags. where we let the price come into an area of value. closer to some sort of support(static/dynamic). so that the SL will lesser.
Top Risk management lies on the top, because as mentioned in the foreword, the set of rules (bottom and middle) only becomes profitable when they are executed with diligence and discipline. The role of risk management is to reduce impact of emotions when we trade/invest. I have learnt from the past that the 3 points are all true! the need to stop loss is very important, because very much like a toxic relationship, once the trade does not pan out accordingly, we need to exit it to control damage..... trailing stop losses also work this way especially when the trend shifts. and last but the most important point would actually be position sizing. position sizing is so important because it affects the size of the loss, which inherently affects our ability to place stop loss at the right places (e.g. middle), which also affects the chances of enjoying higher probability trades without getting stopped out. e.g. with 100K capital, playing very mildly, $500 is the stop loss. Entering a position size of 10K( for optimal commissions) means a fluctuation of 5% is more than sufficient to pull your stop loss trigger, a 5K position means 10% fluctuation... in reality, the chances for a)5% move versus b)10% move is higher for a) by many folds, so this actually improves your "win rate". and because in the stock markets, your losses are limited, means if you enter 10k, you can only lose up to 10k, but your upside can be many times your capital over time, exercising good position sizing makes loads of sense.
Conclusion
I hope to review all my holdings for this, and write some sort of note when i trade subsequently, so i can win more and lose lesser! happy weekend and always do your hard work and due diligence when investing/trading!
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