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Stock trading system using 50 day moving average supports, strong stocks, and market trends

Trend following trading system   Overview 

Make money buying, and selling stocks using a trading system that relies on pre-planned trading rules.  The rules are designed to take advantage of fundamental analysis, money management, technical analysis, and the regular development of trends in the world.  

I created this trading system which was inspired by The Original Turtle’s commodity trading system. http://www.elitetrader.com/vb/attachment.php?s=&postid=928713    I have tried to creat a system that is adjustable to meet many individual needs, and minimal time commitments.

 Buys and sells are based largely on stocks chosen to watch crossing the simple 50 day moving average (DMVA), and the simple 20 day moving average.  These entries are to be made into a set list of stocks following the rules to avoid making emotional trading decisions.

  Portfolio selection rules

The system is to focus on the best growth stocks in the market.  Additionally stocks to short sell can be focused on singling out the worst stocks that can be short sold.   Focussing on stocks with the worst forward looking future to be part of the bearish group to be short sold.

After identifying bull and bear stocks watch you must decide how many stock you want to attempt to manage.  You should look too the time you want to devote group size should be based on experience, time to dedicate, capital available, and personal judgment.  Groups can be selected by one’s self or using a reliable source to cater to one’s experience or lack thereof, and personal choice.   Stocks should normally have a two to one ratio of bullish stocks to bearish stocks to reflect the overall concept that stocks move higher over time.  I suggest starting the system with 4-12 stocks in the bullish group, and 2-6 stocks in the bearish group.

The two groups should be reexamined, and updated every week end, or ever month or year depending on ones choice.  Stocks should be added or removed because of developing trends in industries, changes in technology, changes in leadership,  population demographic changes, politics, natural resource developments, natural disasters, wars, politics, and forward looking changes in revenues and or earnings can lead to trends. A stock can be removed from the list at this time if quantifiable factual evidence exists that may cause a trend to end, or in an attempt to find better opportunities. 

A stock should only be removed if no open position in the stock exists.

Groups’ sizes should be reduced if the current group is proving too hard to manage.  Or the group size should be increased if one has been successful with the current group size, and feels it would be beneficial to add more stocks. 

Rules

  1. Use a set list of stocks. 
  2. Determine all simple 50 and 20 day moving averages for all of the chosen stocks on a daily, weekly, or  monthly basis.   These averages will be used set up trades to be executed.  Also determine all value entry prices.
  3. Buy a unit of a bullish stock at or above the 50DMVA, plus at or below the 20DMVA.  A position should be initiated at the open on the first business day a stock has been added to the bullish group and meets these parameters. 
  4. Buy a unit of a bullish stock previously added to the bullish group when it crosses the 50DMVA on an intra-day move from below the 50DMVA.
  5. Buy a unit of a bullish stock previously included in the bullish group when it is above the 50DMVA + above the 20DMVA then retraces to hit the 20DMVA on an intra-day move. 
  6. For all trades initiated, a second unit should be added at the open two business days later as long as the security has not triggered a sell. If a sell is triggered the trade is done.
  7. If a stock gaps higher or lower breaking through an entry price, still go forward with the trade at the open as long as the gap does not void the trade by reaching the exit point before entry.
  8. Sell all units of a stock when a daily close below the 50DMVA occurs for bullish units. All units should be sold at the open the following business day.
  9. Short sell a bearish group stock at or below the 50DMVA plus no more than 10% below the 50DMVA.  A position should be initiated at the open on the first business day a security has been added to the bearish group and meets the above parameters.
  10. Short sell a unit of a stock previously added to the bearish stock group when it crosses from above to below the 50DMVA on an intraday price move.
  11. Short sell a unit of a stock when previously added bearish group stock had been below the 50DMVA and below the 20DMVA and retraces to hit the 20DMVA on an intra-day move.
  12. Close out all short sold units of a bearish stock at the first daily close above the 50 DMVA at the open the following business day. 
  13. Value entry – buy a unit of a bullish stock when it reaches a value 20% below its 50DMVA.
  14. Value entry – short sell a unit in a bearish stock when it reaches 10% above its 50DMVA.
  15. Exit all units of a value entry stock at the open following a day when a closing price reaches an average loss of 8% or higher on the trade.
  16.  Do not buy any stocks below the 200DMVA. (added rule after seeing recent bear trend, and listening to other successful trader that employs this rule with success.

   

Risk reducing strategies

 

 A portfolio should own no more than two stocks from a specific subsector (i.e. computer hardware) in one direction at any given time. No more than four stocks should be owned at any given time in the same direction that is highly correlated (i.e. oil corporations).

The system uses moving averages as a technical indicator to buy stocks when others are likely to also be buying, and sell quickly when the stock has lost this technical indicator advantage.   The system focuses on only the best opportunities in an attempt to maximize returns, and minimize the down side risk of any position.

   

Unit size

Everything can be scaled down to the point of functioning even if that means investing in one or two stocks.  Adjust the units to no more than 30% of portfolio if possible. Use a single unit strategy rather than buying two units reduce commission charges.  Also, reduce the number of stocks in the focus groups to those with best chances to trend well.  One could just invest in bullish group stocks to avoid paying margin interest that may be associated with shorting stocks, and take advantage of the principal that stocks tend to move higher over time. Stocks move higher over time because of retained earnings, stock repurchases, accumulated assets, increases in productivity and advances in technology.  One should consider only investing in stocks that have been recommended by a pre-determined reliable source if they have a lack of experience, time to dedicate, and or comfort with making stocks selections.

For a higher net worth portfolio

 

A suggestion would be to use under five percent of a portfolio in an individual trade.  Units are to be figured by taking the total dollar value of the portfolio multiplied by the percent determined for a unit.  The unit is to be recalculated every weekend.   The stock must be liquid enough to not have the trades materially affect long term results. Exits can be done in two unit sales on the day a sale is called for if the position size is hard to liquidate in one sale.

   Final Thoughts 

      Stocks make a good opportunity for this trend following system to be financially successful.  This trend following trading system is for your education and or entertainment purposes. This system can be tailored to meet your own ideas, time frames, trading tools, and any other special needs. Business conditions are always changing, creating an ideal situation for trends to develop routinely.  Many trades will have a whipsaw effect because sells will often be triggered shortly after you have purchased. This system is designed to preserve capital, minimize risk, and make the vast majority of profits in a small number of trades that trend much farther.   Most of the work for the system is to done on the weekend and outside stock operating hours.

Entertainment purposes only,
 
 
 

 

November 15, 2008 Posted by | Stock investing links, ideas, and opinions. | , , , , , , , , , , , , , , , , | 7 Comments

Market maker thoughts on figuring his position

Update (6/15/2008)  The market maker has a wicked control on the market, and should show good profits as GS reports this week along with private firms like Scottrade Securities.)  Market moves with conviction, and revaluation as we find real terms.  I still think beer first, get high 2nd, and lover; then kiss your neighbor if he wants peace; kill your neighbor if he wants war!

At the bottom or top of any market their are lots of sellers (at the bottom) and lots of buyers (at the top) so the market maker is taking the other side of the market and it is in his interest when things get to an extream in any time frame to  go the other way of trader psychology. 

 

 

In the shortest of time frames the market maker is on the other side of any trade that is placed when he can not match orders for a buyer, and seller.   The computer algorithm or market maker is in charge of setting a buy, and sell price for the market regardless if there is a buyer or a seller.   If someone makes a block trade larger than the size of the market you will often see the stock make a print that is outside the offered bid and ask.  Well now you know someone has made a transaction for that amount of shares on the buy side if it was higher, and on the sell side if it was lower.  The market maker has made a deal to take on a larger transaction  at slight discount or premium to the market.  

A successful openings only strategy I learned from Bright Trading is buying or selling major stocks on the New York stock exchange when a stock gaps open outside of a normal trading range.  You could use this strategy on any market; but, Bright felt the other markets were two unpredictable.  Say MER gaps opens 5% higher tomorrow in the morning you could short the stock, and have a trade with a positive expectation.  In theory going on the side of the market maker (the specialist as they call it).  If it gapped lower they would go long the stock looking to exit the trade with in thirty minutes to gain a small amount of money.  In theory the market maker has  alot more buys than sells  at the open on a gap higher so naturally it is in the market makers interest if those people leave the trade with a loss, and if he has other people taking the other side of the trade.  So routinley the stock will trend back towards the mean at least for a quick time to exit with a profit.

 

January 11, 2008 Posted by | Stock investing links, ideas, and opinions. | , , , , , , , , , , , , , | Leave a comment

Made a long trade on the QQQQ’s

The downside appears to be limited given investors have been selling for the Nasdaq 8 days straight lower.  Goldman recomended a buy on the drug stocks which is supported the QQQQ that are present in the index.   London is scheduled to make cuts in rates tomorrow, and Beranke is set to make a speech tomorrow. Got in when the Nasdaq was down.   Berkshirt hathaway said they are looking to make a deal with one the current morgtage insurers which should limit the downside move in the stocks in the next 24 hours.  I am hoping a short term bottom has been achieved. Solar stocks also look over sold short term trade set up.  CMED a medical device company with strong growth in China just covered a gap.

Not alot of  profit in trade.  Just looking for a quick gain on the Jan 46 call options.  Taking profit early tomorrow on what I hope to be a pop, and positive close today.   I have been short QQQQ most of the past week.

January 9, 2008 Posted by | Uncategorized | , , , , , , , , , , , , | Leave a comment