Equity Trading Strategies

Equity Trading Strategies

Seminar Content

• Management and Decisions• What• When• Strategy Summary

Management and Decisions

Content

• Time Frame Decisions• Trader or Investor?• Method Management• Money Management• Mind Management

Time Frame Decisions

• Day Trading• Swing Trading• Core Trading• Pension

Day Trading

• This can be compared to a full-time job. Intra day trading of the Alsi40, forex and some highly liquid shares like the Anglo's.

• This is difficult and definitely not easy.• This is done on time frames of 5min, 10min, 15min

or maybe 30min.• Very time consuming, and you need to be very, very

focused.• If you put your mind to it, anybody can do it, but be

careful. (It falls outside the scope of this seminar.)

The creation of a line chart.. Data points are formed using closing price data and then the dots are connected to form a price line…

A re-cap on the formation of candles…

If the price closes above the opening price it’s a positive day & the system colours it in green.

If the price closes below the opening price it’s a negative day & the system colours it in red!

Swing Trading

• Swing trading is done on an end of day (EOD) basis. There is no need to watch the charts during the day.

• You download your data in the evening, make your decision and enter the position the next morning.

• They are high momentum trades in the direction of the trend, which will last from 3 days up to 21 days.

• You should be able to find 3-5 of them per month.

Core Trading

• Also done on an end of day basis, and they tend to last 3 to 9 months.

• Core trading is about taking the whole move up the page, and forgetting about the short-term swings.

• You are not concerned about the short-term timing.

Pension

• The pension is based on recurring income from dividends.

• You will make your calculations, buy a share and hold it forever.

• Your main concern is the dividend yield.• (Building a Pension Portfolio falls outside the scope

of this seminar.)

Less than R20 per share in 1998.

To over R200 per share now!

Income Tax

• With intraday, swing and core trading, the receiver of revenue will look at it in the same way as any other business.

• As with a business where you aim to buy “goods / stock” now and sell it later at a profit - You will therefore be taxed just like any other business!

• You should therefore treat it just like you would treat your OWN business.

Trader or Investor ?

• A trader, trades the market to make cash, and manages their risk with stop losses.

• Investors, invest on the market to receive a re-occurring income and are not concerned with the share price. Their only concern are the dividends and if the company will be increasing their dividends. An investor manages their risk by diversification.

• If you do both I advise you to keep these 2 portfolios separate.

• This seminar is all about the trader and not the investor!

The Trader• The trader must at all times get the following 3 things

right to be successful in the markets.• He / She needs a method with a positive

expectancy.• The method must make you more when it is right

than what you loose when you are wrong.• The trader needs to manage their money with a risk

to reward ratio and protect their cash with a stop loss.

• The mind is all about playing the game, and not allowing any fear to cause you to make trading errors.

Method Management• The first thing we need is a method with clearly

defined characteristics / rules.• You must make more when you are right than you

lose when you are wrong.• 2 Variables namely hit rate and then the risk to

reward. It is the correct risk to reward ratio that insures wealth.

• Buy a share at R10, with stop loss at R8-50, your risk is R1-50. When the share gets to R13 you have a risk to reward ratio of 2:1.

• Successful traders play the game over and over and over again.

Money Management• How Much of my account am I going to risk on a

single trade. DON'T RISK THE FARM!!!• A cluster of bad trades will eventually come. It is not

something that happens only to others, it will happen to you too. I can guarantee that.

• Never risk more than 2% of your account size. If you have a cluster of 3 bad ones you are only down 6% on your account.

• A cluster of bad trades can clean you out if you risk too much. Emotionally you will be destroyed.

• The risk is the distance between your entry point and your stop loss in Rands.

From R15 per share to R70 and back down to R11 per share!

Money Management

• How much money is in my trading account for speculative trading.

• With small accounts you will not be able to trade in the more expensive shares.

• Account size of R100 000 you should not risk losing any more than R2000 on any single trade.

• This is risk not exposure.• Any one trade should never be a big deal or issue!

Money Management Example• Buy a share at R250 with a stop at say R220-00.

This risk is R30 per share.• Our account size is R100 000. So we risk 2% which

is R2000 on this trade.• You phone your broker on Monday morning asking

him to buy ABC shares at R250. The first thing he will ask you is, how many?

• The number of shares we buy, times the risk must = 2% of our account size.

• So, therefore the number of shares = 2% of Account size divided by the risk per share.

2% of account SizeN of shares =

Risk per share

So, N of shares = R2000/R30 = 66 shares

Exposure = Entry level x number of sharesSo, exposure = R250 x 66shares

= R16500

If you buy R16500 of ABC shares, and it falls from R250 to R220 you have lost 2% of your account size.

• By looking at only the risk on the chart, we start putting some structure to our trading plan.

• Stop losses are there to get you out when you are WRONG, not when you are right.

• Don't sweat about a stop loss, let the market tell you where you should put it. Use the previous significant low. Never ever use a fixed % or amount as a stop loss.

• Put your stop well out off the way and just trade a slightly smaller position, at least you are in the game.

Stop Losses must be set at the previous significant low!!

• Old support could become resistance• Old resistance could become support.• We call this change of polarity.

Support and Resistance

• How to determine the previous significant low:1) Determine a level of support or resistance.2) Draw a trend line.NB! – Never set all your stop losses at a standard %

Support and Resistance

The level of support has become resistance (the floor has become the ceiling).

The level of resistance has become support (the ceiling has become the floor).

All appropriate levels to set stop losses!

Resistance becomes support = A significant level!

Another previous significant low!

Mind Management

• The mind game is to be able to play the game consistently AND keep to the rules of proper money management, even when you are on a streak of good luck.

• The 4 trading fears that we each have at least one of:1) Fear Of Being Wrong2) Fear Of Losing Money3) Fear Of Missing Out4) Fear Of Leaving Money On The Table

The Traders Journey

• Find a Method with a positive expectancy to Execute Without Fear or Hesitation

• Let Your Winners Run and Cut Your Losers• Be Bigger When You are Right Than When You

are Wrong• It is the things that very few people can do, that

make you money.• Analysis is easy, to execute the method, very few

people can do.

What

Content

• World Sentiment• Sector Sentiment• Relative Strength• Picking Shares• Watch List

• The most important question is, WHAT do I buy. If you get WHAT right, pretty much everything else takes care of itself.

• When you get “WHAT” right you will find “WHEN”very easy. If you get “WHAT” right and you get “When” wrong, most of the time the trend will come and dig you out of trouble.

• If you get “WHAT” wrong, there is no trend to come and dig you out of trouble. You will end up becoming very religious and stuck with a very very long term investment.

What

World Market Sentiment – Step 1

• What, is always done on a weekly chart.• We will use the S&P500 to determine the world

sentiment on a weekly chart.• Add a 20EMA and an 89MA to your weekly chart .• If the 20EMA is above the 89MA we are in a bull

market.• If the 20EMA is below the 89MA we are in a bear

market.• This will tell you what the global markets are doing.

This will discount a lot of the news.

• If you are conservative, stay out of the market when the World sentiment is bearish.

• There are a lot of shares doing well while the S&P is falling, but you need to be nimble. Your timing must be fairly accurate.

• When the S&P is in a bull trend, you should be fully invested. Your timing does not need to be as perfect.

• You could use a trend line to determine the trend but the 89MA is more mechanical and easier to use.

• When the S&P is moving up investors are keen on emerging markets.

Open TrendnTrade and start with a clean page!To close any existing charts select the option above.

Then go to the Layouts drop-down menu to start the filtering process.

Sector Sentiment

• First we need to find sectors trending strongly• Then we need to find sectors outperforming the

Top 40 index.• Then we need to find the shares that are

outperforming a winning sector.• And lastly we need to find THE strongest share in

the sector, and trade it.

At any given time there are ALWAYS some shares that are trending up!

We need to find THESE trending shares to trade!

There are also ALWAYS at least a few going sideways…

And there are also ALWAYS, unfortunately, some shares trending down!

Relative Strength / Price Relative• We find these out-performing sectors and share by

using a RS or Price Relative! The RS or PR is an analytical tool that will pick out the sector / share that is outperforming the others.

• It is not the RSI!!!!•• The RS or Price Relative is the share price The RS or Price Relative is the share price

divided by the sector average.divided by the sector average.• If the PR is going up the page it is outperforming.

When it is going down the page it is under performing.

• The fundamentals by default. You will not find a high RS share with bad fundamentals.

Sector Sentiment – Step 2• We need to find sectors that have a strong

sentiment and are therefore trending up and we need to find sectors that are outperforming the JSE Top40 index.

• To measure the sector sentiment, we also do it on weekly charts, by adding a 10 and 20ema and an 89MA to find the trend of the sector. We also add a Relative strength with a 89sma to determine if the sector is outperforming the JSE Top 40

• Once we have a weekly close above the 89sma we can put the sector on our watch list or we can wait for the 20ema to cross up through the 89sma.

• When you find a sector that is above its 89sma, also look at the Relative strength to see if it is outperforming the Top 40 index.

• If you find that the sector is above the 89sma, but the RS is below the 89sma it is still fine to trade in that sector, but there are other sectors that are is outperforming the Top 40 index and that might be a better trade.

• When in a bear trend and you “need” to trade you will find most sectors below the 89sma, then one can trade in the sectors that the RS is moving up above the 89sma, although the sector is below the 89sma, but you need to be “present”. All this is done on a weekly chart.

Create a watch list of winning sectors

• Banks• Food Producers• Food & Drug• Gen-Finance• Gen-Industrial• Gen-Retailers• Health & Pharmaceuticals• Industrial Transport• Platinum• Technologies• Non-Life Assurance

Share Relative Strength

• Once we know which Sectors have passed both sets of criteria, i.e. Have a strong sentiment and are outperforming the JSE we need to find which shares inside the sector to trade. We now need to find the shares that are outperforming the winning sector.

• Again on a weekly chart, we add the Relative strength of the particular sector also with a 89sma.

• We are now doing the fundamentals by default.• If the RS is up above the 89MA the share is

outperforming the sector, if RS is down below the 89MA the share is under performing the sector.

What you could expect to see in a bear market…

Picking Shares For Our Watch List

• After finding the strongest sectors, and then finding the strongest shares within the sectors with a RS on a weekly chart, We can add all these high performing shares to our watch list.

• You can now compare different shares within the sector against each other using the RS to find the strongest single share in a particular sector, still using a weekly chart.

Create a watch list of winning sectors

• Banks: • Food Producers:• Food & Drug:• Gen-Finance:• Gen-Industrial:• Gen-Retailers:• Health & Pharmaceuticals:• Industrial Transport:• Platinum:• Technologies:• Non-Life Assurance:

Watch List• Your watch list will now consist of the strongest

shares!• For the first time you will start looking at your

shares on a daily chart, and start to time it.• Again add a 10,20ema with a 89sma, but using a

daily chart. Also add volume and a Stochastic 14,3,3 or a MACD 26,9,12 (we will look at them later today)

When

Content

• Weekly Entry• The Zone Entry • Trend Lines and Trend Studies• Volumes• Trend Reversal Patterns• Trend Continuation Patterns• Divergence

Technical Analysis

• It is the study of trends and turning points.• Price movements are recorded and arranged in the

form of candles, which tells the technical analyst the mood and manner of the markets.

• The combination of bullish and bearish actions that indicates the direction of the market and investors psychological conflicts at important turning points.

• Finding a trend, buying and holding onto it until you see that the trend is about to fail.

Timing – Initial Entry

• Enter into a buy when the Weekly Price closes above the 89MA with a stop loss at the previous low.

• You will ratchet your stop loss. Exit when the 20 and 89 cross down again. You can add using the technical tools we will be looking at.

Buying Zone – If you’ve missed the initial entry!

• Now we will also be looking at the 10EMA and 20EMA on a daily as well as a weekly chart.

• Buy or add in the zone with a stop loss at the most recent significant low (refer to levels of support & resistance), PROVIDED the previous high has been broken to confirm the trend is still intact.

The price keeps breaking the old high..

Price fails to make a new high, 1st sign that

the trend is about to fail.

Trend Lines and Trend Studies

• Charles Dow said in 1880 that an uptrend is a series of rising bottoms (troughs) and a down trend is a series of falling tops (peaks).

• We can connect the bottoms and the tops with trend lines.

• You will notice over time that “up markets” eventually change into “down markets” and “down markets” are changing into “up markets” – this is the natural cycle. We will look at large technical patterns and small reversal patterns.(Candlesticks)

Trend Lines and Trend Studies

Bullish Trend Bearish Trend

Dow Theory

Volumes

• Volume tells us the story behind the story.• Volume analysis increases our understanding of

what is currently going on in the market. It is far from easy, but once mastered, you will never look back.

• Golden rule is volumes will dry up at turning points, and volumes will expand with the trend.

BULLISH

BULLISH

BEARISH

BEARISH

Volumes

Volume

Price

The Bulls are in control !!! The Bears are in control !!!

Volumes

Volume

Price

The Bulls are Losing control !!! The Bears are Losing control !!!

Divergence

• Normal Divergence• All Divergence must be confirmed by price

action. • NEVER TRADE DIVERGENCE ON IT'S OWN!!!

& NEVER TRADE AGAINST IT!!!

DIVERGENCE WARNS YOU THAT THE TREND IS ABOUT TO REVERSE!

Normal Bullish Divergence

Price

Indicator

Against The Trend

Lower lows…

Higher lows…Indicator can be: MACD (21/50) orStochastic (14)

Normal Bearish Divergence

Price

Indicator

Against The Trend

Higher highs…

Lower highs…

The trend is coming down,making lower lows…

Your ratchet stop loss would’ve got you out!Or fading volumes but divergence was the1st sign!

Reverse Bullish DivergenceWith The Trend

Price

Indicator

Reverse Bearish DivergenceWith The Trend

Price

Indicator

Trend Reversal Patterns

• Head and Shoulders• Falling and Rising Wedges• Double Tops and Bottoms• Breaks and Kisses• ABC's

Head and Shoulders Reversal

Target

Y

Y

S

H

S

S

H

S

Target

Y

Y

Rising and Falling Wedges

A

A

Double Tops and Bottoms

Break and Kiss Reversal

A

B

A

B

ABC Reversal

A

B

C

D

A

B

C

D

See also Fib's forpossible targets1.618

Trend Continuation Patterns

• Flat Top Triangles

• Flag

• Symmetrical Triangles

Flat Top Triangle

Y

Y

Good to add rising volumes to this breakout as confirmation.

Flag

Y

Y Y

Y

A flag seldom retests!

Symmetrical Triangle

Summary

Strategy Summary

1) Determine World Sentiment using weekly charts - Step 1 – 20EMA above 89MA = Bullish,20EMA below 89MA = Bearish

2) Determine SA Sector Sentiment using weekly charts -Step 2 – Add the 20EMA & 89MA as well as the Price Relative (Relative Strength) Indicator to find the best performing sector vs. J200.

3) Check each winning Sector to find the strongest shares with bullish sentiment AND that are outperforming their Sector – Step 3 – Add the 20EMA, 89MA and the Price Relative / RS. (Remember the “Z”-shares)

4) Compare shares against each other to find the very best per Sector & create your watch list. – Step 4

A. Robust Entry / Initial Entry – weekly close above the 89MA.- Set stop loss at previous significant low & ratchet!- Exit when 20EMA crosses below 89MA.

B. Zone Entry- The zone = area between 10EMA & 20EMA- Has to break the previous high; enter when the share price pulls back to the zone.- Set stop loss at previous significant low & ratchet!- Apply a 2nd indicator to improve entry timing and a 3rd

one as confirmation...

Important Points to Remember!

• Calculate your position size with a 2% risk model!• Adhere to your STOP LOSS!• Have a positive expectancy & correct risk to reward ratio!• Look at volumes! Candlestick patterns! DIVERGENCE!• For a trade to be a trade you need 1) an entry level, 2) a

target and 3) a stop loss level, before you take the trade.• Always, plan your trade, and then trade the plan.

• May you be abundantly blessed in life and in trading!!!