Stock Strategy

8/6/2019 Stock Strategy

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A Few Useful Tips

Dont pay for any service, if you can get it for free.

Dont blindly following others investing ideas, opinions,inspirations, and encouragements.

Keep your mind cool. Let sanity triumph over emotionand urge.

Let the market, not wishful thinking (including technical

indicator signals and chart or candlestick patterns),dictate whether you should buy or sell.

If you have made a mistake, accept the outcome, cleanthe mess immediately, and move on. Denial will onlymake things much worse.

If you cannot calculate gain/loss in percentage, you arenot suitable for trading stocks by yourself. If so, keepyour money in your bank accounts for interests instead.

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Low-Stress Stock Trading Strategy

Get the 5 stocks from the Stocks On The Move and the 1 stock

from the Daily Stock Analysis sections ofIBD. Use free chartingsites to analyze the stocks you have collected over the pastseveral days or weeks.

If some stocks meet our buy criteria, begin to study their profilesand recent news. If their business models are decent and there isno bad news, you have some potential fish to catch.

Use free charting and Yahoos historical price sites to figure outthe stop limit buy and sell prices. If the potential loss is morethan your tolerance (e.g., 5~10%), let this fish go free.

Once you have bought a stock, place a stop limit sell order rightaway to prevent any disastrous loss.

If the stock price moves higher, study its chart daily. Change thestop limit sell order to new higher low price, so that you will keepmost of the gain and exit before the fast imminent downfall.

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Market Tops

regular market top

irregular market top

lower high

higher low

higher high

higher highlower high

higher low breaking point

breaking point

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Trade Tops

regular market top

irregular market top

place stop-limitbuy order here

exit (short) at

breaking point

place stop-limit

buy order here

exit (short) atbreaking point

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Trade Bottoms

regular market bottom

irregular market bottom

place stop-limit

sell order here

place stop-limit

sell order here

enter (buy) at

breaking point

enter (buy) at

breaking point

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Full Trade

1ststop-limit

sell order

buy (cover short)at breaking point

1ststop-limit

buy order

sell short at

breaking point

2nd stop-limit

buy order

3rd stop-limit

buy order

trailing stop-limit

sell orders

sell short

or exit buy

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Risk Control

2nd: After your buy order is filled, place a

stop-limit sell order here immediately.

If future price breaks below this level,

your stop-limit sell order will be filled.

3rd: Potential loss = Price (buy) Price (sell)

Keep the loss 10% of your buy price.

1st: Place initial stop-limit buy order here.If future price breaks above this level,

your stop-limit buy order will be filled.

Only after the set-up of these potential

market bottoms is formed, you can then

proceed below.

Loss from top Gain to break even8% 9%

10% 11%

15% 18%

20% 25%

25% 43%

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In & Out Level 1 (IO1)

1ststop-limit

sell order

buy (enter) at

breaking point

initial stop-limit

buy order

sell (exit) at

breaking point

2nd stop-limit

sell order

3rd stop-limit

sell order

4th stop-limit

sell order

Profit = Price (sell) Price (buy)

Once the price moves up, shift stop-limit

sell order to higher lows to protect profit.

In & Out is better than Buy & Hold. The strategy of short sell is the reverse.

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exit (sell short)

Risk < 3%

trailing buy-to-cover-short orders

cover short

short selling

Gain > 40%

IO1 short

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enter (buy)

Risk < 5%

trailing exit (sell) orders

long buying

Gain > 55%

exit (sell)

IO1 long

g

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Sometimes, IO1 does not work well, because the nearesthigher lows (lower highs), if used as trailing exit (buy-to-cover)

points, do not produce much profit.

In this case, we will instead work with IO2, in which the method

of entry (with appropriate risk control) is the same as IO1, but

the exit strategy is different.

Once a buy order is filled, immediately place a stop-limit sell

order at yesterdays low. After todays market close, shift thestop-limit sell order to todays low. This stop-limit sell order will

last till tomorrows market close when the stop-limit sell order

will be reset to tomorrows low, unless the active stop-limit sell

order is filled during todays market action.

The IO2 strategy of short sell is the reverse.

IO2 has a much shorter trading span than IO1 does: You will

stay in a position only a few days (1~7 days normally).

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enter (buy)

Risk < 5%

long buying

Gain > 17%

exit (sell)

daily trailing exit (sell) orders

IO2 long

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IO1 vs. IO2

When to use which?You need to study the price action of a stock for the past 36

months, during which the same market makers (mutual funds,

big banks, etc.) have been manipulating the price action of the

stock. If historical data indicate thatIO1 performs better thanIO2, you will adoptIO1for the current trade. In other words,

history (not your fancy) will dictate your trading strategy.

Can we alternate them or combine them in a single trade?

Yes. We can! Again, when to use which requires a few moreadvanced techniques that constitute In & Out Level 3 (IO3).

To learn IO3, we need the help from some technical indicators.

I will not explain how to compute such technical indicators, butsimply tell you which ones to plot on your stock charts and

how to trade them in combination with IO1 and IO2.

In the end, IO3 will instruct you to use IO1 till the last waltz

when you switch to IO2. Essentially, IO3 = IO1 + IO2 (3 = 1 + 2).

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We need only two technical indicators for IO3:Indicators Parameters

Fast Stochastics (STO) %K(7), %D(10)

Wilders DMI (ADX) ADX(10)

%D(10) (the brown curve)

indicates the overall trend of

price action.

The peaks of ADX(10) (the

black curve) signal the price

tops (if+DI above DI) or the

bottoms (ifDI above +DI).

When ADX(10) 50, the current

trend is going to reverse.

When +DI and

DI are twistedtogether, the stock price is

going sideways.

Switch to IO2 ifADX(10) is 50+,

or both %D(10) and ADX(10)

begin to go down or stay flat.

Otherwise, stay with IO1.

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enter (buy)

Risk < 10%

long buying

Gain > 33%

IO3 exit (sell)

IO3 long

> 50

enter (buy)Risk < 10%

long buying

Gain > 40%

> 50

IO1 exit (sell)

IO3 exit (sell)


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M t I t t T di Ad iPage 19 of 25


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Most Important Trading Advice

Do not trust any guru with your money.

Do not use trend lines, chart patterns, candlestick patterns, andtechnical indicators to trade. These things only provide someadvanced warnings. Do not try to predict tops and bottoms.

Market action should be the only factor in your trading practice.

Greed and fear are the two archenemies of your trading success.

Only invest in 5 or fewer stocks. More stocks bring more stress.

Only buy stocks whose prices are higher than $15 per share.

Avoid those stocks with a lot of gaps and wild daily volatility.

You do not have to trade. Sometimes, cash is the best choice.

You should enjoy trading and have fun! If not, do not trade.

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Market Sentiment IndicatorsChaikin Money Flow (CMF)Volume+

Trend IndicatorsPercentage Price Oscillator (PPO)Moving Average Convergence/Divergence (MACD)Directional Movement Index (DMI)

Volatility IndicatorsBollinger Bands (BB)Parabolic SAR (SAR, for stop limits)

Momentum IndicatorsSlow Stochastics (Slow STO)Commodity Channel Index (CCI)Relative Strength Index (RSI)

Williams %R (%R)Momentum/Rate of Change (ROC)

Best Technical Indicatorsone choice for each category

BigChartsASPVPage 21 of 25
http://stockcharts.com/education/IndicatorAnalysis/indic_ChaikinMoneyFlow1.htmlhttp://bigcharts.marketwatch.com/help/glossary/detail.asp?area=lf&word=268435456&desc=Volume++http://stockcharts.com/education/IndicatorAnalysis/indic_priceOscillator.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_MACD1.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_ADX.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_Bbands.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_ParaSAR.htmhttp://stockcharts.com/education/IndicatorAnalysis/indic_stochasticOscillator.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_CCI.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_RSI.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_williamsR.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_ROC.htmhttp://stockcharts.com/education/IndicatorAnalysis/indic_ROC.htmhttp://stockcharts.com/education/IndicatorAnalysis/indic_williamsR.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_RSI.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_CCI.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_stochasticOscillator.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_ParaSAR.htmhttp://stockcharts.com/education/IndicatorAnalysis/indic_Bbands.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_ADX.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_MACD1.htmlhttp://stockcharts.com/education/IndicatorAnalysis/indic_priceOscillator.htmlhttp://bigcharts.marketwatch.com/help/glossary/detail.asp?area=lf&word=268435456&desc=Volume++http://stockcharts.com/education/IndicatorAnalysis/indic_ChaikinMoneyFlow1.html


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BigChartsASPV

BB

MACD

Slow STO

Volume+

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StockChartsBLUD

BB

PPO

CMF

Volume+

CCI

SAR

T

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Avoid

Too many gaps

Price too low

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AvoidPrice too low

Too volatile

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AvoidToo volatile

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