Starting out as a stock trader trying to carve out profits, I had to learn different methods of
Technical Analysis in order to buy the right stocks at the right time.
Over time, I have changed my strategies to find the one that fits me the best. Here is my current stock trading system.
How I created my system
Here are some criteria on my preferences and how I came up with this trading system:
1. I don't want to spend all day monitoring my positions. I want flexibility of time, so I prefer swing trading and position trading.
2. My preferred holding period is from 0-50 days. Any longer, and I get impatient.
3. I prefer picking stocks that are about to reverse or bounce from support.
4. I want to easily monitor all my positions at one glance.
5. I want to ride the bigger movements and not worry about smaller fluctuations in the market.
6. I only risk a maximum of 4% of my capital on each trade.
My Technical Analysis Indicators
Moving Averages- I use the 50 and 200 day settings (50 because of criteria #2, 200 because it is often a strong support, and it shows me the long term trend.)
Bollinger Bands- 20 day (typical settings)
Parabolic SAR- typical settings, used to set trailing stop losses
MACD- typical settings
RSI- typical settings
My Swing/Position Trading Setup
My step-by-step analysis before every trade
1.) First thing I do before every trade is to check that the weekly chart is improving technically. Is the stock's MACD showing a buy signal? or is the histogram going up, at least? Is the RSI going up and not overbought?
If the stock passes the first test, I then check the same indicators showing that the daily chart is improving as well.
2.) If both the weekly and daily chart show signs of improvement, I check for a Moving Average Crossover or that the price is above the Moving Averages in the 4 hour or daily charts (4 hours is more risky and predictive). If the Bollinger Bands (which is a 20 day MA) cross above the 50 day MA, it is a buy signal for me. Also, the price has to be above the averages to show good momentum for swing trading.
Note: if the price bounces from the 20 or 50 day MA, it is a strong trend.
3.) Next, I check if the price is within the Bollinger Bands. Prices within the bands and close to the middle average are more manageable than those that are outside the bands. If the price is outside the upper band, I set my buy order at the price of the upper band (aggressive) or at the nearest support (defensive).
When to sell
After buying the stock, I sell only on the following conditions:
- if my stop loss is hit.
- if stock goes up in the first few days then reverses and hits my trailing stop loss (Parabolic SAR)
- if stock trend is strong, I sell when the BBands cross down the 50 day MA to show the end of the run up.
Note: Make sure to set stop loss and profit targets with a risk/reward ratio of at least 3 or more.
This is my primary stock trading system, and I compare it with other systems to double check if a stock position is really worth buying into.
Backtesting this Technical Analysis strategy would show around a 70% rate of success. So far, the strategy has been profitable, as long as you apply the rules strictly. What do you think of my swing trading and position trading system?
Want to share your suggestions or your own trading system? Let me know what works for you in the comments below!