My trading style is a mix of swing & position trading. I start all trades with a duration of 5-7 trading days in mind. But if the trade keeps on going I don’t exit it, I use a trailing stop to let the profits run. So few of the swing trades could turn into position trades lasting few weeks.
Setups
I basically look to buy on dips in strong trending stocks. I use 20 & 50 EMAs to indentify trends. If 20 EMA > 50 EMA the stock is in an uptrend.
There is no question of trading downtrends because shorting is not allowed in the Indian stock markets. I think it is crazy not to allow shorting. I did read somewhere recently that SEBI is looking to allow shorting in the near future.
To pinpoint dips in uptrends I just look for Fast Stochastics (3,1) dropping to 20 or below. To me this is a oversold condition.
Note: The only discretionary part of this trading plan is the selection of stocks. From the shortlist generated at the end of the day I eyeball the charts of each stock and select the ones displaying smooth & steady trend. If the chart looks erratic I don’t trade it.
Entry
Once I shortlist oversold stocks in uptrends I key in buy orders for the next day to buy these stocks above the most recent high. If the buy is not triggered the next day I keep trying to buy it on subsequent days (upto 4 days after the oversold condition occurs) on a break above the most recent high.
Initial Stop
The initial stop is placed just below the most recent swing low OR 2 times ATR(10) away from the entry price (whichever is closer to the entry price).
Position Sizing
I buy the number of shares determined by the formula below:
Number of shares = Initial Risk / Entry Price
Here, Initial Risk (R) = 1% of total equity / (Entry Price – Initial Stop)
Number of shares is rounded off by ignoring the decimals.
Note: The total value of any single position cannot be greater than 10% of total equity. If this happens the number of shares is adjusted to bring down the total value to 10% of total equity.
Exits
I exit half of my position when the profit on it touches 1.1 times R. This is done by having a stop limit order in place. The rest of the position is closed when the trailing stop is hit.
Trailing Stop
A trailing stop is placed (and adjusted daily if required) for the 2nd half of the position. The stop level is computed using the following formula:
Trailing Stop Level = Highest High since entry – 2 times ATR(10)
Note: ATR(10) in the above formula is for the highest high bar. The above formula ensures that the trailing stop value only increases, it never decreases.
So that is it. That is the current plan, I will tweak very slightly if required. I plan to trade using the above plan. I have paper traded it to get a feel of what all I have to do before, during & after the trade. I will post my selected stock picks on a daily basis. I will also post my progress from time to time.
Hiren said
Excellent. I think this will provide tremendous learning value to new aspirants as not a single book of Technical analysis in India talks of Trading systems. You should present everything as a system(part of a whole, whole of a part) to facilitate understanding of how everything jives as a system. This post is a step in that direction.
recovery path said
Could you pl explain the position sizing with an example & what is the expansion for ATR(10)
SwingTrader said
Position Sizing Example:
Suppose: Initial equity is 100,000 and I am willing to risk 1% of it on each trade and the stock I am buying is at 104.55 and my initial stop is at 99.85. Then the number of shares I would buy would be computed this way:
Num of Shares = risk amt / (Entry Price – Initial Stop)
so, 1000/(104.55 – 99.85) = 212.76 which is rounded off to 212. So I would be buying 212 shares of the stock.
This is actually the “Percent Risk” based position sizing explained in Dr. Van Tharp’s book “Trade Your Way to Financial Freedom”.
*** I have corrected the typo in the main post – I had (Initial Stop – Entry Price) instead of the other way round.
ATR(10) is the 10 day Simple Moving Average of Average True Range.