I have been trading my swing trading strategy since 6-7 months on minimal position sizing to collect statistics on it to see how I can improve it further before I start trading it with my regular trading position size. Currently its reliability (% of winning trades) is 61% but the reward-to-risk ratio is only 1.2 which is a bit low for my comfort because the reliability would probably come down further a bit once I gather more stats (after more trades). Currently I have stats for 52 trades, I would like to collect stats for atleast a total of 100 trades. I had added “scaling out of trades” idea to my swing trading, it sure reduced equity curve volatility as many traders had told me it would but it did reduce my reward-to-risk ratio too.BTW here is a link where you can key in the stats of your trading strategy and view its randomly generated equity curves. For example to view random equity curves for my strategy enter the following data:

Win/Loss: 1.2
Win Prob: 0.61
Lines Qty: 10 (this will display 10 random equity curves)

Now click the “Generate” button to display the random equity curves. Expectancy & Kelly Value of the strategy are also displayed.

NOTE: This doesn’t mean that my real equity curve would look like one of the lines displayed here but the lines would give a fair idea of what is possible. To be on the safe side I generally draw 100 lines and look at the worst line displayed and take is as the best possible equity curve.

I am currently trying to increase the average reward-to-risk of the strategy. One way is to have tighter stops which I am not comfortable with. The other way is to capture more of the profits (give little back). When positing trading I use a totally different strategy, I enter only part of the positing on an entry signal and then I add lesser & lesser amounts to the trade as it proves itself until the full position is built. This way if I get stopped out at the initial stop I generally have only part of the position but when the trade is successful I am carrying the full position. So here I can afford to let the full position run using a wide trailing stop. But in swing trading since I am looking to capture relatively quick profits I do not have the luxury of building my position.

I still do not have a solution to the above problem. These are just my thoughts. I gladly welcome ideas/suggestions. I will post an update if & when I come up with a satisfactory solution.

DataI trade NSE stocks only. I maintain a database that is updated each day.

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.