Follow a veteran trader’s trades on the Australia and US equities in 2 respective portfolios.
- The purpose of this portfolio is to demonstrate a trading plan in action. This trading plan revolves around some very basic charting techniques that every trader and investor can use.
- As positions are added to the portfolio, traders can follow the results.
- The management of the Portfolio will cover the position sizing of each parcel with a description of the risk.
- Stop Loss levels and entry points will be shown as the position is opened and both the realised and unrealised performance tracked. All trades will be placed on the CityIndex platform and the account will start with AUD$10,000.
These technical set ups will be used as they offer high probability entry points.
This is an overview of the strategy that will be used and these will be explored in greater depth with each trade. So don’t worry too much if it is not completely clear how this will work.
1. Spike high and spike low pivot points.
A spike high is formed when the candles on either side create a lower high (LH) this is illustrated in the figure on the right below. A spike low is formed when the candles on either side create a higher low (HL) this is illustrated on the left.
To refine the Pivot point, look for a low or high following a 12 bar move, the lowest low or highest high after 12 bars or more.
2. Price break reversal when historical spike high or spike low with closing price finishing inside of the historical spike high or spike low.
3. Price break continuation when historical spike high or spike low with closing price finishing at a new high or low from the historic spike.
Using further indicators to add to a higher trade probability.
Technical set ups will not work all the time so it is a good idea to look at other information to assist in getting higher probability trades, using indicators such as the relative strength indicator is one way to achieve this.
Relative strength Bullish and Bearish divergence.
One of the better observations of the RSI is Bullish and Bearish divergence.
These trading set ups can be confirmed with these divergence occurrences.
Bullish Divergence
RSI and closing price - buy divergence. Market and indicator make a low (1) both swing higher (2) RSI remains below the 50 level Market makes a lower low, RSI makes a higher low (3)
Bearish Divergence
RSI and closing price - sell divergence. Market and indicator make a high (1) both swing lower (2) RSI remains above the 50 level Market makes a higher high, RSI makes a lower high (3)
Managing the risk - Position sizing and stop loss levels.
Key to any trading strategy is to manage the risk associated with loss. Capital preservation is essential as without capital you can’t trade. Knowing how much you are risking for each trade ahead of placing the trade is the most adopted way to tackle this. The approach used is outline below.
Equities, the 2% Risk model.
Entry price – Stop loss level = $ amount per security ($ risk)
Calculate 2% of the funds allocated to trading, divide this by $ risk per security and this will give you the number of securities or shares you should buy for this trade.
Let’s illustrate this with an example using our trading portfolio example where we will allocate $10,000 to trading each trading strategy. So 2% of $10,000 is $200.
Let’s say the trade we are looking at has an entry price of $5.00 and a stop loss level of $4.60 (40c risk).
So to calculate our position size we do the following.
$10,000 X 2% = $200.00 $200 / .40c = 500 units/shares.
Indicating that we would buy 500 units or shares in his case.
FX & Futures 1% risk model
For FX and futures we apply the same methodology but only use 1% of the allocated funds.
One of the biggest challenges you will face when trading is dealing with your emotions. By setting a structure that removes this process for your decision making you will get much better returns. Consider the Sunk Cost Fallacy. The Misconception: You make rational decisions based on the future value of objects, investments and experiences. The Truth: Your decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it.
As we progress in trading each of these markets we will dive deeper in all of these concepts. I hope that the information provides a mandate for what we are about to do. I look forward to this process and sharing all my experiences in this very organic manner. Please feel free to contact me through this process with any questions or comments.
