23-Jun-05. Over time, my trading strategy has evolved from essentially chasing 'hot' stocks to being more discriminating about which stocks to buy to thinking more about when to sell. The successes and failures at each stage led to modifications. This third version reflects mostly a change in the selection of stocks to target as buy candidates.
One further disclaimer: This strategy applies to my trading account which is essentially experimental and recreational. I want to make money in it, of course, but it is completely separate from my investment accounts which are the financial basis of my retirement. Those I manage quite differently.
Churn and earn. The basic objective is to capture gains from short- to mid-term price movement. This is neither a "buy and hold" strategy for long-term gains, nor is it "day trading." I expect to hold positions for periods ranging from a few weeks to a few months.
• Look for stocks priced from $5 to $8. Stocks below $5 are not marginable on Ameritrade, and if they're that low anyway there must be a reason. Go higher in price, if necessary to find good buy candidates, but in that case buy proportionately fewer shares initially.
• Buy candidates should meet at least 4 of the following 5 technical characteristics:
- Price momentum (PPO) — gaining momentum steadily in last month or more, or gaining momentum sharply after declining momentum has reversed
- Trend (ADX) — above 20, with buying pressure (+DI) above selling pressure (-DI) and widening the gap between them
- Money flow (CMF) — at least moderately positive or shifting sharply from negative to positive
- Relative strength (RSI) — above neutral (50) and increasing
- Price rise is accompanied by an increase in daily volume
• For selling short, the reverse should be true
• The screen for stocks trying to reverse a long downtrend in Ameritrade's AdvancedAnalyzer tool generally turns up a good pool of potential buy candidates (Note 1).
• Buy an initial lot of 500. That's enough shares to amount to yield spendable money with a modest price gain, but few enough to limit the exposure if the stock tanks. (Note 2)
• If a stock rises 8%, buy another lot of 500, assuming it is still a good buy candidate. That lowers unrealized gain to 4% to cushion a small drop in price while doubling the number of shares on which to take profits (hopefully).
• Avoid buying just before earnings are reported. The Expectations game makes this a complete crap shoot.
- If I am absolutely sure I want to buy, I prepare a limit order that will only trigger and be entered into the system if the stock price is above a certain amount. This protects me from buying too high if the stock opens unexpectedly lower.
- If I want to be more cautious, I wait until after the first 1½ hours of the trading session have passed, or even until the last hour of the trading day. Weird stuff often seems to happen in the middle of the trading day.
This is the hard part. I have a tendency to hang on too long or get shaken out too soon. Setting limit orders that execute automatically based on an arbitrary limit (say 8%, which is the conventional wisdom) doesn't work well for me because with thinly traded stocks outlying trades or a big spread between bid and ask often triggers the trades prematurely.
It may be time to sell if:
- Gap down with heavy volume
- Buying pressure (+DI line) crosses below selling pressure (-DI line)
- Gap up to open above the previous day's range but then closes lower, especially after a jump up
- Stock has followed the upper Bollinger band up for more than a week, especially if it gets to two weeks
- Stock breaks the lower Bollinger band and falls again the next day
- Stock dips back to the 50-day moving average and stays there more than a day or two