A Robust trading strategy looks like this

In this article I’ll try to explain what makes a good strategy and how to use it. We’ll give you the tools of an ‘under the radar’ strategy. You only need 1 or 2 hours a day to check your screeners and setup/manage your trades. The hardest thing for a robust strategy is putting your emotions aside and keep going even when you are in a losing streak which will eventually happen. You’ll detect potential winners faster than investors using the CANSLIM method discussed in a previous post.

COMPONENTS OF A COMPLETE TRADING STRATEGY

• WHAT TO BUY/SHORT
• WHEN TO ENTER
• HOW MUCH TO BUY/SHORT
• WHEN TO EXIT

ACCEPT UNCERTAINTY AND PROBABILITIES

• Every trade has a probability of being unprofitable
• A sure thing does NOT exist in trading, never forget that it is a probability game

FOLLOW THE STRATEGY

SUCCESSFUL TRADING IS HAVING THE DISCIPLINE TO FOLLOW THE PROVEN RULES OF A POSITIVE EXPECTANCY TRADING STRATEGY.

YOU SHOULD ONLY FOCUS ON EXECUTION

TRADING SMALL

Using your edge and placing small bets makes you profitable in the long run like a casino having 52,6% chance to win over a player due to the 0 and 00 when you bet on black or red. Using the law of large numbers will make you profitable in the long run if you don’t run out of money.

WIN RATE VS PROFIT TO LOSS RATIO

Issues with high win rate strategies:

• Attracting more people who can’t think in probabilities
• they tend to be LESS robust over time

Advantages of high profit-to-loss strategies are more robust

A strategy with a profit-to-loss ratio of 3 can be wrong 7 times out of 10 and still make money

THE BEST STRATEGIES HAVE A

HIGH PROFIT-TO-LOSS RATIO (>3)

A RESPECTABLE WIN RATE (> 40% TO 50%)

A ROBUST STRATEGY BASED ON TIMELESS PRINCIPLES

THE FOUNDATION OF A ROBUST STRATEGY IS

1. DIFFICULT TO FOLLOW and don’t become overcrowded AND/OR
2. DIFFICULT TO TURN INTO AN ALGORITHM because of discretionary advantage which cannot be coded

HOLY GRAIL

Easy strategy based on only technicals or only fundaments

Afraid of gap breakouts

Can’t accept losses

Can’t let winners run

Need excitement

ROBUST STRATEGY

Both

Not all gap breakouts are created equal

40% to 60% unprofitable trades

Use trailing stops

Nothing to do most of the time

When we enter a trade, we NEVER know what’s going to happen next.

We don’t need to know what’s going to happen to make money over time.

We are NOT trying to make money on every trade. That’s impossible.

Recommended tools for this strategy:

Tradingview can help you setup the graphs with the needed indicators and the stockscreener below your graphs as you can see below:

Indicators you should use are the 20DMA, 50DMA & 200DMA, Volume(45) and the Bollinger Bands like shown below, if you have any other questions about how to set this up feel free to ask in the comments.

Those are the filters on Tradingview I use to scan for potential entries.

You can also use Finviz to screen for stocks if you don’t find any on Tradingview or vice versa.

https://finviz.com/screener.ashx?a=142316892&v=151&f=cap_largeunder,ind_stocksonly,sh_curvol_o100,sh_relvol_o2,sh_short_u20,ta_change_u3,ta_sma200_pa,ta_sma50_pa&ft=4&o=-change

Don’t forget to check today’s movers and scan through them to see if there are stocks that match the criteria we’ll discuss further in this article.

If you still can’t find any don’t worry, this is trading. The same way a sniper keeps waiting for hours/days for the perfect opportunity!

If you found some good entries go through the checklist for every stock!

The PEAD Checklist: The Post Earnings Announcement Drift (Price Momentum)

• Macro Level
  • S&P500 Above 200DMA
  • Theme/Industry hype
  • NASI buy signal
  • Russel2000 to S&P500 Ratio

https://www.marketinout.com/chart/market.php?breadth=mcclellan-oscillator

• Technicals
  • Earnings Breakout above the line in the sand consolidation, outside Bollinger Bands
  • Tight consolidation for at least 5 weeks: Clear & Clean tight weekly consolidation with decreasing volume, at least 5 weeks with an obvious line in the sand. Not yet in a firm uptrend.
  • Volume must be higher then 45 previous days (+100% above average 45 days)
  • Close above 200/50/20DMA
  • EPS & Revenue Growth EPS>25% & Sales>15% (compare with previous Q’s and previous year’s same Q)Stop level?
  • Close higher then GAP’s open price is better
  • No overhead supply, no price higher then line in the sand for the last 6 months (traders with loss wanting to get out)
  • Avoid serial spiker (pump & dump)
  • Former Big Runner
  • At a profit right from the start
  • Small free float (below 700M best but not a must!)
  • No shorts, a high short interest = many people are already trading the stock

• Fundamentals:
  • Great revenue growth + Great EPS growth + Profitable:
    • EPS & Revenue Growth EPS>25% & Sales>15% (compare with previous Q’s and previous year’s same Q)
  • Growth sustainability (earnings press release):
    • Not sustainable growth clues: Milestone payment received, Asset sold, Tax gain, No revenue increase due to change in business model
    • Sustainable growth clues: new product/service, recent aquisition,Expansion,business is trending up, growing backlog, good conservative future earnings guidance, insiders are buying only for 1 reason!
  • Positive surprise
    • beat earnings estimates
  • Little to no debt
  • Recent IPO’s (last 3-4 years)

Once all criteria above checked you can determine how many shares you can buy @ open or close of the next day based on your your Stop Loss and position sizing explained further in this article.

Initial Stop Loss:

• Set your Stop loss at 3x ATR(Average through range) initial stop loss, use an 8% to 10% initial stop if you can’t handle low win rates below 40-35%)

If you don’t know what ATR please leave a comment and I’ll show you how to add it to your chart.

Trailing Stops (only on close price end of day, not on crosses!)

Every day you’ll manage your open positions/trades and move your stop like a trailing stop does.

50DMA: Better average returns than 20DMA on individual trades BUT Longer holding period

Average time in a trade: 80 days for profitable trades & 20 days for unprofitable trades

20DMA: Lower returns than 50DMA on individual trades BUT Shorter holding period

Average time in a trade: 40 days for profitable trades & 10 days for unprofitable trades

Mostly use 20DMA, use the 50DMA if they are close to each-other or strong conviction in the stock

Only change your stops based on the daily candles not on the wicks! You could eg. set your Trailing stop at the 20DMA and a hard stop at the 50DMA. If this isn’t clear for you feel free to ask me for more details in the comments…

Trailing Stops Exceptions

Sometimes I put my StopLoss on the lower Bollinger Bands when there is low volume and tight action as seen below.

• Lower Bollinger Band is close
• Tight action on low volume

Emergency Stops (below 50DMA)

• Hard stops
• Not triggered 99% of the time
• Reduce unforeseeable risks
• To be updated once a day or every other day
• Only takes a couple of minutes

KEEPING CONFIDENCE IN YOUR STRATEGY AND ROUTINE

At some point every strategy will have a losing streak, 10 to 15 losing trades isn’t uncommon for winning strategies!

AVOID :

• SYSTEM HOPPING
• NOT RESPECTING YOUR STOP LOSS
• NOT TAKING AN ENTRY
• OVERTRADING

HOW?

• UNDERSTAND WHY THE STRATEGY WORKS
• THINK IN PROBABILITIES
• MAKE THE STRATEGY YOUR OWN
• KEEP RECORD OF YOUR BEST TRADES TO LOOK AT WHEN YOU ARE LOOSING AND WHY IT IS IMPORTANT TO BE CONSISTANT

DON’T CARE ABOUT THE OUTCOME OF A TRADE

HAVE ENTRY/EXIT CHECKLIST

QUIT CHECKING OTHER PEOPLE’S OPINION

USE SYSTEM STOPS

Making it difficult not to make money

Finding potential fast & large moves to ride cut many small losses

Earnings GAP Momentum strategy

Position sizing

Emotions

Remove all profit/loss related amounts from your brokers interface (check twice a year), focus on the strategy not the money! Think in R-multiples and %

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Where to trade safely with a low/no commissions broker

I use following brokers: Etoro and DeGiro. Remember those brokers are for swing trading, these are not suitable for daytrading!

If you need any more information or explanation feel free to ask for it in the comments…

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