Y-SWING 3.0 Trading Strategy:
1 - Determine the total value of your portfolio & the maximum number of stocks you can hold in your portfolio
<$5000 = 2 stocks $5001-$10000= 3 stocks $10001-$25000= 4 stocks $25000-$50000= 5 stocks >$50000= 6 stocks
2 - Determine your maximum investment for each stock
If the total value of your portfolio is of $9000, you should have up to $3000 invested per stock ($9000/3=$3000 per stock)
Current Portfolio Balance: $9000
Maximum Investment
Stock 1 - ABC: $3000
Stock 2 - DEF: $3000
Stock 3 - GHI: $3000
3 - Breaking down your positions into several potential entries
You should never invest the full $3000 associated to one stock at once. By default when you first enter your position after getting a BUY SIGNAL you should invest 50% of that $3000, so $1500. When you get a 2nd BUY SIGNAL after you find yourself already into gains you should invest 32.% of the $3000, so $975. Finally when you get a 3rd BUY SIGNAL, you should complete your position entry with the remaining 17.5% of the $3000, so $525. Please keep in mind that you may choose to change those percentages to different situations accordingly. In this $3000 example, it may not be worth taking three positions, but rather two, because of the bigger impact commissions would have in your new entry. You may choose to invest 75% of your cash for your first entry and the remaining 25% for your 2nd and final entry. It is for you to decide. But I suggest that as your portfolio balance increases that you should split your entry into three, since commissions will have very little impact on your position.
Maximum Investment
Stock 1 - ABC: $3000
Entry 1 - Intended Position %: 50%
Max Investment: $1500
Entry 2 - Intended Position %: 32.5%
Max Investment: $975
Entry 3 - Intended Position %: 17.5%
Max Investment: $525
Please keep in mind that your current portfolio balance will continually change as you trade and you should update it after you close any position.
There are two possible scenarios:
1) the value of your portfolio increases with time, and enables you to invest in additional stocks
2) the value of your portfolio decreases with time, and forces you reduce the number of stocks you invest in.
The moment you start investing, keep in mind that you will never be able to invest at exactly the percentages you have set. Once you enter into your first entry, your 2nd and 3rd entry percentages will automatically increase or decrease. If you had set 50% as your first entry, you may have invested 52% or 48% and thus automatically your 2nd entry may become 34.5% or 30.5%. This is why this strategy can only be easily applied with an excel files that calculates everything automatically for you, like the file I created and use for my strategy. Making all those calculations manually is too demanding and time consuming.
Keep in mind that you do not need to always be fully invested. This means that if you can invest to up to 3 stocks, you may at times have only 1 or 2 stocks. The 3 stocks criteria is only a maximum.
After 20 business days (1 month) of having your stock fluctuate between your stop loss and your entry point, you should decide to just sell the stock and move on to another, if you expect the trend to continue for a while. If you are already fully invested in the maximum number of stocks you can hold, just sell your most underperforming stock, to use those proceeds to invest in this new stock.
With this strategy, each stock you buy should be from a unique sector. Some people may argue, that this strategy implies not having a well diversified portfolio. That is partially true, but the reason is because you have to be able to follow your stocks, and if you have a portfolio of 15 stocks, it will be hard to keep track of where each stock is heading. On top of that you will be diluting your gains.
4 - Picking your stocks when it's safe
How to find which stock to invest in is perhaps the toughest decision to make. Whatever your strategy is, in the end it all comes down to your stock picks. The first thing I would suggest is to monitor the Daily and Weekly Top Gainers every day. By monitoring this everyday, you may start noticing that some stocks will show up more often than others, and this usually indicates it's in a strong uptrend. I think it is a great way of finding great stocks for your portfolio. Although you may not want to take a position in a stock that just moved +25% in a day, you may want to look at others who are perhaps less volatile. This doesn't mean the +25% stock won't move even higher, but it may be safer to go with less volatility.
However, it's not as simple as picking a stock that seems to show up in top gainers list the most often. This list is where you select your candidates. The next step you need to follow is checking out the charts of each of these stocks, and determine if there any safe opportunities. How do you do this?
First of all when taking a position with any stock, the purpose is to enter when it's the safest, when there is the least potential down risk, not when there's the most potential upside. That's the mistake that most people do when they start trading, they focus too much on their potential to make money in a position, but they forget to look at how much they could lose. You have to primarily focus on your downside, and then look at how much you could gain from that position.
When you enter into any position you should not only get a BUY SIGNAL but also look to get in as close as possible to a support level, ideally from which there was a recent bounce back up. Your entry point should not be further than -7% to -8% of the next support level. The lower the better. This means that if you manage to get a BUY SIGNAL from a stock that is -5% away from its last support level, you are taking less risk and less chances of getting whipsawed. This is simply because you should always have a stop loss set just below the support level. So if the stock starts moving against you and crosses down below its support level you will only incur -5%, and this number should never be over -7% to -8%. You may find some stocks with huge upside potential, but who are very far from their support levels (e.g. -15%). This means that you would need to take on more risk to not getting whipsawed. This is very common of very volatile stock with high betas. Basically what I'm saying is that when you set your stop losses, it shouldn't automatically be at -7% to -8%, those should be your maximum. If you get a SELL SIGNAL when your down -3% to -4% for example, you shouldn't wait for it to go lower to sell. Your goal is to cut your losses, and cash in as much gains as you can when you have them. I'd rather take a long position with a stock that has -6% potential down side with a +15% upside, than -15% potential downside with a +30% upside. My main focus is how much I can lose from taking that position. If there is a -6% down side with +15% up side vs. -5% down side with +15% up side, I will take the 2nd option. Another example if there is a -7% down side with +20% up side vs. -7% down side with +25% up side, I will take the 2nd option again. The safest positions are obviously the one's with the lowest down side and the highest up side, as long as the down side is below -7% to -8%. Taking long positions with stocks with more downside can easily wipe you out and this takes away your chances of being wrong. The lower your stop losses the more chances you have at being wrong, the higher your stop losses the less chances you have at being wrong. Basically if you take more risk you have to be better at picking stocks.
One other important factor is the dollar amount you are willing to sacrifice. -7% of $1000 (-$70) is not the same as -7% from $5000 (-$350). Basically, when you trade or set your stop losses you should focus as much on the percentage level and dollar amount you would be willing to sacrifice in case of a pullback. This also applies to when you are in gains. When your up let's say $500, how much are you willing to sacrifice of it to have the potential of seeing it move higher? It would make no sense to say that no matter how much gains you have that you would be willing to sacrifice the same percentage. So, when your gains become heavier, you should focus more on the dollar amount you are willing to possibly sacrifice. It can be a fixed amount, and you may increase it a bit as you move up. Once you start getting into gains you may choose to be willing to lose as much as $100 in swing trades, no matter how much money you have invested.
At times may get stopped out and then see the stock move higher again, and that's ok. In that event you may choose to go long again even at a higher price than where you were stopped, because now you know that the up trend is not over. But the whole point of all this, is that you did not take unnecessary risk and you cashed in your gains when you had the potential to lose more.
Example:
Here is a great example of a low risk position, with SBUX chart of November 6th: Not only did it give us a BUY SIGNAL my having a break out, it also crossed over its resistance level of $21.00. But more importantly SBUX would only need to fall towards $19.75 to give us a SELL SIGNAL. By going long at $21.00 with a stop loss at $19.75 you would only have the risk of losing -5.95% of your position.
Looking at the chart under a longer time range, we can see that there is an upside potential for SBUX to go as high as $27.50 with a return of +30.95% before seeing a potential pullback.
Keep in mind that this may not happen, and SBUX could immediatelly fall back down its resistance level below $20.00, that will make you take a loss. But the whole purpose of this strategy and technical analysis is not of predicting moves but of getting in when there is the least risk. Technical analysis is NOT a tool that predicts the future, it's a reactive tool that allows you to make decisions when it's the safest. You should never assume that what the technical analysis says will actually happen, and that is why that when you start making gains you should not have to sacrifice too much of what you have to have the potential to make more. DO NOT BE GREEDY.
5 - Placing your orders
Market & Stop Loss Orders
Now that you have determined which stock to buy, you have to place your orders. So continuing along the first example for which you would a current portfolio balance of $9000, you would invest no more than $3000 in the stock you have picked, but only 50% of that $3000 ($3000 x 0.5= $1500) for your first order. So, if the price of the stock ABC is $10.00, you will invest $1500/$10.00= 150 shares @ $10.00. The moment your order gets filled you will automatically set a Stop Loss Order below the last support level. So if the last support level is at $9.45 (-5.5%), you may choose to set it at $9.30 (-7%). The reason you do this is to get a clear SELL SIGNAL and lower your chances of getting whipsawed, and seeing the stock bounce back up after hitting that support level.
Stop Buy Orders
Another order you may want to place is a STOP BUY order to buy more shares when you get another BUY SIGNAL. Such an order should only be set if there is another clear BUY SIGNAL in sight in the event where the stocks starts to move higher. Basically you would be averaging up rather than down. You should never add to your position when your into losses, this means that you probably took a wrong decision and that the stock may continue lower. It only makes sense to add to your position when you are making money and looking to make more; this means you probably were right and took the right decision and the stock may continue higher.
Setting your new Stop Loss Order
The moment your 2nd or 3rd order gets filled you should cancel your last stop order and set a new one below the new support level, which is the last resistance level that was crossed when your BUY STOP order was triggered. This is when you start locking in gains, and usually when you are this point with a STOP LOSS order set above your average cost, you are guaranteed to exit your position with gains. However, the moment you start making gains of over +8% from your first position, despite having a stop loss order about -7% away, you should increase your stop loss order towards around what would guarantee you a return of about 50% of what you already have, so +4%. It would be too stupid to have a +8% gain and see the stock move back down and have you cash in only +1% or less. Even if you get stopped and cash in +4% to then see the stock continue much higher, you may choose to reenter into that position even at a higher price. The whole purpose of this is that you didn't sacrifice more gains than you should have.
Locking in Gains with Virtual Trailing Stop Orders
When you start getting into heavier gains, especially when your up over your last 2-3 orders, you should start focusing more on the dollar amount you are risking rather than the percentage. -7% of $1500 (-$105) is not the same as -7% of $3000 (-$210). At this point you should decide what amount of money from your gains you would be willing to sacrifice to have the potential to make more. Ideally I would suggest to have a fixed amount and perhaps the dollar amount that use to be represented by the -7% of your first entry. So in this case you would be willing to take swings of -$105. This is easy to do with Virtual Trailing Stop Orders that allows you to set a fixed dollar amount you are willing to let your stock swing as the price moves higher, it adjusts automatically and locks in gains. For example if stock ABC is now worth $11.50, to sacrifice no more than -$105 you would set a -$0.70 VTSO. This means that the moment the stock swings over -$0.70 at once your VTSO will get triggered. It automatically adjusts based on the last highest price. So if the last high was $11.70, the VTSO will be at $11.00 ($11.70-$11.00). If the stock continues higher to $11.90 the new VTSO will automatically adjust itself to $11.20 ($11.90-$0.70). However I know that most people do not have access to VTSO, and therefore you would have to manually set new Stop Loss orders as the price moves higher.
The moment you find yourself in net gains you should set a VTSO which is the equivalent dollar amount of your stop loss order. For example if you buy 150 shares of stock ABC at $10.00 and set a stop loss order at $9.30, your VTSO would then be of -$ 0.70 per share. You would be risking -$105.00 of proceeds (ignoring commissions). This -$0.70 should be set the moment you start getting into gains so that you don’t risk more money than you should, therefore no more than -$105.00 price swings. As the price of the stock increases this -7.00% stop loss order will decrease the percentage amount you’re risking of your gain. However you will only be guaranteed to exit with a gain the moment you achieve a return of greater than +7.00%. The reason is that the purpose of this strategy is not to capture small gains but rather trying to make big gains. If you were to start locking in your gains the moment you are up +2.00% or +3.00% for example, you would not be giving enough space for the stock price to fluctuate and therefore your VTSO would be more likely to get triggered which will limit your chances of making any greater gains. This criteria is important in terms of daily fluctuations. Of course if in terms of technical analysis you believe the stock price gave a SELL SIGNAL and is about to fall, there is no reason to hold on and you should sell your shares. Now it may seem like it would be now harder to achieve decent returns with a stock, and this is true to some degree. In fact it depends on the original stop loss order you have set. Basically if you invest in a stock for which you have judged that a -4.5% stop loss order would be enough for a SELL SIGNAL, this means that the stock would also only need to move up +4.5% from your purchase price for you to start locking in your gains with a VTSO. Therefore, this strategy forces or encourages you to try to enter into positions when it’s the safest. Therefore the closer you buy to a confirmed support level, the lower you need to set your stop loss order, and as a result the lower you need your stock to go up for you to set a VTSO and start locking in gains. Unfortunately 2 simulation tables I created to display this relationship are too big to be displayed on the blog.
Cashing in your investment
The moment you start making heavier gains such as +20.00%, you may consider cashing in some gains. What I do most of the time, is sell the portion of shares representing my gains. For example if I managed to invest my full $3000 for one stock and I'm up +20.00%, so my shares are now worth a total of $3600, I would sell $600 worth of stock. This allows me to not risk some of the gains I have, while it continues to allow me to profit from any more up side the stock may have. The price point at where you sell your portion of gains is the equivalent as if you brought back your investment to $3000 ($3600-$3000). At this point the cash invested in your stock is starting to proportionally represented by gains. If you're lucky enough and the stock moves much higher, you may eventually find yourself with a position in a stock with only cash from gains, since you will have already cashed the gains you have accumulated. In reality when you cash in gains, you're actually cashing in the money you've invested and reducing your risk.
Conclusion
So, to conclude what you may have learned from reading about my Y-Swing 3.0 strategy, is that the main focus is about how to limit losses and keep most of your gains when you have them. Before even learning how to do technical analysis you have to learn how to manage your orders. If you already have this figured you will have already made a huge step forward. Once you have this figured out you can start learning more about technical analysis. This is what technical analysis is all about how to pick stocks, but more specifically when to enter and exit.
What is extremely hard when you start trading, it's the inability to take losses, and set your stops in advance. When I first started trying to apply this strategy, I found myself either canceling my stop orders before they would get triggered or wait till it hit my stop loss target and tell myself I would just place a market sell order then. At other times I just waited to have high enough gains that I would set my stop loss order then when it will no longer have much impact. The truth when your stop loss order is not set, you are not protected. This is the equivalent of having insurance, and it's free. If you didn't want to bother with stop loss orders you would need to buy options that would guarantee you a certain price but only for a limited time. Also, options are usually very expensive and stop loss orders as opposed to options can be set for an unlimited amount of time (GTC - Good Till Canceled).This strategy allows you to be disciplined. You may need to follow the price moves of your stocks almost everyday, while paying close attention the technical charts when the price gets close to one of your buy or sell points If there is a crash, despite having stop losses, the stop losses are not active during pre-market and after-hours, you would need to place a separate live order, and even if the stops were active during these periods you still won't be completely protected. If a crash occurs the first opening trades during the pre-market for example may be much lower than the previous day's closing price and may be much lower than your stop. For example assume you bought stock ABC @ $10 with a stop @ $8, and the price closes for the day @ $8.25. If a crash occurs the next day, when the pre-market opens the bid and asks could be $6.00 and $6.50. However, if you trade in the stock market this is a risk you have to assume; Only the careless would invest all their money that they have earned over the past years, it is important to cash in gains each year. For example when you first started trading you started with $10,000 and over the years you accumulated $5000 of gains. You would be stupid to invest your $15000 and risk all everyday, you should continue to invest $10000 and cash in the $5000, or just each year increase a little bit your investments if you can afford it to maybe $11,000 or $12,000. During accumulation periods when the market moves sideways it may be harder to successfully use this strategy either way, you would need to be more precise in your buys and sells; and you may need to lower the profit point where you decide to take some profits or sell your position completely (for example selling portion or all shares of gain @ 10%-15% rather than 20%).
It took me about 2-3 years to be able to accept the fact that I had to take some losses. The most successful traders have more losing trades than winners. The reason is because, those traders cut and limit their losses while when they start making gains they try to ride those trends as long as possible and will make huge gains. If out of 3 trades, 2 represent losses of -7.00% each, while your winner made you 40.00%, you are profitable, and that's the goal of this strategy. Most people will hold on to losses and hope they bounce back, while they quickly sell their winners because they're scared of losing it when they have it. Think of it like this, if you are making gains it means that you are doing something right, and probably made the right call, and you should hold on to it as long as you can or as trend persists, without giving up too much of what you have though. The beauty of this strategy, is that even if you're not good at picking stocks, by limiting your losses, the chances are that you may be profitable in the end. You may get frustrated, if you get stopped out several times consecutively. If this occurs, you should settle back and stop trading for a little while, and try to figure what is it that you're doing wrong. You can only learn from your mistakes, and if you just started trading you will definitely lose a lot of the money you have invested. That's why I would suggest that you don't start by investing too much money. Make your mistakes with small investments, you will not learn by investing more. As you gain more experience and make more money you will then increase your investments, because you will have already learned some of the toughest lessons. Keep in mind that when the market is continually up, anyone can do money in the market and you will only learn when the market is down and your losing money. That's why people who started trading and experienced this last recession are much more well equipped than people who start trading now when the market is in a huge bull run. In the end you will only get better with time when you gain more experience and this is a process that cannot be accelerated, you have to be patient. It usually takes about 3 years to build a discipline and start making money in the market.
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