Sunday, January 31, 2010
New "Quick Signals" Section
Small Change in SIGNALS
Thursday, January 28, 2010
Dow Jones - How Low Can It Go?
After failing to recover last week's losses, the Dow Jones finally broke down again sharply today. Since giving my STRONG SELL SIGNAL last Friday, the Dow Jones has continued its move lower, and I now believe that we are indeed in a correction. I now strongly advise to sell long positions and take your profits if you have any. Opportunities can now be found on the short side. Now that the major up trend has been broken with a cross down below the 50 day MA, I expect the Dow Jones to head back at least towards its 200 day MA which currently stands at 9417. However, keep in mind that now that the market is moving lower this will affect the 200 day MA negatively and it will be moving lower and lower as the days go by. The same goes for the 50 day MA which was trending up until recently, and is now flattening, meaning that it should start moving down also. Now that the Dow Jones is looking to continue lower, the question is: how low can it go? To help us answer this question I decided to use Fibonacci Retracement Levels. Fibonacci indicates a possible pullback towards 9123. A fall below that level would send the Dow Jones back down to 8614, 8105, and finally 6457. Obviously a move back towards 6457 would be catastrophic and something major going on in the economy would have to trigger such a sell off. For the moment, the most realistic assessment is seeing a pullback back towards 9123; at least that's the level we're aiming for now. If the Dow Jones does reach this level, we will be waiting for either a BUY SIGNAL with a bounce back up or another SELL SIGNAL with another move lower.
When we look at the Dow Jones' weekly chart, we see yet more evidence that the Dow Jones is now in a correction. First of all, just like in the daily chart, the major up trend was broken last week. However, what gives the Dow Jones' SELL SIGNAL the most reliability is the fact that the MACD has given us a SELL SIGNAL also. Why is the MACD so significant in this case? Simply because it had given us a BUY SIGNAL for the Dow Jones back in March after the market bottomed. Since giving that BUY SIGNAL, the MACD line has stayed above the signal line during this bull run, until now.
Tuesday, January 26, 2010
ATVI - Very Bearish
Although ATVI is in very oversold territory based on the stochastic, it could move much lower from here. The fact is that ATVI has been in a major down trend since June-July. ATVI has constantly broken through the lower bollinger band in recent days which is accelerating the move down. ATVI does have support at $10.00, however it does have a strong potential to move even lower from here. ATVI's next support levels are at $9.30, $8.75 and $8.15. In mid-December ATVI's 50 day MA crossed down through its 200 day MA, which is never a good sign. Looking at ATVI's chart, I can only see negative signals and signs that ATVI may still move much lower. Fibonacci Retracement Levels indicates that a move below $10.00 for ATVI should send it back towards $8.15. This scenario is even more likely if the market continues lower into a correction as I expect. Wilder's DMI ADX also indicates that the negative momentum is still much stronger than the positive (+DI 33.85 vs. -DI 10.89). I would strongly advise against taking any long position with ATVI. Buying at this point would be trying to catch a bottom, and you never want to go against the major trend. Based on current levels, ATVI could possibly give us a BUY SIGNAL when it moves back above $11.00 and back up over its 50 day MA. However, I don't see this happening any time soon. Based on the RSI, we could see a short term bounce back up from ATVI, however it would still be trending in a major down trend.
Monday, January 25, 2010
MGM - Surprisingly Outperforming the Market
Surprisingly enough, while the market in general has been moving down sharply last Friday with the Dow Jones shedding more than 200 points, one rare stock that moved up strongly was none other than MGM. In a rare occasion, while LVS and WYNN were pulling down along with the market MGM moved up +2.65%. This is relatively high for a day when most stocks are down sharply. The big sign of strength recently for MGM is the fact that it was not only up strong on a major down day for the market, but also that it was up while other casino stocks were down. This leads me to believe that something may be going on with the company itself. Today despite shedding most of the day's gains with the markets posting only modest gains, MGM still moved up another +3.18%, continuing to outperform other casino stocks. After seeing this anomaly on Friday, I decided to take a long position with MGM despite getting a STRONG SELL SIGNAL from the market's action. To hedge myself I also took a short position with GRMN which have given a SELL SIGNAL on Wednesday and Thursday. What I liked about MGM's action on Friday is also the fact that it pulled back to its 50 day MA before bouncing back up strongly, for which I considered a BUY SIGNAL. Today's continued move up also broke through the minor down trend. However, it's too early to say if MGM will manage to go any higher. I am currently watching MGM very carefully with the market looking to continue pulling back. Tomorrow will be a big test for MGM, as we should see the markets move lower again, and if MGM manages to post gains, stay flat or post minor losses this will add more strength to MGM. You have to remember that MGM has a beta of over 4, and when the market sheds around -2.00%, MGM should be down around -8.00%. This is why last Friday's action was so interesting. If MGM does manage to continue higher, it will be met with strong resistance at $12.50, while a move even higher should send it towards its strongest resistance level of around $14.00. As long as MGM manages to stay above its 50 day MA which currently stands around $10.65, MGM will remain a hold for its major trend. For the moment MGM's major trend is sideways. MGM did give us a BUY SIGNAL today in terms of its minor trend, but with strong resistance at $12.50 and the market moving sharply lower, issuing a HOLD on the major trend is more appropriate.
LONG MGM
HPQ - Going Down
Until this past Friday HPQ was a STRONG HOLD, but now after crossing below its 50 day MA, HPQ is now a STRONG SELL. HPQ had managed to stay above its 50 day MA since April, which makes the cross below more significant and reliable. An ascending pattern can also be observed for which the price broke down from, while making an attempt to recover losses today. We should now expect to see HPQ to pullback down along with the market towards its 200 day MA which currently stands at $43.65. This signals a possible correction of at least -12.00% from the current price of $50.06. This is yet another signal that the market is indeed beginning a correction. As I write this the current futures market are all down, and today's weak attempt to recover losses shows how momentum have now shifted from positive to negative.
Y-Swing 4.5 - Trading Strategy
Y-SWING 4.5 Trading Strategy
A - Introduction
Applying the “Y-Swing 4.5” stock trading strategy implies holding a maximum of 6 stocks in your portfolio, which would depend on the total funds you are willing to contribute. This strategy is not a mass diversification strategy. Holding too many stocks in your portfolio would dilute your returns and prevent you from keeping track of each of your stock’s performances on a regular basis. The moment you start holding on to too many stocks, you could probably select any random stock and lose or gain the average market return. Keep in mind that when the whole market moves down, holding 3 or more stocks over 2 exposes you to more risk as you are most likely to see all your stocks move down.
To be truly diversified you have to hold a portfolio of stocks that are negatively correlated with one another. This means that you can be as diversified with 5 stocks as with 20 stocks; it’s just a question of finding the right combination. However, again, holding on to too many stocks would prevent you from keeping track of all your stock’s performances on a regular basis. Here is a great link to a correlation tracker (www.sectorspdr.com/correlation) that allows you to see the list of stocks that are the most positively and negatively correlated with your stocks. This web site also allows you to see the correlation between any stocks you wish to see for the past 3, 6 or 12 months. Holding on to 2 highly positively correlated stocks would be the equivalent of just holding one of the stocks with the combined contributed capital for each stock. Most often, stocks from the same sector will be highly positively correlated and that is why you should never hold more than 1 stock from the same sector. When managing your portfolio, you do not want to eliminate the entire non-systematic/business risk. If you picked a good company you want to be able to reap in the returns of its individual performance, rather than gain the average return for the market or sector.
B - Goal of Strategy
The ultimate goal of this strategy is to know how to react and trade under all possible scenarios. Knowing in advance what to do when you either have gains or losses will remove the emotions you may undergo while trading. The reason for that is that you will be using a trading system in a mechanical and calculated way. The moment you have to start thinking about what you should do based on the stock’s current price, whether to buy, sell, or hold is when you will run into problems, and this is a warning sign. You never want to react in the moment, and that’s why there should be a set of strict guidelines to follow as to what orders to place under different situations whether you have gains or losses. The purpose of this strategy is to remove all uncertainties and emotions during the process of trading. You want to be able to hold on to a stock as long as possible when it starts moving favourably in the direction you are trying to profit from. However, you should not tolerate fluctuations from your stocks of more than -8.00%, at least initially. The goal of this strategy is not to capture quick gains but being able to ride major trends as long as they are sustainable, while not risking more capital than required.
C - Applying the Y-Swing 4.5 Trading Strategy
Step 1 - Determine the total value of your portfolio & the maximum number of stocks you can hold in your portfolio
Ideally you should not contribute more than 10% to 20% of your total income once it stabilizes. When you are still young and have recently entered the job market it is acceptable to contribute more than 20%, assuming your income will increase in the future. However, you should never invest more capital than you would be willing or capable to lose. Basically you do not want to invest so much capital, that it would prevent you from sleeping tranquilly.
After determining how much capital you want to contribute to your portfolio, you must decide up to how many stocks you would be willing to invest in.
| Total Portfolio Cash Balance | Maximum Number of Stocks to Invest In |
| <$5,000 | 2 stocks |
| $5,000-$9,999 | 3 stocks |
| $10,000-$24,999 | 4 stocks |
| $25,000-$50,000 | 5 stocks |
| >$50,000 | 6 stocks |
Respecting these criteria may force you to not invest in more stocks than you need to and possibly prevent you from diluting your returns. This will force you to make more thought out decisions, and should force you to get rid of your least performing stocks in case you want to add new ones to your portfolio. For example, if you have a total portfolio cash balance of $9000 and you are already holding your maximum of 3 stocks, you would have to sell your least performing stock to replace it with a new one. With this strategy, each stock you buy should be from a unique sector. There is no point in picking two stocks from the same sector as they usually follow the same trend. Therefore you should only pick the stock from that sector that you believe will outperform the others.
Step 2 - Determine your maximum investment for each stock
If the total value of your portfolio is of $9000, you could choose to invest up to $3000 per stock ($9000/3=$3000 per stock).
Current Portfolio Balance: $9000
Maximum Number of Stocks to Hold: 3
Maximum Amount to Invest per Stock: $9000/3= $3000
Maximum Investment:
Stock 1 - ABC: $3000
Stock 2 - DEF: $3000
Stock 3 - GHI: $3000
You should also note that your current portfolio balance will continually change as you trade and you should update it every time you close any position.
There are two possible future 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.
Step 3 - Breaking down your positions into several potential entries
You should never invest the entire portion of capital associated to each individual stock all at once. Depending on the total cash balance of your portfolio, you should split your entries for each stock into 2 to 3 entries. If you hold a relatively low cash balance you may choose to split your transaction into 2 entries. As your total cash balance increases you should start splitting your entries into 3. One reason for that is that when you have a low balance, the commissions paid for each transaction would have a bigger impact on your net return. Whereas when the value of your portfolio increase the impact of commissions become very minor and therefore splitting your transaction into 3 would not have much of a negative impact on your net return.
| Total Portfolio Cash Balance | Maximum Number of Stocks to Invest In | Maximum Amount of Cash to Invest in One Stock | Number of Entries | Position % Splits |
| $4,000 (<$5000) | 2 stocks | $2000 | 2 | Entry 1: 60%=$1200 Entry 2: 40%=$800 |
| $9,000 ($5,000-$9,999) | 3 stocks | $3000 | 2 | Entry 1: 60%=$1800 Entry 2: 40%=$1200 |
| $20,000 ($10,000-$24,999) | 4 stocks | $5000 | 3 | Entry 1: 50%=$2500 Entry 2: 32.5%=$1625 Entry 3: 17.5%=$875 |
| $40,000 ($25,000-$50,000) | 5 stocks | $8000 | 3 | Entry 1: 50%=$4000 Entry 2: 32.5%=$2600 Entry 3: 17.5%=$1400 |
| $60,000 (>$50,000) | 6 stocks | $10000 | 3 | Entry 1: 50%=$5000 Entry 2: 32.5%=$3250 Entry 3: 17.5%=$1750 |
*Please keep in mind that you may choose to change those percentages under different situations accordingly or depending on your risk tolerance.
The moment you start trading, keep in mind that you will never be able to invest at the exact 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 file that calculates everything for you automatically. 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 4 stocks, you may at times have only 2 or 3 stocks.
Step 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 of each day. By monitoring this every day, 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 that the +25% stock won't move even higher, but it may be safer to go with less volatility. Another thing that I would suggest doing is creating a watch list of basically all the companies you can think. You would preferably want to watch stock of companies for which you understand its business. The list will represent your potential stock candidates, and you should check out this list on a daily basis until you manage to find a stock that most often shows up in the top daily gainers list.
Once, you start pinpointing a few stock candidates, the next step you need to do is to check out the charts for each of these stocks, and determine if there are any opportunities. You always want to select candidates with the greatest potential returns but also enter when it’s safe. You may find stocks with the potential to appreciate very quickly in value, but they are most likely very risky and therefore could potentially cause you to make quick losses. When taking a position with any stock, the purpose is to enter when it's safe; 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. So, now the question is how do you determine if a stock is safe or at a safe point to enter?
a) When you look at a stock’s profile, you should focus on 2 things in particular: The Beta & the Average Volume
Beta: Pick Low Beta Stocks (1 to 2.5): To prevent your chances of finding yourself in losses very quickly, you should focus onto picking stocks with a low beta and therefore modest volatility. Although picking a high beta stock (e.g. over 4) could provide you with quick gains, this also increases your chances of getting stopped out very quickly if you don’t time your entry well, and this could very likely happen within a day or two of your entry. Basically, high beta stocks give you less chances of being wrong, as you have to be very good at timing your entry points. That is why that as a new trader, you should start with lower beta stocks and as you gain more experience you may choose to move onto higher beta stocks. Remember that higher betas mean higher risk. For example a stock with a beta of 3, basically represent an average accelerated move of 3 times the speed the market moves, and therefore your holding period of stocks would most likely decrease as the trends would start and conclude more quickly before starting new ones. This means that if you are very good at timing your entries you would manage to make a lot of gains more quickly. However this increases your chances of getting stopped out very quickly on multiple occasions; you have a shorter span of time to react, and this eventually brings you closer to becoming a day trader rather than a swing-trader.
The goal of this strategy is not to make the quick buck, but to take on high quality stocks to make slow and steady gains, rather than chase after +5/7% day moves. It might be annoying at times of seeing some other stocks perhaps from the same sector outperforming yours, but you’re more likely to see those stock fall harder on pullbacks. That is why holding high beta stocks would make it harder to apply this strategy in terms of achieving its goal.
If you pick a high beta stock which is in an uptrend, it might have strong fluctuations higher than your stop loss order, and therefore you would likely get stopped out on the way up despite the stock still trending up. You want to get into stocks that you will be able to hold on to into pullbacks, meaning that they would average pullbacks of less than your stop loss. A low beta stock moving lower than your stop loss order is a stronger indication that the trend may be reversing and becoming bearish. For example, a high beta stock may move down -15% while still trending in a major up trend, while a low beta stock that moves down over -8.00% for example would be a clear indication that the stock is now trending down. The only difference is that you would have to incur lower losses with a low beta stocks to realize this.
Volume: When picking any stock you should always make sure to look for stocks with enough liquidity; an average volume of at least 10 million. The lower the volume the bigger jumps in prices you’ll see from one trade to another. For example if you were to observe 2 stocks with a Beta of 2, with one stock with an average volume of 1 million vs. 25 million, you’ll see that despite moving around the same pace on a daily basis, the stock with the lower volume will have bigger jumps from one trade to another (within each tick). For example you may have 2 stocks worth $20.00 with a Beta of 2, with the low volume stock making swings of $0.15 within each tick, while the higher volume stock would make swings of $0.02 within each tick. You always want to be with a stock with a relatively high volume so that you don’t have to worry of seeing too many changes in prices within each tick when you want to enter or exit your position. Basically, lower volume increases the volatility within each tick and shortens your time of reaction.
b) Enter into a position after a BUY SIGNAL near a relatively good support level
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. However, do not enter into a position with a stock that is about to break down below the support level; you want to see it bounce back up from its support level before entering. 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 want to give yourself less chances of seeing your stop loss order triggered. So if the stock starts moving against you and crosses down below its support level you could choose to sell your stock before having your stop loss triggered and perhaps take a -5% loss rather than wait to incur a bigger loss with your stop loss order triggered.
You may find some stocks with huge upside potential, but who are very far from any support levels (e.g. -15%). This means that you would need to take on more risk to not get whipsawed. This is very common of very volatile stocks with a high beta. If you get a SELL SIGNAL when you are down -3% to -4% for example, you could choose to sell immediately before potentially having your stop loss order triggered. However, you should note that technical analysis is not a perfect science and you should not rely entirely on it, and that is why you should initially set a -8.00% VTSO (virtual trailing stop order) for every position. A VTSO is a stop loss order set at a fixed percentage or dollar level below the market price. If the market price rises, the stop loss price rises proportionately, but if the stock price falls, the stop loss price doesn't change. If the SELL SIGNAL is clear before having your VTSO triggered, just sell. However, doing this too often could perhaps result in more losses despite being lower than your VTSO, as you will likely be over trading. You would not be giving some of your stock’s trend enough time to get into motion. You never want to do more trades than you need to. For traders who do not have access to VTSO, you would have to manually update your stop loss order as the price of the stock moves up.
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 -8% down side with +20% up side vs. -8% down side with +25% up side; I will take the 2nd option again. The safest positions are obviously the ones with the lowest down side and the highest potential upside, as long as the down side is not over -8.00%. Taking long positions with stocks with more downside can easily wipe you out and this takes away your chances of being wrong. If you decide to take more risks, you have to be better at picking stocks at the right time.
Example:
Here is a great example of a low risk position, with SBUX chart of November 6th, 2009: Not only did it give us a BUY SIGNAL by having a break out; it also crossed over its resistance level of $21.00 (you should look for a 50% volume increase over its average on break outs). But more importantly SBUX has a lot of support between $19.75 where its 50 day MA stands. By going long at $21.00, the potential of seeing SBUX fall below $19.75 is low and you could consider SBUX as having the potential hold above -5.95% down swing in price.
November 6th, 2009 Chart
In fact since crossing over the $21.00, this resistance level became the support level and has moved higher since. As of January 15th, 2010 SBUX is now trading around $23.00. The most important thing to note is that SBUX has since never fallen below $21.00 and has trended higher along its 50 day MA.
January 15th, 2010 Chart
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.
November 6th, 2009 Chart
Keep in mind that this could have not happen, and SBUX could have immediately fallen back down its resistance level below $21.00 and $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 safe. You should never assume that what technical analysis says will actually happen, and that is why you should set VTSOs that will take away the emotions of having to make decision to sell or hold on to a stock. You do not want to have to risk or sacrifice too much of what you have gained. DO NOT BE GREEDY.
You should note that in the end only learning more about technical analysis thoroughly will allow you to improve your ability to picking stocks. This trading strategy will not teach you how to pick stocks at the right time but rather how to manage your orders for each stock. Despite that, learning how to manage your orders is what I consider the first and most important step to learn before even knowing when or how to pick stocks. Even if you are not very good at picking stock, being able to master this strategy will allow you to eliminate a lot of risk and this could still result in a positive outcome. As you become more disciplined into applying this strategy and removing your emotions and trading in a mechanical and calculated manner, you will have achieved the first step into becoming a successful trader. The second step would be to learn technical analysis more thoroughly and to eventually become better at picking stocks and timing both your entries and exits.
Step 5 - Placing your orders
Market, Limit, and Stop Buy 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 hold a current portfolio balance of $9000, you would invest no more than $3000 in the stock you have picked, but only 60% of that $3000 ($3000 x 0.6= $1800) for your first order. So, if the price of the stock ABC is $10.00, you will invest $1800/$10.00= 180 shares @ $10.00. You could choose to enter into your initial position either with a Market Order, Limit Order, or Stop Buy Order. In terms of you entry points, you have to try to better time them rather than buy at any price when you get a BUY SIGNAL; don't worry about not getting your order filled. Don't rush; take your time.
Locking in Gains with Virtual Trailing Stop Orders
Set a -8.00% VTSO or manually update stop loss order on every initial entry: The moment your order gets filled you will automatically set a -8.00% VTSO or manually update a Stop Loss Order of -8.00%. You never want to find yourself in a situation where you would be over trading with stop loss orders that are too tight, as this increases your chances of being whipsawed. You want to give your stock enough room to fluctuate and yourself more chances of being wrong. However, you always want to cut your losses and give yourself the chance to trade another day in case you make a wrong decision. That is why that with every entry you should set an automatic -8.00% VTSO or stop loss orders. This will not only give your stock enough space to fluctuate but this will also enable you to start locking in gains and cutting your potential losses. A -8.00% stop loss order triggered after you were up +6.00% is not the same as having a -8.00% VTSO triggered. With a stop loss order this will mean that you would have let your stock to fall back around -14.00% rather than just fluctuate down -8.00%. You should start locking in your gains the moment you start making them even if they are minor, and even if you end up taking on a loss. What will happen in the end is that this will allow you to cut your losses. Tolerating a loss of max -8.00% doesn’t mean you have to incur it every time you’re wrong. Basically when we say that we want to cut our losses to -8.00% this also means that we don’t want to let our stock have fluctuations of more than -8.00%. This is why it would be preferable to stay away from high beta stocks with this strategy, as it would then be more likely of seeing your VTSO triggered earlier rather than later. The -8.00% is an arbitrary number but is considered reasonable enough to give your stock enough space to fluctuate while not taking a significant loss that could wipe you out in just a trade or two. If you manage to foresee a further fall in the value of your stock before having your VTSO triggered at -8.00% you should sell your stock beforehand.
The advantage of setting a VTSO from your initial order is that you will be locking in gains from the start even if you end up taking a loss. The fact is the moment your stock starts moving favorably your maximum loss will be lower and lower going from -8.00% on your initial entry to -6.00% if you’re up +2.00% for example. This will help you cut your losses, and when this gets triggered there is more chances of taking on a smaller loss than -8.00%. For example taking a -2.00% loss after you were up +6.00% is less painful than taking a -8.00% loss. Before even thinking of making profits, you must focus on how you can cut your losses. After 20 business days (1 month or 28 days) of having your stock fluctuate between losses and your entry point, you should decide to just sell the stock and move on to another.
In terms of technical analysis, if 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. This strategy forces or encourages you to try to enter into positions when it’s safe. Therefore the closer you buy to a confirmed support level, the less chance you have of seeing your VTSO or stop loss order triggered.
You should set a fixed dollar VTSO which is a fixed amount in terms of price swing you would allow your stock to move before selling your position. If you set a -$0.80 VTSO when your stock is worth $10.00, a stop loss order would get triggered at $9.20, assuming $10.00 is the last highest price. However, as the stock moves up without incurring bigger swings than -$0.80, the stop loss order will automatically adjust itself, so if the stock’s last high was $12.00, the new stop loss will now be $11.20. Initially, this amount should be calculated on a percentage basis, but as your stock’s price continues to trade higher the VTSO will adjust itself up accordingly while keeping the same fixed dollar amount set. This means that if you set a -8.00% VTSO of -$0.80 when a stock is at $10.00, when the stock continues higher at $12.00, the VTSO will remain at -$0.80 while the percentage will become lower and be -6.67%. Ideally you should adjust the VTSO when you start getting into heavier gains, because as the price increases your fixed dollar VTSO will represent a lower and lower percentage from the last highest price, and this increases your chances of getting whipsawed. For example, when you set a -8.00% VTSO with a fixed dollar amount of -$0.80 based on your initial entry of 100 shares at $10.00 for stock ABC, and then your stock increases to $13.00, you should set a new -8.00% VTSO of -$1.04. The fact is that you will be sacrificing more money as the price increases while maintaining somewhat of a fixed percentage for your VTSO. As the value of your stock appreciates you can afford to sacrifice a little more cash, and it is necessary since the stock’s volatility should relatively stay the same. If you were to keep the initial -$0.80 VTSO when the stock price increased to $13.00, you would only have a -6.15% VTSO which would be too tight when you start having heavier gains than +20.00%.
However, the dollar amount you are willing to sacrifice is an important factor; -8.00% of $1000 (-$80.00) is not the same as -8.00% from $5000 (-$400.00). Basically, when you set your VTSO or stop losses you should focus as much on the percentage level as the dollar amount you would be willing to sacrifice in the event of a pullback. In the end, if you are happy with the gain you have achieved and do not feel comfortable sacrificing more than you would be willing to, there’s nothing wrong in just cashing in your gain or setting a tighter VTSO, if you feel that it’s the right move to do. When you start having heavy gains, you have a lot more flexibility. 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.
Set VTSO or manually update Stop Loss orders when you start making strong gains:
- The best way to protect gains when you have them is to set a VTSO between -5.00% to -8.00%: As long as you have losses or gains of between -8.00% and +9.99% you should stick to your -8.00% VTSO which is based on your entry point.
- When you are up +10.00% to +20.00% you should set a VTSO of -5.00% to -8.00%
- When you’re up +20.00% in less than 8 weeks, set your VTSO at -8.00% which will lock in a minimum gain of +12.00%
- If you’re up +20.00% in more than 8 weeks, you could decide to sell at this point or watch for a technical signal
| Order | Current Gain | Minimum Locked in Gain |
| -8.00% VTSO | -8.00% to +9.99% | -8.00% to +1.99% |
| -5.00% VTSO | +10.00% to +15.00% | +5.00% to +10.00% |
| -6.00% VTSO | +15.01% to +17.00% | +10.00% to +11.00% |
| -7.00% VTSO | +17.01% to +19.99% | +11.00% to +12.00% |
| -8.00% VTSO | >+20.00% in less than 8 weeks | >+12.00% |
| Sell on technical signal or set maximum VTSO of -8.00% | >+20.00% in more than 8 weeks | >+12.00% |
Please note that the -8.00% VTSO should never have you incur more than -3.00% of the total value of your portfolio. Incurring a loss of -3.00% of the total value of your portfolio should always be the maximum amount of losses tolerable. In the event where a -8.00% VTSO exceeds a -3.00% loss of the total portfolio value, this would mean that you are over investing into this stock and most likely means that you should add one stock to your portfolio. You should always adjust your VTSO to remain below this maximum limit. If you are over investing in one stock you would be forced to take on more risk, meaning that if your stop loss would get triggered, you would incur a bigger loss. You could run into this problem when you add to your position with a 2nd or 3rd entry. However, you should note that no matter how many entries you make with one stock you should always have a -8.00% VTSO initially, based on your average purchase price. When you decide to add to your position, you have to accept the facts that if you’re VTSO were to get triggered that you would have to take on a bigger loss on a cash basis. For example if you buy 100 shares of stock ABC at $10.00 for $1000 on your first entry, you would have a -8.00% stop loss order at $9.20 where you would incur a -$80.00 loss. If your stock starts running up and your stop buy order of +3.00% is triggered at $10.30 for another 97 shares at $999.10, your average purchase price would now be $10.15 ($1000+$999.10=$1999.10/197= $10.15). Therefore your new -8.00% stop loss order would be at $9.34 which would have you incur a loss of (197x$9.34=$1839.98) - $1999.10 = -$159.12.
Once you’re up strong (e.g. +20.00%) you may choose to not to set the -8.00% VTSO as you would now be in a more flexible situation, and you might perhaps choose to follow technical signals rather than incurred losses. For example if your stock is riding neatly along its 50 day MA, while having average pullbacks of -6% you could set a VTSO that would possibly get triggered when or if the stock crosses its 50 day MA. However, keep in mind that new trends may start and you may want to adjust a VTSO accordingly. A strategy you may consider is to sell the portion of shares representing your gains. For example if you managed to invest your full $3000 for one stock and you’re up +20.00%, so your shares are now worth a total of $3600, you would sell $600 worth of stock. This allows you to not risk some of the gains you have, while it continues to allow you to profit from any more upside 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 be 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 in the gains you had accumulated. In reality when you cash in gains, you're actually cashing in the money you've invested and reducing your risk. At times you may get stopped out and then see the stock move higher again. This could possibly be because your stop loss order or VTSO was too tight. If that happens, you could just choose to re-enter when it bounces back up a new support level.
Stop Buy Orders
Set a +3.00% stop buy order after your initial entry: The moment you enter into any position, you should set two different orders: a -8.00% VTSO, and a +3.00% stop buy order. Only when the stock starts moving favourably in your direction should you average up and add to your position up to the maximum amount determined (in this case the maximum would be $3000). So if you should have invested $1800 in your first entry and a place a stop buy order with a mark up of +3.00% to add another $1200 to your position to totalise your maximum $3000. Your stop buy order should be set with a mark up of +3.00%, but as you become better at timing your entries you may choose to lower this to as low as +2.00%. Basically you would be averaging up rather than down. 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. You should never add to your position once your stock is up +5.00% or more as the trend is probably well into motion at this point, and it would probably be not a good time to add to your position risking more chances of seeing a pullback. Such an order should preferably be set with a 2nd clear BUY SIGNAL in sight in the event where the stock starts to move higher. If you don’t feel confident enough you may choose to not add to your position yet and wait for another time to enter, such as after a bounce back up support after a small pullback. However, if you don’t feel confident enough to add to your position, you probably should not have taken the initial position to begin with and you are perhaps trading with a higher risk stock than you should, and possibly with a risk higher than you are willing to tolerate. You should never add to your position when you’re into losses. This means that you probably took a wrong decision and that the stock may continue lower.
Setting your new VTSO or Stop Loss Order
The moment your 2nd or 3rd stop buy order gets filled you should cancel your last VTSO or stop loss order and set a new one at -8.00% of your average purchase price, while staying under a potential -3.00% loss over your total portfolio value. This could happen in the event where you are over investing, meaning that you are perhaps holding too few stocks and should probably diversify and add a stock or two to your portfolio.
Step 6 - Reviewing your mistakes
Review your trades every time your stop loss order gets triggered: When you take on a loss, always review what went wrong. Do not wait until the end of the year to review all your failed trades. If you are trading with stocks with high betas, this will cause your holding period to decrease and therefore increase your number of trades. This is a warning sign and indicates that you need to shift towards safer stock with lower betas. This probably means that your timing of entries is not good enough to trade with these higher beta stocks. Make sure you don't rush to make your trade.
Stop trading for 2 weeks after 4 consecutive trades being stopped out: In the event where you have 4 consecutive failed trades with your stop loss order being stopped out, you should stop trading for about 2 weeks and review carefully what it is that you are doing wrong. In that event this probably means that your timing in entry is not acute and you should perhaps learn more about technical analysis to improve your timing.
Typical Trade Example:
$20000 portfolio with 2 stocks – Stock ABC: $10000; Stock DEF: $10000
Stock ABC - Position 1: 50% Position 2: 50% (Position 1 & 2: $10000x0.5= $5000/ea.)
1) BUY 500 shares of stock ABC @ $10.00 = $5000
2) Set -8.00% VTSO @ -$0.80 (Based on last $10.00 high: $10.00 - $0.80 = $9.20x500= $4600 - $5000= -$400 maximum tolerable loss)
3) Set +3.00% Stop Buy order @ $10.30 for 485 shares ($5000/$10.30) for $4999.50
4) If Stop Buy order gets filled set new stop loss order for all shares up to -3.00% of total portfolio value of $20000, so -$600. $5000+$4999.50=$9999.50/(500+485)=$9999.50/985= $10.15 Average Purchase Price
5) $20000 – 3.00%= $19400 - $20000= -$600 max tolerable loss
6) $10.15 Р8.00%= -$0.812 ̬ $9.338 ̬ $9.338x985= $9197.93- $9999.50= -$801.57
Average Purchase Price: $10.15
| Order | Current Gain | Current Price |
| -8.00% VTSO | -8.00% to +9.99% | $9.338 - $11.16 |
| -5.00% VTSO | +10.00% to +15.00% | $11.17 - $11.66 |
| -6.00% VTSO | +15.01% to +17.00% | $11.67 - $11.87 |
| -7.00% VTSO | +17.01% to +19.99% | $11.88 - $12.17 |
| -8.00% VTSO* | >+20.00% | >$12.18 |
*When you’re up +20.00% in less than 8 weeks, set your VTSO at -8.00%. If you’re up +20.00% in
more than 8 weeks, you could decide to sell at this point or watch for a technical SELL SIGNAL.
D - Conclusion
To conclude what you may have learned from reading about my Y-Swing 4.5 trading 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 apply technical analysis you have to learn how to manage your orders. If you already have this figured out you will have already made a huge step forward. What is extremely hard when you start trading, it's the inability to take losses, and set your VTSOs or stop losses in advance. When I first started trying to apply this strategy, I found myself either cancelling 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 enough gains and then set my VTSO or stop loss order when it will no longer had much impact. The truth is that when you’re VTSO or stop loss order is not set, you are not protecting yourself. This is the equivalent of not having insurance. If you don't want to bother setting VTSOs or 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 Cancelled).This strategy allows you to be disciplined. Despite having stop losses, the stop losses are not active during pre-market and after-hours, you would need to place a separate live GTEM limit orders, and even if the stops were active during these periods you still won't be completely protected. However, the major difference between stop orders and options is that stop orders would only cost you regular commissions if it were to get triggered, whereas options usually have a high premium cost. In the event a stock market crash occurs in the first opening trades during the pre-market, the current price 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. However, during your first years of trading you may need to build a strong enough cash balance to be able to make stronger returns with bigger investments in the future. Basically, only when you start having a stable income should you start cashing in gains. The reason is that if the first time you started trading with $1000 you started incurring losses, this won’t be a big deal, until you get older and have a higher and stable income where you invest $50000 and when you incur losses your income no longer increases. Basically incurring losses with small investments will not hurt you that much at the beginning and will allow you to gain experience without risking too much money. In the long term this $1000 investment may represent very little to you if when your income stabilizes and you make about $50000 or $75000 a year. If your income stabilizes while you’re investing $50,000 and that over the years you accumulated $20000 of gains, you would be foolish to invest your $70000 and risk all every day. You should continue to invest $50000 and cash in about 50% of your gains ($10000), and perhaps each year increase a little bit your investments if you can afford it. If you manage to become a successful trader one day, you may eventually be trading only with gains you have accumulated over the years. During accumulation periods when the market moves sideways it may be harder to successfully use this strategy, and you would need to be more precise in your entries and exits.
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 make huge gains. If out of 3 trades, 2 represent losses of -8.00% 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 up, while they quickly sell their winners because they fear 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 that stock as long as you can or as the trend persists, without giving up too much of what you have though. Even if 2 out of 3 stocks bounce back up, it only takes one stock to stay down and have you incur huge losses to wipe you out. 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 these occurs, you should settle back and stop trading for a little while, and try to figure out what is it that you’re doing wrong. You can only learn from your mistakes, and if you just started trading you can expect to lose most of the money you started with initially. That's why I would suggest that you don't start by investing too much money at first. 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 that you are losing money. That's why the people who start trading during a recession are much better equipped than people who start trading in an expansion period. 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.