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Trading Model:
My trading model is very simple and consists of
four components, namely the Exponential Moving Average (EMA),
Realtive Strength Index (RSI), Asset
Allocation, Risk Management and trading Exchange Traded Funds
(ETFs).
(1) Exponential Moving Average (EMA) explained
Period: 20
Offset: 0
Average Type: Exponential
Average of : Last (Price)
The Exponential Moving Average gives the recent prices an
equal weighting to the historic ones. The calculation does not refer
to a fixed period, but rather takes all available data series into
account. This is achieved by subtracting yesterday’s Exponential
Moving Average from today’s price. Adding this result to yesterday’s
Exponential Moving Average, results in today’s Moving Average. Like
an Simple Moving Average, it smoothes out a data series, making it
easier to spot trends.
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My trading
strategy follows the exponential moving average for a period of 20
days. When the equity trades above the trend line it's a bullish
signal while trading below it's a bearish signal - it's simple and
it works.
Bullish Signal
- when the closing price closes above the
EMA(20) trend line. It's a signal only and does not necessarily
mean it's a bull market rally.
Bearish Signal
- when the closing price closes below
the EMA(20) trend line. I use this signal to set my stop loss
exit for my long positions. |
(2) Wilder's Relative Strenth
Index (RSI) explained
Period: 14
Moving Average: 5
RSI is a versatile momentum oscillator that
has stood the test of time. Despite changes in volatility and the
markets over the last 10 years, RSI remains as relevant now as it
was in Wilder's days. While Wilder's original interpretations are
useful to understanding the indicator, the work of Brown and
Cardwell takes RSI interpretation to a new level. Adjusting to this
level takes some rethinking on the part of the traditionally
schooled chartist. Wilder considers overbought conditions ripe for a
reversal, but overbought can also be a sign of strength. Bearish
divergences still produce some good sell signals, but chartists must
be careful in strong trends when bearish divergences are actually
normal. Even though the concept of positive and negative reversals
may seem to undercut Wilder's interpretation, the logic makes sense
and Wilder would hardly dismiss the value of underlying price
action. Positive and negative reversals put price action of the
underlying security first and the indicator second, which is the way
it should be. Bearish and bullish divergences place the indicator
first and price action second. By putting more emphasis on price
action, the concept of positive and negative reversals challenges
our thinking towards momentum oscillators.
RSI is a momentum oscillator that measures the speed and change of
price movements. RSI oscillates between zero and 100. Traditionally,
and according to Wilder, RSI is considered overbought when above 70
and oversold when below 30. Signals can also be generated by looking
for divergences, failure swings and centerline crossovers. RSI can
also be used to identify the general trend.
(3) Risk Management
My trading strategy uses a simple buy and
manage plan. Each position is equally divided into a core
allocation and a swing trade. When the market goes sideways, I
use my swing trade to raise cash
selling about 1/2 of my position. And when the market drops below
7% from the highest closing price, I sell my core position.
Swing Trade explained: while a long
position is considered an investment, a position trade is an
investment that I hold as long as it gaining in value - from a few
days to 1-2 weeks. I monitor the
market direction very closely and when the market is trading
sideways, I will take some of the top unless it gets stopped out
first (3% exit from the highest closing price).
(4) Asset Allocation - Portfolio Diversification
Asset allocation affects both the risk and return of investors, and
is often used as a core strategy in basic financial planning. To
achieve portfolio diversification, I have modeled 2 portfolios using
index funds and
sector specific exchange
traded funds. I don't have any preference, both models achieve my
objectives.
For my
large portfolio (plus $75k), I am using a balanced portfolio for
current investment income along with capital preservation and modest
growth. I use my age as an allocation guide. For example, when my
age is 60, I invest 60% in fixed income securities and the remainder
(40%) in ETF diversified equities.
more... information about my balanced portfolio
(5) Exchange Traded Funds
ETFs Are Safer Than Stocks -
There is less single stock corporate risk as ETFs are a basket of
underlying securities. With multiple securities, you aren't subject
to the wide array of risk including corporate scandals, after market
earning reports, and other factors that affect individual stocks.
Trade ETFs On Both The Long And Short Side - This enables the
opportunity to profit in both rising and declining markets.
Trade ETFs With or Without Leverage - Many traders like the
idea of getting added leverage in their trading and the newly
released leveraged ETFs have seen tremendous volume growth as active
traders have gravitated to them.
ETFs Are One Of The Fastest Growing Financial Vehicles - ETFs
are growing quickly as money managers and traders find them to be
more convenient and have the added benefit of less risk than
individual stocks.
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