Basic Strategy

FTSE Beater

Experienced member
1,518 5
Hi All

A number of people have recently asked me. I want to get into trading, but I don’t really know where to start – So I thought I would start this thread with the aim of giving new traders a place to start and a simple strategy that can be implemented without (fingers crossed) too much trouble.

I used to trade a slight variation of this a while ago. The UK stock markets are naturally range-bound, especially on a short-term basis. This strategy looks to buy low and sell high, so it is swing based. It uses the basics of support, resistance and trendlines combined with money management. These are the elements I looked at Here.

What is the strategy

  • What were looking for is a test of support or resistance or a trendline that fails to break.
  • If it tests support and bounces up, then go long and place the stops just under the support level.
  • If price tests resistance and bounces down, then go short and place the stop just above the resistance point.
  • Take profits at a test of previous support or resistance.
  • Once the trade is in profit (how much is up to you) Move the stop to break-even, so your then sitting on a “free trade”
  • Trade stocks, That are in the FTSE 100, and That have a high average daily range
  • Trade off a 60 minute bar or candlestick chart
  • Look for a Reward / Risk ratio of at least 2:1 – ideally 3:1
  • No trades held overnight if the company is reporting the next day
I haven’t got a list of good tradable FTSE 100 stocks, but if someone with Sharescope could get the FTSE 100 companies, sort via either daily range or even better average daily range and post the results here, it would be much appreciated :)

Here’s an example of what I mean from the last few weeks - looking at Royal Bank of Scotland.


RBS71203.png


Here there is resistance at 1614, which has been tested and failed to break above that point. There is a potential trade here, but the price says 1605 which, with a stop at 1616 and a target at around 1590, would give a Reward / Risk ratio of 1.36 – which is too small to trade :rolleyes:
However if we enter a limit order in the market at 1608 then we will get a Reward / Risk Ratio of 2.25 :)
Lets see if we get a fill on the next bar.


RBS712032.png


Yes we got filled. That last bar shows a high of 1610 and a low of 1604, so our limit order at 1608 would have been filled.
Ok, so we are now short with a stop at 1616


RBS712033.png


For the next few bars the price moves down slowly, but surely. Once price hits 1590, I’m out of the trade and taking the profits :) Is that the right decision?

Well……..


RBS712034.png


Nope :cry: The price fell further. Would I be happy taking profits where I did. Yes :)
The next trade set-up is at this point. The price has bounced off the previous support level, so this is now resistance. With the price at 1584, a stop at 1590 and a target of 1557, so a great Reward / Risk ratio of 5.5 :p
So we are now short (as we enter on a market order to get a price of 1584), with a stop at 1590.


RBS712035.png


eek :eek:
Price never really started to fall, so stopped out for -6.


RBS712036.png


Here’s the next set-up. Again a test of the 1590 mark. The problem is price hasn’t quite tested it, and on the next bar this happens.


RBS712037.png


eek :eek:
What a fall, could you have caught it? Possibly, but you would have had to be quick and if I managed to get in on the trade then I would be exiting at 1558.


RBS712038.png


On the next bar, the price does indeed bounce. Price at 1560, stop at 1554 and a target of 1590 gives a Reward / Risk ratio of 5:1 :)
So long with a market order to get filled at 1560


RBS712039.png


After threatening the stop on the previous bar, the stop got hit on this one. Out for -6 again :rolleyes:

This is where things get tricky and at this point some people would abandon this strategy. – Well we have had 2 losses in a row. The ability to carry on with a strategy, that in the short-term is failing, is where a strong psychological make-up comes in. :)


RBS7120310.png


The next set-up comes here. A bounce up off the previous support level gives a long entry at 1547 with a stop at 1541 and a target of 1570. So a Reward / Risk ratio of 3.83


RBS7120311.png


The exit comes a couple of bars later as price hits 1570 :)
After that the price carried on all the way up to 1635.


So there you go, a few easy and relaxing trades in Royal Bank of Scotland :cool:
The one thing I would say with this, and it goes for much of trading, you need patience. 3 (maybe 4) trades in a the space of 2 weeks, is not a great deal. So the majority of the time you will be waiting for the trade, which isn’t always easy to do.

This strategy is by no means perfect. I could pick holes in it all over the place, but as a starting point – it’s pretty good. :cool:

Feel free to ask questions, and post comments
Thanks for reading
 
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mercury7

Member
78 0
FTSE,
Nice to see someone prepared to help other people how to trade from scratch; have you tried using this strategy for USA stocks by the way?
Also, for us morons who are not good at maths, can u explain how risk/reward was worked out?
Thanks Kevin
 

FTSE Beater

Experienced member
1,518 5
Hi Kevin

I haven't tried it with the US as it's harder to find range bound stocks - maybe I haven't been looking hard enough. I can't see any fundamental reason why it wouldn't work, as long as there is good liquidity and the stock is likely to stay fairly range-bound, you shouldn't go too far wrong, but as I say I haven't tried it.

Another thing to think about is on a 60 minute chart, you would only get 6.5 bars a day compared to 8.5 bars for the UK market - as the US trading day is 2 hours shorter :eek:

With regards Reward and Risk it's:

Target price minus Entry price = Reward
Entry price minus Stop loss level = Risk

Then Reward [size=3.5]÷[/size] Risk = Reward / Risk ratio

Hope that helps :)
 

ZigZag

Active member
123 0
FTSE Beater. I must congratulate you on your philosophy for helping others. You are giving up your time and thoughts without recompense to yourself apart from the reward of passing on knowledge and ideas. You truly encompass the nature of this site and its objectives.
THe FTSE 100 wide ranging shares I follow are: GSK. RBS. AZN.AAL. RIO. RB.. IMT.EMG.LAND.WOS.SN.CCL.BOC.NXT.JMAT.
Regards
 

mercury7

Member
78 0
FTSE,
Many thanks for explanation, forgot about 2 hours less trading in USA, so didn't even realise there were less bars, shows my observancy.
Have now recorded how to work out risk/reward, I'm sure this will also help other people who were too shy to ask.
So, have now worked out on first trade:
Target-Entry is 1590-1605 = - 15
Entry-Stop Level is 1605-1616 = -11
Even though both ended up minus levels i divided -15 by -11 which is equal to what you said in first place 1.36. Begorrah I've got it!!For one moment thought that having negative values would mess up calculations.
Many thanks
Kevin
p.s. As you say I have tried some fav.US stocks and doesn't quite work as well as FTSE shares.
 

neil

Legendary member
5,167 748
FTSE
Your "buiding block" method is an excellent way to get the new trader to study price bars and the formation of resistance/support etc.
 

BlueChip Trader

Active member
165 4
FTSE Beater

Excellent post. Your S/R strategy WORKS! I know as I have traded RBS along with other banking stocks for the last two years, although I use 5, 15 and 60min charts.

This strategy is a good stepping stone for newbies when used with one or two indicators like MACD and RSI.

Most importantly one must have a good money management in place before any trade is executed.
 

FTSE Beater

Experienced member
1,518 5
Hi all

Thank you for your kind comments, both on this thread and from PM's. It is really appreciated :p

A thought that occurred to me last night was that this strategy will get to the heart of any psychological problems as well. Mark Douglas, in his book The Disciplined trader (which I thought was available in the T2W Book store :confused: ), talks about the psychological issues and that you need a simple clear strategy to test your mind on.
If anyone has read this book, then this is a strategy that I would recommend you use in conjunction with chapter 10 :cool:

<hr>
Hi ZigZag

Thank you for posting the list. Personally I would be tending more towards the start of the list and if that brings up nothing, then move towards the end. From memory GSK. RBS. AZN. AAL. RIO trade well :cool:
Also if BlueChipTrader says the rest of the banks are good to trade, then that's good enough for me

<hr>
Hi Mercury

Yes, that's Reward / Risk ratio :)
Thank you for posting up the details - I think I should have explained it better :eek:

<hr>
Hi BlueChipTrader

Trust you to want to add in the advanced stuff ;) ;)
Your 100% right, money management is the key, and thanks for adding the banking sector to the list :)
 

kevin546

Established member
699 0
Dr Alexander Elder ' Come into my trading room' has some examples and it is easy to follow but this is just one aspect of the book.
 

Halfbutt

Member
56 0
another great thread. And thanks to you and a few more of the guys on this site , im out of the Reception class and into YR 1 with a bit more money than when i started.

halfbutt
 

kevin546

Established member
699 0
One suggestion

I know this was set up as a beginners strategy and trading the range is a good way to get to grips with support and Resistance, target profits and stops.

The one thing I do find is how many traders appear lost for what to do when a share price moves outside the range they have become accustomed to. My suggestion to improve and maybe take this a stage further would be to add when you find yourself trading a range and you have entered the market in the direction of the trend; then it maybe worth considering that the support or Resistance maybe broken. When this happens there is a real chance that the price surges away from it.

Now I realise this is probably going against the basic principle of what FB has so kindly provided but there is a well known saying 'trade with the trend'. In such circumstances I would be tempted to trade from 2 perspectives, especially if using SB as my medium. I would take profit with half when the target was reached and let the other half have a chance of trending through the support/Resistance.

As I say this is just a suggestion from trading trends by adding another dimension to what is a very good strategy in its own right. The reason I have mentioned this is that if I have learnt anything over these past years it has been that you have to be able to adapt to market conditions and this is one way that you could offer yourself a chance to run with the trend.

Of course you could filter this by making an assessment of how strong a support/Resistance level is, how many times has it rebounded before,what happened afterwards. If the price did not move up as high as before to the upper level Resistance then there is a better chance that it is trending down and vice-versa.

Anyway best of luck
 

alby

Newbie
2 0
Nicely laid out strategy - thanks FTSE Beater.

Can you expand on the concept of a "limit order", and what this means in terms of "getting a fill on the next bar"?
 

FTSE Beater

Experienced member
1,518 5
Hi Axthree

Thank you for your kind comments :cool:

<hr>
Hi Alby

A limit order is an order that is placed in the market and it instructs your broker to only pay a certain price for a product.

For example: If company XYZ is trading at £1 a share and you think that's too expensive, you can tell your broker to place a limit order at 90p. This means you will not get a fill over 90p for a share of XYZ. (A fill is when an order is executed and you have brought or sold a share), and therefore you will not pay more than 90p for a share.

With regards "Getting a fill on the next bar". If your looking back over old data (normally refereed to as Back-testing), then it is very easy to cheat. When I say "Getting a fill on the next bar" I'm looking to see if my price will have been executed

So in the example, this is what I mean:

However if we enter a limit order in the market at 1608 then we will get a Reward / Risk Ratio of 2.25
Lets see if we get a fill on the next bar.


RBS712032.png


Yes we got filled. That last bar shows a high of 1610 and a low of 1604, so our limit order at 1608 would have been filled.
Ok, so we are now short with a stop at 1616

Because the latest bar shows a high of 1610 and 1604, then at some point the price traded at a price of 1608 (my limit), so therefore I would have got a fill. That last bar is showing that during the last 60 minutes, the price had moved between 1604 and 1610

I hope this makes a bit more sense. If it doesn't please let me know and I'll try and make it clearer :eek:
 
 
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