Fundamental Stock Trend Trading - by Trader LT

[TraderLT]

Hello traders - Thanks for taking the time to check out my trading journal.

TLDR: Fundamental analysis – trend following technical timing entries – mainly UK and US stocks – long term position trading with a bit of day trading thrown in.


I think it will be something quite different from the existing journals already here as my trading method is primarily fundamental based.

I know there are a lot of haters on Fundamental Analysis (FA) from the retail trading space but I’ll try to demonstrate how FA can be consistently applied to make sound trading decisions.

I’ve come to a natural quiet time in my trading account due to the time of year (holidays) and I felt it would be good fun to document how I build a portfolio coming in to the autumn and manage the positions to close out the year.

A little bit about myself – I am a professional investment adviser to private clients. I build and maintain client investment portfolios on a daily basis. Although I’m not trading specific stocks for my firm – I’m expressing my market views though collectives (Investment Trusts/Funds, ETFs ect) – the research and analysis of how I make my investment decisions is exactly the same.

For obvious reasons, all of the trades I will document here are in my own account and are not replicated anywhere else. Also I feel I have to mention that none of this should be considered as advice – it’s just my journal and take from it what you will!

In the future my ambition is to become a professional trader, either for a firm or just though my own account. Build up my track record and then potentially open my own hedge fund/start a proprietary trading firm in the South West of the UK where I live.

 

[TraderLT]

Anyway – enough of that, down to the trading.

My methodology

1 – Fundamental Analysis to target sector long/short bias
2 – Technical trade timing on specific stocks


My investment process starts with the fundamental analysis. This is very simple and just what I’ve been taught through my qualifications. I pay attention to the following reports: GDP, PMI, CPI, RPI, Retail Sales, Monetary policy statements, House price index, housing starts, and employment figures.

I’ll talk about these more in depth as the journal goes on, but these determine my long/short bias in specific markets.

From these repots I record my bias in global markets and specific sectors.
Once I’ve got my bias down to which sectors I’d want to be trading, I then find stocks using a couple of stock specific fundamentals and the most basic technical analysis to time trade entries.

I’ve read books on technical analysis but the approach I’ve adopted has been pretty much stolen from Jon Boorman CMT. I’ve followed his work for a long time and although I use FA where he doesn’t – His technical momentum trading and trading psychology is fantastic.

All I’m doing is once I’ve found my target to trade, I’ll look for a flag (bull/bear) or breakout with increased volume and I’m in.

Spreads vs. outrights

Most of the time, I will favour using spreads to express a trading idea. I honestly think this is critical for an equity trader in volatile market times. Right now, it’s not as important as we are in a quiet and bullish market – but we don’t know when that will flip, and by using spread positions you can hedge out the market risk to a certain extent.

An example would be – Right now the UK market is bullish with inflation slowly increasing, so I want to be long commodities. I’m now looking for a long trade in the mining sector. To hedge out the market risk, I’ll also look for a short in consumer staples which typically don’t do much during these market conditions.

I’ll talk more about this later, as I don’t think I’ve seen anything about spread/pairs trading on this forum and it’s been such a great tool for me over the years. It’s a real art to get the right weighting on each side of the trade and if you can make money on both the long and short play, then the risk/reward in your account is going to make your year.

 

[TraderLT]

I've finished typing for tonight. I'll prepare a couple of trade examples of positions from earlier this year to give a bit more colour to my approach - then it will be on to the trading.

Happy to answer any questions.

Cheers all. LT.

 

[TraderLT]

Long trade - FRES

Ok so first trade is on - long Fresnillo PLC at 902.9

The story around this trade -

UK PMI's have been very strong with the most recent figure being a euphoric 57.5.
Anything above a 50 can be considered to be a bullish indicator, holding above 55 and rising is very bullish for cyclical sectors (ie. things that do well in a growth environment). Also inflation came in recently at 2.7 which was an unexpected increase. Fresnillio is a mining stock - specifically silver and gold which do well in inflationary conditions.

The stock itself is currently trading at a Price/Earnings of 41, which is at a premium to the market which is currently 30.4 - this means the stock is hot.

So the fundamentals all line up. Now for technical.

I've attached a picture of my chart. The EMA's are just the 20 and 50 to give the small picture some shape for readers - I don't use them to make trading decisions. What is significant is that we've got a nice bullish close after a bull flag pattern - that is enough for me to have a nice entry to the trade.

 

[TraderLT]

Quick note - Not stocks, but looking at EURUSD, I'm really interested to see what might happen this week. Looking at the chart, I may get long on another run of 13500. Looks very interesting....

 

[TraderLT]

Update - My trade on FRES has started very nicely. To hedge that - I've gone short Tesco plc. I'll get a chart up on Tesco soon enough.

I'm not touching the Euro as it got smashed again. Sadly I'm in meetings but I'd love to trade the Euro on Thursday. Could see some great short term sells on a run up during event volatility. Sigh.

 

[TraderLT]

Update - 28/7/14

So its a typical summer market with not much going on right now. Lots of event risk later in the week so things might get moving again. It's times like these that I feel sorry for people who are trying to trade forex majors.

Anyway -

My two current positions are moving nicely.
FRES currently + 3.6%
TESCO currently + 5.1%

I'm franticly looking for more positions to get in to before things get busy over coming months.

An idea I've been working on is a relative value spread on European stocks.
So we can expect an interest rate rise in the UK at some point in the near future - who stands to benefit? Probably finance providers and deposit takers (ie. banks)

Germany continues to outperform vs. France and I like the idea of playing a German Financial Services stock against a short in a French bank.

It's going to be tricky to express this trade as to gain access to the European stocks - I'm spread betting. Usually a bad way to trade stocks because your position volatility is more determined by the initial price of the asset than it's real beta vs. the market.