A trend following system like mine performs best in liquid stocks that tend to trend in a relatively stable manner. The good liquidity enhances the effectivness of stop losses. (stops tend to become less effective in thinly traded stocks.)
The template I put on my WEEKLY charts is...
* 11 period ADX with a horizontal line set at 25.
* 3 period CCI histogram with a horizontal line drawn at the zero level.
* 13 week and 26 week EMA's.
Here's what I do in my once a week analysis each Saturday morning...total time spent is about an hour to analyse the 600 US blue chips that I follow.
First, check the WEEKLY chart of the All Ords (or S+P 500 if you trade US stocks). If the 13 EMA is above the 26 EMA, both are rising and pulling further apart, and the tops and bottoms of the price action are getting progressively higher, then you know the overall market is bullish and you ABSOLUTELY MUST trade ONLY long positions.
The mirror image of these rules apply to identify a downtrend. If the overall market is downtrending, you ABSOLUTELY MUST trade ONLY short positions.
I cannot overstate the benefits of being in tune with the overall market...its VERY important.
SCANNING.
If the weekly trend of the All Ords is bullish...Scan for 'CCI crosses below zero' This scan finds stocks that are in the process of retracing to the downside.
OR
If the weekly trend of the All Ords is bearish....Scan for 'CCI crosses above zero' This scan finds stocks that are in the process of retracing to the upside.
With just a couple of mouse clicks the stocks picked by this scan can be put into a separate workbook. My weekly template is put on these stocks. Now I look at each stock one by one, but at this stage I'm only interested in the ADX, not the price action. As each chart comes up I'm looking at the bottom right corner of the screen to see if the ADX is above the horizontal line which is set at 25. It takes only a one second glance to check the ADX reading, and if its not strong enough, a further two seconds to put the next chart up on the screen. It sounds inconceivable that you can check out a new chart every three seconds, but remember that the process so far has been mainly to weed out the undesirables rather than to pick the winners.
If I come across a potential winner (one whose ADX is reading 25 or higher), I then check it's price action, Moving Averages etc, and if it shapes up OK in those areas I transfer it to a workbook which I've called 'Watchlist'....this takes just a couple of mouse clicks.
Out of my workbook of 600 US blue chips the scanner usually finds about 10% - 60 odd stocks, that are giving the CCI signal. At less than 5 seconds per chart it doesn't take long to whiz through this list and cull most of them, and save the best 8 or 10 to a watchlist.
The final selection on the top 8 or 10 is purely visual. If the overall market is bullish I'm looking for the stock to have....
* Higher tops and higher bottoms, 13 EMA above 26 EMA, daylight (space) between the two MA's, both MA's rising and pulling apart.
* ADX reading of 25 or higher.
* Stock must be in the process of a pullback.
ENTRY...
Put a buy stop or a buy limit order 1 tick above the candle that pulls CCI below zero. Lower the buy order each week if necessary to just above the top of the last candle. If/when the uptrend resumes, your entry order will be filled.
OR
For a more conservative entry, put the buy order 1 tick above the first bullish candle following the pullback.
All buy orders are placed on a GTC (good till cancelled) basis.
STOP LOSS...
Attach an 'If done' stop loss order to your buy order. If your buy order is done (filled), your stop loss will automatically be put in place.
I like to place the stop somewhere between 8% to 10% from entry, but I've used a 5% stop on occasion. 8 to 10% gives the market a bit of room to fluctuate without stopping you out.
For long positions its prudent to pay a small extra charge to use a GSO (guaranteed stop loss order), if your broker offers this facility. A GSO is designed to protect you against a severe price slump that could gap past your stop loss order.
TRAILING STOPS.
As the trend moves in our favour we need to progressively lock in profit. I do this by moving my stop up to just below each swing low on the weekly chart. Each swing low is of course preceded by a swing high. When each pullback ends, and the revitalised uptrend moves above the last swing high, then and only then will I move my stop loss up to 2% under the swing low.
I repeat this process each time a higher swing low is made, until finally the trend dies and my stop is hit, and I'm taken out of the trade.
There's one other part to my trailing stop strategy....if a weekly candle penetrates the 26 week EMA, at the start of the next week I'll move my stop up to 2% below the bottom of that candle. A penetration of the 26 EMA can sometimes be a warning that the trend is getting tired, in which case its prudent to take the precautionary action of moving your stop up to just under that candle.
MONEY MANAGEMENT.
2% of my trading capital is the maximum I'm willing to risk on a trade.
SUMMARY.
Use weekly charts exclusively.
Once a week check the weekly trend of the overall market, and trade only in that direction.
Find stocks that are trending in the same direction as the market as a whole, but are currently retracing.
Use the ADX to measure the trend strength of these stocks.
Buy these stocks as they finish their retracement and resume their trend.
ALWAYS place a stop loss order, and make it a guaranteed stop loss if you're trading long.
Use trailing stops to progressively lock in profits as the trend moves your way, and to take you out of the trade when the trend dies.
Use the 2% money management rule to prevent serious depletion of your trading capital from a losing trade.
If the overall market is bearish, use the mirror image of the system to go short in bearish stocks.
CONCLUSION.
By cutting losing trades quickly and letting winning trades run as long as the trend remains healthy, by trading only in strongly trending stocks, and by trading only in the direction of the overall market, this system virtually ensures an acceptable ratio of winning trades to losing trades, and that the average profit will be considerably larger than the average loss.
Its difficult NOT to make money with this type of system, PROVIDING its applied consistently.
The icing on the cake is that a large number of stocks (600 in my case) can be analysed in just an hour once a week.
The template I put on my WEEKLY charts is...
* 11 period ADX with a horizontal line set at 25.
* 3 period CCI histogram with a horizontal line drawn at the zero level.
* 13 week and 26 week EMA's.
Here's what I do in my once a week analysis each Saturday morning...total time spent is about an hour to analyse the 600 US blue chips that I follow.
First, check the WEEKLY chart of the All Ords (or S+P 500 if you trade US stocks). If the 13 EMA is above the 26 EMA, both are rising and pulling further apart, and the tops and bottoms of the price action are getting progressively higher, then you know the overall market is bullish and you ABSOLUTELY MUST trade ONLY long positions.
The mirror image of these rules apply to identify a downtrend. If the overall market is downtrending, you ABSOLUTELY MUST trade ONLY short positions.
I cannot overstate the benefits of being in tune with the overall market...its VERY important.
SCANNING.
If the weekly trend of the All Ords is bullish...Scan for 'CCI crosses below zero' This scan finds stocks that are in the process of retracing to the downside.
OR
If the weekly trend of the All Ords is bearish....Scan for 'CCI crosses above zero' This scan finds stocks that are in the process of retracing to the upside.
With just a couple of mouse clicks the stocks picked by this scan can be put into a separate workbook. My weekly template is put on these stocks. Now I look at each stock one by one, but at this stage I'm only interested in the ADX, not the price action. As each chart comes up I'm looking at the bottom right corner of the screen to see if the ADX is above the horizontal line which is set at 25. It takes only a one second glance to check the ADX reading, and if its not strong enough, a further two seconds to put the next chart up on the screen. It sounds inconceivable that you can check out a new chart every three seconds, but remember that the process so far has been mainly to weed out the undesirables rather than to pick the winners.
If I come across a potential winner (one whose ADX is reading 25 or higher), I then check it's price action, Moving Averages etc, and if it shapes up OK in those areas I transfer it to a workbook which I've called 'Watchlist'....this takes just a couple of mouse clicks.
Out of my workbook of 600 US blue chips the scanner usually finds about 10% - 60 odd stocks, that are giving the CCI signal. At less than 5 seconds per chart it doesn't take long to whiz through this list and cull most of them, and save the best 8 or 10 to a watchlist.
The final selection on the top 8 or 10 is purely visual. If the overall market is bullish I'm looking for the stock to have....
* Higher tops and higher bottoms, 13 EMA above 26 EMA, daylight (space) between the two MA's, both MA's rising and pulling apart.
* ADX reading of 25 or higher.
* Stock must be in the process of a pullback.
ENTRY...
Put a buy stop or a buy limit order 1 tick above the candle that pulls CCI below zero. Lower the buy order each week if necessary to just above the top of the last candle. If/when the uptrend resumes, your entry order will be filled.
OR
For a more conservative entry, put the buy order 1 tick above the first bullish candle following the pullback.
All buy orders are placed on a GTC (good till cancelled) basis.
STOP LOSS...
Attach an 'If done' stop loss order to your buy order. If your buy order is done (filled), your stop loss will automatically be put in place.
I like to place the stop somewhere between 8% to 10% from entry, but I've used a 5% stop on occasion. 8 to 10% gives the market a bit of room to fluctuate without stopping you out.
For long positions its prudent to pay a small extra charge to use a GSO (guaranteed stop loss order), if your broker offers this facility. A GSO is designed to protect you against a severe price slump that could gap past your stop loss order.
TRAILING STOPS.
As the trend moves in our favour we need to progressively lock in profit. I do this by moving my stop up to just below each swing low on the weekly chart. Each swing low is of course preceded by a swing high. When each pullback ends, and the revitalised uptrend moves above the last swing high, then and only then will I move my stop loss up to 2% under the swing low.
I repeat this process each time a higher swing low is made, until finally the trend dies and my stop is hit, and I'm taken out of the trade.
There's one other part to my trailing stop strategy....if a weekly candle penetrates the 26 week EMA, at the start of the next week I'll move my stop up to 2% below the bottom of that candle. A penetration of the 26 EMA can sometimes be a warning that the trend is getting tired, in which case its prudent to take the precautionary action of moving your stop up to just under that candle.
MONEY MANAGEMENT.
2% of my trading capital is the maximum I'm willing to risk on a trade.
SUMMARY.
Use weekly charts exclusively.
Once a week check the weekly trend of the overall market, and trade only in that direction.
Find stocks that are trending in the same direction as the market as a whole, but are currently retracing.
Use the ADX to measure the trend strength of these stocks.
Buy these stocks as they finish their retracement and resume their trend.
ALWAYS place a stop loss order, and make it a guaranteed stop loss if you're trading long.
Use trailing stops to progressively lock in profits as the trend moves your way, and to take you out of the trade when the trend dies.
Use the 2% money management rule to prevent serious depletion of your trading capital from a losing trade.
If the overall market is bearish, use the mirror image of the system to go short in bearish stocks.
CONCLUSION.
By cutting losing trades quickly and letting winning trades run as long as the trend remains healthy, by trading only in strongly trending stocks, and by trading only in the direction of the overall market, this system virtually ensures an acceptable ratio of winning trades to losing trades, and that the average profit will be considerably larger than the average loss.
Its difficult NOT to make money with this type of system, PROVIDING its applied consistently.
The icing on the cake is that a large number of stocks (600 in my case) can be analysed in just an hour once a week.
