My evolving trading system

My trading system continues to evolve the more I learn from studies and from experience. I thought it would be important to note what my current trading system is considering this current iteration has proven to be most successful for me.

Here it is below. Feel free to let me know if you want me to explain certain points in more detail.

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Version 1.3 - June 18, 2010

Trading System

1. Stock selection:

- Choose stocks purely on fundamentals. No speculation.

Currently, I exclusively buy only stocks that have a ‘buy’ rating with ATR Kim Eng. So far, their analysis and stock picks have been generally accurate. It works for me so why should I agonize over not being able to do my own research when ATR can do a much better job. Of course, my preferences for certain companies and industries still come into play but only among those ATR recommends. It keeps my stock selection process easy and, more importantly, successful.

2. Trade Plan:

- Limit acceptable loss to maximum of 1/3 of potential gain.

- Set your cutloss level based on maximum acceptable loss.

- Maximum acceptable loss per trade should never be more than 2% of total current value of portfolio

Limiting my risk exposures for every trade to specific levels protects my portfolio. A simpler way of putting this is if I win, I look to win big. If I lose, I keep my losses small.

3. Timing:

- Time buying into stocks using technical analysis. Buy on lows, near support or after big drops.

I studied technical analysis by reading books and by joining seminars by Absolute Traders (http://www.absolutetraders.com/newsletter/). I’m using what I learned now to time my trade entries (and exits) but not for stock selection. I believe buying a certain stock purely on technicals is tantamount to a follow the herd mentality or betting on whichever stock everyone else is betting on. It may work but I’d rather build my portfolio on more solid fundamental footing.

4. Portfolio:

- Build up portfolio by buying more of the stocks with higher upsides

- Limit number of total stocks owned to only six. Do not overdiversify.

Every month, I set aside money to add to my trading account. I don’t look for new stocks to invest in. I simply add to my current positions and try to keep the whole portfolio balanced. No single stock is greater than 30% in value against my total portfolio. And I only hold on to a maximum of 6 stocks at any single time. That way, I can track stock movements better. Also, and more importantly, I enjoy maximum benefit from strong movements in one or two positions. Too much diversification would have dampened my growth. I can manage the higher risk since I watch my portfolio more closely.

5. Realizing gains:

- Sell only when fundamentals tell you it’s a sell. Never liquidate a rising stock.

If the trade goes my way, I hold on to the stock until it reaches the target price. Only then do I consider selling it. If however the trend is continuing, I hold on to the stock and just trail my stop just below support levels. If during the trade, the fundamentals change and the stock’s rating (and consequently its target price) is downgraded, then I sell. Even downgraded, a stock may still have some upside left but I’d rather pull out my investment and go with another stock with a higher upside.