The 'Support' Strategy

Discussion in 'Strategy Development' started by JamesWalden, Dec 31, 2006.

  1. Hello,

    I'm new here but I wanted to share my stock investing strategy. You are more than welcome to evaluate it however you like!

    First, I would like to share the basic theory of my stock investing strategy. I am a fan of buying and selling stock long rather than trading on margin or short selling. By avoiding these investing techniques all together, I do not need to worry about their inherent and sometimes infinite risks.

    Speaking of risk, control of risk is CRITICAL to any trading strategy. One of the simplest forms of risk control is the use of stop loss or trigger orders to sell a stock once it has reached and/or exceeded a maximum risk tolerance. Take for example the hypothetical situation of purchasing stock XYZ. By buying the stock, setting the stop loss to -5% and the target sell at 10% you establish a basic form of risk control. Now, if you were to say that you had a 50% chance of guessing that the stock will go up then every two trades would probably yield a 4.5% gain (assuming you lost 1 and won 1 every 2 trades). Of course, actual trades are much more complicated than this and the probability of success or loss can depend heavily on a multitude of factors such as volatility.

    Moving right along..

    Because I buy stocks long, my primary disposition using this trade strategy is bullish. There are many ways to trade but we are looking for stocks that will give enough positive price movement that we can trade accurately and precisely to achieve a predefined target sell.

    I think that one of the finest places to get stock ideas is with a useful scan that picks out stocks with certain criteria important to you. I use the following criteria in my scans:

    I call this scan "support" (I'll talk about that in a moment)...

    United States Stocks with...
    20-day Simple Moving Average of Volume for today is greater than 100,000
    60-day Simple Moving Average of Close for today is greater than 1
    Daily Close for today is greater than 200-day Simple Moving Average of Close for today
    Daily Close for yesterday is greater than 200-day Simple Moving Average of Close for yesterday
    Daily Close for 2 days ago is less than or equal to 200-day Simple Moving Average of Close for 2 days ago
    50-day Simple Moving Average of Close for today is greater than 200-day Simple Moving Average of Close for today
    Daily RSI(14) for today is greater than 50
    5-day Exponential Moving Average of Close for today is greater than 20-day Exponential Moving Average of Close for today.

    Note: These scan criteria can be used in any scan service. I use to do my scans.

    You may wonder, "what does this mean?" Well, I'd be happy to explain. The first 3 lines help remove all the international stocks and penny stocks from the results. This isn't necessarily because they are bad investments. I remove them because the things we will be looking at are ineffectual or non-existent with these types of investments.

    The next 3 criteria deal with support (which is why the scan is called "support"). The 200-day SMA is commonly seen as a universal support and resistance level for any stock. Regardless of the truth in this, many investors and instutions do take the 200-day SMA into consideration for bargains and overpriced stocks and therefore gets a special spot in this scan.

    The last 3 criteria deal with trends. Not only do we want to purchase our stock at a bargain, we also want to make sure that we at least have some good indication of a possibly fruitful up trend. This comes from the fact that the...

    50 day SMA > 200 day SMA (a very common bullish trend indicator)
    5 day EMA > 20 day EMA (another common but shorter term bullish trend indicator)
    RSI > 50 (a popular momentum oscillator that represents a good bullish strength if over 50)

    The theory of trends is both simple and complex. A trend line on a chart can be likened to a slope line of data points. A positive slope clearly indicates a positive trend. When we consider many days together and compound their data, the trend line tends to lag behind the changing price. A larger set of data lags more than a smaller set of data. If we take a shorter term trend and compare it to a longer term trend, we can say that the near term has been more positive or more negative than the longer term. By comparison, this helps us perhaps find developing trends and explains why trend criteria have won their way into the scan criteria.

    I use this strategy quite often and it has benefited me greatly!

    Hope you enjoy the ride as much as I do,

    -James R. Walden