# Developing Investment/Trading Plan



## kermit345 (20 January 2012)

Hi All,

I regularly read these forums but rarely post, however i've decided its time to turn my returns around as i'm less then impressed with how i've been going. I seem to always be waiting and re-assuring myself with flimsy reasoning only to see my returns be mediocre at best. Anyway, enough about my poor performance, i've decided 2012 is the time to reverse my trend, develop a sound investment/trading plan and to stick to it.

First things first, i haven't backtested my ideas and i understand that without postive expectancy etc etc it really counts for squat. However i'm hoping some insightful views can still be provided by the extraordinary combined knowledge some posters on this forum have to offer. The following is what i've basically got written into my plan at the moment.

Note: I'm taking a more fundamentals approach for selecting stocks then using very basic technicals to enter and exit. Mainly trying to use support and resistance to guide me.

1. Stock Filtering (Haven't solidified this section yet, still tweaking)
Principles:
- Above normal ROE
- Low debt/equity
- Positive Cashflow / share
- Market Cap above $100,000,000

2. Portfolio Management
- Maintain at least 10-30% available funds (Cash and/or Margin Loan)
- Margin loan must not breach a $ level i've set in relation to my position (don't worry i'm nowhere near margin call territory)

3. Entry Criteria
Primary
- Share price pivot's at support confirmed with higher low's in two trading days following the pivot and reasonable volume
- Share price pushed through resistance with noticeable increase in volume

Seconday
- Stochastic has turned positive from under 20% level
- MACD Histogram has pivoted at a low and looks to be increasing along with a positive MACD cross looking likely

4. Position Sizing
- Fixed Fractional Position Sizing
- Risk: 1.00% of Total Equity
- Max Position Size: Total Equity / 12 (I want the portfolio to hold approx 10-15 stocks)

5. Position Monitoring
Haven't completed this section yet but looking at diversification options, ensuring 1 stock doesn't grow to control the majority of portfolio (i.e. taking some profits if it does) etc etc.

6. Exit Criteria
a) Protective - Implemented at time of entry, placed slightly below support
b) Fundamentals - If fundamentals change negatively, must review immediately and if impacts entry assumptions exit
c) Preservation - Move trailing stop to breakeven point when the lowest of following occurs:
- Open profit of 2R
- Open profit of 15% achieved
- Initial price target/resistance has been reached
d) Greed - Moving trailing stop to 2R below stock price once it makes higher high above 5R
e) Trend - If MACD divergence is apparent when stock trending up, sell once price breaches EMA

6. Self Guidance
Before each entry I must fill in a form which asks the following questions and review to ensure i am comfortable with the trade and i'm not forcing it for flimsy reasoning:
- Stock Code
- Explain Entry Signal
- Has it been confirmed?
- Risk Analysis - Support & Resistance levels
- Entry Price
- Protective Stop Price
- Initial Trade Risk
- Profit Targets
- Explain profit Targets

I know for some parts I haven't given exact specifics but i'm hoping the smart cookies around (i.e. Tech/a) can hopefully give me some pointers. I've read a LOT of threads on this forum both old and new and collated what I think best suits how I want to invest/trade.

All replies appreciated.


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## tech/a (20 January 2012)

kermit345 said:


> Hi All,
> 
> I regularly read these forums but rarely post, however i've decided its time to turn my returns around as i'm less then impressed with how i've been going. I seem to always be waiting and re-assuring myself with flimsy reasoning only to see my returns be mediocre at best. Anyway, enough about my poor performance, i've decided 2012 is the time to reverse my trend, develop a sound investment/trading plan and to stick to it.




Logical



> First things first, i haven't backtested my ideas and i understand that without postive expectancy etc etc it really counts for squat. However i'm hoping some insightful views can still be provided by the extraordinary combined knowledge some posters on this forum have to offer. The following is what i've basically got written into my plan at the moment.[/b]
> 
> Well you realize this so unfortunately without the ability to test this with past data you are forced to forward trade your ideas.As you will find not ideal.
> 
> ...




I really don't think you'll get a decent portfolio with open positions totalling 15
In this market. I adjust position sizing in a discretionary manner through experience on a judgement of perceived risk and ( the % used ) expected length of trade. 




> 5. Position Monitoring
> Haven't completed this section yet but looking at diversification options, ensuring 1 stock doesn't grow to control the majority of portfolio (i.e. taking some profits if it does) etc etc.




While not complete I think this is a big mistake
One trade could change your life. It could mean a profit or loss for your portfolio
Why would you stop growth. All you need to do is mitigate risk along the way.



> 6. Exit Criteria
> a) Protective - Implemented at time of entry, placed slightly below support
> b) Fundamentals - If fundamentals change negatively, must review immediately and if impacts entry assumptions exit
> c) Preservation - Move trailing stop to breakeven point when the lowest of following occurs:
> ...




Stops and trailing stops really are governed by the current market.
Right now you'd probably have all of the above.
In a bull market you'd be much more lenient
In a bear market you wouldn't be trading a portfolio ( in my view)



> 6. Self Guidance
> Before each entry I must fill in a form which asks the following questions and review to ensure i am comfortable with the trade and i'm not forcing it for flimsy reasoning:
> - Stock Code
> - Explain Entry Signal
> ...




Wise 
Then add comments through the trade and a summary after.
Look for commonality.



> I know for some parts I haven't given exact specifics but i'm hoping the smart cookies around (i.e. Tech/a) can hopefully give me some pointers. I've read a LOT of threads on this forum both old and new and collated what I think best suits how I want to invest/trade.
> 
> All replies appreciated.




Your approach is logical and many including myself have been where you are.
You need to travel this journey.
You will learn a great deal
More about what you DON'T need than what it is you THINK you need.
Trading is really simple.
It's just numbers.
Income must exceed expenditure.

It's far easier to have positive numbers when you have a market which is more likely to deliver them ( a bull market ).
Being able to identify important and enduring turning points in markets and individual stocks is a Definate addition to your tool box.

Keep us informed.


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## kermit345 (23 January 2012)

Tech/a,

Thanks for your reply, I haven't had a chance to continue my work on the plan over the weekend but wanted to address some comments you made and get some further thought. Also in terms of keeping you and others informed on my progress, i'll definitely be looking at starting a blog myself or a thread here for people to follow my progress once I have the plan in place.

In relation to the watch list, I've ran a few different types of screens/filters just basically along the lines of RoE, D/E, Cashflow, P/E's, market cap etc etc. Most of the stocks are regularly present and the list only varies between 70-110 stocks. Would you suggest this is too many or too few? It seems like a manageable number to me as once I have the initial list i'll filter further by ranking them based on the given ratios etc so I have a starting point.

I see what your saying regarding all in and all out which is a fair comment. I think the 10-30% rule is more to get myself in check so I don't over-invest and find myself looking for funds from being too invested if a great opportunity arises. This partly also relates to my reluctance to sell stocks which is something I definitely need to overcome and learn from when implementing this plan. The margin loan point is more of a personal comfort thing which i'm sure you understand.

In terms of positive expectency my plan doesn't exactly have hard and fast precise entry/exit points in terms of determining support/resistance etc. I haven't got a mathmatical way of determining these and plan to enter based on looking at the charts rather then following a mathmatical system. Does this mean I should paper trade it first to ensure i have positive expectency before jumping in the deep end as it makes it very difficult to backtest such a discretionary approach?

In terms of the basic entry criteria, are you suggesting this may be in-effective for the current market due to its range trading and volatility? Or could this form of entry criteria be effective but that I should look at adjusting my exit criteria for this form of market as gains may not be as sustained and long due to the range trading?

In relation to the 15 stocks comment are you suggesting that the quality of my portfolio/inestments will be lacking if I manage to be in 15 stocks at once? The 10-15 stocks idea was more a loose guidance rather than a set in stone rule, i'd be happy to hold 4-5 stocks if they were the only opportunities available or hold a full 15 if a bull market was on and there were entries to make everywhere. I like the idea of adjusting position size based on risk as I do quite a bit of successful sports betting and fully understand the risk/reward side of things.

In terms of the position monitoring section, you've said it could be a big mistake to implement what i've suggested and that its a good idea not to stop growth but to mitigate the risk. If i was to take small profits while not selling the entire parcel if i've made extraordinary gains on a stock this would be risk mitigation yes? Or were you suggesting a different approach?

In terms of my exit criteria it sounds like you think what i've got down at the moment is a reasonably solid base to work from. Should I have tilts on my exit criteria based on the wider market activity. i.e. as you've suggested, current market retain my current exit strategies, bull market make them more lenient, bear market reduce my trading activity (If trading at all)?

I love working with numbers, problem solving and building equations etc to solve those problems hence why i love the share market, sports betting (team statistics etc), building websites etc etc. All involve problem solving, numbers and conceptual thinking. Thankyou for your reply Tech/a, I hope my quetions don't bother you too much and definitely plan on keeping the forum informed one way or another.

Cheers


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## tech/a (23 January 2012)

kermit345 said:


> I haven't had a chance to continue my work on the plan over the weekend but wanted to address some comments you made and get some further thought. Also in terms of keeping you and others informed on my progress, i'll definitely be looking at starting a blog myself or a thread here for people to follow my progress once I have the plan in place.




A good way to be accountable for your trading.



> In relation to the watch list, I've ran a few different types of screens/filters just basically along the lines of RoE, D/E, Cashflow, P/E's, market cap etc etc. Most of the stocks are regularly present and the list only varies between 70-110 stocks. Would you suggest this is too many or too few? It seems like a manageable number to me as once I have the initial list i'll filter further by ranking them based on the given ratios etc so I have a starting point.




Some will be filtered technically I presume?
If the chart is like a falling stone?



> I see what your saying regarding all in and all out which is a fair comment. I think the 10-30% rule is more to get myself in check so I don't over-invest and find myself looking for funds from being too invested if a great opportunity arises. This partly also relates to my reluctance to sell stocks which is something I definitely need to overcome and learn from when implementing this plan. The margin loan point is more of a personal comfort thing which i'm sure you understand.




You need to address you weaknesses. A correctly planned method will consider opportunity cost.
Learning how to mitigate risk will remove your fear.particularly when you know how your portfolio is managed during the inevitable drawdown. Again the importance of a blue print can be seen in the above sentence. If you know how your method should be performing and when it's trading well outside it's parameters --- you may be able to recognize a broken system. As for keeping funds available fr a great opportunity--- aren't all the trades you take potentially great opportunities?
There is a time to load up---margin--- again if you know your method is out performing the norm--- trading on margin won't have the same fear.



> In terms of positive expectency my plan doesn't exactly have hard and fast precise entry/exit points in terms of determining support/resistance etc. I haven't got a mathmatical way of determining these and plan to enter based on looking at the charts rather then following a mathmatical system. Does this mean I should paper trade it first to ensure i have positive expectency before jumping in the deep end as it makes it very difficult to backtest such a discretionary approach?




Your left with no choice--- doing no testing is like playing pokies---
Positive expectancy should e worked out on closed trades.working out EXPECTED return on risk is expectation NOT the expectancy of your trading method.
Few understand that! You'll need around 100 trades to have some idea.
Running 4 or 5 portfolios may quicken the process.
Doing all the trades and portfolios in STATOR will save you lots of effort and massive feed back. For around $295 you'll never look back for *realtime* recording and testing. This is your solution. Time consuming but necessary.



> In terms of the basic entry criteria, are you suggesting this may be in-effective for the current market due to its range trading and volatility? Or could this form of entry criteria be effective but that I should look at adjusting my exit criteria for this form of market as gains may not be as sustained and long due to the range trading?




If your trading shorter term and your looking for high% of winning trades then ENTRY IS IMPORTANT. Infact poor entry will kill you.
Longer term where win % isn't the driving force but very high reward to risk is--- then entry is not nearly as important.
However in this market where long trends are are--- this would prove difficult and frustrating at best.



> In relation to the 15 stocks comment are you suggesting that the quality of my portfolio/inestments will be lacking if I manage to be in 15 stocks at once? The 10-15 stocks idea was more a loose guidance rather than a set in stone rule, i'd be happy to hold 4-5 stocks if they were the only opportunities available or hold a full 15 if a bull market was on and there were entries to make everywhere. I like the idea of adjusting position size based on risk as I do quite a bit of successful sports betting and fully understand the risk/reward side of things.




Trading short term will see it difficult to maintain or even fill 15 stocks in a portfolio.
Longer term trading energy gives you better opportunity to have a wider range of stocks in your portfolio. Some trade one instrument! Like futures or a stock or 2
Again if you could test it( Backtest ) which I know you can't-- you would find your answer.



> In terms of the position monitoring section, you've said it could be a big mistake to implement what i've suggested and that its a good idea not to stop growth but to mitigate the risk. If i was to take small profits while not selling the entire parcel if i've made extraordinary gains on a stock this would be risk mitigation yes? Or were you suggesting a different approach?




If you see a parabolic rise then I would certainly be trailing a stop.
30-50% plus in a day and I'd e all out on a trailing stop.
Growth at 45 degreess ithink needs less attention.
My view is that if you think a buy is a buy then buy it.
If it's clear that sentiment hasnt REVERSED from positive to fear--- then be slow to sell unless other better opportunities are screaming buy.



> In terms of my exit criteria it sounds like you think what i've got down at the moment is a reasonably solid base to work from. Should I have tilts on my exit criteria based on the wider market activity. i.e. as you've suggested, current market retain my current exit strategies, bull market make them more lenient, bear market reduce my trading activity (If trading at all)?




Covered above I think.



> I love working with numbers, problem solving and building equations etc to solve those problems hence why i love the share market, sports betting (team statistics etc), building websites etc etc. All involve problem solving, numbers and conceptual thinking. Thankyou for your reply Tech/a, I hope my quetions don't bother you too much and definitely plan on keeping the forum informed one way or another.
> 
> Cheers




Understanding he relationship numbers have on your investing is one of those AHHH HAAAA moments.


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## tech/a (23 January 2012)

I think though time will show disappointment in your results.

My experience has been plans similar to your own--- and they are logical
Tend to disappoint.


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## brty (23 January 2012)

Hi Kermit,

As per usual TechA has some good advice, yet I can't get past this part of your post, despite all the other stuff...



> i haven't backtested my ideas




.....especially when accompanied with the following line of yours....



> i'm less then impressed with how i've been going.




I'm sorry, but I'm in the camp of completely stop what you are doing, and start testing something, even if it is completely the opposite of what you think will work.

You need to gain knowledge in what works, not what you think will work. Most people tend to treat markets logically, yet most people are wrong when it comes to trading. Test outside the square, outside your comfort zone, then retest. 

brty


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## tech/a (24 January 2012)

Brty

Testing  is certainly the ideal
but sometimes you can't back test your method.

A good argument is --- develop a trading method that can be back tested.


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## brty (24 January 2012)

Tech/a,

While you may not be able to perfectly test a fundamental idea compared to a technical one, testing can still be carried out.

For example, grabbing hold of past announcements/annual reports of companies, finding where they meet your criteria, then tracking prices from that point. 

One way of using fundamental data is the piotroski score/method as mentioned here...

http://seekingalpha.com/article/310927-21-stocks-with-high-piotroski-scores

Could you please elaborate on what method cannot be back tested?

brty


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## tech/a (24 January 2012)

brty said:


> Tech/a,
> 
> While you may not be able to perfectly test a fundamental idea compared to a technical one, testing can still be carried out.
> 
> ...




Well I cant backtest Elliott/Market profile/Point and Figure.
Plus a whole host of visual chart interpretations where peaks and troughs are part of a formula.
While I can do them tediously by hand over time I will have designed many more that dont require a discretionary input.


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## brty (24 January 2012)

Tech/a,



> While I can do them tediously by hand over time




Ahh, yes, the time element. I have spent a great deal of time over many years testing different concepts, including those you name above, and yes it was tedious, and by hand, pencil, paper and calculator.

I'm not suggesting that you do it, but for the beginning trader that is not having success, (and probably for those that ARE having current success), then the tedious method helps to understand what can happen. That was the gist of my question about what methods are not testable. I was not concerned about the time to do it in my question.

I can remember a couple of years ago in a conversation with Trembling Hand, he mentioned the amount of work and volumes of graphs, numbers and concepts he had produced in his research. My reply was along the lines of 'so what', I really expect people to do it if they wish to be successful. I have done similar over many years.

I just have a difficulty with the notion that many have, about a quick easy method to trade. Even the Turtles who had lessons from a master, and were hand picked, could not all repeat the performance of a good system. Some bombed out, while others made millions. My suspicion is that the successful ones put in the hard yards.

brty


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## tech/a (24 January 2012)

brty said:


> Tech/a,
> 
> 
> 
> ...




I'm afraid my findings are that hand testing is NOT statistically significant.
It's only a snippet in time with at best 50 to 200 trades.

MonteCarlo testing shows many 1000s of tests over many types of market conditions are more likely to show expected performance of. System than a single pass in a single time in the market.

I personally would say such testing is next to useless.


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## brty (24 January 2012)

Tech/a,



> a single pass in a single time in the market.






> I personally would say such testing is next to useless.




I think we are going to have to agree to disagree about this. However I do agree that a single pass in a market is next to useless. Even using sample sizes in the hundreds (individual stocks) during a bull phase is useless, the correlation of most large and mid cap stocks is high. 

Personally, I believe that the large trading houses have so much market research and computing power, that all statistically testable successful systems that can be used will be employed, and they tend to negate the performance of such. I have sought out my trading style based on what I consider not statistically testable by computer.

I also test a bull system exclusively in bear market conditions to make sure it keeps me out of the market during those times, or at least minimally invested such as now.

My original foray into this thread was in response to the OP comment of....



> i haven't backtested my ideas




My opinion is that any type of backtesting is better than none, and the more the better, even if it is not statistically significant. I will add though, that it must be tested in a variety of market conditions to see where it works and where it doesn't.

brty


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## kermit345 (25 January 2012)

Hi there guys,

Thankyou for the continuing discussion and encouraging / insightful words. While I haven't edited my original plan yet according to your suggestions and views I decided to have a crack at some backtesting in excel which i've done previously but with zero success.

This time around I used basically what I covered in my original post with some slight adjustments etc to help it work a little harder for me, particularly when sustained returns were apparent. I've only tested it against 13 stocks for now which i understand is a small sample size but wanted to share the results and see what you thought. If your interested in what trading parameters i've used feel free to PM me for discussion.

Note i've only completed this back testing on a pure technicals sense and randomly picked some of the ASX 20 plus some other well known 'Value' Investments. The idea is that my fundamentals filter will find stocks with greater potential for high returns due to low debt and high ROE so that if the trading strategy works on all stocks, my theory is it should work even better on the value stocks I identify. Anywhere heres my results so far:







I'm also contemplating using the strategy i've outlined/defined in the upcoming ASX trading game as a sort of test run to see how I go. If I do go down this path i'll probably post my progress somewhere on the forums or even within this thread.

Comments welcome and appreciated.


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