SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

How to Build a Portfolio – Your Trading Game Plan

5 min read

Successful investment involves professional approach or systemic approach to save time ,ensure disciplined approach and avoid unnecessary repetition and  to prevents us from discretion  trading .Following steps are just example of my approach to building a portfolio.Any one can have his choice of contents under sequence of broad framework outlined below.

Frame work consist of

1.Trading Rules

2.Trading Method

3.Trading Strategy

4.Trading Plan

5.Risk Management

6.Psychology

This is simple template and adequate for systemic approach for small portfolio.

What is Game Plan?

Every game has a rule ,so also the game of trading. Be cricket or football, every game have their set of rules which all players have to follow and rules are enforced by umpires or referee. In trading however ,the trader himself combines the dual role of player as well as referee and it is terrible most of times.Nonetheless a trader have to stick to rules once into the game, whatever may be emotional cost.Tested method then follow .Method such as offensive or defensive ,balling or batting depending on pitch and weather condition , no of overs or game format etc like in cricket .Then Planning after winning toss, fielding arrangement ,batting and balling order etc for structuring of game and players for optimal results.Strategy follows planning.

 
Once in the game ,unexpected do happen.Diferent conditions demand differing strategies.Fast ballers may have to be replaced with slow r spin ballers or line-length may have to adjusted or batting order is tweaked and so on

Yes risk management.fielding arrangement is changed when there is flood of boundaries or ballers are changed to control the average run rate.Finally Psychology.It involves overcoming fear when chips are down.Key is to handle pressure when the opponent is firing with all cylinders and your team being at receiving end has low morale ,motivation and in despair.Yes, to WIN, you have to stick to discipline of your plan.

TRADING RULES

  • Nothing new ever occurs in the business of speculating or investing in securities and commodities.
  • Money cannot consistently be made trading every day or every week during the year.
  • Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
  • Markets are never wrong – opinions often are.
  • The real money made in speculating has been in commitments showing in profit right from the start.
  • At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
  • One should never permit speculative ventures to run into investments.
  • The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
  • Never buy a stock because it has had a big decline from its previous high.
  • Never sell a stock because it seems high-priced.
  • I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.
  • Never average losses.
  • The human side of every person is the greatest enemy of the average investor or speculator.
  • Wishful thinking must be banished.
  • Big movements take time to develop.
  • It is not good to be too curious about all the reasons behind price movements.
  • It is much easier to watch a few than many.
  • If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
  • The leaders of today may not be the leaders of two years from now.
  • Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
  • Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket

METHOD

90% of the people in the stock market, professionals and amateurs alike, simply haven’t done enough homework.

The first step in learning to pick big stock market winners is for you to examine leading big winners of the past to learn all the characteristics of the most successful stocks. You will learn from this observation what type of price patterns these stocks developed just before their spectacular price advances.

It seldom pays to invest in laggard stocks, even if they look tantalizingly cheap. Look for, and confine your purchases to, market leaders.

What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.

Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.

Out of the ways a company can achieve enormous success, thereby enjoying large gains in its stock price, is by introducing new products into the marketplace. We’re not talking about a new formula for dish soap. These products and companies have to revolutionize the way we live.

Cardinal Rule #1 is to sell short only during what you believe is a developing bear market, not a bull market.

The best way to measure a stock’s supply and demand is by watching its daily trading volume. When a stock pulls back in price, you want to see volume dry up, indicating no significant selling pressure. When it rallies up in price, you want to see volume rise, which usually represents institutional buying.

Those who ignore what the market says usually pay a heavy price. Those who listen and who learn the difference between normal and abnormal action are said to have a “good feel for the market”.

The number one market leader is not the largest company or the one with the most recognized brand name; it’s the one with the best quarterly and annual earnings growth, return on equity, profit margins, sales growth, and price action.

Scaling into a trade means to enter more than once, either at a better or worse price, and scaling out means to exit the trade in pieces. They are taking a casino approach, making a big number of small trades, each with a small edge, and this can result in tens or even hundreds of millions of dollars in profits each year

TRADING PLAN

When trading there is a lot of decisions to make: when to buy, when to sell, when to take profit, when to take a loss etc. If using your own judgment this might be tiresome and sometimes very difficult to execute. And for most traders highly unlikely to bring any success. Why? With so much decision making it requires a great intellect to beat the market. You have to fight the market, but also fight yourself. It’s so easy to do the wrong thing if you don’t have objective rules. These rules need to be backtested, of course

Elements of Plan which are to be laid down in advance

Entry level

Exit /Target level

Stop loss

Risk /Reward ratio

Execution should strictly follow the plan.Equity or finally profitability is function balancing between Win percentage and RR

TYPICAL TRADING STRATEGY

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It is just an example ,not exactly recommended.There are number of strategies available to chose from.You only have to back test and optimize as per your objective and plan.Strategy consists of as below.

Entry Strategy

The strategy trades daily breakouts away from the next friction level.

Buy if…

Today’s close price is higher than yesterday’s high

The distance to the next resistance is higher than the distance to the next support.

Sell if…

Today’s close price is lower than yesterday’s low

The distance to the next support is higher than the distance to the next resistance.

You can get creative picking an entry trigger, as long as the support and resistance rule is met. For example, candlestick patterns or price action patterns are also valid entry triggers.
Exit Strategy at a loss

Exit long trades at a loss when the price breaks below the closest support level

Exit short trades at a loss when the price breaks above the closest resistance level

Exit Strategy at a profit

Close the deal when you are 1/2 ATR in profit.

RISK MANAGEMENT

I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation.This is crucial for success of your portfolio.

Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.

Letting losses run is the most serious mistake made by most investors.

The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.

PSYCHOLOGY

Excess fear does not allow one to give some room to rallying stock.We have to have staying power-The ability to hang on thru ups and downs during the life of the move as they never go straight up.Instead of being fearful ,one has to consult chart to know if this movement is normal or abnormal.A lot of pull backs or shakeouts are normal behavior of stocks.More aggressive the stock ,the more aggressive is pull back. Many investors caught in these pull backs as they are fearful.When you conquer fear and control emotions, you will see investment results change dramatically

SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

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