If you're ever thinking about trading stocks, one of the first things you'll hear is to start with a simple trading strategy. These are the sentiments of some very successful traders. The best stock traders in the world do not get caught up in complicated techniques and strategies. They stick to a simple trading strategy and cut their losses early.
In this article, I will be going through the reasons to learn a simple strategy, set the actual strategy, and implement it. Note that this strategy is purely based on technical analysis.
Why Learn a Simple Trading Strategy
With a simple trading strategy, your chances to win over the long term are much higher than if you were to try and trade using a complicated set of rules. A simple trading strategy is also easy to learn and understand, which means that you're more likely to stick with it over time.
Simple trading strategies are great because there's no guesswork involved, so all trades can be executed with 100% confidence – something that can't be said for complex strategy strategies. Learning a simple trading strategy will help you in the long run because it allows you to keep your emotions out of the equation while making decisions on what positions you should take at any given point in time.
Finally, learning a simple trading strategy will help you avoid over-trading which can lead not only to losing money quickly but also lead them down paths such as addiction or depression - something no trader wants for themselves!
Trading Rules
1) No Penny Stocks
Although penny stocks have much more potential to increase dramatically, but usually most end up going to ZERO. The goal here is not going to the moon (nor mars), but being consistent in a well-justified setup. Strong companies with a minimum of $10 billion in market cap shall be considered only.
2) Never Risk More Than 1% of your Account
On each and every trade you make, never risk more than 1% of your total account size. It is possible to lose 5 or even 10 consecutive trades, had you used a loose money management policy, you would've emptied your pocket in no time!
Keep in mind that this depends on each person's risk tolerance.
3) Never Buy in Green
Warren Buffet once said: "Be fearful when others are greedy and greedy when others are fearful." When you see a lot jumping into a stock, know that it's time to get out, and vice versa. You usually hear people advising to go long a stock when it is already in green, but the move has already happened and you didn't ride that! This simple trading strategy works at buying when the stock is oversold (red) and selling when the stock is overbought (green).
4) Risk Management - Big Picture
Usually, the stocks traded follow the general market sentiment. Therefore, it makes sense to increase and decrease your positions relative to what the general market is doing. The s&p 500 index shall be taken as the benchmark.
Requirements for the Strategy
- Stochastic RSI (default settings)
- Channel Pattern
- Basic support and resistance
- 100 and 200 SMA (simple moving average)
Applying the Simple Trading Strategy
As we mentioned, when screening for trade setups, we look for stocks with more than $10 billion in market cap.
To Buy:
1) Stochastic RSI value is less than 20
2) channel pattern is present, and the price is at the bottom of this channel.
3) The support level in this situation is the bottom line of the channel. If there are more support levels that align with this one, it adds to the probability of a winning trade.
4) Price bounces off the 100 or 200 simple moving average.
All these criteria might not be met every time, but having them all adds to the probability of a winning trade. Once present, a trade is valid for entry. You can aim for a move of 7% - 10% and exit gradually.
For the stop loss, always risk no more than 1% of your total capital on each trade.
Conclusion
This strategy falls within the realm of low-risk, high-reward trades. The best part is that it can be done regardless of your trading experience. No matter if you're a professional or just getting your feet wet in the world of trading, this simple trading strategy will work for you.
DISCLAIMER
The material on this blog is not intended to be investment, financial, trading, or other types of advice, and you must not regard any of the website's content as such. Payout Factor does not advise you to buy, sell, or hold any particular stock. Before making any investment or trading choices, do your own due diligence and speak with your financial advisor.
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