Lesson 4 – Trading Concepts and Strategies
Trading Concepts and Strategies
Now that we have the scan in our hands, what do we do?
- The first thing we want to do is identify the CEF’s within the scan as they have their own strategy. Usually, these will be the ones with very low Vega, below one in most cases.
- We automatically enter a limit order for the Last price on the scan.
- There are no favorites on the scan we enter all that are on the scan.
- We access our account size. (under 100k)
- We look at the shares column.
- The orders are as follows. EMD, Limit order @ 14.12, 24 shares. NHF, Limit order @ 14.03, 15 shares.
- Cost: EMD $338.88, NHF $210.45.
- Assuming you pick these up on the opening bell, you will then put your closing order in for the dividend amount plus your entry price.
- EMD $14.12+$1.08=$15.20-$15.25.
- NHF $14.03+$0.60= $14.63-$14.65.
- Assuming you have an account with no commissions, profit is EMD $1.08*24 shares= $25.92. NHF $0.60*15 shares= $9.00.
- This is the total amount you would gain if you hold these positions for the entire year. We are just trying to speed up the process.
To be clear, when we buy something, this is for life no matter what. The only way we rid this now from the portfolio is if we sell it at our profit targets or we are happily collecting dividends. These are for the most part monthly payers so we are getting at least 12 occurrences per year from this security. Now we have two options we focus on moving forward. Because we use charts to help us visualize and set up price levels, we want to stick to the weekly charts so we can alleviate a lot of the trading noise. We can either look for the price level that is 50% of the distance from our Mean (average price) on a 6month weekly chart, or we can simply wait for the CEF to show up on the scan again. Here’s is option 1.
In this case, you can see there are no lines on the chart. You would identify this as a scan-only strategy. Meaning that the only way to buy more shares is one, be below the mean or the average price paid for the security, and two be on the scan again. Most people that work during the market hours use this strategy as it is easier and less complicated for someone that doesn’t have the time during the week.
The second option is the pullback strategy. This can be effective for faster-moving securities and on account, under 25k, it helps keep you from crossing the PDT (Pattern Day Trading) regulations. Option 2.
We use alerts to warn us when we are getting close to our next entry point, but you can simply enter another limit order at the 50% mark. Now you will have 20% of the Max shares in your account. It’s always a good idea to annotate the Max shares so you can see where you are in the cycle. Once you hit the 100% pullback the cycle is complete. At this point, the only way to buy more shares is to wait for the CEF to come back up on the scan. You will at this point have 30% of Max shares in this position. You have essentially tripled the dividend amount you are receiving. In this case, you started with 15 shares, now you have 45. These events with regards to CEF’s do take a while to transpire, but like I said before if you have patience you will be rewarded. Simple right, no losses. On to stocks…
Now we open up the mind a little bit. I would advise if you are just starting out to stick to one strategy for a minimum of 90 days until you feel comfortable with the system. Then you can experiment because your grey matter will now be thinking more long term than short term. Because the majority of people have this belief that they need to win big with one lottery ticket it is hard to convince people that the key lies in occurrences, whether that be a dividend payment or a trade. They all add up.
I use this strategy to teach on a daily basis. It is great for those starting out with smaller accounts. Being rules-based we start again with the list of stocks on the scan. I alphabetize them strictly for ease of use and for identifying those already in the portfolios. We will be concentrating on a single portfolio in this lesson that would be more like what you will find in a new investor’s account. This particular scan had 74 securities on it.
- There are 2 variations to this strategy. One is setting an alert on the Limit price, or placing a limit order on the Limit price.
- As you can see that there are colored boxes under the Symbol, which means they are already in the portfolio.
- Also, the symbol ALX is colored yellow, which means it is not eligible for trading in accounts under 100k.
- Variation 1: Setting an alert on all those securities below the Last price minus the Dividend amount puts the alert at $111.28.
- After the market opens, alerts start hitting or they don’t. Never chase price up. (FOMO)
- If they do the next step is to enter a Trailing Buy order (we will use ADP) for the dividend amount, $3.72, minus in this case $0.30. $3.42 Trailing stop. What this helps with is price action. You are not guaranteed a fill immediately so we subtract a buffer.
- The order will be for one share of ADP @ whenever the price cross that $3.42 threshold.
- Let us say for example the price continues down all week to $200 before heading back up. At $203.42 we get filled. Our target will be $207.14-$207.15. Always factor in small government fees.
- Now your next decision is how am I going to proceed with managing this position. Remember you have two options. Wait for it on the scan again, or 50% and 100% retracement, then back to the scan. Also, remember DCA (dollar-cost averaging) above your mean is not allowed, you make your position worse by doing so. No losses right…
- Let’s take a look at what that might look like. While teaching the public in general we use the 50%, 100%.
- Option 1. Place alert, wait for the price move to activate. Place Trailing Buy. Note: Once a Trailing Buy is put in it stays on the books until it triggers or ages and is taken off by the broker.
- Option 2, buy the pullback at the Limit price. these orders should already be in place before the market opens on usually Mondays.
- The target value after the buy is the amount of the Dividend amount. ($3.72)
- Your target is $215.17-215.20.
- After the transaction is complete, you have the option to use either the pullback 50%-100%-scan or wait for the scan again to DCA. This is an important thing to understand so if you are having questions, ask.
- The “wait on the scan” option is pretty self-explanatory. Just know if the price is above your average cost or mean. DO NOT BUY.
- The second option would look like this. I will use another symbol that we are already in possession of, like AEP.
- This is on the scan and we own it, we do nothing.
- There are 3 things at this point that can happen. 1. Price moves up and we take profit. 2. Price floats around and we collect dividends. 3. Price drops down to our next entry point at the 50% level and we double the number of dividends we get and improve our position with respect to price. Rinse and repeat.
- The natural tendency is to try and make money fast, this is everyone’s Achilles heel. I would advise that you keep each strategy the same for each stock. The portfolio can have a range of strategies.
- For example, you can use one strategy for high Vega while, using a different one for low Vega stocks. You just have to stay consistent.
- Profit target strategies can be adjusted as well, as long as they are not changed for each stock. You have to be thinking about probabilities and occurrences. Remember you can take away from the rules but you can never subtract. Don’t change what works.
- You can mix things up by limiting only the stocks that pay a minimum amount per share per year. We have a minimum threshold of $1.20. We want lots of occurrences. Maybe you only want a minimum of $2.00 per share per year. It’s your choice.
- The target profit will be a personal choice for you, we target the dividend amount in the smaller accounts and stay close to the mean. (our average price) These are high probability trades.
- Once you have the foundation down you can experiment, but always keep in mind you are holding for a lifetime, that’s the worst-case scenario.
We can see why the rules are so important. It helps us to not realize any losses and the whole time we keep improving and growing our accounts sizes. Depending on how involved you want to get, the management of your portfolio all comes down to the individual and their circumstances. Remember we don’t care what stocks make up our portfolio as long as they are paying us to be in that portfolio. Money management is key.
- All orders that have been placed that are Limit orders are only good until the close of business on Friday. Most platforms allow you to set a GTC or GTD. Use this function.
- All Trailing buys can remain on indefinitely. Usually, they will age and your brokerage will cancel them for you at some time in the future.
- Managing your own money means you have to get used to cleaning up after the trade is completed so as not to incur losses through negligence and untidy charts. Depending on the strategy you use there is sometimes no need for charts.
- There are times when things happen in the market that are not normal and they will give you anxiety. The rules are there to stop you from making mistakes. When in doubt follow the rules or ask me.