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UOB’s Trading Strategy Guide For Investors
Aspire, Personal Finance | 28 May 2015
By: Lim Si Jie
Articles (169) Profile

As an investor, we are always looking to triumph over the market and achieve the elusive alpha return. However, many investors forget a simple and important yet forgotten rule that could greatly improve our chance: adopt a disciplined trading strategy that can be repeated consistently.

So how do you actually create a trading strategy?

Step 1. Identify The Trend: The Trend Is Your Friend

The first rule of thumb, and also one of the key aspect of TA (Technical Analysis) is to trade with the trend. How do we identify the trend of a stock? One of the most popular TA tool is the use of SMA (Simple Moving Average) to identify trending stocks.

Example of Simple Moving Average

A common setup using the 20 (short term), 100 (mid-term) and 200 (long term) SMA can identify the trend of a stock. When the 200 SMA is upward sloping and price is above the 200 SMA, the stock is considered to be on an uptrend. Using the 20 and 100 SMA, entry into a long position on the stock can be taken once the 20 SMA crosses above the 100 SMA (cross over between red and blue).

It is important to note that the effectiveness of MA as a trend indicator is only restricted to trending markets. If the market is caught in a sideway movement, effectiveness of the MA will be limited.

Step 2. Taking Advantageous Positions: Identify Support And Resistance Levels

Example of Support Levels Chart

Using horizontal and diagonal trend lines, you can identify support, resistance levels and potential trends that will give you a clearer view on advantageous areas where you can make an entry to take a position.

These levels can be identified on charts where price has only touched once before bouncing off. There is also a high tendency for these levels to be near round numbers as traders like to place stop losses at round numbers.

Price actions tend to hover at support or resistance levels before a breakout occurs. After prices break out from the support or resistance level, they tend to retrace back to these levels before continuing with the momentum of the trend.

Step 3. Making Use Of Indicators: Time Your Entry

Example of Stochastic Chart

Indicators are useful tools that can aid you in timing your entry. A commonly used indicator is the Stochastics. It can identify overbought and oversold levels that are bound to be reversed. If these reversals align with your overall trend and support/resistance level/trendline, Stochastics can offer you a confirmation and timely entry point.

The use of at least two indicators to assess the time of entry can be useful as well by comparing the Stochastics indicators with different lookback periods.

Step 4. Knowing Your Risk Appetite: Never Over-Expose Your Position

Based on your individual risk-to-reward appetite, ensure that you establish stops (or trailing stops) and potential take-profit levels so that you do not leave yourself exposed to potential downsides.

And the last and most important step: Always adhere to your strategy. Never let market emotions get the better of you.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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