Saturday, September 27, 2008

Stock Market Trading Method



I'd like to share with all of you a method or an approach I've been using to trade the stock market on an intermediate term level. I know there are many people out there claiming to have the holy grail for trading stocks but in my opinion those methods never hold up in real-time trading. What I'd like to do is present a method that is very simple and will keep you on the right side of the stock market around 75% of the time. Let's begin!

The first thing you want to do is identify the trend. Everyone has their own favorite method for determining what the trend is and I'm no exception. I prefer to use simple moving averages based on closing prices. When it comes to trading the stock market, I found success using the 30 and 60 week simple moving averages. If the 30 average is above the 60, the trend is up. If the 30 average crosses below the 60 average the trend s now down. I am not using the averages to trade or time the stock market, I am using them to determine the trend and noting else.

OK, now that we know how to identify the trend we now need to be able to time the stock market for entry. If you've been a reader of this blog, you will know one of my favorite tools for timing into trades is the stochastic oscillator. If the trend is up in the stock market based on the 30 average moving above the 60, I will only look to buy when the stochastics are oversold (below buy line) and have turned back up. If the trend is down I will only look to short when the oscillator is overbought (above sell line) and has turned back down.

So now we have a way of determining the trend in the stock market as well as a way to time into trades. By combining moving averages with the stochastic oscillator, you will increase your odds of finding winning trades.

Over the last 11 years this approach has had 17 trades, 13 were winners and 4 trades would have lost money. This makes the accuracy of profitable trades to be around 76% which is very good. Keep in mind these are not small profitable moves but large winning trades as can be seen on the above chart.

If you were expecting to find the holy grail in this post, then I'm sorry to have disappointed you. On the other hand if you follow this simple system and combine it with money management, I think you will greatly shift the odds in your favor and will find much success trading the stock market.

13 comments:

del said...

Yep, most of the time simpler is better...

michael said...

do you vary your settings for oscillators for different scenarios?

Joe said...

Kevin,

What's the timeframe for your stochastics signals? Are they on daily, weekly or monthly basis?
Thanks, Joe

Kevin said...

Hi Michael.. I usually keep my oscillator settings pretty much the same.. My favorite settings are 14 and 40 for stochastics.. In the S&P example I used a 12 setting but 14 would have given you the same results.

Kevin said...

Hi Joe,
The timeframe for the stock market is weekly.

Anonymous said...

Is the sto on a buy signal from July? If so, are you long this market?

Kevin said...

The trend is down...Only sell signals are taken and buy signals are ignored.... Right now a trader should be short and looking to scale out of profitable short positions.

michael said...

thanks for the reply kevin. Can i ask why and when you would use a 40 over a 14?

Anonymous said...

great blog, what method do you use to exit each position?

Kevin said...

Hi Michael,
Depends on the cycle. If the swings appear to be large, I will use a 40 setting rather than a 14.

PursuingWealth said...

Kevin,
Your on to something here. What do you use for your exit strategy?

Nefri said...

OK, I put the 30 and 60 day moving averages on my chart, but it does not look like yours. When I change the moving averages to 10 and 30 day, THEN it looks like your chart. Why is this? I am perplexed.

Kevin said...

So am I...make sure you are using simple moving averages.

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