Method Part 2 : The What

In Method part 1 I discussed when I would like to be in the market and when I want to be defending my capital and moving into cash.

I use a weekly close in my personal on/off trigger so let's imagine that my system has turned on at Fridays close – what happens next?

The first thing I do is filter out the ASX and pick every stock that is priced between $0.05 and $50.00 and has a minimum turnover of $400,000 a day. I am simply trying to pick up a list of stocks that I would have a reasonable chance of buying and selling without finding too many gaps in the depth of market. Being stuck in a stock once is probably once too often.  Even with these baby sized trades it can become problematic if I am not a little fussy to begin with.

I will also state up front that I trade purely from a technical perspective, I don't look at any fundamental information and, usually, I don't have any idea what the various companies I have a slice of do for a crust. Sometimes I don't know their name! Just what their ticker is and what the chart looks like will do me just fine. I know all the accountants and economists plus about 90% of financial advisers out there will be pulling out their hair and wailing and gnashing teeth about now but I have always been this way. In my opinion, fundamentals, even just watching the news, tends to cloud judgement. There are all types of mental bias in trading and knowing extra information seems to introduce a few more so I stay away from all that mumbo jumbo.

Having said that, I hear you saying, perhaps even shouting, “Hey Nick! you must have some way of choosing stocks other than turnover and price!”

Well of course I do! Once I have my basic list it's time to hit the charts. After all there are about 300 different stocks and I want to weed out what I consider to be unworthy. So I like to pop them onto a weekly chart with multiple moving averages and flip through them deleting anything I don't like the look of.

There are probably many different books and trading schools that mention multiple moving averages, The first time I came across them was reading Daryl Guppy's 'Trend Trading' and I have loved them ever since. Even though they are simply a bunch of moving averages I can happily whiz through a list of stocks and cull 100 or more at the rate of about five seconds a stock.

I want charts that look like this

Not this

Or this

The other thing I look for on the daily chart is something that looks tidy.  That's a technical term for pleasing on the eye - no big spikes or gaps, no days of zero liquidity.  It's a feel thing!

Charts courtesy of www.IncredibleCharts.com