Trading Plan

Oh one more thing... my trading plan for 08/09
Here for my own reference lol - I wouldn't expect others to actually read this O_O

Trading Plan

Strategy: Long speculative Australian equities
Advantages:
- Strength in underlying Australian miners: coal, oil, iron ore, phosphate, potash, gold and possibly uranium looking bullish for 08/09 – Australian miners to benefit.
- Equities are not leveraged – safer in the current more volatile environment.
- Speculative stocks allow massive gains as they are leveraged to exploration success – hence able to achieve higher than normal growth. Ideal as capital gains are favoured over income at this stage.
- Amateurs are generally in speculative stocks, hence there is less competition.
- Australia offers a great place for fund money in a weak U.S dollar / high inflation environment.
- Long only – infinite gain possibility and limited losses (as opposed to shorts).
Disadvantages:
- Illiquidity and slippage on small stocks are large.
- Insider trading and bad management in small stocks.
- Speculative stocks are generally hit harder in downturns.
- Australia may not be completely decoupled from U.S/global downturns.
- Australia’s growth may slow as China slows. Less commodities demanded.
- Unable to benefit from a generally falling market (no shorting available.)

Absolute max allowed to any one position: 15% of account. Exception for pyramiding!!

Tactics

Note: tactics my change during the stocks life depending on market action – for example a pure fundamental long may become a strong hybrid if the market breaks upwards.

Pure Fundamental Long:
- Make it a relatively small position (5% of account allowed). Being too long and you will become a weak long – i.e. shaken out by weakness (which is most likely inevitable).
- Ideal entry in long dated out of the money call options.
- No Stop.
- Avoid strong downtrends if possible. Side ways is acceptable.
- Do not add as it falls. No averaging down permitted (unless already pre-determined. However it can not go beyond the max allowed).
- Must be bullish sector, strong management, very bullish DCF’s with low technical problems.
- Low market cap / with high cash / high management ownership preferred.
- Buy in quiet periods preferable – like sideways and low volume.
- Very confident in business prospects.
- Hold indefinitely until fundamentals change and or it becomes fully priced. (Note: Add if it becomes a Strong Hybrid).


Pure Technical Long:
- Medium size (10% of account allowed). This is because the stop is very tight, hence amount risked is at an acceptable level.
- Buy on close. Must be closing near its high on significant volume.
- Very tight stop – the idea is to sell the open. If it gaps up sell half on open and sell rest during the day (if it fails to continue making highs intra-day). If it opens down hit the bid – no excuses.
- Preferable if the sector is also bullish – would add to strength – but not necessary.
- Can be any stock – but the smaller the better (tend to over-react more on open).
- Also preferable if accompanied with news.

Pure Hype Trade:
- A relatively “normal” announcement comes out but there is a lot of “hype” in this sector. A lot of dubious but high target claims are made. Or there is an undefined large “discovery” of some sort in the hyped commodity.
- Usually an unheard of penny dreadful.
- If the market is slow to react to the announcement get long 5%-7.5% of account max.
- WARNING: If the hype trade becomes saturated from the open STAY OUT. Open price is likely to be the high!!!
- Be sure to liquidate before the end of the day.
- If it is not moving soon after you bought it hit the bid you have misjudged where the hype is – get out!
- The less movement before the news the stronger it will be.
- If you miss it or see it later than others DO NOT touch it. You will likely be buying the high, the easy money has gone.
- DO NOT get greedy!! Take the money if enough is on the table. This may be very quick money… but only temporary
- DO NOT even CONTEMPLATE adding to this as it falls – or you will be raped without a doubt!

Weak Hybrid
- This trade is better than a pure technical long and pure fundamental long. This is because market is confirming the “fundamentals” via technicals (i.e. it is not one sided).
- Fundamentals are ‘acceptable’, sector is bullish and it looks like it may be breaking upwards or coming into support.
- Use a predetermined stop with medium position size (7.5% of account allowed).
- Take profit at pre-determined resistance unless it becomes a Pure Technical Buy (closes near high on volume).

Strong Hybrid
- This is the trade that makes your year.
- Strong fundamentals, strong sector, strong technical’s.
- Initial parcel may be 12.5% of account. Enter on strong technicals. (Note: this may be a strong pure fundamental buy that is becoming recognised).
- If it continues to rise average up on close (pyramid). May go to 20% of account max!!
- Continue buying as it rises – so long as technical’s remain bullish.
- Once your last purchase is out of the money stop adding to the position.
- Use technical’s as your exit guide. Give it the benefit of the doubt to the upside if valuations are still compelling.
- A 100% net gain will become your free carry level (i.e. sell half at that level – no choice!!!).

General Trading Rules (reflected in tactics).

- No ASX200 stock – PERIOD. Refuse to trade against professionals.
- Do not buy into downtrends. It must break upwards on volume before entry is permitted. The only exception would be a pure fundamental entry on small size and no stop or a hype trade – but even then this is discouraged – sideways is better.
- Do not go too overweight any particular stock. Although this leads to larger rewards the possibility of going broke increases dramatically.
- Record every transaction in a monthly journal and a specific journal depending on whether its:- - Pure fundamental- Pure technical- Pure hype- Weak hybrid- Strong hybrid
- Never trade tax money
- Keep all expenses recorded and organised
- Do not average down unless your pre-determined entry (most likely pure fundamental entry) has dictated that
- Do not put good money after bad. Don’t add to a losing position.
- Pyramid up.
- If you think a stock is reasonable keep an eye on it and monitor it. Trading opportunities may arise.
- Have a pre-determined stop loss at all times.
- Analyse your wins and losses.
- Never be afraid to take a small loss.
- Follow your system at all times if you believe the expectancy is positive.
- Look at ways to minimise tax.
- Ensure commissions are their lowest whilst maintaining a minimum requirement of service.
- Wealth preservation is your number one objective.
- Only trade if there is a legitimate opportunity.
- Remain unemotional and detached when trading.
- Correct mistakes as soon as they become evident.
- Be bold with your profits and cowardly with your losses.
- Remember that every now and again the impossible can and will happen.
- Be reactive when deciding when to buy and sell… not predictive.
- Never over bet, but don’t over diversify either. 5-10 positions is ideal.
- Read the news every morning.
- Do not get long without stops in a bear market unless you are absolutely convinced (pure fundamental long).
- Always take responsibility for your wins and losses
- Trade the market you see and not the market you hope for. Base decisions on reality.
- Wealth is acquired over time – be patient.
- Follow your gut when you have to. This is NOT the same as emotional trading.
- Determine whether trading is trending or range bound.
- Base position sizing of a predetermined amount you are willing to risk given the circumstances of the trade. The more reliable the signals the more you can risk for example.
- A smaller position is much stronger than a large one.
- Never trade out of frustration, anger, desperation, or any other form of emotion.

Most importantly…

- DISCIPLINE IN APPLYING THE ABOVE IS THE ONLY DIFFERENCE BETWEEN YOUR ULTIMATE SUCCESS OR FAILURE. PSYCHOLOGY IS EVERYTHING. KEEP A STRONG MENTAL STATE WHILST TRADING.