LON:CAML | Trading Made Easy - My Strategy For Buying Stocks

11th Jun '15 by Pcarrallo10

32 comments 26023 reads

would like to share my investment strategy with you, which has been working really well for me after I changed it a couple years ago.

After reading some books, attending several courses and making many mistakes, I finally understood that the best method is KISS:

I will start by teaching you the methods I use to search for the stocks in which I want to invest and, once selected, how I open position and set a stop in losses.

My idea is to publish other posts with stocks that match the criteria that I will be presenting in the following paragraphs. These should help you get started with my methods and give you some companies that you could potentially invest in.

As a sample: 3 stocks I own

Theory is fine. But as an introductory example, first of all I would like to show you 3 of my current stocks I own. Blue line is entry point, red one is stop level. It is true that in 2 of them the Exchange market size is lower than the required, but as an exception I assumed the risk (explained later in this article).

1) Stocks that have no profit yet: CAML.L Central Asia Metals Plc.

2) Stocks gaining some % but still in danger if stop is touched: TPK.L Travis Perkins Plc.

3) Risk free stocks (under normal circumstances): MSLH.L Marshalls PLC.

Macro uptrend

First thing I have into account is the macro uptrend: if we are in a negative trend market, for me the best option is to go out of the market, or open short positions.

Historic peaks in the last 12 months

I limit my search to those companies that have reached record highs in the last year (52 week breakout). I believe that these companies have a very good chance of starting upward trends in the future.

Small – Medium Caps United Kingdom

UK has a large variety of firms of all sizes.

I started investing in this market because I read several books that dealt with it and it seemed full of opportunities. After vast research I came to the conclusion that this market has high liquidity and is not as volatile as the American market (where stocks can open up with a 20% difference).

CFD’s with Ig Markets

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Graham Neary

10th Jun '15

It has some shared elements with StockRank, that's right.

Mark Simpson

It's a form of momentum (the 52 week breakout thing) with a quality/value filter (point 4). In essence, it's similar to systematic Stockrank investing.

This isn't really like a stockrank strategy which is much more broad in its criteria. I doubt 13-23 x EV/EBITDA provides exposure to any value premium or EBITD +ve provides any exposure to quality premium.

There is academic evidence that a 52-week high strategy can generate some excess returns so this is likely to be the only true return-enhancing component.

What concerns me most is what a bear market would do to a 2:1 leveraged portfolio. A 10% stop loss is equivalent to a 20% loss of capital. You 'd need to significantly reduce leverage when you stop out to avoid wiping out capital in a down-turn.

Pcarrallo10

With CFD´s I have the possibility to increase leverage in certain moments.
They also pay dividends, unless you are short that will charge you for them.
But it is true that they also apply interests everyday.
Other brokers give you the possibility of leverage without CFD´s.
Some people distrust Ig because they are market makers, I completely understand them. But for me works so far today.
There are so many options as brokers are, of course.

Hi stepone, thank you for the warning. It was a HTML format 'trick', I've already changed it.

Hi David,

Yes, I´m in Spain, I would really love to have the same taxation system as UK for Spread Bets, but I´m afraid we are going exactly to the opposite :-(

What I'm trying to say with the spread is that if the difference between bid and ask is 4% in both moments (when you buy and when you sell) you are losing 8%, globally. It is true that in 2 different moments, but more or less would be about 8%.

Regards,

Pablo

Hi Grindertrader,

Yes, I think Naked Trader has many good ideas, I have included some variations. Good read!

I completely agree with you on the strategy, thank you very much for your encouraging words!

Regards,

Pablo

pka

You should bear in mind that the majority of traders of CFDs lose money over the long run, so the odds are against you if you use CFDs.

underscored

So do most retail investors into the stock market.

Good stock herbie47, everything is ok except that I would need something bigger in terms of Exchange Market Size (150) because I would buy 150 * 25,98 Gbp = 3,897 Gbp, lower than my usual budget of 7,300 Gbp (10,000 €).
I think Ebitda is an excellent indicator about how the company is going. Also compared with debt, in order to know the leverage level of the company.

Graham N, StockRank looks interesting, I will definitely check it out. Thank you for the tip.

Hi dangersimpson,

In my case, to be sure I will not be stopped in all my stocks, I only open new positions if some of the stocks have already gone up and, in case of stop exit, I will not loose money with them...

Regards,

Pablo

Pka, I completely agree with you.

That´s their business in fact, the people who open an account, apply super-leverage and loses everything, in just a couple of months!

But I am happy to say that I am using Cfd´s since 2012 and my account is still alive! ;-)

I agree

"But I am happy to say that I am using Cfd´s since 2012 and my account is still alive!"

That's good news. But the stock market over the last few years has been relatively calm by historical standards. Have you thought what would happen to your CFDs if there is another stock market crash like the one on 'Black Monday' in 1997? Stop losses wouldn't help you on a day like that:

http://en.wikipedia.org/wiki/Black_Monday_%281987%29

Rusty2

I see but does this not exclude many small and mediun size companies?

Re Ebitda, I have read several articles about it, all negative, also Warren Buffet and Paul Scott I believe are not keen on it. But I'm not an accountant.

In my case, to be sure I will not be stopped in all my stocks, I only open new positions if some of the stocks have already gone up and, in case of stop exit, I will not loose money with them...

Wise to consider your downside protection however that limits you loss to 20% on one set of stocks only since it certainly is possible that all your stocks could be stopped out with a 10% correction, in fact I'd go as far as suggesting that this is almost certain to happen at some point in the future given how tight 10% is compared to the volatility of the average stock and correlations between stocks.

The question is what you do you do then? If you truly want to limit your downside to 20% of capital then you need to have the nerve to give up share trading and never trade again. If you can't or won't do that then you have to face the reality that trades can continue to go against you for quite some time and your loss potential far exceeds 20% of capital.

Rather than an all or nothing approach a far more sensible approach would be to vary your gearing according to market conditions going from significant cash when very little is hitting 52 week highs to your maximum of 2:1 when in a bull market as we have been in the last few years. The key is to have the discipline to cut back exposure as things go against you and add it back only when things are turning otherwise there is a high chance of a total wipeout at some point in the future.

Well, it depends on if it gets you when the market is open or closed. Obviously, the second scenario is worst. Ig also allows guaranteed stops, they work fine, but it will cost you about 0.3%-1% more.

Yes, it definitely excludes a lot of stocks, under my point of view there are so many that the key is how to select the better ones: some days it is impossible to find any... but it works so far today!

"Ig also allows guaranteed stops, they work fine, but it will cost you about 0.3%-1% more."

IG Index is probably OK. But from what I've read about them, I suggest you don't use Plus500 as your broker!

Hi dangersimpson. Yes, you have to very disciplined about cutting losses. I always check that we are on a bull market, otherwise I will be out of the maket for some time.

I forgot to include this in my article, I have alredy done it in the first part of it:

Macro uptrend

First thing I have into account is the macro uptrend: if we are in a negative trend market, for me the best option is to go out of the market, or open short positions.

Thank you for the tip!

Regards,

Pablo

Trading Made Easy - My Strategy For Buying Stocks

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Pcarrallo10

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