A Simple Method for "Stress Free" Consistent Profits

Every now and then, in the forum, we see posts like;
'Will the market go up soon?'
'Why has it come down?'
'Is this a crash?'
'Will these shares go up?'
'Should I hold these shares any longer?'
'Oooops I sold it too soon!'
'Sh*t I missed the low price to buy'
'I bought these, what should I do now?'
'Those manipulators robbed me!' ...........................   
 

the list is endless.
The reason, as I figure out, for all these outcomes is, the trading related (psychological) stress; and associated trading mistakes.

In my case, I have been in all of those situations, more than anybody in the market:   
But not anymore!!
 
To help anybody who wants to improve consistency in trading, I thought of sharing a technique which helped me to improve myself.

This is a very simple position sizing technique. Intended to bring the 'mentality' form novice stage to consistency. However, when used intelligently, it can be used as a stand alone trading plan to beat the market as well.

**** A word of caution: every method has its limitations as well as favorable conditions. So there is no 100% guarantee that this will work if used "blindly".

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There are few "so called bad" practices in the market quite similar to what I am going to describe, such as;
Averaging Down/ Scaling out/ Market neutral trading, Non directional trading, martingale, Grid Trading etc.
But non of those are exactly matched this method so I called it by a new name; that is

Constant Average Position Value Method.

I will explain it through an example below.
The language may sound a little 'childish' since this will be done keeping a novice trader in mind; nevertheless, I am sure, some experts may also find  things interesting.

Here we go........

The first step of 'Constant Average Position Value Method' is to find which stocks to invest in.

1. Screening and short listing:
You can decide to select any share you like. However, for better safety, I recommend selecting a corporate with a stable business; witch may not go busted within next couple of years.
For better performance, pay attention to counters which looks like to undergo some price fluctuations ( more that 20~30%) within next 3~4 months.
('Cause if price never moves, we will never make any gains. Isn't it obvious?)

OK. after selecting a share, we need to consider engaging (buying).
BTW. If you wish, you can use any fundamental analysis you like to select the stock.

2. Look for a signal to buy:
What I mean here is, deciding on a price at which to buy the shares. There is no hard and fast rules. The idea is to have an expectation that the price will appreciate by about 25% in near future (few months). If you like, you are free to use your favorite technical analysis methods here. If not, or if you are too excited, go ahead and buy now! : no price is too high to buy.

3. How much?
Now we have selected a share and decided at which price to buy. But how much should we buy? Now comes the most important part.
Before coming to this stage, you need to decide upon your 'risk capital' on one counter (stock). That means, how much you are ok to loose on one stock. In other words, let's say, today you buy this stock; then tomorrow you will hear that the company has closed and you would loose all you money invested in it: so how much would not make you uncomfortable?

Fine! now let's say you're ok to let go Rs 20k on this stock.

Then, at this stage use only 50% of that amount. That means use Rs 10k to buy shares at our decided price.

As an example; let's say your selected share's price is Rs 100. Then use Rs10k to buy 100 shares. Now, your 'position value' is Rs10k.
OK?
(Note: for the time being let's ignore the commissions and other overhead charges).
Now we have bought shares; what next?

4. Leg jump.
In this method, we need to decide on a leg size. That means how much the share price should move before we take the next action.
Let's consider a 25% leg size.

So we will wait until the price moves a 25%; Up or Down.

If the price moves 25% up before it hits a down leg, and if your target is a 25% overall gain, then you're free to sell the whole quantity and enjoy; and look for the next stock.

But, Let's imagine the market moves down and the price goes down 25%.
Then, you will invest 25% more so that the position value again becomes your original value of Rs10k.
In other words, if the new price is Rs80, you will buy 25 more shares so that your new position value is Rs 80*(100+25) = Rs 10k.
Then, if the price moves down again 25%, you invest 25% more.
On the other hand, If the price goes up by 25%, you sell 25% of shares, which will be your PROFIT!
So do like that whenever there is a 25% price movement; UP or DOWN!
And enjoy your stress free trading!!

Constant Position Value:
Essentially, at the end of each 25% price movement, you either buy or sell a portion of shares and make the value of the remaining lot a constant.
There is no panic since we are ok with the market to move up or down. There is no regret since we always have enough shares in our position for 'another more' 25% profit.
We do not care what our original buying price was since we always use our last 'action price' as our new reference price.

Sound interesting?..

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In this method, if we use 25% leg size, 4 swings will give us a 25% of overall profit (out of our first investment).
as I have observed, if we select the right shares, we can gain about 20~40% within a year.
You are free to select any leg size to match your taste. Higher the leg size lower the number of swings needed but longer the time to wait.
 
After all, the main point here is not the profits, but learning to eliminate trading stresses and funny mistakes.
 
Pls tell me about your views ; I like to learn any alternative ideas.

Thanks for sharing.

Thanks Hunter
very simple  

Thank you. indeed it's simple.

Thanks and appreciate.
One of the disadvantage is frequent commission expense to the broker.
But still this is a good one for a beginner.

Thanks for the comments.

Regarding brokerage, according to my calculations. it's true there will be frequent commissions; but the total value of the commission can be relatively far less than usual.

I am sure, most of the brokers will hate their clients using this. (At least my one does!)

To make an eventual profit out of this, the share price should move in an upward zigzag and not horizontal zigzag.
Brokers shouldn't be a problem if you are trading online. Of course they shud be happy.

Thanks lot Hunter.....Very useful Strategy...

Thanks Hunter.
It's a kind of interesting. Im not sure if get the whole idea. Even this strategy people may find difficulties in phase 1 and 2?

BTW, can you please explain below scenario?
for ex: I am thinking to buy share x at discounted price say 10. i have 20k and i have invested 10k @ x = 10, 1k shares.
then it drop to 9 and within next 6 months it's never given a good return, say it is playing 9-10.5 range.
then trader get confuse whether to sell buy more or hold.

in the current market, most shares are undervalue as per my view. and most of the shares we have invested not given expected return but some were not fallen as well.

my current strategy more in to identify "swing" shares parallel to investing shares. "swing" means that shares tend to have "trade-able" move for given short period. there i am following steps similar to you and taking risk at buy on certain level and meanwhile give up at margin profit. but in same time if it is a solid and fundamental share i tend to reserve some profit in to it and try to increase the volume.

to take profit, you need to kit with the share every day. even there is a price drop, analyze and try to get some advantage in intra-day price moments.

This is a hard game and very time consuming and very less profit. but for few shares that i have tried so far succeed. some are yet to success since no much moments as expected. However it didn't occur any realized-loss yet. It is not bad if you enjoy maths, so you can be busy whole month do your own analysis

kalum wrote:Thanks Hunter.
It's a kind of interesting. Im not sure if  get the whole idea. Even this strategy people may find difficulties in phase 1 and 2?

BTW, can you please explain below scenario?
for ex: I am thinking to buy share x at discounted price say 10. i have 20k and i have invested 10k @ x = 10,  1k shares.
then it drop to 9 and within next 6 months it's never given a good return, say it is playing 9-10.5 range.
then trader get confuse whether to sell buy more or hold.

Thanks for the comments.

I guess your question is what we should do if the share price not moved; is it?

In my view, if a share price is not moving, we cannot do any successful trading. So my strategy is to consider more than one share (counter) concurrently for trading. In that way, if one share doesn't move some other will.

Furthermore, what I have suggested rely upon certain assumptions to work;
1. When the price goes down the chances are higher to bounce back up. In other words, the share becomes more attractive at a lower price hence more investors are attracted to it.
2. The prices will not go down indefinitely without giving some up movement.


Note:
This method should never be used in high leveraged environments with possible long trends in negative directions (Such as Forex Trading)

Thanks for sharing. I'm using slightly different to your method. Honest to say working fine on less than Rs. 5.00 shares and warrants for short time trading. Concentrating on limited counters is important to the beginners and amateurs.

Thank you very munch Hunter
It's very interesting.

hunter wrote:

kalum wrote:Thanks Hunter.
It's a kind of interesting. Im not sure if  get the whole idea. Even this strategy people may find difficulties in phase 1 and 2?

BTW, can you please explain below scenario?
for ex: I am thinking to buy share x at discounted price say 10. i have 20k and i have invested 10k @ x = 10,  1k shares.
then it drop to 9 and within next 6 months it's never given a good return, say it is playing 9-10.5 range.
then trader get confuse whether to sell buy more or hold.

Thanks for the comments.

I guess your question is what we should do if the share price not moved; is it?

In my view, if a share price is not moving, we cannot do any successful trading. So my strategy is to consider more than one share (counter) concurrently for trading. In that way, if one share doesn't move some other will.

Furthermore, what I have suggested rely upon certain assumptions to work;
1. When the price goes down the chances are higher to bounce back up. In other words, the share becomes more attractive at a lower price hence more investors are attracted to it.
2. The prices will not go down indefinitely without giving some up movement.


Note:
This method should never be used in high leveraged environments with possible long trends in negative directions (Such as Forex Trading)

Hi Hunter,

Thanks. yes my question was exactly what you have explained here.
I personally enlighten with your post because it is some what applicable to my strategies as well.
Can i get a bit more help form you if it is ok? can you please share or give me few hints according to the current market? may be couple of counters that is feasible to apply this theory? Let's assume. I can purely invest 50k and there is a chance for another 50k as a backup.

Please excuse me, if my question sounds unethical. I know it is not ethical to ask certain shares or advice from forum members / moderators. i just trying to built up my own strategy for next decade based on some experiments. So i would be greatly appreciate if you could at least PM me the request.

my concept is, i am done with 80% investing now. for next 2 years i will pump more 20% based on current investment.
Then i am trying to re-use invested capital to work for me for next decade. most probably if i live such long that investment should be enough when i retired

sriranga wrote:Thanks for sharing. I'm using slightly different to your method. Honest to say working fine on less than Rs. 5.00 shares and warrants for short time trading. Concentrating on limited counters is important to the beginners and amateurs.

Can you share that pls, or give us a link.

@kalum,
I am sorry, let me be a little undiplomatic and say I would hesitate recommending any shares.
I also do not know what will happen tomorrow.
But you do not need to know that in order to trade successfully.

Anyway, to give you a hint, pls have a look at @sriranga's comment above. He has mentioned two types of counters with better chances of bigger 'swings'.
Hope that will be helpful.

hi hunter,

Thanks. I do understand the circumstance and those hints more than enough for me  

Note: Please don't count me as a blind follower, but i am a good listener. The most of the day i tend to listen and analyze then EOD i'm trying to figure out some points that sense to me for my own R&D strategies

kalum wrote:hi hunter,

Thanks. I do understand the circumstance and those hints more than enough for me  

Note: Please don't count me as a blind follower, but i am a good listener. The most of the day i tend to listen and analyze then EOD i'm trying to figure out some points that sense to me for my own R&D strategies

That's the way to go; you have part of me in you.

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I am happy that this helped many to improve their approach to trading.

hunter wrote:

kalum wrote:hi hunter,

Thanks. I do understand the circumstance and those hints more than enough for me  

Note: Please don't count me as a blind follower, but i am a good listener. The most of the day i tend to listen and analyze then EOD i'm trying to figure out some points that sense to me for my own R&D strategies

That's the way to go; you have part of me in you.

-------------------

I am happy that this helped many to improve their approach to trading.

Thanks hunter