STOCK TRADING SET-UP:

A TECHNICAL ANALYSIS
TREND FOLLOWING STRATEGY
UTILZING MARKET INDICATORS
AND RISK MANAGEMENT

by BOBOSS
 ACKNOWLEDGEMENT

On the very outset of this study, I would like to express my deepest gratitude to all those who
pushed me past my struggles and into this state for which I can stand firmly and press on forward to
freedom and success.

To Him who gave me purpose, who gave me strength and who walked by me as I went through
all the hardships – I am eternally grateful. I will forever be your humble servant and let this step I take
on with my life be my testimony for you so that I can help and support your ministry and let others see
you in me. God, thank you for all the blessings that I don’t deserve; for all the trials that honed me; and
for all the people whom you used to help me. Glory be to you alone.

To my family who will always be my most cherished ones, this is for all of you. To my parents
who sacrificed everything just to raise me up, to my brother and sisters whom I shared the colorful bits
of life with – know that all of you have been my inspiration to continue even at the hardest times. To my
Mona lisa, my I can’t leave without, my love – thank you for all the motivations and support that lifted
me up. Thank you for being there, for staying, even when I know I don’t deserve someone as perfect as
you.

To my friend Saitama, God knows how you have been a blessing to me in my path as a trader.
You have continually inspired me to go on when I feel like giving up. Thank you for unselfishly sharing
every bit of knowledge that you learn, if not for you I would have stayed the same as before – lost in the
world of stock market.

To Mr. Abraham, I could only imagine how God will bless you as you bless others. You sir have
been a great help to me and my fellow aspiring traders. We were lost and wanderers but you showed us
the path to which we can take and grow on. Thank you for your patience, your hard work and efforts
that helped us grow as a trader.

To ZFT, Sir Akio, RootingForCeleste, Rayner Teo, and all the traders out there who gave me
knowledge, wisdom, and inspiration to continue working towards my goal. I hope to meet you all one
day and personally express my gratitude, even for just over a cup of coffee.

My deepest gratitude to you all.

BOBOSS
 I am a son. I am a brother. I am a friend. I am a coffeeholic. I am..

BOBOSS

This name serves as my reminder to my recent realization that turned my life around: I love
coffee but I have never finished a cup in just one sitting. It may sound trivial, but upon realizing this fact,
I also knew that I have to do something. I have to change something. I have been practicing Ningas-
Kugon unconsciously. When I reflect to what I have done in the past, It became clear to me that this
negative trait is the main villain that I need to defeat if I were to be successful, not just in trading, but in
life overall.

I started my journey in the stock market last 2016. Back then, I was a complete novice, a
newbie, an idiot. I entered the market full of joy and excitement and ready to receive that pot of gold. I
was an “Investor” who does not look at the charts of the stocks but rather looks at the list of stock picks
of some random guru I found online. I followed their recommendations hoping that I am on the right
path only to be lead to my damnation. I made a lot of choices during this period, a lot of bad
investments not just in the market but also on other schemes like networking and lending. At some
point I knew that I was doing it wrong, that I am not maximizing the potential of my finances. But as I try
to learn even just how to read the chart, I got lost and did not push through. It was early 2018 when I
got slapped hard in the face by Ms. Market. I lost a significant amount of money because of my
stubbornness. It was also then that I woke up to my foolishness. I sold all my shares, accepted my loss
and preserved what was left of my capital. For months I struggled to learn trading, it was a hard route
especially when I was the only one and I had to look for directions from different people. Information
where overflowing to the point where I am feeling weary and lost again. But slowly I had progress,
thanks to my friend who was very patient and understanding. We were lost together but now I have
someone who can look to the left while I look the right in order to find what’s up ahead. It was through
this journey that I met a handful of people who helped me go on. They made me realize a lot of things
that is vital if I were to grab that success that I have been chasing for so long.

And now I say to myself, never again. Never again will I leave a job unfinished. Never again will I
walk out of a commitment. Never again will I lose interest to what I love. Never again will I be
inconsistent. Never.

from Bobo to Boboss.

 CHAPTER 1: FUNDAMENTALS OF TECHNICAL ANALYSIS

Technical analysis is a trading discipline employed to evaluate investments and identify trading
opportunities by analyzing statistical trends gathered from trading activity, such as price movement and
volume.

I-A. UNDERSTANDING A CHART'S LANGUAGE

CANDLESTICKS

A candlestick is a type of price chart that displays the high, low, open and closing prices of a
security for a specific period. The wide part of the candlestick is called the "real body" and tells investors
whether the closing price was higher or lower than the opening price.

The candlestick's shadows show the day's high and low and how they compare to the open and
close. A candlestick's shape varies based on the relationship between the day's high, low, opening and
closing prices. (excerpt from Investopedia.com)

There are a lot of other price charts types that can be used such as Line Charts, Bar Charts, Point
and Figure charts and others but for this study, we will be utilizing Candlestick charts.

figure I-A.1 Candlestick Parts

For more candlestick chart patterns, refer to Appendix 1 – Candlestick Cheat Sheet
 figure I-A.2 SSI candlestick chart showing daily price movement

SUPPORT

A support or support level is the level at which buyers tend to purchase or enter into a stock. It
refers to the stock share price that a company rarely goes below. When a price of stock falls towards its
support level, the support level holds and is confirmed, or the stock continues to decline and the
support level must change. (excerpt from Investopedia.com)

- a price that a stock has had a difficulty falling below

- a point where market considers the price to be "cheap"
- tends to attract buyers which supports the price and prevents it from getting lower.

RESISTANCE

Resistance, or a resistance level, is the price point at which the rise in the price of a stock or a
stock index is halted by the emergence of a growing number of sellers who wish to sell the stock at that
price. Resistance levels can be short lived if new information comes to light that changes the overall
market’s attitude toward a stock, or they can be long lasting.(excerpt from Investopedia.com)

- a price that a stock has had a difficulty going above

- point where stock price usually starts going down because of too much supply (traders
usually sell at this point) and not enough demand.
 figure I-A.3ALI chart showing S/R

- looking at ALI chart, we can see that since March 2018 the price is at 39.89-39.65 level. Whenever price
approaches this range, it bounces back - this is a valid support. Consequently, when the price hits 41.9-41.5, it does
not go up further - this is a valid resistance.

Support and Resistance are range values based on history.

SUPPORT AND RESISTANCE ROLE REVERSAL

Support and resistance are levels that play a key role with each price movements. But in
technical analysis, their roles can be reversed - a support will be a resistance, and a resistance will be the
support. This happens when stock prices pierces through these levels.

Referring to figure I-A.4 we can see ALI's chart. As observed S/R role reversal occurs as follows:

A. This 44-44.5 price range was a resistance level during the month of December 2017.

B. Once the price pierced through 44.5 price range at the end of December 2017, this price
range acted as support as seen from, January to February 2018

C. During this period (December 2018), this level acted as a support

D. In the middle of March 2018, this support level was pierced and it now acts as the resistance.
 figure I-A.4 ALI chart showing S/R role reversal

VOLUME

Volume is the number of shares or contracts traded in a security or an entire market during a
given period of time. For every buyer, there is a seller, and each transaction contributes to the count of
total volume. That is, when buyers and sellers agree to make a transaction at a certain price, it is
considered one transaction. If only five transactions occur in a day, the volume for the day is five.

A rising market should see rising volume. Buyers require increasing numbers and increasing
enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume show lack of
interest, and this is a warning of a potential reversal.

Volume is an important indicator in technical analysis as it is used to measure the relative worth
of a market move. If the markets make a strong price movement, then the strength of that movement
depends on the volume for that period. The higher the volume during the price move, the more
significant the move. Technical analysis is based on price and is used to determine when to buy.
Technical analysts are primarily looking for entry and exit price points, and volume levels provide clues
about where the best entry and exit points are located. (excerpt from Investopedia.com)

Looking at figure I-A.4, the bars below each candlesticks represents the volume.
 I-B. A DATE WITH MS. MARKET

Ever since I heard the term "Ms. Market" from other traders, I had this clarity of how to better
understand the complicated-simple-chaotic-organized characteristic of the market - yes, treat the
market as a lady and it will make sense. I know guys can relate, right?

Remember how your first date went? When you came prepared and hoped for the best at the
end of the evening? Well, somehow it can be related to how we engaged in trading. Though the market
seems new and ever changing, we must still find a way to familiarize ourselves with her; to be prepared
to whatever she may throw unto us.

3 ASSUMPTIONS IN TECHNICAL ANALYSIS:

1. The Market discounts everything

- based on the Efficient Market Hypothesis, which states that a stock’s price already reflects
everything that has or could affect a company – including fundamental factors. Technical
analysts believe that everything from a company’s fundamentals to broad market factors to
market psychology are already priced into the stock. This removes the need to consider the
factors separately before making an investment decision. The only thing remaining is the
analysis of price movements, which technical analysts view as the product of supply and
demand for a particular stock in the market. (excerpt from Investopedia.com)

2. Price moves in trends

- As a technical analyst, it is believed that the price moves in a short, medium and long term
trend. This means that the stock prices tends to move based on a past trend, whether an
uptrend, a downtrend or sideways.

3. History repeats itself

- Technical analysts believe that history tends to repeat itself. The repetitive nature of price
movements is often attributed to market psychology, which tends to be very predictable based
on emotions like fear or excitement. Technical analysis uses chart patterns to analyze these
emotions and subsequent market movements to understand trends. (excerpt from
Investopedia.com)

4 STAGES OF THE MARKET:

1. ACCUMULATION PHASE
- occurs after a fall in prices and looks like a "Consolidation" phase.
Characteristics:
• usually occurs when prices have fallen over the last 6 months or more.
• looks like a long period of consolidation on downtrend
• the long term moving average tends to flatten out after a price decline.
• price tends to whip back and forth around the long term moving average.
 2. ADVANCING PHASE
Characteristics:
• occurs after price breaks out of accumulation phase
• forms a series of higher highs and lows
• short term moving average are above long term
• price is above long term moving average

3. DISTRIBUTION PHASE
Characteristics:
• occurs when prices have risen over the last 6 months or more
• looks like a long period of consolidation during an uptrend
• the long term moving average tends to flatten out after a price decline
• price tends to whip back and forth around the long term moving average

4. DECLINING PHASE
- happens after price breaks down the distribution phase
- this is where traders who are not able to cut their loss becomes long term investors.
Characteristics:
• occurs after price breaks out of distribution phase
• price forms a series of lower highs and lows
• short term moving averages are below long term MA (Ex. 50MA below 200MA)

MARKET TRENDS

1. UPTREND - if composed by series of higher highs and lows.

An uptrend describes the price movement of a financial asset when
the overall direction is upward. In an uptrend, each successive peak
and trough is higher than the ones found earlier in the trend.

figure I-B.1 - UPTREND for example, the high at point 4 is above the high at point 2 and the low at point 5
is above the low at point 3. The uptrend is broken if the next low on the chart falls below point 5. The
opposite of an uptrend in a downtrend. (excerpt from Inevstopedia.com)

2. DOWNTREND - if composed by series of lower highs and lows.

A downtrend occurs when the price of an asset moves lower over a
period of time.

figure I-B.2 DOWNTREND - Notice how each successive peak and trough is
lower than the previous one. For example, the low at Point 3 is lower than
the low at Point 1. The downtrend will be deemed broken once the price
closes above the high at Point 4.

3. SIDEWAYS - A sideways trend is the horizontal price movement that occurs when the forces of
supply and demand are nearly equal.
 figure I-B.3 NOW daily chart showing different market phase and trend

Referring to figure I-B.3, we can see NOW Corporation daily chart. Upon careful observation:

A. Accumulation Phase - this phase shows significant increase in volume (bar chart below
candlestick) which means that bulls are starting to stockpile and getting ready for a possible
uptrend. This phase is in sideways.

B. Advancing Phase - this phase shows price increase which mean that there are a lot of buyers.
Notice how the volume significantly increased compared to previous trading days. Bulls have
overcome the bears that is why price is soaring. This phase is an uptrend.

C. Distribution Phase - this phase shows a halt in prices increase and looks like a consolidation
period. This is where traders take profits. This phase is in sideways.

D. Declining Phase - this phase shows a price breakdown. A lot of traders are taking profit that is
why the sellers overcome the buyers. This phase is in downtrend.
 CHAPTER II: RECOGNIZING THE SIGNS
Reading a stock price chart seems complicated at first glance especially for beginners in trading.
This is personally true for me when I was first trying to figure out what the chart is telling me. This is
where Market Indicators come in. These are tools that helps us simplify and interpret better each
information that the market is conveying. There are a ton of Market Indicators out there, but the idea is
to find the ones that suits you, master it and utilize it fully. For this study purposes we will be focusing
on Moving Averages, RSI and MACD.

II-A. MARKET INDICATORS

Indicators represent a statistical approach to technical analysis as opposed to a subjective

approach. By looking at money flow, trends, volatility, and momentum, they provide a secondary
measure to actual price movements and help traders confirm the quality of chart patterns or form their
own buy or sell signals. (excerpt from Investopedia.com)

MOVING AVERAGES

The moving average (MA) is a simple technical analysis tool that smoothes out price data by
creating a constantly updated average price. The average is taken over a specific period of time, like 10
days, 20 minutes, 30 weeks or any time period the trader chooses. A moving average helps cut down the
amount of "noise" on a price chart. Look at the direction of the moving average to get a basic idea of
which way the price is moving. If it is angled up, the price is moving up (or was recently) overall; angled
down, and the price is moving down overall; moving sideways, and the price is likely in a range.

A moving average can also act as dynamic support or resistance. In an uptrend, a 50-day, 100-
day or 200-day moving average may act as a support level. This is because the average acts like a floor
(support), so the price bounces up off of it. In a downtrend, a moving average may act as resistance; like
a ceiling, the price hits the level and then starts to drop again. (excerpt from Investopedia.com)

figure II-A.1

Moving Average as
Dynamic Support
and Resistance

Take for example

this chart from CEB.
The 20MA (Red Line)
acts as support
where it holds the
stock price (Green
Range). Then once it
was pierced, it acts
as a resistance (Red
Range).
 The price won't always "respect" the moving average in this way. The price may run through it
slightly or stop and reverse prior to reaching it. As a general guideline, if the price is above a moving
average, the trend is up. If the price is below a moving average, the trend is down. However, moving
averages can have different lengths, so one MA may indicate an uptrend while another MA indicates a
downtrend.

Types of Moving Averages

A moving average can be calculated in different ways. A five-day simple moving average (SMA)
adds up the five most recent daily closing prices and divides it by five to create a new average each day.
Each average is connected to the next, creating the singular flowing line.

Another popular type of moving average is the exponential moving average (EMA). The
calculation is more complex, as it applies more weighting to the most recent prices. If you plot a 50-day
SMA and a 50-day EMA on the same chart, you'll notice that the EMA reacts more quickly to price
changes than the SMA does, due to the additional weighting on recent price data.

Charting software and trading platforms do the calculations, so no manual math is required to
use a moving average. One type of MA isn't better than another. An EMA may work better in a stock or
financial market for a time, and at other times, an SMA may work better. The time frame chosen for a
moving average will also play a significant role in how effective it is (regardless of type). (excerpt from
Investopedia.com)

Moving Average Length

Common moving average lengths are 10, 20, 50, 100 and 200. These lengths can be applied to
any chart time frame (one minute, daily, weekly, etc.). For this study, short and long term lengths shall
be utilized such as 100MA, 50MA and 20MA.

figure II-A.2

Plotting of Moving Averages

100MA - Blue Line

50MA - Yellow Line
20MA - Red Line

using Investagrams charting

tool, MAs were plotted
according to user's preference.
RELATIVE STRENGTH INDEX (RSI)
The Relative Strength Index - RSI is a momentum indicator that measures the magnitude of
recent price changes to analyze overbought or oversold conditions. It is primarily used to attempt to
identify overbought or oversold conditions in the trading of an asset. The relative strength index (RSI) is
calculated using the following formula:
RSI = 100 - 100 / (1 + RS)

Where RS = Average gain of up periods during the specified time frame / Average loss of down periods
during the specified time frame

The RSI provides a relative evaluation of the strength of a security's recent price performance,
thus making it a momentum indicator. RSI values range from 0 to 100. The default time frame for
comparing up periods to down periods is 14, as in 14 trading days. Traditional interpretation and usage
of the RSI is that RSI values of 70 or above indicate that a security is becoming overbought or
overvalued, and therefore, may be primed for a trend reversal or corrective pullback in price. An RSI
reading of 30 or below is commonly interpreted as indicating an oversold or undervalued condition that
may signal a trend change or corrective price reversal to the upside. (excerpt from Investopedia.com)

figure II-A.3 BLOOM daily price chart

Using Investagrams charting tool, RSI is plotted showing an oversold level (RED) August 2015 to January 2016 and
overbought level (GREEN) during June to August 2016.
MOVING AVERAGE CONVERGENCE DIVERGENCE

Moving average convergence divergence (MACD) is a trend-following momentum indicator that

shows the relationship between two moving averages of prices. The MACD is calculated by subtracting
the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD,
called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell
signals.

MACD Signals

1. Crossovers - As shown in the chart above, when the MACD falls below the signal line, it is a
bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises
above the signal line, the indicator gives a bullish signal, which suggests that the price of the
asset is likely to experience upward momentum. Many traders wait for a confirmed cross above
the signal line before entering into a position to avoid getting "faked out" or entering into a
position too early, as shown by the first arrow.
2. Divergence - When the security price diverges from the MACD, it signals the end of the current
trend. For example, a stock price that is rising and a MACD indicator that is falling could mean
that the rally is about to end. Conversely, if a stock price is falling and the MACD is rising, it could
mean that a bullish reversal could occur in the near-term. Traders often use divergence in
conjunction with other technical indicators to find opportunities.
3. Dramatic Rise - When the MACD rises dramatically - that is, the shorter moving average pulls
away from the longer-term moving average - it is a signal that the security is overbought and will
soon return to normal levels. Traders will often combine this analysis with the Relative Strength
Index (RSI) or other technical indicators to verify overbought or oversold conditions.

figure II-A.4

BLOOM daily price

chart with MACD
indicator

we can observe the

"BUY" signal at the
start of an uptrend
and the "SELL"
signal at the start of
downtrend.

Note that MACD is

not absolute as with
any other
indicators. It is best
use with other
indicators for
confirmation.
ALIGNMENT OF THE STARS (AOTS)

Alignment Of The Stars or AOTS - is a chart observation utilizing moving averages. This term was
familiarized by Zeefreaks and his tribe. Basically, the idea is to spot a beginning of a trend using a set of
moving averages specifically 20SMA, 50SMA and 100SMA.

For an AOTS to occur, the price of the stock must be higher than 20SMA; 20SMA must be above
50SMA and 50SMA must be above 100SMA - if this conditions are met, then the stock is in AOTS. In the
event that AOTS happens, the probability that an uptrend will occur is high. AOTS is usually observe in
conjunction with Zeus Strike or ZS.

Zeus Strike (ZS)

Zeus strike or ZS - is another term popularized by ZFT. It is conceptualized that ZS happens

before AOTS. It is when the 100SMA is pierced by the price significantly (with volume) crossing it. This is
because of spike in buyers as the stock is approaching AOTS.

In summary:

AOTS: PRICE>20SMA>50SMA>100SMA

ZS: PRICE CROSSES 100SMA (100SMA is below Price)

Note: Subsequently, Inverse Zeus Strike (IZS) and Inverse AOTS (IAOTS) happens in oppositesignalling a
downtrend.

figure II-A.5 BLOOM daily chart showing ZS and AOTS

DARVAS THEORY

Darvas box theory is a specific type of trading strategy that former ballroom dancer Nicolas Darvas
developed in 1956. Darvas' trading technique involves buying into stocks that are trading at new highs. A
stock creates a Darvas box when the price of a stock rises above the previous high but falls back to a
price not far from that high.

The Darvas Box Set-up

1. Find a new 52-week high, Multiyear high or an All-time high (ATH)

2. Find the top of the box, which is the highest high for the next three days (4 days total).
3. After finding the top, look for the bottom of the box. It's the lowest low for the next three days
(4 days total).
4. If box is complete, a close (Darvas used a new high) above the top of the box signals a buy.
5. A close below the bottom of the box is the sell signal

Key Rules of Darvas Theory

a) Volume – look for increasing volume when selecting stocks to trade

b) Upper Box Limit Breakout – must have upper earnings trend; when upper box limit breaks, BUY.
c) Lower Box Limit Breakout – if the price precedes to drop out of the new box and back to the old
box, EXIT.
d) Entry and Stop-loss – define your entry point and cut point. Place cut loss/stop loss below the
low of the most recent box.
e) Record trades
f) Factor in market conditions – do not buy on a bear market or without volume
g) Add more funds – since the cut loss is being trailed up (Trailing Stop), more funds can be added
on each consecutive breakout.

figure II-A.6 Darvas Box plotted in ANI daily chart

 CHAPTER III: ENTER RISK MANAGEMENT
In stock market there is strong relationship between risk and return. Greater the risk, greater
the return. In financial terminology risk management is the process of identifying and assessing the risk
and then developing strategies to manage and minimize the same while maximizing the returns.

Every investment demands a certain amount of risk and for an investor to assume this risk he
has to be compensated duly. Risk is therefore central to stock markets or investing because without risk
there can be no gains. Successful investors use stock market risk management strategies to minimize the
risk and maximize the gain. (excerpt from managementstudyguide.com)

STOP LOSS (SL)

Stop loss (aka Cut loss, Cut point or Stop point) is a risk management principle that aims to
protect the capital. It is defined at the beginning of the trade to minimize the risk of losing the capital
invested. For this study, Stop loss will be defined with the following conditions:
1. -4% of entry price
2. Moving Average stop (when the price hits an MA below it), whichever comes first.

TRAILING STOP LOSS (TSL)

Trail stop on the other hand is another risk management principle that aims to protect the
capital along with its gains. It is like a stop loss but is set as you follow the trend. A valid initial trail stop
should be set above the Average Entry Price (AEP),
consecutive trail stops are then plotted as you follow the
trend.For this study, Trailing Stop Loss will be defined
with the following conditions:
1. Moving Average stop with respect to AEP.
2. Darvas Box

MOVING AVERAGE SWITCHING

Moving averages can also act as a stop loss or a
trailing stop loss as long as conditions are met. MA
figure III.1 MAs as valid TSL
switching is a strategy wherein a TSL is moved from a
short term MA to a medium term MA. Take note though that this is done only if:
1. Both Short and medium term moving averages are above AEP.
2. There is a strong conviction that the trend is not yet exhausted.
3. Gap within the short and medium trend MA is not significant, otherwise MA switching is not
practical since it will result to more profit loss.

TRANCHE SYSTEM
Tranche system is practiced both in trading entry and exit. The idea is to set a portion of your
total allocation (in entry) or your total position (in exit) in a particular execution. Setting a specific
tranche will minimize the risk of losing a whole allocation and will help maximize your gain. The number
of tranche is a personal preference but for this study, a maximum of Three Tranche will be used for
entry and a maximum of Two Tranche for exit. “Never test the depth of river with both feet”
BREAKOUT/BREAKDOWN TRANCHE (BT)
Buy On Break-Out or BOBO is a move that
traders do to maximize gain upon successful
breakout. But this also involves risk whenever a
breakout failed or didn't materialize that is why in
this study, a tranche BOBO will be observed.
Specifically, an entry point is set in tranches based
on (+-) 5% of the prevailing resistance (26wk High, figure III.2 BOBOT illustration
52wk High, Multiyear High or ATH).

figure III.3 VUL daily price chart showing Darvas Box, AEP, SL and TSL

Taking a look at VUL price chart above, we can observe that:

A. Price was nearing 52wk High and approaching 100MA (AOTS formation was anticipated), 1st
tranche was executed before 100MA breakout. Stop loss (SL) was set at 20MA. 2nd tranche was
executed after 100MA breakout and 20MA was defined as Trailing Stop Loss (TSL).
B. Darvas box is plotted to define 2nd TSL, with 20MA acting as continuous TSL.
C. 2nd Darvas box is plotted and eventually, price broke down from the support signaling to sell 1
of 2 tranches. 20MA still acts as continuous TSL, upon piercing 20MA - sell 2 of 2 tranches.
D. Trend is exhausted, and AOTS formation failed as the downtrend forms.
 CHAPTER IV: PLAN TO TRADE THE TRADING PLAN
As a beginner in the vast world of stock market, one of the key mistakes I did was engaging in a
trade with no trading system whatsoever. It is like going into battle blindfolded, no weapons and no plan
- ultimately leading you to your doom. So what is a trading plan and why is it crucial to trading?

A Trading System includes a trading plan and an overall trading strategy. It is a systematic
method for identifying and trading opportunities that takes into consideration a number of variables
including time, risk and the trader's objectives. Trading System can be built in a variety of different ways.
Traders will typically customize their own trading plans based on their personal goals and objectives.
Above all else, investors seek trading plans that will result in profit. (excerpt from Investopedia.com)

“Trading Strategy will become your religion.

Trading System will become your Bible
Trading Plan will allow you to walk everyday"

5 KEYS TO BE A PROFITABLE TRADER:

1. Good and stable trading psychology
2. Build a well-defined trading system
3. Master the basics of Technical Analysis
4. Proper risk management
5. Master a trading set-up that suits you

We have already covered items 3 and 4 so we're 2 steps closer to becoming a profitable trader.
There are still quite a few more in our checklist.

IV-A. THE PSYCHO TRADER

Trading Psychology is one aspect of trading that most people overlook at. In trading, a trader
actually puts in two type of capital: (1) Monetary or Financial Capital; (2) Psychological Capital. Most
traders only focus on financial aspects of trading that they forget that psychological aspects is as equally
as important.

Trading psychology refers to the emotions and mental state that help to dictate success or
failure in trading securities. Trading psychology represents various aspects of an individual’s character
and behaviors that influence their trading actions. Trading psychology can be as important as other
attributes such as knowledge, experience and skill in determining trading success. Discipline and risk-
taking are two of the most critical aspects of trading psychology, since a trader’s implementation of
these aspects is critical to the success of his or her trading plan. While fear and greed are the two most
commonly known emotions associated with trading psychology, other emotions that drive trading
behavior are hope and regret.

The psychological aspect of trading is extremely important. Traders often dart in and out of
stocks on short notice, necessitating quick decisions. To accomplish this, they need a certain presence of
mind. They also, by extension, need discipline, so they will stick with previously established trading plans
and know when to book profits and losses. Emotions simply can't get in the way. (excerpt from
Investopedia.com)
 figure IV-A.1
The Trader's Emotional Dilemma

UNDERSTANDING FEAR

When a trader gets bad news about a certain stock or the general market, it's not uncommon
for the trader to get scared. They may overreact and feel compelled to liquidate their holdings and go to
cash or to refrain from taking any risks. If they do that, they may avoid certain losses, but they also may
miss out on gains. Traders need to understand what fear is: a natural reaction to what they perceive as a
threat, in this case, to their profit or money-making potential. Quantifying the fear might help, and
traders should consider pondering what they are afraid of, and why they are afraid of it. (excerpt from
Investopedia.com)

GREED IS A TRADER'S WORST ENEMY

There's an old saying on Wall Street that "pigs get slaughtered." This adage refers to greedy
investors hanging on to winning positions too long, trying to get every last tick. Greed can be
devastating to returns, because a trader always runs the risk of getting whipsawed or blown out of a
position. Greed is not easy to overcome. It's often based on an instinct to try to do better, to try to get
just a little more. A trader should learn to recognize this instinct and develop a trading plan based upon
rational business decisions, not emotional whims or potentially harmful instincts. (excerpt from
Investopedia.com)

ELIMINATING FEAR AND GREED

The dangers of fear and greed is very significant in every trade. In order to eliminate these two,
we must be keen and stick to our trading plan no matter what and avoid listening to other people's
opinion. Our trading foundation should be built solely to our Trading Plan - grounded, solidified,
engraved and mastered with our trading psychology.
 IV-B. THE TRADING SYSTEM

TRADING PLAN

A. TARGET MARKET

 4th-liner Micro Cap (<Php 3 Billion)

 3rd-liner Small Cap/Penny Stocks (<10 Billion, >Php 3 Billion)
 2nd-liner Mid Cap (<Php 60 Billion,>Php 10 Billion)
× 1st-liner(Bluechips) Large Cap (>Php 60 Billion)
* For complete list of stocks refer to Appendix 2 - Philippine Stock Market List of Companies

B. WATCHLIST FORMULATION
TECHNICALINDICATORS (use Investagrams charting tools to set the following parameters)
 Simple Moving Averages (MA)
- 20MA-RED, 50MA-ORANGE and 100MA-BLUE.
 Relative Strength Index (RSI)
- 14 period;
- 70 upper limit and 30 lower limit
 Moving Average Convergence Divergence (MACD)

You can save your

settings as a template
for future use
MA and Volume
Indicators Drop down list
for indicators

RSI and MACD

Indicators

figure IV-B.1 Investagrams Chart Settings

• Each corresponding data such as RSI level or Prices are shown on the right side.
• Utilize Investagrams charting tool and save these settings as your template that you can use each
time you log in.
• Explore other options, settings and charting tools that will be helpful
 CONDITIONS
 ZS and AOTS formation is evident in daily (more conviction if in weekly)
 Price is approaching prevailing resistance
- ATH
- Multiyear High
- 52 Week High
- 26 Week High
- 13 Week High (consider only during strong conviction, supported by more than one indicator)
 RSI is above is greater than or equal to 60.
 Secondary confirmation if MACD projects BUY signal

figure IV-B.2 Investagrams Screener Settings

Using Investagrams screener, set the following conditions and run. This will generate a list of stocks that
might fall into your watch list. Carefully check each stock and further eliminate stocks that are:
• Untradeable – stocks whose chart appears to have no pattern or whose candlesticks appears to
be dispersed.
• No Volume
• Not yet approaching prevailing resistance

C. ALLOCATION, POSITIONING AND STOP-LOSS

Total Capital = C
 ALC = 20% of Capital Max. Allowable Capital risk = 2.5%
 Entry Point: Max. Risk per Allocation = 4%
Price is within (+-5% of Prevailing Resistance) Total Allocation (ALC):
 Entry Execution: Capital risk = Total Allocation for 3 Stocks
Breakout Tranche buying (BT) – Max. 3 positions (0.025)(C) = (ALC1)(0.04)+(ALC2)(0.04)+(ALC3)(0.04)
(0.025)(C) = (ALC123)(0.12)
 Stop Loss (SL):
ALC123 = 0.2083 (C)
(-4%), Darvas Support or an MA below is hit
ALC = 20% of Capital
D. POSITION AND TREND TRACKING

 Daily Time Frame

- verifying entry and exit points
 Trailing Stop Loss (TSL)
- Moving Average Stop with respect to AEP
- Darvas Box
 Weekly Time Frame
- confirming overall trend
- verify healthy trend (RSI is above 70)

E. PROFIT ACQUISITION

 Breakdown Tranche selling (BT)

- Max. of 2 tranche
 Selling point:
- Primary TSL is hit, sell half (1 of 2 Tranche)
- Secondary TSL is hit, sell all (2 of 2 Tranche)
 When trend is exhausted, TAKE PROFIT AT ONCE

E. PRE AND POST TRADING

 Make and update Trading Journal indicating all relevant information of trade.
 Record each experience including strengths and weakness; correct and wrong moves, mistakes
and everything that can help improve overall decision making and trading mentality.
 Tithing shall be practiced. 10% of total profit must be allotted as Tithes.

F. TRADING GUIDELINE

• NEVER TRADE OUTSIDE OF TRADING PLAN

• NEVER AVERAGE DOWN
• NEVER CHASE PRICES
• NEVER TRADE WITHOUT VOLUME AND CONFIRMATION
• NEVER GO ALL-IN, TRANCHE IS THE KEY
• AVOID TRADING BLUECHIPS
• PRACTICE END OF DAY DISCIPLINE: BUY ON CLOSING, SELL ON OPENING
• MINIMIZE STOCKS YOU HOLD IN PORTFOLIO, MAXIMUM SET AT 3 STOCKS
• DO NOT BE GREEDY. A SELL SIGNAL IS NEVER A BUY SIGNAL.
• DO NOT SET A SPECIFIC OVERALL NUMBER GOAL, RATHER AIM FOR MASTERY
• DO NOT ENTERTAIN AND LISTEN TO BASELESS OPINIONS AND HEARSAYS
• KNOW WHEN TO RECOGNIZE YOUR OWN MISTAKES AND ACCEPT A LOSS
• PRAY AND BLESS EACH TRADE AND DO NOT FORGET YOUR TITHES WITH EACH WINNING TRADE
TREND FOLLOWING CONCEPTUAL FRAMEWORK
 APPENDIX

Appendix 1 – Candlestick Cheat Sheet

Appendix 2 - Philippine Stock Market List of Companies