BUYING RULES

RULE 1: GOOD STOCK

  • Make sure the stock is in a strong industry group. Trade only the real leaders from the leading industries 

  • Make sure the stock is showing high relative strength. The next big winners are found during corrections. They are found by screening for stocks that hold up better than the market

  • There is a big Theme behind the stock i.e. EV, AI, Cannabis...

  • Should consider only stocks with at least 40% increases in Earnings & Sales in the most recent quarter (vs. same quarter previous year)

  • Focus on stocks with a ROE of 17% or more; ROCE of 17% or more

  • Avoid cheap stocks. Cheap stocks are way too volatile and are usually cheap for a good reason. 

RULE 2: GOOD CONDITIONS

  • Make sure the market is in a Stage 2 Uptrend (monthly & weekly charts). Stay out of flat / directionless market

  • Make sure the stock is coming out of sound Chart Patterns

  • The Bigger the Base, The Bigger the Move: always be on the lookout for a breakout from a very large base formation. What a big base really means is that a lot of stock has changed hands during the Stage 1 formation. Many disenchanted Sellers who were holding the stock as it plummeted, hoping to get out even, finally sold the stock in disgust to a new group of Buyers at this low price. The new Holders are willing to be far more Patient and wait for the stock to advance significantly before selling. 

  • Make sure the stock is above 50-day moving average and 40-week moving average and the moving averages are rising

  • The less resistance the better: always check whether and how much resistance is overhead on any stock before you buy

  • Make sure the stock has already doubled during the past 52 weeks. As a rule of thumb, stocks that have risen some 40-50% or more before breaking out do the best in the months ahead. Focus on stocks at or close to new 52-week High 

RULE 3: CONCENTRATION

  • Stay focused on only a handful of stocks at a time (10 or less)

RULE 4: BUY POINT

  • Buy right as the stock breaks out of a sound base (as close to the top of the base as possible).

  • Don't buy too late in an advance, when it is far above the ideal entry pointShould not chase a stock that is more than 5% higher the top of the base, except in case of explosive Gap-up

  • If a stock jumps too far past its buy point, wait for pullback when stock falls back into buying range

RULE 5: VOLUME

  • Volume confirmation on a breakout is crucial. Stocks can fall of their own weight, but to advance it takes plenty of buying powerstock.

  • If you see enormous volume relative to the typical amount of trade in a stock it is a sign of institutional buying. As a smaller investor, we want to find the stocks institutions are building positions in, with the goal of riding their coattails for large gains.

  • I wouldn't worry what shape the volume pattern takes while it is forming a Stage 1 base. However, once the stock breaks out above the Top of its Resistance area and moves above its 40-week MA, I want you to worry plenty about Volume: either a 1-week Volume Spike that is at least 2x the average volume of the past month, or a Volume build-up over the past 3-4 weeks that is at least 2x the average volume of the past several weeks.

  • Make sure the Volume is well above average on the breakout day (at least 50% higher than 50d average daily volume)

 

RULE 6: AHERE TO STRICT LOSS CUTTING POLICY

  • Before purchasing a stock, set your "worst case scenario" stop-loss, decide where the exact stop-loss will be placed. This is the price that you have to sell at if the stock falls below this point

  • The % will Not be the determining factor. Instead, the prior support level and 50-day MA, 40-week MA will be your keys to focus on

  • I place initial Stop half way between the top of the base (resistance level) and the bottom of the base (support level) i.e if a stock form a Box/Flat base with the Top at $100 and the Bottom is $90, then initial Stop-loss will be at $95

  • Risk = Buy point - Stop Loss point (i.e. I buy a stock at $100 and my stop loss is at $95 then I am risking $5 per share)

  • Percent Risk (= (Risk/Buy point)*100) of total money you are risking should below 8% and above 3%. If not, this is not a good trade (Risk/Reward)

    • Below 3%, the stop loss point is too close to the Buy point and you can get out of a position too quickly

    • Above 8%, the stop is too wide, it takes longer to get to 3-5R

 

RULE 7: AIM FOR HIGH RISK/REWARD TRADES

  • Play for 3-5R trades. This means if we risked $1 per share, we sell when we are up to $3 or $5 per share. This ensures we are trading at a good Reward/Risk ratio. We are looking to make 3-5 times what we are risking on a trade

  • Invest no more than 1% of your total capital on an individual trade (i.e. If I had $25,000 to invest, I would only risk $250 a trade)

  • Calculate Position Size (How many shares to buy) based on:

    • Amount to risk on each trade 

    • Buy point: price we will buy the stock

    • Stop-Loss: the price which we will sell it for a loss

  • Scale in position:

    • BUY 1 - Probing 40% at the Pivot Point of calculated Position Size on initial purchase;

    • BUY 2 - Add another 30% of calculated Position Size at 2.5% above the Pivot Point / once the next Trough appears to be formed;

    • BUY 3 - Complete building the position to 30% of calculated Position Size at 4-5% above the pivot point / once the Peak after the BO or the first Buy is exceeded

    • Before Pyramiding, always raising trailing stop to the point that it will keep 2% rule intact

RULE 8: PYRAMID WINNING TRADES

  • Pyramid your winning positions to compound your returns

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