Monday, 1 October 2012

Introducing the Avid Chartist growth stocks model portfolio

My passion with regard to the markets is identifying growth stocks trading on the Australian stock exchange, those with the potential to double in price over a period of months or years, and double again, given the right general market background.

This may come as a surprise to anyone who is not a first time reader, as my posts on the ASX 200 and other global stock indexes have been bearish most of the time since I started this site in April 2011. To explain, there is nothing I like better than trading and investing in a bull market. But there is nothing worse for my own financial health that I could have done than pretend we had a raging bull market on our hands, just because I wished it to be so, when plainly that has not been the case. So bearish I was, since early 2007, the message being (directed to myself) do not risk your savings going long in this market. Prior to early 2007, six months before the ASX 200 peaked, I had been a raging bull for several years. I try to keep my stance in line with both market conditions and my own personal investment goals, something that is not as simple as it sounds.

The big picture risks are now shifting toward the upside for stocks. Why? Firstly, the ASX 200 is pushing through trend line resistance, as shown in the chart below. Yes, there is resistance immediately overhead around the 4450 level. That is why I said the risks are shifting, not the risks have shifted. If the market clears 4450 and then 4500, clearly a run toward 5000 will be on the cards. 

Any other reasons for thinking the risks are shifting? Yes, influences from Chinese and US markets are looking increasingly bullish, though these reasons are secondary to the action of the ASX 200 itself. China has potential to bounce from a long term trend line test, and may have begun that bounce already. Also, over a century of history of the Dow Jones Industrial Average as depicted by the decennial pattern suggests that mid this year would have been a good time to buy US stocks, and recent action on the US market supports that view. 

So, what is the Avid Chartist growth stock model portfolio? That is best explained by an "in a nutshell" version of its structure and rules:
  1. Initial trading capital on 1st October 2012 is $100000, all in cash.
  2. Trades are long only on ASX traded stocks.
  3. Maximum risk to cash on any single trade is 1%
  4. Maximum total risk to cash is 10% if ASX 200 is trending up on weekly chart, 5% otherwise. Risk on open profits is not included in risk to cash. 
  5. Position size is restricted to a maximum 5% of capital, where capital equals cash plus open profits. Position size is rounded down to the nearest $1000. So with starting capital of 100K, initial position size is 5K, rising to 6K, then 7K etc as capital grows. 
  6. Entry criteria is simple. To be bought, a stock must be making new all time highs, or be developing a bullish pattern and trading within 20% of all time highs. There is no need to finesse entries any more than that, though on occasion I will do so.
  7. Stop loss is specified when trades are opened.
  8. Stop losses are trailed up. How? This is discretionary and differs for each stock based on its behaviour and characteristics. Initially the goal is to raise the stop loss to break even as soon as possible in such a way that the stock will still have enough "room to move" to catch any big move up over months or years.
  9. Discretionary portfolio stop loss and profit take can be applied if general market conditions warrant.
An important part of my trading process (as opposed to my trading plan) is the way I select candidate stocks, which I have not specified above, but will describe in due course.

Yes, I have used the word discretionary in the plan several times, and the entry criteria is not precise. This suits my personality, but may be a very good reason why the plan does not suit you.

For many traders a target return would be an essential part of a plan. I will take what the market gives. The focus is on managing risk, not daydreaming about returns.

Every trader needs to develop their own plan. 

At the close of trade today, the model portfolio opened positions in four stocks. I don't have time this evening to explain my entry and initial stop loss rationales for these positions, but will hopefully have time to do so in coming days. 

I will describe the management and performance of the model portfolio regularly going forward. 

For now, please find below the details of positions opened and charts of the stocks.

Any questions, please ask. 

ARP - ARB Corporation
Bought 514 @ 9.71
Initial SL 7.77 (for simplicity 20% below opening price)
Risk to Capital 1% 

Bought 645 @ 7.74
Initial SL 6.97 (for simplicity 10% below opening price)
Risk to Capital 0.5% 

Bought 109 @ 45.76
Initial SL 36.60 (for simplicity 20% below opening price)
Risk to Capital 1% 

TOX - Toxfree solutions
Bought 1858 @ 2.69
Initial SL 2.15 (for simplicity 20% below opening price)
Risk to Capital 1% 

This post is not trading or investment advice. Please read full disclaimer.