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Stock world:
The strategy focuses on a group of highly liquid stocks. These stocks are typically selected based on market capitalization, average daily trading volume, and other liquidity metrics.
A common choice for this strategy might be the top 500 or 1,000 stocks by market capitalization in a given market.
However, there are no rules written in stone, so you can easily test anything you want, but keep in mind that stocks with low volume tend to have high slippage.
Entry rules:
Determining the trend: The strategy uses technical indicators to determine the direction of the trend. Common indicators may include moving averages, trend lines, or breakouts.
Momentum: The stock should be among the winners based on momentum during the review period.
Relative Strength: Stocks that show relative strength compared to the broader market are preferred. This can be measured using indicators such as the Relative Strength Index (RSI) or by ranking stocks based on their performance over a given period of time.
Breakouts: Entry signals are often based on price breakouts. For example, buying a stock when it breaks above its recent high.
Market Order: Is the market generally bullish or bearish? Most stocks rise with the tide, and vice versa. You don’t want to fight the market, so it can be helpful to use a market order filter. Below, we have included such a filter in our trading rules.
Determine the position size:
The strategy often uses a fixed fractional position size model, where a pre-determined percentage of the total trading capital is allocated to each trade.
The risk per trade is usually kept low, usually around 1-2% of the total trading capital.
Nick Rudge recommends adjusting position size based on the volatility of the stock. Less capital is allocated to volatile stocks than to low-volume stocks.
Risk management:
Stop Loss Orders: Each trade has a pre-defined stop loss level to limit potential losses. This stop loss level may be determined based on a percentage of the entry price or a volatility-based measure such as the Average True Range (ATR).
Trailing Stop Loss: As the trade moves in the right direction, trailing stop losses can be used to lock in profits. These trailing stop losses are adjusted based on the stock’s movement. The trailing stop loss can only be raised – not lowered.
Exit rules:
Profit Targets: Pre-defined profit targets can be set based on risk-reward ratios. For example, aiming for a reward that is 2-3 times the risk. However, we are not sure if Nick Radges uses profit targets – most likely not.
Reversal: Exits can also be triggered by trend reversal signals, such as moving average crossovers or breakouts in the opposite direction.
Time-Based Exit: In some cases, trades may be closed after a certain period of time regardless of the outcome to free up capital and reduce risk.
Weekly review:
The strategy involves reviewing potential trades and setups over the weekend. This allows for unemotional decisions and adherence to trading rules.
Implementation example
Here is a simplified example of how to implement a weekend trading strategy:
Definition of the universe:
Choose the top 500 stocks by market capitalization (e.g., S&P 500).
Entry signal:
Buy the stock if it closes above its 50-day high and is in the top 10% of stocks by relative strength over the past 3 months.
Determine the position size:
Allocate 10% of your total trading capital to each trade.
Stop loss:
Set your initial stop loss at 20% below your entry price (we don't recommend using a stop loss, but for some reason most traders insist on including it). We prefer to trade with smaller sizes and different strategies rather than using a stop loss.
Stop Tracker:
Use a trailing stop set at 20% below the highest close since entry. However, this may also depend on the market system (see our rules below).
Weekly review:
Check all new potential positions and points every weekend. Adjust stop loss points, close trades that reach stop loss or profit targets, and set new entry points.
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