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Training for success – when to entry in a new stock position?

One of my goals is to learn when to entry into a new position so the [tag]trade[/tag] will be successful. My past trades were about jumping into a new position without knowing why I was doing it. After I bought a new stock I hoped it would grow. Sometimes it did, sometimes it didn’t. Mostly it didn’t.

I read several books and tried to find information on this topic on Internet and mostly I found strategies showing [tag]trend[/tag]s with many [tag]oscillator[/tag]s providing signals to [tag]buy or sell[/tag] and most of the [tag]chart[/tag]s in such books already showed what happened next to prove that the [tag]strategy[/tag] indicated was the best. Whenever I tried it I failed. It was because no one knows what would happen next. We will never be able to say where the [tag]market[/tag] will go. Back-testing a strategy with a knowledge of the future movement is foolish and unfortunately almost every book or a course is based on it.

So this didn’t work for me and I still wanted to find a [tag]strategy[/tag] which would give me [tag]high probability[/tag] of success. I wanted a system providing [tag]reliable signals[/tag] so I can automate my trading as much as possible; eliminate losing trades which would be obvious if the homework is done properly.

Recently I was studying oscillators and trying to use them in my favor. In my previous post I mentioned [tag]ADX oscillator[/tag] which would help me to determine the [tag]strength of the trend[/tag]. As I said it doesn’t care where the trend goes, whether it is [tag]bullish or bearish[/tag], it just tell me how strong the trend is. It is considered that the value above 20 signals building a [tag]strong trend[/tag] and everything above is considered a strong trend. Some traders use 25 to consider the trend established. With ADX mostly you can get [tag]Directional movement oscillator[/tag]. In this case when +DI line crosses over -DI it may be considered as a buy signal and that the price will grow up as long as +DI stays above -DI.
However this didn’t work either. When looking at historical data, there were too many [tag]false signals[/tag] and [tag]whipsaw trends[/tag] that commissions would kill me if trading based on Directional movement.

So what oscillator would be providing me with best results? I tried [tag]MACD[/tag]. It didn’t work as I wished. Then I tried [tag]StochasticRSI[/tag] oscillator and tried to play with the movement [tag]divergence[/tag] versus price movement. This approach seems to be working, however it still is not ideal. When looking on the chart I am also receiving too many divergences so buying stocks whenever the oscillator’s fast line crosses above slow line in [tag]over-sold (OS) zone[/tag] and selling whenever it crosses down in [tag]over-bought (OB) zone[/tag] would wipe-out my [tag]portfolio[/tag] pretty quickly.

I was thinking how I can eliminate these zig-zag trends and filter them as much as I get only true [tag]reversal signals[/tag] which may indicate my [tag]entry point[/tag]s. I tried to play with settings of the oscillator, but it didn’t work either. When I made the oscillator slower (by extending the period of past data taken into account) it was too slow and provided me with signals either too late or too early and it didn’t eliminate those false signals at all. Then I tried one more thing which seemed to me the best so far. I looked at weekly chart and compared it with daily chart. The result I got was interesting and may be working well. I am testing it during these days and will see later what true results this strategy gives me.

To see what I am doing, let’s take a look at a new position I opened today (in my [tag]hypothetical portfolio[/tag], of course). Also I will show you step by step, how I am evaluating new stock positions so far.

Yesterday a new stock appeared on my screener’s list. It was Hansen Natural Corporation (HANS) / Beverage industry:

I typically check couple more [tag]fundamental data[/tag], to see how strong the company is. Mostly my [tag]screener[/tag] already does this for me, but I like to review it anyway:

  1. I check [tag]P/E[/tag] and I want as high as possible (value investors will probably look at the very opposite). HANS has 35.35 P/E while the [tag]industry group[/tag] only 18.22. This is good for me and this is what I want to see.
  2. I check [tag]P/S ratio[/tag] and my stock has 3.71 while the industry only 2.39, which is also OK for me. Again value investors may be looking for opposite numbers.
  3. I check [tag]PEG ratio[/tag], Hansen has 2.93 while the industry only 2.24. on the entire scale all above numbers are within #3 range which indicates strong results (for scaling I am using [tag]TD Ameritrade[/tag] Research tools which gives me the scaling opportunity).
  4. Then I check [tag]Gross Profit, Net Profit and Operating Margins[/tag], all are higher or at the same level as the industry.
  5. Then I check [tag]EPS[/tag], Hanses is at 49.89% while the industry only at 0.29%. Also good sign for me.
  6. I check the entire industry and it is among first 5 sectors, which is good (growth at 5.86%)

After this quick review I am satisfied with the number so I open the chart:

Hansen Natural Corp (HANS)
Enlarge the chart.

When I take a look at this chart it is already trending so when would be the best [tag]time to buy[/tag]? If I buy just without any further study I may be buying at the end of the trend. There is one positive thing I can determine right away. ADX is at 26.25 level which indicates strong trend. It has an up-trending direction. Also a good sign. But it doesn’t say anything about when to entry.

As I wrote above I switch to [tag]weekly chart[/tag] and the story looks different a bit:

Hansen Natural Corp (HANS)

I tagged divergences on a weekly chart with magenta lines and indicated trends of the price as well as the StochasticRSI oscillator. As you can see there was a moment when the price was growing while the oscillator went the opposite direction (circled area). When the oscillator crossed over near the OS zone I marked this with a green line. This is my divergence in momentum of the trend I was looking for. Since then the trend is confirmed. The oscillator is at the same direction as well as the stock price and now I can switch back into a daily chart to seek entry points within this period.

Hansen Natural Corp (HANS)

The green line indicates the divergence I marked on the weekly chart. Since then I can identify three daily divergences. I missed first two entry points, however ADX at that time was weak. The third crossover seems ideal. ADX is above 25 line and seems to be growing. I entered a new virtual position the next day and lets see how this strategy will work (or won’t). The only risk I can see here is when looking on the weekly chart, the oscillator is entering OB zone and may turn down. This may reduce chances to make some money.

I bought 13 HANS @ $43.10 today in my virtual account.

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