How to develop position trading strategy? | stockbee

2/03/2011

How to develop position trading strategy?

Reproduced from members site....



The key edge required for position trading is ability to identify right stock that will likely go up for next year or two.

Momentum is primarily a 1 to 2 year phenomenon and most momentum stocks will only show momentum for six to 12 month. Very few stocks show multi year momentum. As a result momentum alone is not a good basis for selecting stocks for long term holding period but is good for 3 to 12 month hold periods.

But using momentum in contrarian way is good for position traders. What do momentum studies show. Long term momentum is mean reverting. Or in other words momentum of say 3 years is likely to lead to reversal. This works on both long and short side.

That brings us to neglected stocks. a stock that has negative momentum for 2 to 3 year is an ideal candidate for contrarian position trader. If such stock changes its business situation or enters growth phrase then it can be good position trade.

This kind of situation is a turnaround growth story and this is one area where position traders can find good ideas.

Every year you will find plenty of turnaround stocks that make big moves once they align their business with new market circumstances. This is a good edge building opportunity for position traders. This is what I am currently studying as part of my own longer term trading plan.

When it comes to turnaround kind of position plays it is best to focus on big stocks for this as small company turnaround can be short term phenomenon and may not last long.

Ideal turnaround kind of situation is on a business with billion dollar plus revenue. That requirement cuts off tradable universe by a lot.

To find turnaround kind of position trades you need a very good understanding of business and its balance sheet and its industry. Which means in practical term using Warren Buffett kind of approach "only focus on businesses you can understand". That reduces your universe further.

After that it is a process oriented approach of scanning for these kind of stocks and analysing them and buying them at right time...

One simple way to do this is using Episodic Pivots method and focusing on billion dollar plus revenue turnaround stories with 2 year plus negative momentum or sideways move.

The other way to find these kind of plays is using Stockbee Power Breakout scan and focus on 1 billion plus revenue and 2 year plus negative momentum.

All in all "Contrarian Turnaround Plays" is one of the ways to position trade...

We will look at more ways to do this in next series of posts....

2 comments:

hef said...

A method I use that seems to fit some of your points is to look at stocks held by the top value managers such as Bruce Berkowicz in his Fairholme fund. CHKP had negative momentum for years but broke out two years ago. It has just over 1B in revenue.

Pradeep Bonde said...

That is a good way to do it.