There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.
Jack Schwager
When I entered the markets and started exploring my way to get to the holy-grail of the market, one of my friend suggested to approach the market through Fundamental analysis,other suggests, trading with Technicals is the best way as it is difficult to asses what happens to the stock over the next 3 or 5 years...
...other suggestions are
- trade options
- trade futures
- use RSI,MA
- use quants
- etc, etc.
Finally I decided to approach the market considering some Fundamentals like good ROE, low debt or good Interest Coverage ratio. With this my watchlist is ready. Now apply Technicals to enter and exit the trade.
My thought process to approach the markets like this is to cover the important aspects of both Fundamentals and Technicals.
Select good Fundamental company with the below parameters
- Market Cap > 2000 (relatively stable companies)
- ROE > 15% (3 year average and 5 year average)
- Debt to Equity < 0.55 (or reducing debt)
- Interest Coverage Ratio > 3 (important for high debt/Banking/Finance companies)
apply the filter on screener.in
Query:
Market Capitalization > 2000 AND
Average return on equity 3Years > 15 AND
(Debt to equity < 0.55 OR
Interest Coverage Ratio > 3)
The above fundamental params will present hundreds of stocks filtered from thousands.
The art-of-elimination is important in selection process.
Now let's apply some Technicals and filter stocks further...
52 Week Index
- Stock raising from 52 week low and retraced more than 40% of the fall.
Let's understand this with an example...
- Stock 52 week high : 1320
- Stock 52 week low : 780
Total points stock fell was 1320-780 = 540
40% retrace means 540*0.4 = 216
So, if the stock retraced 40% from low then the stock price would be
780 (low)+216 (40% retrace) = 996
In my experience, I observed that stocks raise to this 40% retracement point and take a decision to further move up or down.
Hence, it's important that we enter only one tranche (1/3 position size) at this point and wait for the stock to take a decision. If the stock falls more than 10%, Exit the position.
If the stock takes out the previous swing high after consolidation then take full position and trail stop based on your favorite indicator, moving average, super trend, RSI, MACD, etc, which ever you are comfortable with.
Return Over 3 Months
We discussed about importance of 3 Month (or a quarter time) on the stock price in Time Frame analysis article.
If the stock has moved at-least 15% or more in the last quarter it's a good sign that bulls are trying to take control of the stock.
Including the above discussed technical parameters to the query on screener.in
query:
Market Capitalization > 2000 AND
Average return on equity 3Years > 15 AND
Average return on equity 5Years > 15 AND
(Debt to equity < 0.55 OR
Interest Coverage Ratio > 3) AND
52w Index > 40 AND
Return over 3months > 15
Click Here to see the results.
now you will be presented with less than 100 stocks from 1000's out there. To further investigate and take a decision on which stock to invest is easy with the list.
For further reading, i would recommend Swing Trading, this would give you better picture about the price-action on the chart.
PS: Follow the price, ignore news and other noise. Price is the fact presented to you. Baki sab, bakwaas.