KPL Swing (breakout trading system)

The KPLSwing indicator is a simple trend following mechanical trading system which automates the entry and exit.

The trading system is extremely simple and easy to use and removes emotions from trading.

The trading or investing logic is simple.... buy on close above 20 days high and sell on close below 20 days low.

No targets are given as profits are unknown and is whatever the market gives. Losses are limited via position sizing.

Caveat: this indicator works best with indices and highly liquid stocks. It is not recommended for stocks with poor liquidity (for that matter, any indicator).

Basic logic/ concept

When any stock has to rally, it has to cross some levels. This can be prior resistance, last week's or month's highs etc etc. Here I have chosen 20 days high as the reference level. Why 20 days? Because there are 20 trading days in a month.

You can of course choose some other number like 30 or 55 etc. The concept remains the same.

Now the outcome of any trade is random so any trade has a 50% chance of succeding. This holds true for any system and statistically speaking, over a large number of trades (a million?), the success will veer towards 50%.

By same logic, beware of any system or analyst who claims an exceptionally high success rate!

So how is money made?

First you need to understand why people lose money. There are only 2 reasons (a) trading beyond one's capacity and (b) holding to loss making positions for long time while 'booking profits' urgently in winning positions.

Put differently, to make money, you need to (a) limit the max loss in any trade to under 1% of your trading capital and (b) follow strict stoplosses and trail profits where trade is in your favour.

If you cannot do the above, then you will better off doing something else in life.

About whipsaws

All indicators give whipsaws and the KPLSwing indicator is no exception. But it is easy to know when a signal is likely to generate a whipsaw.

The first warning will be where the stock is trading in a small range for a long time. Here it is possible to get a buy signal today followed by a sell signal in next few days.

The second is where a buy signal is generated near a known/ significant resistance.

Ditto for the sell side.

Now the indicator in action - same stock, different charts... 4-5 years

Previous - Next

Installing the indicator:

Stoploss and Exit Strategy (delivery):

The kplswing indicator has no target because you can never know with certainity if a stock will give 100, 200 or 500% return in a year. But by staying in a trade as long as possible, you vastly improve the chances of atleast capturing a significant percentage of the big move.

Initial stoploss: Min 10% from entry price or recent swing low (long positions) or low of signal bar (tight, can lead to whipsaws).

Exit strategy:

If you do not have Amibroker:

Risk management / Position sizing - How much quantity to buy?

This is the most neglected aspect of trading and the reason why most people lose money on a regular basis.

In the stock market, everyone likes to know how much money they can make. No one asks how much they can lose.

So it makes sense you predefine your loss - this will help manage a trade. It does not matter if your trades are wrong.

Half your trades are anyway bound to fail (statistically speaking) so following this simple rule will automatically limit losses and help you stay in the market.

If you cannot quantify the loss before taking a trade, stay away from stock markets and do something else.

Position sizing answers the question: how much quantity should you trade.

Quantity to buy = (1% of trading capital) / (Purchase Price - Stoploss) .

Eg. Assume an initial trading capital of Rs.100,000/- and a risk per trade of 1% or Rs.1,000/-. You want to buy a stock trading at Rs.100/- with a stoploss Rs.90.

The quantity you should buy is 1000/(100-90) = 100 shares. You are investing Rs.10,000/- and if your stoploss gets hit, your maximum loss will be Rs.1.000/-.

Let's assume your stoploss gets hit.

You are now left with Rs.99,000/- and for the next trade, your loss per trade is Rs.990/-.

In above example, say the stoploss is Rs.95. The quantity you should buy is 990/(100-95) = 180 shares. You are now investing Rs.18,000/- and if your stoploss gets hit, your maximum loss is still Rs.990/-.

The capital for the next trade is 99,000-990=98,010/-. Note that your capital is reducing but the rate of reduction will also reduce.

It is obvious that this simple exercise will ensure that you still stay in the game and have a good chance of a profitable trade.

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