Disclaimer

I’m not a SEBI registered investment advisor. Please make your investment/trading
decisions after consulting with your financial advisor. This document is for educational
purposes only.

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 PASSIVE STRATEGY FOR CASH-ONLY STOCKS

Who Is this for?

• Those having a minimum capital of 2 lacs, looking to grow the same with an infinitely
scalable strategy.
• Those who can’t trade full time due to their personal work, business, job. Only 15
minutes (9:15-9:30) of activity/attention required.
• Homemakers, students, retired personnel.
• Those trying to get out of middle class.
• Those having a working knowledge of smart phones and computers.

Problem in Buying Stocks without exit Plan

• For every multi bagger among the listed stocks, there are multiple stocks that
can erode your wealth. Investor’s judgement gets clouded with his initial
decision to buy and hold forever.
• Not having an exit plan actually makes the investor/trader add more money to
a losing position. The investor/trader never considers the possibility that the
stock could indeed drop significantly in value because he’s emotionally trapped
with the stock.
• You only need one big loser in your portfolio to neutralise the gains from the
rest of the stocks.
• Emotionless trading is the best way to make money in the long term, which
potential profits, or fear of missing out on a future up move.
• Having no rules causes emotional weakness.
• Missing out on other better opportunities.

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 Strategy logic and rules

Long Only System

Plot Exponential Moving Average of 13 period and 34 period on daily chart.

ENTRY

Filter - EMA13 crosses EMA34 from below

(In this figure, when the marked candle is formed, the 13 EMA crosses the 34 EMA from below.)

Buying condition – Place buying bid above previous day’s high. If on current day the stock
doesn’t cross previous day’s high, place a buying bid the next day above current day’s high.

(In this figure, when candle A is formed, the bullish crossover takes place. That is our initial filter. On the next day,
we place a buying stop-loss order above the high of candle A. However, the stock doesn’t reach that level as is
depicted by candle B. We repeat the process again next day. However, this time we place a buying bid above the
high of candle B, which is taken out by candle C and we enter the trade.)

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 EXIT
Filter – EMA 13 crosses EMA 34 from above.

(In this figure, when the marked candle is formed, the 13 EMA crosses the 34 EMA from
above.)

Exit condition – Place selling bid below previous day’s low. If on current day the stock
doesn’t fall below previous day’s low, place a selling bid the next day below current day’s
low.

(In this figure, when candle A is formed, the bearish crossover takes place. That is our initial filter. On
the next day, we place a selling stoploss order below the low of candle A. However, the stock doesn’t
reach that level as is depicted by candle B. We repeat the process again next day. However, this time
we place a selling bid below the low of candle B, which is taken out by candle C and we exit the
trade.)

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 Advantages of a long only system

• Shorting of cash stocks can only be done intraday. That would take away the gains
that you’d get from all the gap downs in your favour. Conversely, a way to benefit
from gap ups is to have positional longs in a cash stock. It makes sure you reap the
benefits of the gap ups, if any.
• A sideways choppy market could cause major draw downs to your account but in a
long-only system (or short-only for that matter), an exit would mean you’d be
sitting on cash waiting for the next opportunity.
• Sitting on cash is also a position in itself. It prevents you from having sleepless
nights in down trending periods like 2008.
• You’re only in a trade in an uptrend, you’d not be in a trade in a sideways or a
downwards market.

Capital allocation

• It’d be logical to keep a watch list of 20 stocks, with your initial capital divided into 20
parts to trade in each stock.
• Watch list tip - Since you have limited capital, you might not want to be trading too
many stocks and narrowing down your watch list to a select few liquid stocks. Even as
you grow your account in size, you could simply scale up your quantities in the same
stocks.
• That way, when you start, any individual stock would only hold maximum 5% of your
capital.
• Say you have a capital of 2 lac rupees, 5% of that is 10000 rupees. You should have a
watch list of 20 stocks for which you should have 10000 ready to either go long in or
stay out on cash.
• Let’s say you get long entry in stock A so you buy its shares worth rupees 10000. Now
it gives you an exit at 10% profit (exit worth 11000). So, the next time you enter the
same stock it should be with a capital worth 11000 rupees not 10000. This would
allow compounding to work.
• The reverse of this should be followed as well. If a stock is entered with 10000 rupees
and exited from with 9000 rupees, the next time you take a position; it should be
with the same 9000 rupees and not 10000 rupees.

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• The position sizing is such that even in extremely negative markets, the pain inflicted
on your open positions wouldn’t prove to be damaging since your allocation would
only be 5% per stock. This ensures that your capital and psychology both are
protected from a wild downward move.

(In this chart, at candle A, there’s a bearish crossover between EMA 13 and EMA 34, It takes you out of the
trade before the carnage that takes place 3 days later at candle B)

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 Benefits of a Long-only system

• The equity curve above represents your account size of 20000 rs. In a particular
stock.
• The major advantage of a long-only system with exit conditions is that in periods
where there’s no uptrend, you’d be sitting on cash and avoiding a drawdown.
• As depicted by the encircled parts, your account size stays constant as you sit out on
cash and wait for the best opportunity to re-enter the market.
• Not only does this prevent a drawdown but also makes sure that you have sufficient
resources to make the best use of favourable conditions.

Backtested reports for stocks

You can mail me at moneyoutofcontrol@gmail.com and request free back tested reports of
whichever stocks they wish to obtain.

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