This article is for education purposes only, and not to be taken as advice to buy/sell. Please do your own due diligence before committing to any trade/investment.

“All the math you need in the stock market you get in the fourth grade.”

– Peter Lynch

Before all else, let’s set the context once again.

This series, just like all the other articles on this platform, is meant for educational purposes.

Which means, please do:

  • Your own due diligence
  • Adopt adequate risk management
  • Take responsibility for your trades

This series that we’re starting today is on Systematic Trading.

It probably comes as no surprise to you, since that is at the heart of what our community is about.

However, for those who have not heard of this term, or have had little to no exposure as to what our community does… Let’s just say it can get a little overwhelming (just like how most things are in the beginning).

 

systematic trading

What is Systematic Trading?

According to Wikipedia, systematic trading is defined as such:

“Systematic trading (also known as mechanical trading) is a way of defining trade goals, risk controls and rules that can make investment and trading decisions in a methodical way. Systematic trading includes both manual trading of systems, and full or partial automation using computers.”

In other words, systematic trading has rules, which result in you having precise clarity on your trade plans.

It’s not about feeling a certain way about the stock price and then acting upon those feelings.

It’s rooted in technical indicators which provide set-ups for entry and exit.

And there are rules on money management, including position-sizing.

So here’s the deal. Rather than trying to explain it in just paragraphs, we will look at different stocks and see how systematic trading can be applied on them.

In this case, we would get the help of the TradersGPS system to provide entry and exit signals. Since the system has both position and swing trading, I will take a look at the stock’s chart for both scenarios. The trading timeframe would be position daily and swing weekly, as these are longer-term trades that are suitable for beginner traders.

In terms of stock selection, each article will showcase 1 stock listed in the US (NASDAQ/NYSE), and 1 stock in another market (SGX/KLSE/HKSE/SZSE/SSE/BSE/NSE/JSX/SET). While there are rules as to how to select the strong stocks via TradersGPS, I will touch on that in a subsequent article.

If you’re ready for it, let’s kickstart this series with 2 well-known counters.

 

TSLA systematic trading

Tesla, Inc. (NASDAQ: TSLA)

1. About the company

“Tesla’s mission is to accelerate the world’s transition to sustainable energy.

Tesla was founded in 2003 by a group of engineers who wanted to prove that people didn’t need to compromise to drive electric – that electric vehicles can be better, quicker and more fun to drive than gasoline cars. Today, Tesla builds not only all-electric vehicles but also infinitely scalable clean energy generation and storage products. Tesla believes the faster the world stops relying on fossil fuels and moves towards a zero-emission future, the better.”

Source: Tesla’s corporate website

 

2. Position trading (daily)

TSLA position daily 15sep

Following the recent “reset” where the candlesticks turned from red to blue, came the first entry signal for long position on 22nd June. The trigger for that trade would be a breaking the high of $657.204. Subsequently, further entry signals were given on 2nd August, and most recently again on 31st August.

As for position-sizing, this would have been scaled-in according to a 50%, 30% and 20% allocation across these 3 trades.

The basis for these entry signals is the combination of the green arrows and the dark green bars on the Trend Impulse Factor (TIF), which indicates the strength of the trend.

Until a red candle appears, traders who have entered positions according to the above should continue to hold on to their long positions.

As for more aggressive traders, there is also the option to enter on a 20% allocation across 5 trades. This means that they would still be keeping a watch on TSLA for further entry signals.

 

3. Swing trading (weekly)

TSLA swing weekly 15sep

The last valid swing set-up which appeared for TSLA would be in early May. Set-up conditions include having the CCI crossing below -100, and the moving averages still sloping upwards. This is to indicate oversold conditions with the upward trend persisting.

Due to the entry trigger requiring a break of the high, this set-up would only be fulfilled 3 candles later (continue to mark the new high in the meantime).

Here, it is important to note that a stop-loss should be set according to the TradersGPS dynamic stop loss indicator, or below the low of the previous candle. In this case, the stop-loss would be around $540/share. This trade would have been a success as the stop-loss was not triggered since the stock continued moving upwards.

 

4. To trade position daily or swing weekly?

In both examples for position and swing trading, these would have been successful trades to carry out. If I had to choose a trade between the 2, I would prefer the swing trade as the entry price was already near the support level, thereby giving a good risk-to-reward ratio. Although I would be concerned about the slope of the moving averages, this is where it is important to have the stop-loss in place if the trade does go against me.

 

BABA systematic trading

Alibaba Group Holding Ltd (HKSE: 9988)

1. About the company

ALIBABA GROUP’S MISSION IS TO MAKE IT EASY TO DO BUSINESS ANYWHERE.

We enable businesses to transform the way they market, sell and operate and improve their efficiencies. We provide the technology infrastructure and marketing reach to help merchants, brands, retailers and other businesses to leverage the power of new technology to engage with their users and customers and operate in a more efficient way.

Our businesses are comprised of commerce, cloud computing, digital media and entertainment, and innovation initiatives. In addition, Ant Group, an unconsolidated related party, provides digital payment services and offers digital financial services to consumers and merchants and other businesses on our platforms. An ecosystem has developed around our platforms and businesses that consists of consumers, merchants, brands, retailers, third-party service providers, strategic alliance partners and other businesses.”

Source: Alibaba Group’s corporate website

 

2. Position trading (daily)

BABA position daily 15sep

Looking at BABA (9988)’s chart for the past year, it seems that the downtrend has persisted since then, with the stock making lower highs and lower lows.

Although it last attempted a breakout on 25th June, and the order would have been triggered after breaking the high on 28th June above $215/share, the candles turned red once more on 7th July, with a short signal appearing on 8th July.

This would lead to shorting trades being triggered on the 9th below $197/share. More short signals followed subsequently, which would lead traders to a profit at the stock’s current price around $154/share.

 

3. Swing trading (weekly)

BABA swing weekly 15sep

This would be a swing sell set-up that we are looking for – which is basically a reversal of the set-up for swing buy. First, identifying the set-up includes having moving averages sloping downwards and CCI above 100. These indicate overbought conditions amid a downtrend.

The recent candle which fulfills this criteria would be in late June, where the high price crossed beyond 20-week moving average, while still closing beneath the 40-week moving average. This trade would have been triggered in the following week, as prices broke below the low of $209.

Once again, in this case, the stop-loss would not have been triggered in this trade. Regardless of whether set according to the TradersGPS dynamic stop-loss indicator, or marking the high of $225, the stock has continued its downward move to date.

 

4. To trade position daily or swing weekly?

Similar to TSLA, both the position and swing trades would have been successful for BABA (9988). Between the 2, I would have preferred to go with the position trade. Given the sustained bearish momentum, the short signal would likely have been an indication of more room to the downside.

 

Conclusion

Hopefully this quick introduction of systematic trading on TSLA and BABA (9988) provides you with an understanding of how it works.

If it still seems confusing, that is completely understandable. The one takeaway that I would like you to have is that amongst other things, systematic trading provides clear rules for entry and exit.

I’m sure we can agree that having clarity in your trade plan allows you to take decisive action on your trades. Thereby also reducing anxiety and stress over indecisions, fears and regrets.

Anyway, this is just part 1 of this series. As we explore various stock charts, we should start to see patterns more clearly, and get a better sense of how this works.

After all, it’s focusing on the process which will eventually lead to results.

 

Swayed by emotions? Unsure when to take action? While discretionary trading is not bad, perhaps systematic trading is what works for you. Discover the intricacies of it as we journey along this series.

If you’d like to learn more about systematic trading to better time your trade entries, click the banner below:

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