For many years I am doing my experiments with trading and investment strategies. Like others, I also looked for a strategy that is simple and money-making. Then I read the book #CASHTAGS by Vishal and Meghana Malkan. I got The Moving Average (MA) and Relative Strength Index (RSI) System. I can say without any confusion that this is the best strategy for a beginner investor. Let me discuss this strategy in detail with you.
The group of trend-following systems includes this system. As a result, this strategy follows an existing market trend and maintains a trade until a signal indicates otherwise. Instead of making predictions, we simply follow the market and the system.
Tools for the Best Strategy for a Beginner Investor
- 14-period Relative Strength Index (RSI)
- 20-period Simple Moving Average
This technique works best with stocks that have a high market capitalization, or those that trade on the Indian Stock Exchange for more than INR 10,000 crores ($1.5 billion) (this parameter could differ in other countries). Large-cap stocks are the general term used to describe these. Stocks are typically categorized as large cap, mid cap, or small cap. The market capitalization of a corporation is determined by multiplying the total number of outstanding shares by the share price.
Systems vary depending on the kinds of instruments they are tuned to operate best on, such as stocks (big, mid, or small size), indices, commodities, or currencies. This is because different types of people trade different instruments, each of which has its own movements and behaviors on the exchange.
The strategy works best when applied to weekly charts, which results in positional trades. This makes it simple for those who desire to trade while pursuing their current career to do so.
Rules for the Best Strategy for a Beginner Investor
The following are the trading guidelines for this system:
- Buy when the RSI on the weekly chart crosses the 60 mark on the upside. Only when the markets close at the end of the week is this indicated. As a result, the trade could only start at the starting price of the first trading day of the week after that, which is Monday.
- The 20-period moving average on the downside must be broken or breached for the trade to be exited. This will serve as your trade’s stop. As soon as you start the transaction, you are aware of the moving average value. As a result, you will set the stop level accordingly (or give the command to set it).
Using the two trading parameters, we can now determine the price of admission and stop level.
We can determine how many shares will be traded based on the system. This was covered in the risk management chapter. By applying the risk management formula, where your risk in each trade is 1% of your capital, you can determine the number of shares to be traded.
Example of the Moving Average (MA) and Relative Strength Index (RSI) System
Figure 1: Chart for Bajaj Auto Limited
Look at the Bajaj Auto Limited chart below. RSI surpassed 60 for the week ending March 27, 2009. 312.20 is the weekly closing price (entry price). The value of the weekly moving average is 222.70. (stop loss level). We now determine how many shares we must purchase.
Considering that we have INR 10,000 as our capital (USD 14,925). A 1% trade-by-trade risk is INR 10,000. (USD 149.25).
- Entry fee: 312 Rupees
- Rs. 222 is the stop loss price.
- Per-share risk 90
- 10,000 Rupees per trade in risk
- Risk per trade plus risk per share equals 111.
- In accordance with our risk methodology, we are able to purchase 111 shares.
To buy 111 shares of Bajaj Auto Limited at the present market price, you will thus phone your broker on Monday morning. (Note: In this case, we’re assuming that the stock will open at roughly the same level as it did on Friday. The number of shares should be determined by substituting the opening price in the calculation for whether it opens lower or higher.
The stop will then be set at the moving average level, which for the entry week is 222.70. Because you are using a weekly chart, this stop would remain the same for the remainder of the week. Every week, the stop level would change. As a result, you will continue to adjust the stop level in accordance with changes in the moving average value while you are still in the trade. Until the day it causes the stop and you are no longer in the position, you will continue to do so. You can see from this example that the trade was active up until December 2010, when the exit signal was sent at 1483.
Let’s perform the analysis in detail:
- Entry cost: $312
- Price at Exit 1483
- Gains per share were 1171.
- 111 swapped units
- Total revenue of INR 129,981 (USD 1,940)
Take note that you had no idea how much the deal would move when you first entered it. Simply keeping an eye on the moving average value as your exit level in the event that it is triggered was all that was required.
All that is required is that:
- You purchase a large-cap stock
- In keeping with the rule, you enter when the stock is trending upward.
- Utilizing the formula, you manage the danger.
These checkpoints will make sure that everything is OK so that you may use the system to your advantage. However, keep in mind that not all deals may be advantageous to you. While some might, others might not. This technique allows you to continuously trade numerous equities at once. You might make some trades that lead to massive trends, others that lead to modest trends, some that get stopped out, and still others. Nevertheless, we are always conscious of our 1% risk. As a result, you can manage your nervousness and concentrate on running the system perfectly.
Below are a few instances of the best strategy for a beginner investor
Figure 2: Weekly Chart for HDFC Bank Limited
In the HDFC Bank chart shown above, the system indicated a March 2014 entry. In August, the stop loss was activated when the price made contact with the moving average value. However, the algorithm promptly provided a buy signal the next week for a trade that ran until April 2015.
Figure 3: Weekly Chart for Britannia Industries Limited
The aforementioned Britannia Industries Limited chart displays a number of entries and departures. Trading starts in June 2014. Price makes two touches on the moving average line, setting off the stop levels and quickly signaling subsequent entries.
I suggest you read the book #CASHTAGS by Vishal and Meghana Malkan to get more ideas about the best strategy for a beginner investor. You can learn the Moving Average (MA) and Relative Strength Index (RSI) System in detail.
This system uses a straightforward methodology with just two rules. Being a trend-following system, it is incapable of making predictions. This makes it very easy to understand. Instead of profit, the process is the main focus.
Pyramiding in accordance with extra rules allows one to delve deeper into the same system, although that is outside the purview of this work. The goal is to keep things straight so that laypeople may use these two basic rules to understand trading on their own.