My today’s post is for those individuals who are fairly aware of the stock market risks yet are not in hurry to make money by losing their capital.
Patience is the key!
Let me start with defining this strategy and how it works.
Essentially what you are doing is picking a fundamentally strong company with a reputed track record. buying the stock when it is trading below its 200 days moving average and when it is in an oversold zone and selling when it is trading above 200, 100, 50, and 20 days moving average when it is in an over brought zone.
You can also backtest this strategy with various stocks of your choice to be comfortable before jumping right into it. You also need to set a few ground rules while picking the stocks for this strategy.
Stock basket
This strategy will work with any stock but ensure you are not risking your hard-earned money on suspicious and high Beta scripts. My preference is always to choose the stocks which are part of the NIFTY50 and further the NIFTY100 Index. This would automatically give you the assurance or rather a shield that you aren’t picking unworthy script. Do note that there are many awesome stocks which are not part of this index but in Midcap and Smallcap and hence your fundamental research and knowledge of certain script will help you ace this strategy.
This is a two-part strategy where you apply fundamental and technicals together to get maximum benefit. I call this a short-term strategy hence anything below 1 year is short-term.
Part-I
Let me list the basic criteria for stock selection:
Prefer a LargeCap Stock.
Pick a low debt or debt-free company. Anything below 2.0 is acceptable.
Pick a company that has high promoter Holding. Promoter holding with 50% and above should be preferred.
Check QoQ and YoY Profit and Sales and see if it is an increasing trend. There are chances that profitability can take a hit due to various reasons (eg. Covid situation) but an increase in sales growth confirms that the company is going in the right direction.
Pick a company whose Return on Capital Employed (ROCE) is above 25% YoY. This shows the efficiency of the company and its management team's business acumen.
P.S: I could have also preferred to filter stocks with Price to Earnings Ratio (PE) but I have come to an agreement that good companies aren’t cheap anymore. Unless you are a market guru and know of a potentially cheap company which may skyrocket once you buy it. let me know too...
All the above ratios are available on a website named screener and you only need to apply filters and you are ready to go.
Part-II
The second part is going to the charts and apply the below technicals.
Open the selected stock with a 1-day candlestick pattern.
Plot 20, 50, 100, and 200 days moving average on the chart (SMA/EMA)
Plot RSI (Relative Strength Index) for the chosen stock and ensure the upper band is at 70 (overbought zone) and lower band is at 30 (over sold zone)
Now, to execute this strategy you just need to follow the below-mentioned thumb rule
Buy the stock when it is below RSI of 30 (oversold zone) and below all the moving averages and sell the stock when it is above RSI of 70 (over brought zone) and above all the moving averages.
Remember that both the conditions of moving average and RSI must be met when buying/selling for maximum gain. Also do read about the company before taking the buy call to ensure there are no red flags.
If you are into futures trading then you can capture both sides of the swing but I generally prefer going long than short selling.
I am sharing a few sample charts where this condition was met to show the effectiveness of this strategy.
Caveats
No strategy is bulletproof hence do note that the top stocks in our shortlist will not always hit lower and upper RSI zones as they tend to be less volatile and their movement as well will be mostly in between the zones. You will need to study the charts on regular basis to find that one stock on the given lucky day. Sometimes it may take many months for stock to reach certain highs and lows so patience is key.
I would like to conclude that on average, only 5-7% of retail investors actually make money in the stock market but with the right choice of stock selection, effective strategy, and by keeping your nerves in control you can surely be a winner.
P.S: The above strategy is of my personal view and this in no way guarantees sure shot returns. Remain cautious while trading in the stock market and do your own research.
Happy Investing!