3 Best Entry Points: Forward Testing the Wealth Trading Strategy

Mastering the Art of Wealth Trading

Powerful Tools for Identifying Optimal Entry Points

We will conduct a forward performance test of Oliver Velez's Wealth Trading Strategy featured in his YouTube tutorial How to use the 50, 20, and 200 SMA All Together. Despite our limited understanding, testing the strategy is the only way to evaluate our trading plan. We may encounter losses, but we will also gain insights. As Oliver Velez said, "It is impossible to win until you become experienced and impossible to become experienced until after you have become the number one expert at losing."

1. Monthly Candlestick Chart
2. 20-Moving Average (simple, in blue color)
3. 50-Moving Average (simple, yellow color)
4. 200-Moving Average (simple, red color)

Forward performance testing

Forward testing is a method of evaluating a trading strategy or system using real-time or future data, rather than historical data. It involves applying the strategy to current market conditions and tracking its performance over time to see how well it performs in practice. This can help traders gain confidence in their strategy and identify any potential issues or areas for improvement before risking real money. Please refer to the article Backtesting and Forward Testing: The Importance of Correlation published by Investopedia.com for a more detailed discussion. 

Here are more details about our forward testing activity:

• Method of analysis: Technical Analysis

• Trading style: Swing Trading

• Holding period: 3 hours to 3 months

• Buying power: Php 15,000

• Stock bias: Ayala Land, Inc.

• Number of trades: 20

• Max daily loss: Php 300

3 Best entry points for ALI

• Buy color near the 20-Moving Average (simple)

• Buy color between 20- and 50-Moving Average (simple)

• Buy color near the 200-Moving Average (simple)

#1 Buy color near the 20-Moving Average (simple)

Based on the 20-MA performance, it would be wise to hold on to cash at the moment since ALI closed at Php 27.70, way below its 20-MA. Although we have identified the 5 best entry locations to buy ALI over the past 13 years, it is best to use the entry point when the 20-MA is rising. However, it is important to note that all these entry points occurred before the COVID-19 pandemic collapse.

#2 Buy color between 20- and 50-Moving Average (simple)

Based on our analysis of ALI's 20-MA and 50-MA performance, it would be wise to hold on to cash for now. ALI hasn't seen much trading activity in the zone between the 20-MA and 50-MA this year, indicating that it may not be the best entry point at the moment. However, in the past 13 years, we have identified the 5 best entry locations to buy ALI, all of which occurred before the pandemic. It's worth noting that these entry points were found in the zone between the rising 20-MA and rising 50-MA, which is considered the optimal entry point for many traders. Nonetheless, given the current market conditions, we believe that holding on to cash is the best course of action.

#3 Buy color near the 200-Moving Average (simple)

It appears that our decision to resume our online trading activities and use ALI to forward test some trading strategies for SMALLCOST may not be favorable at the moment, given our aim to promote stock market participation among traders with limited capital. However, we can still find hope in our Rule #3, which prioritizes the 200-MA.

Applying Rule #3 to assess the movement of ALI in relation to the 200-MA shows very a promising entry point in between Php 27.70 and Php 28.50 price zone. Are we going to win in this trade? Let's find out this week. But the more important question is what should be our stop-loss level. That is a question for risk-to-reward ratio to answer.

Risk-to-Reward Ratio Calculation for ALI:

• Entry point: Php 28

• Target Exit:  Php 30

• Stop-Loss level: Php 27

• Risk-to-Reward Ratio: 1:2

• Reward Protection: 75%

• Minimum exit point: Php 29.50

• Risk (Potential Loss): 28 - 27 = 1

• Reward (Potential Profit): 30 - 28 = 2

• Reward Protection: Php 2 * 75%

• Protected Reward: Php 1.5

• Minimum Exit Point: Php 29.50

Using the formula:

• Risk-to-Reward Ratio = (Potential Loss) / (Potential Profit)

• Risk-to-Reward Ratio = Php 1 / Php 2

• Risk-to-Reward Ratio = 1:2

Here we have a risk-to-reward ratio of 1:2, which means the potential profit is twice the size of the potential loss.

Benchmarking: BPI Trade Trader's Takedown Dated March 30, 2023

We are sharing verbatim the BPI Trade Trader's Takedown dated March 30, 2023, for its Stock Feature: ALI as our benchmark:

"We maintain our BUY rating on ALI and keep our PT of Php40/shr (+38% potential upside), which is based on a 50% discount to NAV. While expectations of prolonged elevated interest rates present downside risks to ALI's residential business (~50% of FY22 sales), we think this is more than priced-in by the 18.8% YoY decline of the stock compared to the 7.2% drop in the PCOMP over the same period. ALI still trades at a wide discount to historical levels (~64% discount to NAV and FY23F P/E of 18.3x vs. 5-year average PER of 32x) with current valuations ascribing zero value to its mall portfolio or a 45% discount to its land bank value, in our view. We believe that the valuation discount is unjustified, especially given ALI's: 1) position as the 2nd largest mall operator in the country, a clear beneficiary of the recovery in domestic consumption; and 2) vast land bank (~12k ha), the largest among the listed property firms."

What to expect

The Risk-to-Reward Ratio Calculation for ALI is a crucial step in determining the potential profit and loss in a trade. With an entry point of Php 28, a target exit of Php 30, and a stop-loss level of Php 27.00, the risk-to-reward ratio is 1:2, meaning the potential profit is twice the size of the potential loss. To further protect the potential profit, a reward protection of 75% is implemented, resulting in a protected reward of Php 1.5. The minimum exit point is Php 29.50. With this information, we can expect to make 20 trades within a 90-day period to test this trading strategy and aim for a minimum of 6% to 8% gain. It is important to note that while the risk-to-reward ratio is favorable, there is still a potential for losses, and proper risk management is crucial in any trading activity. 

Stay tuned for our updates as we aim to achieve a 60%-to-70%-win rate and master the art of wealth trading as well as become experts at losing responsibly.

SMALLCOST Blog is Back: 13-Year Pause Ends as Its Online Trading Restarts

Welcome Back to SMALLCOST: Our Journey to Restarting Online Trading

3 Important Lessons Learned from Our Previous Trading Experience

1. The Importance of Learning from Past Trading Experiences

Learning from past trading experiences is essential to improve one's trading skills and making better decisions in the future. By analyzing past trades, traders can identify patterns and tendencies in their behavior that might be hindering their success. They can also identify successful strategies that worked well in the past and apply them to future trades. Additionally, examining past trades can help traders identify their strengths and weaknesses and develop a plan to capitalize on their strengths while mitigating their weaknesses. Learning from past trading experiences is an ongoing process that requires reflection, analysis, and adaptation.

2. The Role of Luck in Trading

Luck in trading is often misunderstood as a random occurrence that cannot be controlled. However, the truth is that luck plays a crucial role in trading, but it is not entirely random. Rather, it is a byproduct of the consistent implementat

ion of a well-planned trading strategy. Luck comes from cultivating good trading habits and continuous learning to improve your trading decisions.

Successful traders understand that luck is not a stand-alone factor in trading. Instead, it is the result of discipline, analysis, and a willingness to learn from past mistakes. By sticking to a proven trading plan and avoiding impulsive decisions, traders increase their chances of success and reduce the impact of bad luck.

While luck can play a role in short-term trading results, it is long-term consistency that counts. By staying true to a trading strategy, traders can achieve consistent results and avoid being distracted by short-term fluctuations. Luck may help you catch a few good trades, but a well-crafted trading plan is what will sustain your trading career in the long run.
Our current 6% return on investment in online stock trading can be attributed purely to luck, as it is a case of a rising tide lifting all boats.

3. The Importance of Continued Learning

Continued learning is crucial in the field of online stock trading, as it enables traders to stay informed about market trends and developments. Without ongoing education, traders risk being left behind by new technology and strategies and may miss out on potential profits. Therefore, it is essential for traders to make learning a habit, and to stay up-to-date with the latest market news, trading techniques, and other relevant information. By doing so, traders can enhance their decision-making skills and make informed investment decisions that can ultimately lead to greater success in online stock trading.

Here are the 5 most valuable lessons that SMALLCOST has learned from a decade of experience:

• Luck can play a role in trading, but it is not a sustainable or reliable strategy. Traders must develop consistent and informed trading strategies to succeed in the long run.

• Saving and increasing trading capital is crucial for small traders to compete in online stock trading. This requires discipline and sacrifice, such as cutting unnecessary expenses and generating extra income.

• Continuous learning is essential for traders to stay informed about market trends, new technologies, and strategies.

• Consistent implementation of a trading strategy is critical for success in online stock trading. Traders must stick to their plans and not be swayed by emotions or external factors.

• Tracking and analyzing trading performance is crucial for traders to learn from their successes and failures, and to improve their strategies over time.

Restarting Our Online Trading Activities

Restarting our online trading activities can be an exciting and nerve-wracking experience. It is essential to take the time to review and update our trading strategies to ensure they are effective in the current market environment. Additionally, we should carefully evaluate our risk tolerance and set appropriate stop-loss levels to protect against significant losses. Adequate preparation and research can help traders navigate the market and increase their chances of success. It is important to approach trading with a level-headed and disciplined mindset, focusing on long-term success rather than short-term gains. By continuously learning and adapting to market conditions, traders can maximize their potential for profitability and achieve their trading goals.

Preparing to Restart: 5 Steps We Took

Here are 5 important steps that SMALLCOST took in preparing to restart our online trading activities:

• Conducted a thorough review: We reviewed our past trading activities and identified areas that needed improvement. We analyzed our past trades, assessed our risk management strategies, and studied market trends.

• Updated our knowledge: We recognized that the market is always changing and that it was important to keep up with new trends and technologies. We watched online tutorials, read books and articles, and more to update our knowledge.

• Set new goals: We established new trading goals that were specific, measurable, achievable, relevant, and time-bound (SMART). We made sure that our goals were aligned with our risk tolerance and our available trading capital.

• Developed a trading plan: We created a trading plan that outlined our entry and exit strategies, risk management rules, and other trading guidelines. We tested our plan using historical data and we will be making more adjustments as necessary as we continue forward testing our ideas.

• Increased our trading capital: We saved more money and reduced our unnecessary expenses to increase our trading capital. We transferred the funds to our trading account and made sure that we had enough margin to trade comfortably. This time around, we are planning to work with a small budget of Php10,000 to Php20,000. The funds will come from a combination of fresh capital and stocks that we still hold after liquidating some positions in the past.

By taking these steps, SMALLCOST was able to prepare hopefully effectively for our online trading activities, and we look forward to sharing our results with our readers in the future.

Changes and Improvements to Our Approach

 The top 3 changes and improvements to our approach would include the following:

• Increased emphasis on continuous learning: We recognized the importance of staying up-to-date with the latest trends, news, and strategies in trading. As a result, we plan to dedicate more time to learning and research to improve our trading skills and decision-making.

• Strategic approach to trading: We learned from our past experiences that trading based solely on luck is not a sustainable approach. To increase our chances of success, we will implement a more strategic approach to our trades, guided by a well-defined trading plan.

• Better financial management: We recognized the importance of having sufficient trading capital and being able to manage our finances better. To achieve this, we plan to save more, reduce unnecessary expenses, and generate additional income streams to increase our trading capital.

Our Performance Targets

Oliver Velez, a renowned stock trader and author, emphasizes that the performance targets of a starter stock trader should focus on consistency rather than profits. 

Win Rate

According to Oliver Velez, a beginner trader's primary goal should be to achieve a 60-70% win rate and a risk-to-reward ratio of 1:2. To us, this means that for every peso we risk, we should aim to earn two pesos in profit. By achieving this level of consistency in our trades, even beginner traders can build a strong foundation and gradually increase their profits over time.

Risk-To-Reward Ratio

The risk-to-reward ratio of 1:2 means that for every unit of risk taken, the trader aims to gain two units of reward. For example, if a trader risks Php 1,000 on a trade, their target reward should be at least Php 2,000. This ratio is used to help traders ensure that their potential gains outweigh their potential losses and to maintain a positive expectancy in their trading strategy over the long run. By using a risk-to-reward ratio of 1:2 or better, traders can potentially be profitable even if they have a winning percentage of less than 50%.

Here's the formula and an example computation for the risk-reward ratio we are using:

Formula:

Risk-to-Reward Ratio = (Potential Loss) / (Potential Profit) 

Example:

Let's say we are buying a stock at Php28 and we set our stop-loss at Php27.00. We also set a reward target of Php30. The potential profit is Php2 (Php 30 - Php 28), while the potential loss is Php 1 (Php28 - Php27).

Using the formula:

Risk-to-Reward Ratio = (Potential Loss) / (Potential Profit)

Risk-to-Reward Ratio = Php 1 / Php 2

Risk-to-Reward Ratio = 1:2

In this example, we have a risk-to-reward ratio of 1:2, which means the potential profit is twice the size of the potential loss.

More Online Trading Performance Measures

We are also setting other performance measures for our online trading activities, including:

• Investor Type: Aggressive Investor

• Trading Style: Swing Trader

• Holding Period: hours to days

• Stock Bias: Ayala Land, Inc. (ALI)

• Buying Power: Php 10,000 to Php 25,000

• Minimum Cumulative Profit: Php1,500.00

• Minimum Number of Trades: 200

• Minimum Time: 90 days

• Maximum Share Exposure: 500

For example, let's say we have a total trading capital of Php 25,000 and we want to invest in Ayala Land, Inc. (ALI). Let's imagine, the current market price of the stock is Php 25 per share. At this price, ALI trades at a board lot of 100 shares and a tick size of Php 0.05. 

If we have a maximum share exposure of 500, then we can only buy up to Php 12,500 worth of ALI stock equivalent to a net amount of Php12,536.88 including transaction cost.

To compute for the maximum number of shares we can buy, we can multiply the maximum share exposure of 500 shares by the current market price of Php 25 per share, which gives us Php 12,500 exposure.

Therefore, our maximum share exposure of 500 shares for ALI is around 50% of our total trading capital or buying power.

Daily Loss: Php 200

Continuing the above example, if we bought 500 shares of ALI at Php 25 per share for a total of Php12,536.88 including transaction cost, we should sell at a stop-loss of Php 24.90 to limit our daily loss to Php 200.

Tracking Our Progress: Recent Performance Results

In tracking our investments, we would use the method described in the related post Measuring Our Stock Trading Profit by The Starter Investor Blog. In summary:

Trading Profit = Previous Selling Level - New Buying Level

Analysis of Performance Results

In analyzing the performance results of our stock trading activities, we need to look beyond the profits or losses we have incurred. 

• It is important to examine our trading behavior, risk management, and decision-making processes. By keeping track of our trades and maintaining a trading journal, we can identify patterns and tendencies that may have contributed to our results. 

• We also need to evaluate the effectiveness of our trading strategy and make necessary adjustments to improve our performance. 

• Furthermore, it is crucial to maintain discipline and manage our emotions to avoid making impulsive and irrational decisions. By conducting a thorough analysis of our performance results, we can gain valuable insights and continuously improve our trading skills.

The Journey and the Road Ahead

Over the years, SMALLCOST has experienced the ups and downs of the stock market. From our early days of trading with a small capital, we have learned the importance of proper risk management, discipline, and continuous learning. 

Reflecting on Our Journey So Far

Reflecting on our journey so far, we have come a long way in terms of our understanding of the stock market and our trading performance. We have learned the importance of continuous learning, risk management, and discipline in our approach. Our journey has also highlighted the role of luck in trading and the importance of learning from past experiences. We have identified changes and improvements to our approach and set performance targets to guide our trading activities. Moving forward, we remain committed to our trading goals and confident in our ability to navigate the challenges ahead.

The Road Ahead: Join Us on Our Journey

Looking ahead, we are excited to continue our journey in the stock market. We know that there will be challenges and risks along the way, but we are committed to applying the lessons we have learned and improving our trading strategies. We will also continue to share our experiences and insights through our blog, hoping to inspire and help others who are also on their journey to financial freedom. So join us, as we navigate the ups and downs of the stock market and work towards achieving our goals.

Connecting with AyalaLand's Vision: Our First Stockholders Meeting Experience

A Small Capital Stockholder's Insight into Ayala Land's Operations

As a small capital stockholder, attending our first AyalaLand stockholders meeting was a delightful experience. The event was held at InterContinental Manila on April 14, 2010. 

AyalaLand Annual Stockholders' Meeting Venue

AyalaLand Annual Stockholders' Meeting Room

Annual stockholders' meeting tokens

Upon registration, we received a tag, a copy of the 2009 annual report, a meal stub, and a meal box for the event. We were thrilled to be personally present with the majority stockholders of the company. 

 

AyalaLand Annual Stockholders Meeting Tag

The Notice of Meeting with the Annual Report CD

The Meal Stub

The Meal Box

The Meal

The USB Stick

Insight into the company's future plans and current projects

It was a rare opportunity to get an insight into the company's future plans and current projects. The meeting's agenda included a review of the previous year's performance and the election of new directors.

 

AyalaLand Annual Report 2009

During the meeting, we learned about Ayala Land's various residential and commercial projects, including the expansion of Ayala Center in Cebu and development of Vermosa in Cavite. We also heard about the company's commitment to sustainable development and its initiatives to reduce its carbon footprint. 

Engagement and discussion among the stockholders

It was fascinating to witness the level of engagement and discussion among the stockholders. The meeting was an excellent opportunity for us being a small capital stockholder to feel connected to the company's operations and decision-making processes. 

AyalaLand Board of Directors and Officers

Unforgettable experience

Attending the AyalaLand stockholders' meeting was truly an unforgettable experience. It provided an opportunity to gain insight into the company's vision and future plans. Looking back, it's a pleasure to reminisce about our experience 13 years and 1 month later. With an investment of under Php10,000, we were able to meet exceptional individuals and hear brilliant ideas. Overall, it was an invaluable experience.