TWO PERCENT GOAL TO FINANCIAL INDEPENDENCE

Rule #1

Invest only in the 500 largest cap stocks on the New York Stock Exchange aka the S&P 500.

You should only be looking at companies within the S&P 500.  These are companies you know.  They are well established companies making real products and real profits.  These are companies like Home Depot, Pfizer, Exxon, Johnson & Johnson etc.  What is also very important about trading these companies is that they are all widely traded and it is very easy to enter and exit a position.

Rule #2

Look at 50 Day/200 Day Moving Averages

After looking at the market from a macro perspective, look at individual companies. When going long on a stock, the 50-day moving average MUST be above the 200-day moving average.  NO EXCEPTIONS You want the stock to be in a climbing mode and you want to ride that trend.  

• In the above chart for IBM the blue line represents the 50-day moving average and the red line is the 200-day moving average. When buying a stock, the 50-day average must be above the 200-day average on the day of purchase.

Rule #3

Look for an oversold Relative Strength Index (RSI) combined with a confirming 50-day/200-day moving average

If the 50 day average is above the 200 day average, the stock is in a long term bullish mode.  Look for the RSI to be coming out of oversold territory (ie shaded area below 30 and rising above 30).  You now have a short term signal and a long term signal saying the same thing.  The short term price is depressed but long term it is still bullish.  Buy low in a bullish trend.

Rule #4

Look for a confirming MACD signal

The MACD (Moving Average Convergence Divergence) represents an exponential moving average.  The chart is composed of two lines.  A black line which represents a shorter and faster moving average while the red line is a slower, longer moving average.  You want to see the black line at least flattening, but ideally changing direction.  This indicates the chart is about to change direction too.

 Rule #5

Use Stop Losses to Minimize Losses and Maximize Gains

• • Our ultimate goal is to double our money each year.  We break that down into smaller bites by aiming for a  2% return per week by swing trading.  No method is 100% guaranteed.  There will be times when we are wrong.  In order to protect yourself, after buying the stock, immediately put in a stop loss that is 3% below the settlement price. If you buy a stock at $100, your stop loss should be set at $97. This will minimize losses for those times the stock did not do what we thought it would.

  • Use stop losses to maximize gains as well. By using stop losses you can also ride the wave and make more than your 2% goal. Again, let’s say you entered a trade at $100. Your goal is $102. Let’s say in three days the stock surpassed your 2% goal and closed at $102.75. You set your stop loss at $102 to guarantee a 2% return. Now let’s say the intra-day low price the next day only went down to $102.50. Your stop loss order was not filled. GREAT.

  • Revise your stop loss to $102.49. Let’s say the stock is climbing and the next day the intra-day low was $102.75. EVEN BETTER. You revise your stop loss to $102.74. Each day you keep revising your stop loss order so that the trigger price is one penny lower than the previous intra-day low.

  • You repeat this process daily. Sooner or later there will be a down day and your stop loss order will be filled. You will have taken advantage of a major upswing while still guaranteeing your minimum goal.

Rule #6

Use Limit Orders when buying a stock

In order to maximize profit and minimze loss, your entry point is crucial.  When you choose to buy a stock make sure it is a limit order and not just a market order.  A market order fills your order at the going makret price while a limit order is a market order up to your limit.  For example if want to buy a stock at $100 a share and you place your order before the market opens and the market opens with the stock listed at $110 a share, your order would be filled at $110 per share.  I suggest using a limit order that is 1% above the closing price.  So if the market closes at $100 and you place your limit order at $101, if the makret opens at $110 a share your order would not be filled.  If you cannot get your order filled at the price you want, move on.  There is always another buying opportunity.

Rule #7

Go Short Too.

• • This process works for shorting stocks as well.  Everything is reversed.  The 50-day average is below the 200-day average.  The RSI has to be in overbought territory.  (The shaded portion above 70) and has to have fallen below 70.  The black MACD line needs to flatten or change direction.  Short the stock that day. Don’t forget to use a limit order that is 1% below the previous day’s closing price.  Look for a 2% drop as that is your goal.  Use a stop gain order to lock in profits or minimize losses.

Rule #8

Diversify

As the saying goes, do not put all of your eggs in one basket.  I strongly recommend you do not put more than 10% of your portfolio on one stock.  You can diversify even more by not putting more than 5% of your portfolio on one position but you could be watching 20 stocks at one time and that could be overwhelming for some.  By diversifying, any losing positions will have a minimal impact on your entire portfolio.

Rule #9

Consider Leverage

Buying your stocks on margin will drastically increase your returns while diversity minimizes risk. If you have a $100,000 portfolio, a 10% diversity factor means you would never put more than $10,000 in one stock purchase. By using a 3% stop loss, you are risking a $300 loss. If you bought this on 3x margin, you would be risking a $900 loss. A $900 loss on a $100,000 portfolio is less than a 1% loss of the entire portfolio and certainly within guidelines for swing trading.

If buying on margin is still outside of your risk tolerances, don’t do it. Try these strategies without buying on margin until you gain confidence in the program and then ease into margin slowly.

Rule #10

Repeat

A 2% gain doesn’t sound like much but if you can do it every week, you will generate a great annual return with very little risk. This method is not flashy; it’s not sexy; it’s boring, and it works.