Introduction
Every successful trader has a plan, and for us, the foundation of that plan comes from Oliver Velez’s 8-step strategy. While we are still learning and evolving, we’ve taken the core principles of his approach and adapted them to suit our goals and trading style. In this post, we’ll walk you through how we are building our plan, the lessons we’ve learned, and why adapting an existing strategy can be a great starting point for any trader.
This post specifically focuses on our stock trading activities, which involve short-term buying and selling of stocks for profit. It is distinct from our stock investing activities, which are covered in our "Investing in Stocks" series, where we explore long-term investment strategies and value-based stock picking.
Since we have not enrolled in any of Oliver Velez’s programs, what we share here is purely our personal understanding of his principles based on publicly available content, including his videos and talks. We fully acknowledge that we may not have a perfect grasp of his ideas and their nuances, but we believe we’ve captured the essence of his concepts reasonably well. Our interpretation serves as the foundation for the trading plan we are developing, and we're excited to refine it further as we gain more experience and insights.
Our Main Tools
For the purposes of our trading plan, we have decided to use the following key tools to guide our trades and enhance our ability to identify high-probability setups:
Daily Time Frame for Candlestick Chart
The daily time frame provides a more comprehensive view of market trends compared to lower time frames, helping us filter out short-term noise. This broader perspective allows us to focus on significant price movements and key trend reversals, ensuring that our entries and exits are based on meaningful market action rather than minor fluctuations.20-Day Moving Average (20MA)
The 20-day moving average is a key tool in our strategy, serving as a dynamic support or resistance level. We use the 20MA to identify entry opportunities, such as the "20ma Halt Buy", which occurs when the price pauses near the 20MA before resuming its upward trend. This tool helps us align our trades with short-term momentum while maintaining proper risk management.200-Day Moving Average (200MA)
The 200-day moving average acts as a long-term trend indicator, helping us determine the broader market direction. By ensuring that our trades are in line with the 200MA, we can avoid trading against the dominant trend, thereby increasing the likelihood of success. This moving average is also useful for identifying major support or resistance levels, which can influence price action over extended periods.
By combining the daily time frame with the 20MA and 200MA, we aim to create a trading approach that is both flexible and disciplined, ensuring that our trades are well-supported by both short-term momentum and long-term trends.
8 Steps of Our Trading Plan
Some of Oliver Velez's videos that we examined to adapt his trading strategy include:
- Do You Know The 8 Steps to Improve Your Trading? Find Out Here 2024
- Simple 3 Steps Formula to Stop Losing | Do This RIGHT Now!!!
- Income Trading with the 20SMA | How To Make Money in the Markets Daily
- The Most Reliable Strategy of My Trading Arsenal
- How To Create Generational Wealth
- 3 Keys To Become A Master In The World Of Professional Trading
- The 20 Minute Trader | Oliver Velez
- Intra Day Trading Or Long Term Trading? // How To Reach The Highest Highs Playing Both
These videos provide a wealth of insight into his approach, from his precise entry and exit strategies to his disciplined risk management principles. Each video added valuable layers to our understanding of his methods, which we’ve synthesized into a practical plan tailored to our personal trading style.
At the core of the trading plan is Oliver Velez’s 8-Step Trading Formula. The formula is a structured approach that ensures discipline and consistency, covering every stage of a trade. The 8 steps are:
- State – Assessing the market's condition and identifying its current phase.
- Position – Finding the most advantageous position based on the market’s state.
- Power – Determining whether the setup has strong momentum or clear direction.
- Entry – Identifying the optimal moment to enter the trade.
- Stop – Establishing a predefined point to exit the trade if the market moves against you.
- Color Change – Observing price action for signals of potential reversal or trend continuation.
- Profit Take – Locking in profits at predetermined levels.
- Let It Ride – Allowing a portion of the trade to run and maximize gains during a strong trend.
In this post, we’ll dive into each of these steps in detail, exploring how we’ve adapted them to create a personalized trading strategy. By building on the foundational principles shared by Oliver Velez, we aim to develop a strategy that aligns with our trading goals, risk tolerance, and market perspective.
Let’s explore how each step has been integrated into my trading plan and why these principles are so crucial for long-term success in the markets.
Step 1: State
THE BELL SHAPE CURVE: In the context of Oliver Velez's trading strategy, the first step, "State," refers to assessing the market's current phase or condition. As depicted in the following image, markets operate within a continuous full cycle that consists of four key parts:
- Up – The market is in an upward trajectory, characterized by rising prices and bullish sentiment. During this phase, traders often look for opportunities to enter long positions, capitalizing on the momentum.
- Top – This phase represents the peak of the cycle. Momentum slows, and price action becomes indecisive. It is a critical point where traders need to watch for signs of reversal or consolidation.
- Down – The market begins to decline, characterized by bearish sentiment and falling prices. Traders may shift their focus to short positions or wait for confirmation of a bottom to re-enter the market.
- Bottom – The market reaches its lowest point in the cycle. Prices stabilize, and signs of accumulation or a potential reversal emerge, indicating a possible transition back to the "Up" phase.
Understanding the state of the market is essential because it informs every subsequent decision in the trading process. By correctly identifying whether the market is in an "Up," "Top," "Down," or "Bottom" state, traders can align their strategy to the current conditions and avoid trading against the prevailing trend.
For example, during the Up phase, the focus might be on identifying strong entry points in the direction of the trend, while during the Down phase, a trader might prioritize capital preservation or consider short opportunities. Recognizing the Top or Bottom state is equally crucial for anticipating potential reversals or trend changes.
By assessing the "State" accurately, traders set the foundation for the remaining steps in the trading formula, ensuring their decisions are aligned with the broader market cycle.
TIGHT OR NARROW AND WIDE STATES: In the context of the space between the 20-period moving average (20-MA) and the 200-period moving average (200-MA), the concepts of Tight or Narrow Space and Wide Space are crucial for understanding market momentum and identifying high-probability trading opportunities.
Tight or Narrow State:
A tight or narrow state occurs when the 20-MA and 200-MA curves are closely aligned, indicating that the market is in a consolidation phase or experiencing relatively flat price action. This lack of clear directional movement often signals an impending breakout or a significant shift in trend. Traders should be vigilant during this phase, as a breakout in either direction is likely once the tight compression resolves.Wide State:
A wide state occurs when the 20-MA and 200-MA are significantly far apart, indicating that the market is in a strong, established trend—either upward or downward. The 20-MA leading the 200-MA in the direction of the trend reflects clear market momentum.
Step 2: Position and Location
ABOVE OR POSITIVE AND BELOW OR NEGATIVE POSITIONS: Step 2: Position focuses on Micro Stock Trader’s strategy of concentrating on the Up and Bottom parts of the market cycle. These phases are crucial for identifying optimal trading opportunities. The Up phase signifies the market gaining momentum, presenting ideal conditions to enter long trades and capitalize on the upward trend. Similarly, the Bottom phase marks the potential conclusion of a downtrend and the start of a reversal, offering a strategic entry point to position for a recovery. By adopting this approach, Micro Stock Trader aims to simplify decision-making, avoid unnecessary risks in uncertain phases, and maximize profit potential during the most predictable parts of the cycle. Now, we are looking for trades that are either above or below the two moving averages when they are in narrow states.
In our Micro Stock Trader Strategy, we adapt our trading approach based on these two states. We seek buy opportunities during narrow states, particularly when the 20-MA is above the 200-MA, anticipating a breakout in the direction of the trend. Additionally, we seek to buy during wide states when the 20-MA is significantly below the 200-MA, aiming to take advantage of potential strong reversals or upward recoveries from oversold conditions.
Conversely, during a wide state where the 20-MA is significantly above the 200-MA, we look for sell opportunities, as this often signals an overextended uptrend that may soon reverse or consolidate. By carefully observing and responding to these market states, we aim to optimize our entries and exits, maximizing profits during strong trends and positioning ourselves for breakout opportunities during consolidations. This approach ensures that we stay aligned with market momentum while maintaining disciplined risk management.
NEAR OR FAR LOCATIONS: The concept of Near or Far Location refers to the stock’s position relative to the moving averages and plays a crucial role in the Micro Stock Trader Strategy. A near location occurs when the stock price is close to one or both moving averages, typically indicating lower volatility and a potential setup for a breakout or trend continuation. In this near location, we look for opportunities to get in, as the proximity to the moving averages suggests that the stock may be stabilizing or preparing for its next move.
In contrast, a far location occurs when the stock price is significantly distant from one or both moving averages, signaling that the stock may be in an extended move. At this point, the stock is more likely to experience a pullback or consolidation. Therefore, in a far location, we aim to get out, locking in profits before a potential reversal. By strategically entering near the moving averages and exiting when the stock moves far from them, we align our trades with key support and resistance levels, maximizing our chances of profiting from strong trends while minimizing risk.
Step 3: Power
Step 3: Power focuses on identifying Buy Bars that signal strong momentum and high probability for a successful trade. As shown in the image, the following types of bars are key indicators of power:
- Elephant Bars - These are large, solid green bars that indicate a significant influx of buying power. They represent decisive market action and are often used as a confirmation of strong bullish sentiment.
- Tail Bars - These bars have long wicks with smaller bodies. A green tail bar suggests that buyers rejected lower prices, pushing the market higher. Red tail bars can also indicate a potential reversal or support level.
- Narrow Range Bars - These are small bars, either green or red, that suggest a period of consolidation or low volatility before a potential breakout. When occurring after a pullback or during a trend, they can signal an opportunity to enter the trade.
By focusing on these specific bar patterns, the Micro Stock Trader strategy leverages market power to enter trades with greater confidence and a higher likelihood of success. These bars help identify strong momentum at the Up or Bottom phases of the cycle, aligning with the overall strategy.
Step 4: Entry
In the context of Oliver Velez’s 8-Step Trading Formula, Step 4: Entry focuses on identifying the optimal moment to enter a trade. The "buy spot" shown in the image below corresponds to the transitional phase from "Bottom to Up," which is the perfect time to position ourselves for a potential upward movement in the market. The green circle marks this entry point, typically when momentum starts to shift from a downturn (the bottom) to an uptrend. The appearance of the "power bar" signals that the setup has strong momentum or clear direction, confirming that the market is likely to move in your favor. By entering at this key moment, we position ourselves to capitalize on the early stages of the uptrend, increasing the likelihood of maximizing profits as the price continues to rise.
20-MA Halt Buy
Another key entry point to consider in our trading strategy is the "20ma Halt Buy," which is shown in the image. This entry point occurs when the price halts or pauses near the 20-period moving average (20ma), as indicated by the green circle in the chart. The price action typically consolidates at this level before potentially resuming its upward movement. This pause can be seen as a signal to enter the market, as it suggests that the price is temporarily stabilizing and might soon continue in the direction of the prevailing trend. By entering near this point, traders can position themselves to capitalize on a potential breakout after the halt, with the 20ma acting as a critical support level that could guide the price upward.
URC Daily Chart Meets the 20-MA Halt Buy Pattern: An Overlay Analysis
In this analysis of the Universal Robina Corporation (URC) Daily Chart, we applied the 20-MA Halt Buy Pattern to the chart by layering a semi-transparent image over the price action. The pattern clearly reveals that the Green Elephant Bar, which breaks above the 20-MA halt, is a key signal in this setup. Following this breakout, we observe a series of red bottoming tail bars and narrow range red and green bars, indicating potential buy events. These price actions align with Step 3: Power, where the momentum begins to shift, and Step 4: Entry, where the optimal moment to enter the trade emerges. The combination of these factors suggests a strong setup for a potential buy opportunity, allowing us to execute our strategy with greater confidence in the direction of the trend.
Step 5: Stop
Step 5: Stop involves strategically placing a stop-loss to minimize risk and protect capital in case the trade moves against us. In the Micro Stock Trader strategy, we place the stop or exit at the bottom of the power bar where we entered the trade, or just below the 20-period moving average, whichever is more appropriate for the specific setup. Placing the stop at the bottom of the power bar ensures that if the market fails to maintain momentum, we exit the trade with minimal loss. Alternatively, using the 20-period moving average as a stop level provides a dynamic point that adapts to the market’s trend. This approach balances flexibility with discipline, helping us manage risk effectively while allowing room for the trade to develop. For URC, we shall place our Stop-Loss Order at Php75.85 for protection.
Step 6: Color Change
Step 6: Color Change in the Micro Stock Trader strategy is an opportunity to add to an existing position when the trend shows renewed strength, ensuring that we maximize gains while the market continues to move in our favor. Building on the concepts introduced in Step 4: Entry, our first key point for adding to the position is at the "buy spot"—the transitional phase from Bottom to Up. Once the initial entry has been made, a color change bar (a candlestick that shifts from red to green during an uptrend or vice versa) signals that momentum is continuing. At this moment, if the trend is up, we add half of our original position to scale up in the direction of the trend. The goal is to capitalize further on the early stages of the uptrend, when momentum is still strong, increasing the potential for higher returns.
To provide a clear illustration, we will be using the 30-minute chart of URC, as shown below:
Step 7: Profit Take
In relation to Step 4: Entry and Step 6: Color Change, the 1/3s Approach provides a structured method for managing positions once the initial entry has been made. After entering at the optimal buy spot, as outlined in Step 4, we focus on adding to our position in the 1/3 zone, as shown in the image below. This is the area where we expect the trend to continue strongly, making it an ideal point for scaling into the trade. We refrain from adding to our position in the 2/3 zone, as the market could be nearing its peak or facing resistance. As the price moves into the last third, or the 3/3 zone, we begin Step 7: Profit Take, where we start to lock in profits and gradually pare down our position. This approach ensures that we capture the majority of the trend while minimizing risk as the market approaches its potential reversal.
Probable Tripple Bottom Formation
The occurrence of lower lows in the chart plays a critical role in the price action that leads to the formation of a triple bottom pattern. Let’s examine the significance of these lower lows and how they contribute to the overall setup for a potential reversal.
Lower Lows: Initially, as seen in the red downtrend, the price forms a series of lower lows, where each successive low is lower than the previous one. This pattern indicates a bearish trend, with sellers in control and the market moving lower. It represents a period of sustained downward pressure, signaling that the sellers are pushing the price down further.
Triple Bottom Formation: However, once the price hits the support zone three times (marked by the blue lines), a subtle shift begins to take place. The market shows signs of exhaustion in the bearish trend, with each new low failing to break the previous one. This is the key characteristic of the triple bottom pattern. It signals that sellers are losing momentum, and buyers may be starting to step in, setting the stage for a potential reversal.
For URC, from the trading period between December 26, 2024, and January 3, 2025, while the chart initially shows a series of lower lows, the triple bottom pattern suggests a potential shift. The price is struggling to break below the support level at Php75.85, which represents a critical point. Should the price break above the resistance level created by the highs around Php80.70, this would confirm the reversal of the previous downtrend and indicate the start of an uptrend.
Moreover, we believe the bottom is forming within the price range of Php75.85 to Php80.70. Using the 1/3s Approach, we can break this price range into three zones, each with a price difference of approximately Php10.00. Based on this, here are the strategic actions for our trading approach:
- First Third (1/3) Zone: We add to our position when the price is between Php75.85 to Php85.00.
- Second Third (2/3) Zone: We do nothing when the price is between Php85.05 to Php95.00.
- Last Third (3/3) Zone: We begin to take profits at Php95.05 and pare down our position.
Our initial stop loss is placed at Php75.85, and as we add to our position, we will adjust the stop loss to the low end of the green elephant bar, where we added the position.
Throughout this process, we will closely monitor the decision criteria set in Steps 1 to 6 to ensure they remain valid and that the market is still behaving in line with our expectations.
In summary, while the chart initially shows lower lows as part of the bearish trend, the eventual formation of the triple bottom pattern at the support level suggests that the market may be nearing a trend reversal. The failure to make new lower lows, combined with the subsequent breakout above resistance, points toward the possibility of an uptrend.
Step 8: Let It Ride
In Step 8: Let It Ride, we allow a portion of the trade to continue running to maximize gains during a strong trend. This phase remains active until we observe any of the six top patterns, as shown in the next image, which signal a potential reversal or weakening of the trend. At this point, we adjust our stop to the price level where we believe the beginning of the last third (3/3) of the move is most probable, as identified in Step 7: Profit Take. This adjustment ensures that we secure profits while protecting ourselves from reversals. The six top patterns act as crucial signals for reevaluating the trade, helping us decide whether to exit or adjust our position accordingly.
For readers of our blog, we shall recommend a range of 20% to 30% of the original stock position to retain for Step 8: Let It Ride. This provides a balanced approach, offering flexibility depending on individual risk tolerance:
- 20%: A more conservative approach, focusing on locking in a larger portion of profits while still allowing for some exposure to further gains.
- 30%: A more aggressive approach, giving the trend more room to run while still securing profits from the majority of the position.
This range accommodates varying risk preferences. Traders who are more risk-averse may lean toward the lower end of the range (20%), while those willing to capture more upside potential may opt for the higher end (30%). Either choice ensures that a portion of the position benefits from continued market movement, with a predefined exit strategy in place to protect against reversals.
Benchmarking
In Step 7: Profit Take, benchmarking URC’s valuations against external references helps us set realistic profit targets. COL Financial, as of December 20, 2024, set URC’s fair value (FV) at PHP 137.00 and the buy-below price at PHP 119.00, indicating significant upside potential from current price levels. In contrast, Simply Wall Street, as of January 5, 2025, provided a more conservative fair value estimate of PHP 82.19, suggesting that while URC is undervalued, it may not have as much room for growth as COL’s estimate implies.
By comparing these valuations to our 1/3s Approach, we can adjust our expectations during the profit-taking phase:
- In the 3/3 Zone (above PHP 95.05), we begin taking profits while monitoring whether URC approaches COL Financial’s buy-below price of PHP 119.00 as an extended target.
- Simply Wall Street’s PHP 82.19 valuation aligns closely with the 2/3 Zone, reinforcing our decision to remain cautious and refrain from adding further positions in that range.
Implementing the 8-Step Trading Plan with URC Stock
As part of our ongoing efforts to refine and test our 8-Step Trading Plan, we have selected Universal Robina Corporation (URC) as a key stock for live testing. Over the next few weeks, we will monitor URC's price action closely, identifying key patterns, including the 6 Top Patterns, power bars, 20-MA halts, and color changes, all of which form the foundation of our strategy. Using the daily time frame, the 20-day moving average (20MA), and the 200-day moving average (200MA) as our primary tools, we aim to validate the effectiveness of our trading plan under real market conditions.
A significant signal appeared on December 26, 2024, when URC printed a Green Elephant bar, indicating a surge in bullish momentum. This bar, which we’ve labeled the 1st Power Green, closed at 79.50, well above the 20MA at 76.79, confirming short-term strength. The key data from that day were as follows:
- Open: 75.95
- High: 79.60
- Low: 75.85
- Close: 79.50
- 20-MA: 76.79
- 200-MA: 99.40
This Green Elephant bar represents the type of entry signal we look for in Step 4: Entry, as it suggests momentum is shifting in our favor. The significant gap between the 200MA and the current price suggests URC is potentially in the early stages of a recovery, providing a favorable opportunity for testing our plan in a trending market.
On January 3, 2025, URC continued to show strength, closing at 79.80, with the price action holding above the rising 20-MA, which had moved up to 77.07. Key data for that day included:
- Open: 78.60
- High: 80.70
- Low: 78.30
- Close: 79.80
- 20-MA: 77.07
- 200-MA: 98.78
The rising 20-MA confirms ongoing bullish momentum, while the slightly declining 200-MA suggests that URC may still be in the broader recovery phase. As the stock approaches potential resistance near 80.00, it remains an ideal candidate for applying our 1/3s Approach, 20-MA Halt Buy strategy, and tracking color changes in alignment with our Step 7: Profit Take and Step 8: Let It Ride strategies.
Over the coming weeks, we will actively use URC to test how well our 8-Step Trading Plan performs in real-time market conditions. Our primary goal is to validate whether URC forms any of the 6 Top Patterns we track, allowing us to refine our approach and improve the plan's effectiveness. We will document our entries, stops, scaling, and exits, providing a detailed case study of how our strategy works in practice. Stay tuned for updates as we move forward with this live test!
Week 2: Micro Stock Trader Strategy Testing with URC
Based on our scenario for Week 2 of URC Trading, we can observe key points in the price action that align with our Micro Stock Trader strategy. Here's a breakdown of the scenario:
1/3 Zone Action: As shown, the price is currently in the first third (1/3) zone of the 1/3s Approach, suggesting that this is the time to add to the position as the price rises. The price has been moving up steadily, with the demand zone highlighted around Php77.07, where support has been established. This suggests that the market has absorbed the selling pressure and is now looking for upward movement.
Probable Resistance Level: The resistance level is indicated at Php80.70, which marks the upper boundary of the current price action. If the price reaches and breaks above this level, it could signal further upside momentum and a potential breakout.
Stop-Loss Order: The stop-loss order is set at Php75.85, a strategic level below the demand zone. This ensures that we are protected from significant downside moves, allowing us to maintain a risk-managed position while adding to the stock in the 1/3 zone.
Price Action: The current price action shows positive movement toward the resistance zone, and we will continue monitoring for signals of a breakout. While the price is approaching resistance, we will not take profits until the price reaches the 3/3 Zone (above Php95), as per Step 7: Profit Take. Our strategy is focused on holding the position through to the last third zone for maximum potential gains.
In summary, Week 2 of the URC Trading scenario indicates favorable conditions for adding to the position within the 1/3 zone, while managing risk with the stop-loss order. We are closely monitoring the price for a breakout above resistance and will hold the position until the 3/3 Zone (above Php95) for profit-taking. This approach aligns well with our trading strategy, as we continue to assess momentum and price action for further scaling and eventual profit-taking.
RELATED POSTS
Micro Stock Trader Portfolio Tracker Page
Micro Stock Trader: Revealed: Our Top 3 Shariah-Compliant Stocks for a Winning Portfolio
No comments:
Post a Comment