The Naked Trader's Book of Trading Strategies

Key Takeaways

1. Focus on Quality Companies and Avoid Hype

You don't actually need complexity to make money in the markets.

Quality over complexity. Look for companies with consistently rising profits, low debt or net cash positions, and solid management. Avoid getting caught up in hype or "jam tomorrow" stories that promise future profits without current results. Quality companies often have strong market positions, pay dividends, and demonstrate long-term growth potential.

Red flags to watch:

• High debt levels
• Reliance on future technologies or unproven markets
• Excessive promotion or publicity-seeking by management
• Lack of clear profit forecasts

Use simple metrics like PE ratios (ideally between 8-18) and PEG ratios (under 1 is good) to assess value. Remember, a lower share price doesn't always mean a bargain – there's often a good reason for the decline.

2. Use Screens and Breakouts to Find Promising Stocks

Screens are a great way to find shares. They strip out the human element (and confirmation bias that comes with it), relying on cold, hard figures.

Leverage technology. Utilize stock screening tools to identify potential winners based on objective criteria. Look for companies breaking out to new 52-week highs, as this can signal positive momentum. Pay attention to stocks showing consistent gains over time, as this may indicate steady accumulation by informed investors.

Key screening strategies:

• Quality and momentum combinations (e.g., Stockopedia's QM Rank)
• Breakouts from established trading ranges
• Stocks with improving fundamentals and rising prices

Remember that screens are just starting points. Always conduct thorough research on any potential investment, checking fundamentals, recent news, and sector trends before making a decision.

3. Implement Stop-Losses and Get Out Quick When Necessary

Never ever move your stop down once you've decided where it should be. You can move it up should your share do well.

Protect your capital. Use stop-losses to limit potential losses on every trade. Set stops based on support levels visible on charts, typically just below recent lows. For less liquid stocks, consider wider stops to account for volatility. Be prepared to exit quickly if new information emerges that changes your investment thesis, even if your stop hasn't been hit.

Stop-loss best practices:

• Set stops 10-15% below entry for momentum trades
• Use trailing stops to lock in profits as a stock rises
• Consider tightening stops before major news events (e.g., earnings reports)
• Don't hesitate to sell if fundamentals deteriorate, regardless of your stop level

Remember, it's easier to re-enter a position than to recover from a large loss. Emotional discipline in adhering to your stops is crucial for long-term success.

4. Trade the News and Sector Trends

Keep an eye on the news. When big things happen, they can affect prices.

Stay informed. Pay attention to major news events, economic shifts, and sector rotations. These can create opportunities for both long and short trades. Look for companies likely to benefit from emerging trends or policy changes. Conversely, identify sectors facing headwinds that may present shorting opportunities.

Strategies for news-based trading:

• Monitor industry-specific news sources
• Watch for increased government spending or regulatory changes
• Identify potential takeover targets in hot sectors
• Be prepared to act quickly on unexpected events (e.g., natural disasters, geopolitical shifts)

Remember to distinguish between short-term noise and genuine, long-lasting trends. Validate news-based ideas with fundamental analysis before committing capital.

5. Balance Your Portfolio with Longs, Shorts, and Dividends

Across all my trading accounts, my dividends tot up to about £120,000 a year.

Diversify for stability. Create a balanced portfolio that can perform in various market conditions. Include a mix of long positions in quality growth stocks, short positions in overvalued or declining companies, and dividend-paying stocks for consistent income. This approach helps manage risk and provides multiple sources of potential returns.

Portfolio balancing strategies:

• Allocate a portion to defensive, dividend-paying stocks (e.g., 4-5% yield)
• Use shorts to hedge against market downturns
• Consider sector ETFs for broader exposure
• Maintain some cash reserves for opportunistic buying

Regularly review and rebalance your portfolio to maintain your desired risk profile and capitalize on changing market conditions.

6. Be Patient with Entry and Average Up on Winners

It's better to buy shares that are going up – including ones you've already bought. Clearly something is going right, and now people are noticing.

Patience pays off. Wait for optimal entry points, such as breakouts from established trading ranges or pullbacks to support levels. Once in a winning position, consider adding to it as the stock continues to perform well. This strategy allows you to build larger positions in your best ideas while maintaining a favorable risk-reward ratio.

Averaging up techniques:

• Buy additional shares as price breaks through resistance levels
• Increase position size as fundamental metrics improve
• Use separate accounts or tracking for initial and follow-on purchases
• Maintain stop-losses on the entire position to protect gains

Remember that averaging up is most effective with stocks showing strong fundamental and technical strength. Avoid averaging up on speculative positions or stocks with deteriorating financials.

7. Treat Trading as a Business and Manage Risk

Treat trading like a business. It's the only way to be disciplined and rigorous.

Professional mindset. Approach trading with the same seriousness and discipline you would apply to running a business. This means having a clear plan, managing risk, tracking performance, and continuously educating yourself. Avoid emotional decision-making and stick to your predetermined strategies.

Key business principles for trading:

• Develop a written trading plan
• Keep detailed records of all trades and reasons for entry/exit
• Set clear risk limits and position sizing rules
• Regularly review and refine your strategies
• Allocate time for ongoing education and market analysis

Remember that consistent profitability comes from treating trading as a profession, not a hobby or get-rich-quick scheme.

8. Adapt Strategies for Different Market Conditions

Be prepared to take action on big news and move decisively.

Flexibility is key. Recognize that different market environments require different approaches. Be prepared to adjust your strategies based on overall market trends, volatility levels, and major economic events. Develop a toolkit of strategies that can be applied in various conditions.

Adapting to market conditions:

• In strong bull markets, focus on momentum and growth stocks
• During bear markets, emphasize capital preservation and consider more short positions
• In range-bound markets, look for mean reversion trades
• During high volatility, reduce position sizes and widen stop-losses

Stay attuned to changes in market sentiment and be willing to shift your approach when evidence suggests a new regime is emerging.

9. Use Spread Betting Wisely for Tax Efficiency

It really is possible! Many dismiss spread betting as gambling and never try it. Well, it is called spread BETTING I suppose. And you don't want to bet, you want to invest.

Tax-efficient trading. For UK traders, spread betting can offer a tax-efficient alternative to traditional share dealing. Profits from spread betting are currently tax-free, making it an attractive option for those who have maximized their ISA allowances. However, it's crucial to approach spread betting with the same discipline and risk management as regular trading.

Spread betting best practices:

• Treat it like a regular investment account, not a gambling platform
• Use the same research and analysis processes as for stock trading
• Implement strict risk management, including stop-losses
• Avoid using excessive leverage
• Consider using guaranteed stops for added protection

Remember that while spread betting offers tax advantages, it also comes with unique risks. Never risk more than you can afford to lose, and always use proper position sizing.

Last updated: March 21, 2025

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