There are 2 steps to putting together a portfolio that performs consistently well over the years.
- Step 1 - Establishing high-probability assets.
- Step 2 - Extracting compounded profit safely the lifetime the asset is in trend.
Get Step 1 wrong and you will always struggle with Step 2.
The key to Step 1 is having a simple mechanical approach that removes all subjectivity and unhealthy attachments and instead forces you to focus on price action.
This is the beauty of technical analysis (TA) on the higher timeframes - the monthly, the weekly and the daily.
TA is using the history of the asset to determine if it has performed well in the past as this is then an indicator of how well the asset is likely to perform in the future. There are, of course, no guarantees. As investors, we are in the probabilities game and not the certainties game and this is where risk management and exit management come in as part of Step 2.
However, by using TA on the higher timeframes, we have an excellent advantage of establishing assets that have a higher chance of returning a profit than a loss.
If you struggle with this, then I have you covered below with my proven checklist system that I have used for over 10 years. Let's get into this. To determine a high-probability bullish asset, I use the following method:
The Monthly
- A history of performance
- Above the high of last year
- Above major round numbers
- Above key resistance levels
- Breaking out from a 3 to 5 month period of consolidation
- Printing new ATHs
The Weekly
- Above the 200sma
- Above the 50sma
The Daily
- Above the 200sma
- Above the 50sma
- Above the 20sma
(I reverse the logic for a high-probability bearish asset.)
With these rules, I can seamlessly go through a list of stocks and filter out the handful that are a potential for the portfolio. As mentioned above, this removes all the guesswork and misleading opinions, including my own, and encourages me to focus on what price is telling.
Price and the charts are after all the source of truth. Everything else is just noise.
By applying this logic to the higher timeframes, I catch the big moves in the market. I do less work for more profit and I am then also in a position to compound, the well-known but badly practised 'secret' to growing accounts. (This is not possible on the lower timeframes and where people repeatedly lose money. Do yourself a favour and stop day trading and instead start trend following.)
Brookfield Asset Management (TSX:BAMa) has been in my portfolio using the above logic since earlier this year. This is now breaking out, printing new ATHs and so has the potential of adding further profit into my portfolio.
I will leave it to you to apply the checklist.
Zaheer Anwari - Co-founder of Sublime Trading