Examples — Worked Trade Setups¶
Each example is a concrete setup with rules, not a "tip." Rebuild the logic; never trade live based on a single example you read.
1. Three-fund passive portfolio¶
Concept: the boring path that beats most retail traders.
Account: Roth IRA, $7,000 annual contribution
Allocation:
VTI (US total market) 70%
VXUS (international ex-US) 20%
BND (US aggregate bond) 10%
Rules:
- Auto-invest contribution monthly via broker's recurring buy.
- Rebalance once per year: any leg drifted >5% from target → trim and add.
- Never sell on news. Never sell on a drawdown. Never sell because of a feeling.
Expected outcome:
- Long-term ~7% real CAGR (historical US equity premium).
- Will see -50% drawdowns once or twice in a 30-year horizon. That's the price.
This is a "trade." Reading too many YouTube videos may make it feel inadequate. It's not.
2. Dollar-cost averaging into a target allocation¶
Concept: a systematic way to avoid timing risk on a lump sum.
You have $24,000 to invest.
Target allocation: 80% VTI, 20% VXUS.
DCA over 12 months → $2,000/month split 80/20 ($1,600 VTI + $400 VXUS).
Auto-set as recurring buys.
DCA is not a return-maximizer (lump-sum has higher expected return). It's a regret-minimizer — protects against the scenario where you invest all $24k the day before a 30% drop.
3. Swing trade: 20-day breakout (Donchian-style)¶
Concept: buy strength, sell weakness. Mechanical trend following.
Universe: S&P 500 stocks above $20.
Entry rule:
Today's close > highest close of the prior 20 trading days
AND today's close > 200-day SMA (long-term filter)
→ buy at next day's open (limit ≤ today's close × 1.005)
Position sizing:
Risk 0.5% of account per trade.
Stop = lowest close of last 10 days.
Shares = (0.005 × account_equity) / (entry - stop)
Exit rules:
Stop = trailing 10-day low (move up only)
Time exit: if held 100 days without hitting stop → close
Portfolio rules:
Max 10 concurrent positions.
Max 25% sector exposure.
Backtest first: ~2010–2024 on a survivorship-bias-free dataset.
Expect: many small losses, occasional big winners. Win rate <50% but R:R >1.
This is a real strategy class, well-studied. Adapt to taste — your job is to make sure you can follow it, not perfect it.
4. Earnings post-drift (PEAD) momentum¶
Concept: stocks that beat earnings tend to drift higher for weeks. Documented anomaly (post-earnings-announcement drift, Bernard & Thomas 1989).
Trigger: company reports earnings.
Filter:
EPS surprise > +5% (actual vs. consensus)
AND price gaps up >2% next day
AND volume of gap day > 2× 30-day average
Entry: limit buy on day-after-earnings open + 0.5%.
Stop: 7% below entry (hard stop).
Target: hold 30 trading days OR -7% stop, whichever first.
Sizing: 1% account risk per trade.
The drift isn't huge per trade but adds up over 50–100 setups per year. Caveat: the size of the anomaly has shrunk as it's become well-known. Always re-test on recent data.
5. The "boring quality" filter¶
Concept: quality factor — owning high-ROIC, low-debt, profitable businesses tends to outperform the market with less drawdown over the long run (Asness, Frazzini, Pedersen 2013).
Universe: S&P 500.
Score each stock:
+ ROIC (5-year average) percentile
+ Gross margin stability percentile
+ Debt/EBITDA percentile (inverted — low is good)
+ Free cash flow yield percentile
Pick top 25 by composite score.
Equal-weight.
Rebalance quarterly: drop names below top 50 in score; add new top names.
Hold in a tax-advantaged account if possible (turnover creates short-term gains).
This is a watered-down version of what AQR / Robeco / Research Affiliates do at institutional scale. Won't beat them, but will beat random stock picking.
6. Bracket order — disciplined entry with predefined exits¶
When you place a swing trade, place a bracket — entry + stop-loss + take-profit — as one OCO order at the broker. You're not relying on yourself to babysit:
Entry: BUY 100 AAPL @ $185 (limit)
Stop-loss: SELL 100 AAPL @ $178 (stop, GTC) [-3.8% risk]
Take-profit: SELL 100 AAPL @ $200 (limit, GTC) [+8.1% reward]
R:R = 8.1 / 3.8 ≈ 2.1
Once filled, the stop and target are linked OCO — whichever fills cancels the other. You can go to work.
7. Tax-loss harvesting¶
Concept: realize losses to offset gains, reducing tax bill, while staying close to your target exposure.
Hold: 1,000 shares VOO at avg cost $410. Current price $390. Unrealized loss $20,000.
Action:
1. Sell 1,000 VOO. Realize $20,000 loss.
2. Immediately buy 1,000 IVV (different ticker, same S&P 500 exposure, NOT a "substantially identical" security per IRS — debatable but generally accepted for different fund families).
3. Wait 31 days, then optionally swap back to VOO if you prefer.
Tax effect: $20,000 loss offsets up to $20,000 of gains, or up to $3,000 of ordinary income with the rest carried forward.
Watch out for the wash-sale rule. Buying the same or "substantially identical" security within 30 days disallows the loss. Auto-reinvested dividends, IRA purchases of the same security, and a spouse's account purchases all trigger the rule.
8. A position-sizing worksheet¶
Account equity: $50,000
Per-trade risk %: 0.5%
Per-trade $ risk: $250
Trade idea: long XYZ
Entry: $42.50
Stop: $40.00
Risk per share: $2.50
Shares: $250 / $2.50 = 100
Capital used: 100 × $42.50 = $4,250 (8.5% of equity)
Max loss: $250 (0.5%)
Reward target: $47.50 (R:R = 2:1) → +$500 profit
Do this on every trade. If you find yourself thinking "I want to put $X in" before you know the stop, you're sizing emotionally, not rationally.