Trading Plans and Scans ...............................
I spoke earlier about a trading plan. A trading plan begins with one's philosophy in relation to the market.
In the world of trading, there are many different ways of making money involving fundamental analysis, several variations of technical analysis or a combination thereof. There are various time frames to focus on. Long term, intermediate term, short term and the micro term.
We can't expect to take advantage of all of the various ways of making money and do it consistently. The task of developing entry and exit strategies and then identifying those trades is too great.
I will share my strategy as an example of how to develop a trading plan.
The first thing I decided to do, is that in 90% of my long trades, I required the stock to be in an up trend. For a long term trade, I require a rising 20 period moving average to be above a rising 40 or 50 period moving average with a comfortable distance between the two. This is the starting point of the trades I take a long position in.
When I have the above bullish alignment, I'm looking for 2 basic buy set ups. I'm looking for a 3-5 day pull back off a recent price high and then I look to go long when price trades above the last down bar.
I have a specific scan that looks for these types of buy set ups.
The other set up I look for off the above bullish alignment is a break out. I look for stocks that are breaking out above a recent price high. I define a recent price high as a 30 day high, it doesn't have to be an all time high, although I play those too.
I said I had 3 basic set ups I look to, I've mentioned 2. The other set up I look for is a reversal pattern. I will look for a stock that has been trending lower into a major resistance level, and look for a hammer or bullish engulfing candlestick pattern. I prefer to see significant volume accompanying the candlestick pattern. I have a scan specifically designed to look for hammer and bullish engulfing patterns. I don't play all of the stocks that show up in those scans, I'm looking for hammers or bullish engulfing patterns that form in a down trend, into major resistance and have a significant amount of volume that accompanies it.
There are a lot of stocks I let go by that still look good and do well. My job is to be patient and focus on the patterns I know well and have had success with. That takes patience. Those patterns don't show up every day.
Your scans and chart set ups must reflect the time frame in which you wish to hold the position. Here's how I determine a swing trade from a long term trade.
If 1 of the 3 set ups mentioned above, show up on a daily chart, it's a swing trade. I'll look to play the pattern over a 2-5 day time frame. I'll keep the profit targets and stops in relation to what I can reasonably expect over a 2-5 day time frame. I can reasonably expect a stock to move a dollar or two in that time frame. I wouldn't set a $5 profit target over a 2-5 day time frame.
If 1 of the 3 set ups mentioned above, show up on a weekly chart, it's a longer term trade. I will expand the profit targets and stops on a longer term trade to reflect the time price has to meet the objectives.
When one of the buy set ups shows up on a monthly chart, then the time frame to hold the position is even longer and the profit targets and stops should reflect that extra time.
This is a basic way to start a trading plan. You must know what you are looking for, have a way of identifying it and know how long you wish to hold it. Once that's done, you get into the managing of the position, position size, adjusting your stops and how you will take your profits.
There it is.
dabum |
