Break Out Your Rules!!!

Another suggestion I had is to open a thread here today to discuss trading rules. This is a great idea to see other traders rules, and to openly discuss them here in a forum type atmosphere. All of my trading rules have been aired out here many times, but please feel free to post a few of your own.

This can be as detailed as what types of stocks you trade, to what technical indicators you use, and how you use them. Any types of confirmation used, time of the day you trade, reasons you wont trade, etc.

Leave anything you can, I will monitor the comments and try to make contributions when appropriate.

Let the games begin!

I am more of a swing trader using nondirectional strategiesin the indices. With a small percent (20% max) I do some intraday trading in the spx. I buy close to what I consider a support/resistance bounced and set my stop loss 2-3 point beyong support/resistance. My other exit is to close my position when its get to my target usually another resistance/support. The reason I used the spx is because it gives me a good risk/reward for intraday trades regardless of its option's spreads.
I also, do some verticals when I am not really bullish or bearish using similar criteria for my intra day.
As you can see my only technical indicator I used is support/resistance. I found that looking at too many indicators, make me a least efficient trader. However, I look very closely for divergences.

This "trading rule forum" is a great idea!

I am a directional swing trader (options)
Here are a few rules...
1. Trade with the trend. I also look at long term charts to confirm the trend.
2. Wait for support bounce or resistance break (I don't take trades in the middle of channels. If I miss the signal, I wait for another bounce.)
3. Use volume to confirm
4. Candlesticks, MACD and stoch. signals are icing on the cake, but I don't use them as stand alone trade signals.
5. Always have my exits planned before I get into a trade. My exits include a stop loss if the trade goes against me (mental), an emergency stop loss if all hell breaks loose (hard), a target exit (mental) and an exit if the stock trends sideways too long (mental).
6. I do not countertrend trade which means I don't trade reversal price patterns. I am not yet comfortable doing that.
7. Don't force trades. Make trading easy by letting the trades come to me.
8. I trade stocks in good industry groups or groups that are on the rise (groups quickly climbing out of the red and into the yellow on the big chart ).
9. I keep a trading journal. Learn from each trade.
10. I always keep an eye on Imp. Vol. If it is high, I pass on the trade and look for a better entry down the road. Thanks to Jeff, I have a better understanding of how option pricing works, and I won't make that mistake again.

I am constantly working on patience...staying in profitable trades and not getting emotional on the intraday price swings. Staying disciplined is the hardest rule for me to follow. I can still get caught up in too many indicators. On those days, I rarely trade. I feel those are days with too much emotion surfacing and I am more likely to not follow my rules.

Although I have been trading for two years, I still feel new to the market. I am constantly learning from every trade.

Amy - Sunset, Texas

Amy & Rodrigo,

Thanks for posting these. It is nice to see how others trade. Rodrigo I like that your approach is very simple, and Amy I love the fact that you have rules similar to mine and that you also keep rules around your emotion. I need to have more concrete rules of when to close down shop and walk away for the day/week. Nice job guys!

Cool! I made the mistake even today about not following my rules. I'll get them into a digital form and post them soon. Thanks Jeff.

Stock Rules – Summary Version

Finding a Stock:
1.Check Market Trend (DJI, SP500, NAS)
2.Look for plays within the trend of the market
3.Glance at fundamentals/industry rank/institutional $/Earnings date
4.Check Technicals/Price Patterns (still learning patterns)
5.Look for breakouts
6.Look for bounces off trend line/support

When a stock is found:
1.Wait for bounce or breakout
2.Determine Imp/Vol – thanks to last Wednesday's session :)
3.Determine risk of waiting for price confirmation
4.Determine entry point – feel good about it
5.Determine exit – no matter how I feel about it - also know the expiration.
(I've made mental stops and hard stops determined by if I'm going to be by a computer)

Rules I need to work on:
1.Risk Reward Ratio
2.How much to place in a single trade
3.Walking away immediately from a failing trade

Hope all these make sense. I'm still very green to trading. My time is very limited, so I'm having a hard time finding a space in each day to study or even look at the markets. I traded for about 5 months last spring and summer...arrghhh...was way too emotional....lost a bunch relative to what I started with. Not following a “set” of rules were probably the biggest reason I lost the amount I did. I'd follow some rules, but get beat up every time. Not to mention that part of the summer was a horrible time for a lot of traders...and exponentially so for a green/emotional trader like me. I was gun shy till the last week and started to put my toes back in the water.

Thanks,
Ed

RULES
GENERAL:

-Always use and evaluate trades base on Money Management, each trade not more than 10% of my total account, not more that 20% of total account in one sector. Limit the risk to 1% to 2% of total account. Apply these rules separately to each account if you have more than one. Stop trading if you lose 6% of total account in that month and wait for the next one.
-Market discounts. Market tells what to do, bull or bear. Analyze the market DOW, SPX and NASDAQ to define your posture (market posture charts, market forecast charts and volatilities)
-Use a watch list ( stocks in the watch list are with price higher than $20, volume higher than 700,000 shares, ATR greater than $1)
- Design the trade: entry and exit point, stop loss (mechanical is an emergency one set at 50% and mental one based on the analysis of the trade, position size, strike price based on volatility lower when buying and higher when selling, delta ( higher than 0.70 when buying) and time value less than 25% on the premium price ( buying), risk to reward ratio higher than 2.

ENTRY POINTS:
Trending UP (HH and HL), Bouncing from support
Trending DOWN bouncing off resistance
TREND REVERSAL
Down-side reversal
1. Double top or Higher-High chart pattern
2. Top candlestick reversal pattern
3. Negative divergence in the Stochastic

Upside reversal
4. Double bottom or Lower-Low chart pattern
5. Bottom candlestick reversal pattern
6. Positive divergence in the Stochastic
CHANNELLING: (channel 2 points per side)
In the channel:
Calls buy at support and sell at resistance
Put buy at resistance and sell at support
Out the channel:
Trade spreads

If break the channel at high volume, enter the trade.
BREAKOUTS:
Look for continuation pattern, (triangles, flags), or reversal pattern (head and shoulder top and bottom, double top and double bottom).
Break resistance or support.
Volume surge except flags
Close at the High or Low of the day, convincing candlestick for the break out, not dojis or spinning tops, or candlestick with big upper or lower shadows
Determine target by the pattern.
EXIT POINTS:
On a profit target
On MACD and/or Stochastic decline or reversal if it is close to resistance or support and are the targets
STOP LOSS: Move SL to comply with Money Management Risk/Reward higher than 2, first move to break even once the trade produces one dollar profit. With profit set the SL below the low price of the candlestick when the MACD starts to turn down for example on a bullish trade.
On time stop (5 to 7 days if no movement in the option)and it is a short term trade, reevaluate in other time frame trades
On lack of gasoline (losing momentum) or no breaking to support or resistance
On down day with heavy volume or opposite depending bullish of bearish trades
On 10-25% of the investment with an uncertain market, and 26-50% in a directional market or using trailing stops

Jeff, Is there a reason you won't publish your trading rules right here & right now?
I'm an investools student & seem to be told by all of the instructors something like "don't worry about my rules, make your own." That cost me $25,000 plus lots of money lost in the market & still haven't figured out what rules to use!

"Anonymous,"

The reason I didn't publish them right here and now is to let you fish around for them. Have you been following this blog long? Have you thumbed through my archives? If you have been following this blog for awhile my trading style is openly discussed, mocked, and illustrated through my posts. The $25K you paid did not entitle you to MY personal trading rules. It entitled you to education and resources to build your own, or an easy to follow INVESTools method. Please don't confuse your relationship with INVESTools and my own personal approach to trading the market. I am here to talk about the market, provide and discuss interesting trades, and support the masses out there with anything I can to help traders reach their financial goals without actually doing it for them. If you need help creating rules, THIS POST WAS JUST FOR YOU! If you have questions, please post them.

Hey Jeff,

Can I give you my account info and you can just trade for me too? If that were the case I should have saved the money I spent to LEARN how to trade and handed it back to the broker.

Give me a break,

TJ

Dear Anom 5:00 pm,

Today must have been another "baaad day" for you especially by NOT having Trading Rules.

My first Rule of advice to you is to STOP Trading immediately!!! This is like driving a car blindfolded.

As for wanting Jeff to post his trading rules? They are here all throughout the site, just read it.

As for the money you paid? Are you attending the numerous trading education workshops and events, utlizing your unlimited access to one of the most powerful trading education sites in the world - yes I said world, taking full advantage of the live Hotline, reviewing the numerous publications provided to you and becoming involved in a support group near you either on-line or in person? Well you get the point by now. I could continue with what you have available but I will not. A book can not be read if it is NOT opened.

I just completed a Live 3 Day Workshop in Utah today (oh by the way I also paid some really good money to learn trading) and what we soon realized was how important our "individual" trading rules and plans were to our success. I had one before I went but was able to really drill down and add to my own plan. As I learned early in my education of trading - a trade MUST be my own and NOT from someone else. If I can not find it, analysis it, make my specific plan for it and then trade it then I was never going to be happy or successful.

I would strongly adivse you to take a break this weekend, relax and then start over - from the beginning and review all your materials before proceeding into live trading again. How much papertrading did you do or still do? I papertrade something every week while live trading and will continue for as long as I trade.

I wish you the best in refocusing your thoughts and feelings!!!

Best Regards,

Randy B.
Fellow PHD Student

“Plan your trade & trade your plan”

Checklist for Call’s/Put’s - Hotline: 800-550-2835

1. Decide if you’re bullish, bearish, Neutral. – Check MARKET POSTURE, MARKET FORCAST, VIX/VXN

FORCAST UP, DOWN, SIDEWAYS
Market Up a lot - Calls – ($5-7 move)

Up a little - Bullish Spread – (bull put, $1-3 move)
Sideways - Spreads, Sell Puts, Covered Calls

Down a little - Bearish Spread – (bear call, $1-3 move)

Down a lot - Puts – ($5-7 move


2. Pick a Stock –Market Commentary, Stock Searches, Watch-lists, Trading Rooms, Mastertalk, blogs, Market Wrap.

3. Interactive Chart – A. Identify the trend (50%-). B. Identify Support/Resistance (25%) C. Is Volume supporting the trend? (20%) E. Indicators-CANDLESTICK type, check macd/stochastics. (5%).

4. Implied Volatility & Strike Price – A. Identify the average move & average time it will take to make it. Check the Implied Volatility to determine if you will go ITM or OTM by using the black scholes calculator.

5. Position Sizing & Strike:
Determin your PORTFOLIO RISK - should be 2% of total portfolio amount
Total risk - should be around 3% below support/resistance
Determin your entry point & support
Calculate the support less 3% and you will have your stop loss
Take your entry point less your stop price & you get your TOTAL RISK
Take PORTFOLIO RISK divided by your TOTAL RISK to determine # of shares to buy

6. Calculate RISK VS. REWARD RATIO: by dividing your risk (difference between entry & exit) into your reward (difference between entry & target) CALLS: B/E point is strike price plus ask. PUTS: B/E point is strike price ask.

7. Plan your exits (mental, time, emergency, target) Set your exits before you place your order! Exit when your mental stop is reached (3% break above or below support/resistance), sell if stock has not made your expected move in the time you forecast (time stops), sell when stop loss reaches your 30% loss on the option price, sell when your target is reached or tighten & let it continue running.

8. Place your order – Thinkorswim then print Interactive Chart and Tracking record for your files.

9. Monitor your position daily


Mark

I have two rules. Long term and Income generation.

Here are the long term growth rules

1)Good fundamentals, uptrending stock. Mainly ETFs and good stocks

2)Use 5 yr chart only.

3)Like Jonathan Thatchar approach. Buy when 10 wk mvg crosses above 40 week and sell vice versa.

4)Monitor the trade weekly

5)Money management - 2% of the account size.

Here are my income generation rules. I used to do the credit spread trading but emotional about daily price swings. I devised a comfortable hedging strategy

1) Follow support/resistance, good volume and imp. volatility. ex. bought ICE at 117$ of 100 qty.

2) Buy stocks of 100 lots.

3) Buy one leg out of the money put
that matches the stock qty. Bought Jan 110$ put for 1.25$

4) Wait for the stock to go 5-7% incase of resistance break or old resistance in the case of support break. When reached sell out of the money calls. Also watch for the imp. vol. is at the resistance. Sold Jan'125$ calls for 7$. Also buy back when the stock goes down reaching support.

Goal is to generate 4% of stock price as income for every trade.

Any comments?

It's late and I'm tired, so I'll just post my first and my last rules:
1. Ignore what anybody else said about market-related information. Make your own mind by looking at the charts!
2, 3, 4, 5, 6, etc.
14. Relax, focus, thank God for all the prosperity that rains down on us, and TRADE!

Hi guys,

Here are my rules for trend following trading like flags and other pattern breakouts. Big thing for me is follwing them.

Setup:
• Trade according to the market and sector trend
• Verify the trend of the stock using a weekly chart. A bullish trend needs to have 2 higher highs and higher lows. A bearish trend needs to have 2 lower lows and lower highs.
• For Bearish - There must be a flag formation trending upward in a down trend at resistance (MA, Horizontal, diagonal) and a bearish candle pattern
• For Bullish - There must be a flag formation trending downward in an up trend at support (MA, horizontal, diagonal) and a bullish candle pattern

Entry Signal:
• For Bearish – At a close below the flag support line buy 1 OTM put with at least 40 days to expiry. Put a stop using market order with price at or above $ 0.20 of high day.
• For Bullish – At a close above the flag resistance line buy 1 OTM call with at least 40 days to expiry. Put a stop using market order with price at or below $ 0.20 of the low day.

Money Management:
• Keep the position at or below $500.

Exits:
• Written Stop
o Bullish - Put a stop using market order with price at or below $ 0.20 of low day.
o Bearish - Put a stop using market order with price at or above $ 0.20 of high day.
• Trailing Stop
o At the end of each day move the stop up to 0.20 below today’s low/high.

Discipline:
• Verify the market and sector trend
• Verify stock trend
• Check the IV on ivoltality.com make sure it is low and rising
• Draw and verify horizontal and diagonal support and resistance lines on both weekly and daily charts
• Check BB and Fibonacci to verify support and resistance
• Check earning announcement date
• Trade during the last hour of the market only
• Follow the rules
• Place stops to be executed in the last 30 minutes of market time

I appreciate any feedback on this. I have really been actively trading 4-5 months and find this blog invaluable to watch and learn from the collective knowledge

Thanks everyone

Mahmood

Thank you to everyone that posted their trading rules. I unfortunately do not have a lot to add since my rules mirror those posted. I am, however, trying to develop patience. I used to feel that I had to trade every day or that I had to take a certain amount out of the market every day. I now know that my approach was wrong. I am happy now to go days without trading or even a week or so. I am not sure where I read this quote and it may have been in the coarse materials, but I live by this now. " I should not feel compelled to trade but I should try to find the compelling trade". Thank you all for this forum and to Jeff for his guidance.

Sean M.

mahmood,
How do you place stops to be executed in the last 30 minutes of trading? I'm on the road a lot and would love to be able to use this trick when I can't be at my computer for the last couple of hours of the day.
Chris and Catherine

Mahmood,

Great post. Question? Do you find your stops woring for you? I see that you use a 0.20 above the prior day as an adjustment margin. I found that this type of Stop settings or adjustment did not work well for me - I kept getting stopped out. I now use the Black-Scholes calculator and the ATR to help me get a Stop area to set. This of course will be in line with my Risk management plan and the charts support/resistance areas.

Look forward to hearing back from you.

Happy Trading,

Randy

I didn't get to post Yesterday, and have just got home and finished my daily position look.


Trading rules

General Rules
-Make Money, not doing this for fun, or entertainment ! ! ! ! !
-Do not risk more that 1% of account on any trade, unless listed below.
-Do not play more than 10% of account on any 1 position (at start of play)
-Do not play more than 20% of account in any 1 industry group
-No more than 20% of account in options.
-If more than 4% loss in day or 10% for week close all positions and paper trade for 2 weeks before getting back into market

Journal Rules:

1. Add to journal Daily.
2. What Was I Doing? Explain what you were doing, researching, reviewing existing stock, etc.
3. What Did I Do? Did I remove stocks, set a stop loss, etc.
4. Why Did I Do it? Explain why you removed or added stocks, did the MACD change, did it start to go in a down / up trend, did the stock break its resistance / support, were you watching it for a length of time and found it to be stable not stable?

Keeping these notes will help to find out what you did, the decisions around why you did it and help watch out for patterns.

Stocks-
-Need to set a mechanical stop for insurance to protect from bad news.
-Need mental stop for exit if stock moves against initial thoughts.
-Play stocks for intermediate trends.
-Exit on breakdown of support (long) or resistance (short) otherwise let winners run.
-Must have 250K in normal volume for longs
-Must have 175K in normal volume on shorts
-Can buy on margin if up for past 30 days.
-Risk/Reward must be 3/1

Options:
-No options on a stock under $20-
-Bid-ask spread no more than $0.40
-Stock volume must be 300K (Possibly moving this higher soon).
-Must check Volitility on every option trade.
-Risk/Reward….. Still trying to figure out rule

Bounce plays:
-Need at least 3 points on support on longs or resistance on shorts
-Play if stock is showing support or resistance has held at close.
-Can play between 3:30 – 4:00 Eastern if at terminal.
-Volume must be at least 75% normal on bounce.
-1st entry into bounce should be stock or 1 option ITM.
-Risk no more than 1% of account on stock play.
-If 50% of ITM option is over 1% of account risk no more than 2% of -account and watch closer.
-If more than 1% of account at risk on ITM option but at least 45 day no -more than 60 days
-If more than 1% of account is at risk on ITM option exit at resist. Or first day of weakness.
-On option bounce play buy at least 75 days of time, exit at resist with 40 days or less

Breakouts.
-Use 3% below breakout as resist
-Must have 130% or above in volume
-Risk must be less than 1% of account play no more than 10% of account

Trend reversals.

Stock must have broken support or resistance and started trending against previous trend.

For longs on first higher low if CCI, MACD, and 10day MA all show green arrows within 1 day I will take a trade.

At current time I have not had any H&S work in paper trading, so I will not play them until I see them work for me


Thanks,

Tom DeGroodt

Response to couple of questions about my stops.

In thinkorswim you can setup a stop to only execute at a certain time and price. I use that. as far as 0.20 cent stop. This is where I am still working on my rules. I am finding difficult time changing stops daily and but my understanding is that is what I need to have for a short term swing trade. My goal is to on a daily basis change the stop to previous 0.20 below the low of the previous day (for a bullish trade) but that only starts once I have profit in the trade.

Stop have been the biggest issue for me. In fact because of these stops I am re-evaluating my trading style from a swing to a short term trend trader and use a 2xATR as a possible stop point.

sorry I forgot to add my name to the last post.

Mahmood

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  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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