Sunday, July 16, 2006

Plan the Trade – Trade the Plan!

Dan Zanger’s 10 Golden Rules

Everyone who trades should have a business plan and a set of rules to go by. To trade aimlessly is fruitless and you may as well go to the casino and put all your money on black.

I like the 10 golden rules that Dan Zanger has on his website
. I go to it and read about once a month to keep me focused. I recommend them as a starting point to creating your own trading rules.

Using Metastock

Metastock is a very powerful charting package and is considered the ‘industry standard’ by the market professionals. Using my methodology I only required the cheaper end of day version as opposed to the real-time data version.

End of Day Data

Reuters Datalink is the Equis recommended data provider for Metastock and currently charge US$24.95/month for US stock market data and another US$9.95/month for the world indices package. I used this initially until I found HSQuote. HSQuote has an initial outlay of US$34.95, but then downloads the data from Yahoo’s servers for free, so there are no ongoing costs. If you wish to purchase HSQuote please click on the image here:

Buy Stock Quote Downloader: HSQuote V1.89

My Trading Methodology

I trade on a very short term time frame. Most of my trades only run for a couple of days and are a mixture of momentum trading and swing trading. I buy explosive stocks that are breaking out of chart patterns to new all time or 24 month highs. I set my initial stop loss at about 1% which means I do get stopped out often, but only with a minimal loss. Initially I only buy half my intended position and then buy the second half once the volume has been confirmed and if the stock is still within 1-2% of the breakout point. If the volume does not reach 50% above the 50 day average by the end of the day I do not buy any more shares. I then aim to sell half the stock when it has risen by 5% and then hold the rest until a technical sell signal is seen in the chart.

Selecting a Watchlist of Buy Candidates

I use William O’Neil’s CANSLIM to identify stocks to buy. After reading his book I signed up to the service on his website. From there I only select stocks that ratings of 97 -99. After creating this watchlist, I then scan the charts using Metastock from looking for obvious chart pattern setups. I then make a shortlist of the stocks that are looking like they are nearing a breakout point, and put in stop-limit orders for each of these.

Order Types

When putting orders in I use stop-limit orders set at the breakout point + 10c, limit + 30c. I also add an auto stop loss order that triggers when the buy order does. I then put in a one-cancels-other order to sell half the position at breakout point + 5%, and then watch the remaining half of the position until a suitable sell point.

Market Direction

Before deciding whether to buy or short sell stocks, it is important to access the overall market direction. Buying stocks while the overall market is in a bear market (or trending downwards) is like trying to swim up river – Hard work. Why swim against the flow when it is a lot easier to go with it? The market should be trending upwards before new long positions should be initiated. But the markets only trend up approximately 30% of the time. They trend down about 30% of the time and the rest of the time they trend sideways. If you are not confident to short sell then you will only be able to successfully trade 30% of the time.

Short Selling

During a bear market I look for short sell opportunities. The chart patterns mentioned under Chart Patterns and Breakouts can be reversed and used to trade shorts. For these opportunities it is best to choose companies who do not have as good a financial record as the buy watchlist.

My Best Advise:

Plan the Trade then Trade the Plan!

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