investing 6

It took me a long time to know what “keep it simple” meant in the market, and even longer to incorporate it into my trading plan, but once I did my trading improved tremendously!

Have you ever tried to find something in a cluttered closet or garage? Searching for hours through piles and piles of junk? I have a feeling that most traders have some version of that experience when trading the markets.

That’s why 99% of what I do centers around simplicity.

I like simplicity. The essence of things. I like to break things down to their tiniest details and look at what’s really important. What’s really necessary. And when it comes to my trading plan, I’ve whittled it down to three criteria that remind me exactly what I’m looking for and exactly how to trade it:

Breakouts, Continuations, New Highs

To be honest, even though it’s really easy to understand, it’s not that easy to follow. Why? Because human nature, being what it is, sometimes makes it very difficult to do very simple things like: “let your profits run” and “cut your losers short”.

If you want a metaphor, I have compared developing the skill to trade with the Wax on Wax Off scene from the Karate Kid.

At heart, my trading plan revolves around trend following.  I arrived at this method after spending years studying all of the massive winners in the market and taking note of where they all begin.

I call this file my “What I’m Looking For” file (WILF for short) — and the chart below pretty much sums it up nicely.

Trading Plan

Take a moment to look at this chart and the steady trend and how it moves higher because this type of trend is exactly what I’m looking for.

It can happen on a 5 min chart, a 30 minute chart or a daily chart — the trends are always the same. Don’t believe me? Here’s a trend on a 5 minute chart. See if you can tell the difference.

Trading Plan

Do you see?  Same type of trend, different time frame. Knowing this will come in handy when you are trying to determine which time frame works best for you.

Now, let’s take a closer look at a few other important components of my trading plan and how I use them.

Price

Like I said earlier, I literally looked at hundreds of charts of trades I wished I had been in and nearly all had massive trends that began below $20 a share .  So that’s where I look for stocks.  I start narrowing my field to all stocks below $20.00 a share, and most of the time well below that.

Volume

Any stock trading over 100,000 shares a day on average is good for me.

Price Setup

I think a lot of newer traders (I used to be one) equate the price setup as the entire trading plan.  Nope.  It’s only a very small part.  But anyway — I like seeing a nice long base at or near a bottom. Like this:

Trading Plan

I might get in early right before the breakout — or I might wait until the break out does occur — or I might find it on a pullback to the breakout zone. Either way — I like the uniform bases.

How do I find set ups like these?  I look and I look and I look at charts.  Hundreds of them.  Everyday.  That’s because, when it comes right down to it, there is no short cut that will work better than your eyes on a chart.

Breakouts

Like I mentioned, I might get in early, slightly after, or on a pullback, but I like to see the breakout, which usually looks like some variation of this:

Trading Plan

Once I’m in — where do I place my stop?  At 2 times the Average True Range to account for the volatility of that particular stock.  But even then — if price closes inside the breakout zone or below the 50 day moving average, or if the chart starts to look ugly, or if the market turns ugly, I will close my position and move on.

Continuations

After the breakout I want to see a healthy price consolidation on lower volume.

Trading Plan

If I missed the initial breakout — then I might even look to take a position here. Usually on a break to…

New Highs

There is no better validation for your position than new highs. I love to see them and keep raising my stops as they occur.  While new highs (unless they are breaking out from new bases) are not a good place to enter a trade, they are EXACTLY what you want to see once you already have a position.

Here’s an awesome break to new highs:

Trading Plan

Position Size

Based on my trading plan and my trading stats I have decided that each of my positions will equal 20% of my total trading equity so I will be trading no more than 4 positions at a time.  But please note: that’s my position size based on my tolerance for risk and my experience trading.

Your rules may and probably will differ.

So there you have it.  My very simple trading plan.  It works for me and it allows me to stay focused on what I’m looking for and it let’s me know when I’ve found it and when I haven’t.

I encourage you to create a simple trading plan of your own.  Without a doubt it will help you clarify exactly what you’re looking for in the market — and how to know when you’ve found it.