My Trading Plan & How I Trade the Stock Market

free trading resources 2013-12-07 09-42-29

I really like simplicity.  The essence of things. Because of this I like to break things down to their tiniest details and look at what’s really important.  What’s really necessary.  For me, trading the stock market and designing my stock trading plan was no different.

That’s why I’ve spent years developing my trading plan.  So I can know it inside and out and weed out the unnecessary details and get right to the heart of who I am and what I’m trying to do. And I can’t do that when I’m trying to manage a 1000 point trading plan.

Can you?

When it comes to my trading plan, I’ve whittled it down to one short, sweet, sentence that reminds me exactly what I’m looking for and exactly how to trade it.  That sentence is:

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.

Watch the funny clip and see for yourself.

At heart, my trading plan revolves around trend following.  Which is great because I like to get in as early as possible (who doesn’t?), at the lowest price possible (who doesn’t?), to maximize the greatest potential for profits (um, who doesn’t?).

This has lead me to something pretty unique — trend following low priced stocks. 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 — and the chart below pretty much sums it up nicely.

Yes!  This is an awesome run of over 100% and it’s exactly what I’m looking for.  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.

I know, I know, this flies in the face of conventional wisdom, but you’d be surprised to learn how many profitable trading methods do 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:

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:

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.

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

NEW HIGHS

Yes — there is no better validation for your position than new highs.  I love to see them and keep raising my stops as they occur.

Here’s an awesome break to new highs:

POSITION SIZE

Based on my trading plan and my trading stats I have decided that each of my positions will equal 25% of my total trading equity so I will be trading no more than 4 positions at a time.

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.  And 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.

As I mentioned in the Kelly Criterion Post, my method only wins about 50% of the time, but the wins are 2 times the size of the losers.

As far as future goals are concerned, my number one goal over the next year is to reduce the size of my losers and increase my win/loss ratio.  With a higher win/loss ratio my gains will accumulate faster and my drawdowns will be less intense.  Let’s see if I can do it!

Want More?

For more information on how I trade and more trading plan details, check out Trend Analysis For Beginners and Breakouts for Beginners.

Any questions, please feel free to leave them in the comments section below.

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