Trading Plan Reboot

The average human mind has over 60 000 thoughts a day. According to Stanford University research 90% of these are repetitive. Imagine all our thoughts on trading getting lost amongst all of this. It’s a good reason for collating and converting our best thoughts into a written trading plan. Having all the basics already on file, I recently decided to make the plan even more detailed and share it.

Why write out a trading plan?

Trading plans are a great tool for decision making. It can’t cover every single scenario but it’s useful as a reference point. It’s a great personal guide for making our own decisions and better than acting on our emotions or on other people’s opinions. We don’t want suboptimal decisions made in a state of panic or confusion.

With some ideas from Guppy’s Tutorials in Technical Analysis newsletters, I filled out some missing pieces of my trading plan. The revised edition of the trading plan covered many aspects of the trade process from scanning for entries to reasons to exit.

This trading plan is not meant to be an all-inclusive template for readers. Rather, used as a resource, there may be some ideas of interest useful for adding into your own trading plan.

TEST CHOSEN INDICATORS IN CURRENT MARKET

Determine the compatibility of the current market with the short-term strategy.

Back testing over a period of a few weeks back has been enough to make observations on whether any indicators are working or not working in line with expected results. Observe any false entry or exit signals when an indicator is applied to a stock.

CREATE A LIST OF INTERESTING STOCKS

🗓 Check for new 52 week highs

🧐 Scan for stocks using MetaStock · EzyAnalyser

Research stocks mentioned in emails, webinars and conferences

Quick scroll through social media

SORTING OUT THE LIST

Avoid low volume, low liquidity stocks making it harder to enter and exit positions.

Any stock in an existing uptrend or starting to break out is a potential trade.

Remaining stocks not meeting initial criteria are placed into one of the following watchlists for further observation:

-        Potential breakouts from a trendline

-        Pullback in price towards lower edge of short-term GMMA against a solid well separated long-term GMMA

-        Potential bottom forming. Use of Rate of Change (ROC), Relative Strength Index (RSI) indicators, price and chart patterns

TRADES TO AVOID ⛔️

This is part of risk management. Preserving capital by lowering the probability of entering into a failed trade.

-        Stocks moving nowhere for weeks or months

-        Stocks in downtrends

-        Trading against the dominant trend

-        End of trend behaviour

ENTRY SETUPS ⭐️

In addition to the traditional GMMA trend trades and GMMA breakouts these are some other movements I look for:

-        ATR x 1 short Traders ATR crosses over the long Traders ATR

-        ROC move over 0 line

-        Trendline break

-        Trading band breakout

-        Trend trade bounce opportunity following a rally collapse. A stock with widely separated exponential moving average lines in the long-term GMMA provides a strong base and the uptrend is most likely to continue.

Beware of any upcoming dividend payments. Price may gap down on the day of payment by the value of the dividend. This reflects the outgoing capital.

GOOD CHARTS 📈

The more features the higher probability of further price rises:

-        Steady uptrend. Exponential moving averages are well separated and the short-term and long-term GMMA are in uptrend order

-        Strong upward sloping trendlines where price has hit and retested the line at least 3 times

-        Support/resistance levels providing protection from big price falls

NOT SO GOOD CHARTS 🚩

Any of the following may be red flags:

-        Price is too spotty with no trade days or too boxy. It is harder to fill entry and exit positions.

-        Fast moves where the GMMA groups are sloping very steeply upwards. There is a risk of collapse in price.

-        Ballooning of GMMA where exponential moving averages are too widely separated or the gap between the short and long-term groups is too wide. Trend is not sustainable in the short-term and price often loses momentum and eventually pulls back.

-        Long-term GMMA is too compressed despite GMMA groups in an uptrend order. Lack of support from investors does not provide a strong foundation for short-term pullbacks in price.

-        Be aware of support/resistance levels obstructing price from achieving a profit target.

RISK

Potential loss is no more than 1% to 2% of total capital including cash.

Risk/reward is at least 1 to 1. Risk $1 to gain a Reward of $1

SETTING PROFIT TARGETS 🎯

There are many ways of setting a profit target

-        Defined percentage return target of around 10% - 30%. One downside is there may be further price moves up, resulting in missed profit. On the upside, profit is banked in and the shorter time in the market eliminates the risk of sudden collapses or profit erosion.

-        Using patterns on the chart for measuring targets:

Double bottom - Measure distance from bottom to top of current price action and project upwards from the top of price action to define profit target.

Equilateral triangle - breakout to the upside. Measure the base and project upwards for a target.

Breakout from a trading band - use the height of the trading band and add to top of trading band for a profit target level.

STOP LOSSES

One stop loss or a combination of the following:

-        Traders ATR, Countback Line CBL or uptrend line. These are good trailing stop losses moving alongside price as price moves up.

-        Support/resistance levels

CHECKING DAILY CHART TRADES

For short-term trading:

-        Check after end of day close and take any required action the next day.

-        Depending on time, check once during the day out of interest. If unusual volatility and price drops through a stop loss, consider closing during the day to cap losses without waiting for market to close. Conversely, consider closing a trade during the day if a spike up results in a windfall profit.

-        For any after market close on the borderline of a stop loss, watch next day market open and make a decision. If price action has been fairly steady then a watch and see approach is ok. If volatility has been a feature, close position over the next day.

CHECKING WEEKLY CHART TRADES

For longer-term trading:

-        Check trades at the end of week, after Friday close and take action next week on the Monday.

-        Resist the temptation of closing out a position triggering a weekly stop loss during the week. Weekly candle is not complete until the end of day close on Friday. Price may close back up above the stop loss level by the end of the week. We may regret not obeying trading plan rules.

-        If unusual volatility due to news consider closing during the week without waiting for end of week to close. Maybe capture a spike up resulting in windfall profit or a spike down resulting in a trigger of a stop loss.

-        For any Friday market close on the borderline of a stop loss, watch Monday’s market open and make a decision. Depends on the price action up to this point. If fairly steady then a watch and see approach is ok. If volatility has been a feature close the position on Monday.

TRADE MANAGEMENT OF OPEN PROFIT

Depending on the criteria for entering:

-        Close any trades reaching profit target, triggering a stop loss or a trailing profit stop.

-        Trendline management - uptrend is in place for as long as price remains above the trendline. Close below the line signals a potential change in the uptrend.

-        Dynamic trendline – a good uptrend may require a new trendline as price action moves away from the line. Placement of a new trendline may become steeper. Steepness of slope indicates the current trend is unsustainable. It triggers a signal for profit taking. Waiting for price to fall back to the original trendline gives back much of the profit.

Other factors for consideration:

-        Gap distance between short and long-term GMMA groups signals strength. Beware of too much distance producing a balloon effect. Like an overstretched elastic band it eventually will snap back.

- Identify additional profit targets for protecting profit in a good uptrend once the first target has been achieved. Exit taken near the first target if price moves below the first target level. Tighten stop losses as price moves above the first target level.

-       Bullish environment – ride momentum back towards the highs after a pullback

-        Price spikes - price surge when a whole bar is greatly above the price activity. Consider capturing profit as price surge often ends in price falling back to normal or worse.

Missing the profit target and not getting filled or price just touches intraday before pulling away. Minimise profit erosion by calculating interim stop losses based on support/resistance for example. Watch for signs of any price rally again to the target.

EXITING BEFORE TARGETS AND STOP LOSSES

Warning signs:

-        If price is directionless for too long consider closing the trade because there is no profit delivered by the loss of momentum. Extra time will not change the outcome.

-        Sideways consolidation, not getting result or breakout hoped for.

-        Any price move below the lower edge of the short-term GMMA is an exit warning. Any price move below the lower edge of the long-term GMMA is even worse!

TRADING ADMINISTRATION

Remove the following type of charts from Watchlists:

-        Failed breakouts

-        Setup no longer showing any potential. For example, short-term GMMA has compressed as traders lost interest and have stopped buying the stock.

-        Stock entered into a downtrend

Once a stock position has been opened:

-        File the stock chart under either short-term (daily chart), long-term (weekly chart) , specs or long-term hold (monthly)

-        Record in trading journal

-        Open confirmation emails and enter trade details into a spreadsheet

-        File confirmation emails

-        Create new alerts on trading platform for price triggers and company announcements

Once a stock position has been closed:

-        Record in trading journal

-        Remove the chart from short-term, long-term, specs or long-term hold files

-        Open confirmation of sell emails and enter details into the spreadsheet

-        File confirmation emails

-        Delete alerts for price triggers and company announcements on trading platform

HOLIDAYS 🏝

Close all trades before leaving or pack the laptop in order to manage open trades over the holiday period.

UPDATE TRADING PLAN AS NECESSARY

Over the trading year we may need to add to or subtract from our trading plan. Sometimes parts of it don’t work and we need to remove it. It becomes more obvious the trading plan is incomplete when we refer to it for guidance and find the issue hasn’t been addressed. Writing it down is highly recommended or else it becomes lost amongst those 60 000 thoughts we have every day.