a. Establish a clear understanding of the current trend.
i. Find the relationship between the TWO most RECENT, ESTABLISHED, & SIGNIFICANT swing highs/lows.
b. Find what “part” of the trend the stock is trading in.
i. Wholesale (the top-most trend line) or Retail (the bottom-most trend line).
ii. We only buy/long in up trends that are in wholesale.
iii. We only sell/short in downtrends that are in retail.
c. Would like the current price to be NEAR the 20/13MA area.
d. Would like to have a good entry candle that is relatively small in size.
i. Example: doji, hammer, spinning-top, etc…
ii. The smaller the candle the smaller the risk.
iii. A good “entry candle” indicates high odds of reversal.
II. Additional Steps
a. Check the earnings announcements for the underlying.
i. Don’t get into a position if the stock is announcing earnings within one week of the current date. It’s not worth the risk!
ii. There are option strategies that you could use during earnings announcements, such as straddles and strangles.
b. Check the recent news headlines for the underlying.
i. Just look for drastic news events or emotional items that you feel may affect the stock in a way that it will be too volatile.
c. Confirm the overall trend of the underlying.
i. Look at the 2 year/weekly chart of the underlying and take note of the “overall” trend in order to stay on the side of the odds.
ii. If the “overall” trend is obviously down, but you were looking to go long into a swing-trade then the odds of your success are now not in your favor.
iii. Take special note of “overall” trend support and resistance levels.
III. Ancillary Items
a. The bid vs. ask spread may indicate the volatility level of the underlying that you are deciding to buy/sell.
i. With an option, the higher the bid/ask spread, the higher the volatility.
ii. The higher the bid/ask spread could also indicate an option that doesn’t trade much volume, which can be to your detriment.
b. Look at volume.
i. With pull-back buy setups, one would generally like to see the volume of the rally higher than the volume of the pullback.
ii. With bear-rally shorts, one would generally like to see the volume of the pullback higher than the volume of the rally.
c. Check volatility levels if you’re trading options.
i. http://www.ivolatility.com
d. Check the delta levels if you’re trading options.
i. This can be done on the Trade Center or on other websites.
ii. I generally like to see deltas around (or above) 0.55 or greater.
e. Take note of the capital expenditure this position will require.
i. Just make sure you are comfortable with the amount of money this position will require in regards to your overall account size.
f. Take note of the overall risk you are assuming in regards to your account.
i. It would be a good idea to not allow your overall risk of all positions exceed 2% to 3% of your total account value. This would be the difference between your entry point and your stop-loss point. The sum total of the amount you are risking should always be known and accepted.
IV. Trade Management
a. Assess your positions on a daily basis.
i. Check your positions daily, but don’t be obsessive with them and look in on them on an hourly basis. More people get into trouble and get stopped-out of a position when they micro-manage their positions. You planned the trade; now let the plan act out accordingly.
b. Move your stop-loss to a reasonable position and log your change in your journal that you are hopefully keeping.
i. The first day or two may be the toughest part of the trade; if the stock hasn’t moved in your favor then keep your stop-loss set where it is; if the stock is moving in your favor then adjust your stop-loss to account for new profits.
c. Have a target price in mind.
i. It’s a good idea to have a profit-target in mind and to decide to take those profits once that price is reached. If you are trading several shares/contracts then sell half of your position to ensure a profit will be made just in case.
d. Plan your trade…trade your plan!
i. Be disciplined with your trading! Set rules and goals and follow those rules in order to help you achieve your goals!
