20 TRADING PLAN ?’s & 20 TRADING RULES(ZT)

This article continues the weekly educational series, primarily dealing with psychology and methodology. Here are the previous articles: 4 Stages of Learning, The Trading Death Spiral, and the Trader’s Mindset /w Common Psychological Issues.

I get over 100 e-mails per week and people asked me more questions about the trading plan and some ground rules, so I’m going to combine both topics into one article.

I like to ask myself several questions when constructing the plan. I’ll give you 20 of them here and you can brainstorm the rest.  The plan is your defense against emotional trading (if you actually follow it). Without a plan, you will be all over the place. The plan must be clear and concise and written down. If you do so, you’ll be in the top 3% of individuals who have a plan, immediately giving you an edge over the other 97%. Here are the questions (in no particular order):

1) WHY are you trading?
2) How will you enter & exit trades?
3) What type of orders will you use?
4) What broker, software, hardware will you use?
5) How much capital will you need to reach your goals?
6) What ARE your goals?
7) What’s your % allocation of capital per position?
8 ) What is your pre-market trading preparation process?
9) What is your after-hours review process?
10) How many positions are you able to focus on at once?
11) What type of trader are you (day, swing, position, etc.)?
12) Are you purely fundamental, technical or a hybrid of both?
13) What will you use (exch-listed, OTC, futures, options, etc.)?
14) When will you trade (all day, set time, every few days, etc.)?
15) What are you guidelines for using stops?
16) What are your guidelines on losing positions?
17) How much will you risk on every trade?
18) Will you go both long and short?
19) Are you going to trade the open (what’s your gap strategy)?
20) Do you have a list of sites to visit, resources to read on a daily basis?

There are many more questions to ask yourself, but here are basics. Meditate on them.

As for the rules, there are plenty of them. We all forget about them once in a while. In fact, I always catch myself in the act of breaking them. The key is to be aware of your mistake and to get out of it as quickly as possible. Right the wrong. If you are not aware, then you won’t know, and then you will be finished. Here are some rules, or little tidbits, that should aid you as a short-term trader. Some are obvious, some are not, just mind them all.

1) Buy on the 1st pullback from a new high & sell the first pullback from a new low.
2) Enter during quiet times & exit during crazy times.
3) Equalize time to opportunity.
4) Sell the 2nd high, buy the 2nd low.
5) Don’t trade the exact open (in most cases).
6) Short the weak rallies and not the sell-off.
7) Do not short strong rallies & do not buy strong weakness.
8 ) Keep the charts in mind & ditch the news.
9) Keep support & resistance and MA’s in mind.
10) Trends test the last point of support or resistance (in most cases).
11) Use the TICK and/or VIX, and other indicators to verify moves.
12) Stop chasing stocks, long or short, if you don’t have a valid reason to do so.
13) The 200-day MA is the strongest MA, followed by the 50-day MA.
14) Therefore, don’t be buying toward or short into an MA. (includes the 20/30-day MAs).
15) Track the pivot points.
16) Make note of every gap and identify them (area, breakaway, continuation, exhaustion, etc.).
17) Massive volume at a pivot will kill the existing trend.
18) Bottoms take longer to form than tops because accumulation takes long than distribution.
19) Stop rapidly trading during consolidation periods.
20) Use multiple timeframes for entry & exit signals.