Before you even think about trading you must learn money management skills and be able to control your emotions.
- 1) The Markets
2) Charting to Make Trading Decisions
3) Indicators and Settings I Apply to My Charts
- 4) Mechanics of The Trade and Money Management
- 5) Entry Rules
- 6) Exit Rules
- 7) Keep a Journal
In order to trade successfully, I have learned I need the right tools to trade with, the right temperament, and good money management skills. At a minimum, you must have a brokerage account with a live data feed. You can spend as much time and money as you want on various tools.
The steps below are how I trade and I come back to this page almost daily in order to stick to my plan and hold myself accountable. If you are reading this, you need to find your own style of trading and what works for you.
I consider myself a hobby Swing Trader. I am not trying to get rich quick. I did when I was younger and basically blew up a couple of accounts and lost money with dreams of aspirations of being insanely rich. I found out later unless you are born into wealth, it takes knowledge and hard work to create wealth. It also depends on how you define what wealth is.
I have paid for trading systems and they just did not work for me. I lost money listening to and blindly following others. I blame no one but myself and my lack of knowledge.
Now I trade slow and steady and learn the craft by reading the psychology and mechanics behind trading and then testing those hypotheses. My win rate is currently 75% and I keep a running log of my trades.
Nowadays, I only trade for income. I am happy to spend just a couple of hours on the weekend looking for trade setups that typically make me $500 to $3000 a week. I do not want to spend all day, every day, chasing some dream of being rich. Why would I?
I live comfortably and live simply. It is less hassle that way. I have paid off my house and make enough to eat. My child is taken care of, has an education, and a leg up on life. I have enough saved to retire and live comfortably on.
In the end, I figure, we all die and can’t take it with us. So, I am not going to kill myself nor make myself miserable in this life chasing the idea of being insanely rich.
When I started thinking that way, I became comfortable with trading and started making money. I also learned you get out of it the amount of time and energy you put into it.
When I was younger, I used to spend a few hundred dollars a month on charting programs, chat rooms, stock recommendation lists, and the next best trading system. What I found is that you cannot predict the future and everyone was selling some guru trading system based on the past and what-ifs. I wasted money I did not need to waste.
I figured out later that I did not need to pay for chat rooms nor stock recommendations subscriptions. The only people who were getting rich were the ones selling that snake oil medicine.
There are a lot of scammers in the “Stock Trading” business and the SEC has no manpower or teeth to police this business. I wasted a lot of time on money. I found out that you really don’t need these things if you just read, trade with real money, and work on your money management skills. If you stop learning and become complacent in your stock trading, or life in general, it will bite you in the ass.
Chat rooms are okay only if everyone in them brings in ideas to share and to critique. There are plenty of free chatrooms out there. Paying for stock lists from “gurus” are a waste of money. I can find trend stocks in five minutes to trade with. There are many free stock screeners available online that what these gurus use.
The purest and cheapest way to trade stock is ticker tape trading. This is nothing more than reading data feeds of stock prices. I can trade from level II stock price quotes if I need to, which is basically the same idea when traders used to trade while using the Edison stock ticker machine. Now, everything is just on a computer screen. The basic principle is the same that all boils down to volume and price.
For long term trades and to be a bit more precise with my trading assumptions, I prefer to have a program that plots historical price action on a chart so I can look at patterns of trading behavior and gauge the trend so I can choose which direction, short or long, I am going to trade.
1) The Markets
– What I trade –
I am most comfortable Trend Trading stocks and stock options. I do not like trading Indexes and their options because they move too fast for my trading style and I usually lose money. I like steady swings, up or down, usually over a period of 2-5 days. I do not like to hold long. My personality is not right for it and it stresses me out.
I will not trade penny stocks. It is an extremely corrupt industry and I do not know why the SEC even allows it. Yes, I know folks who have done well with them, but this is not my cup of tea. Many penny stock companies (people) pump and dump or just take your money and simply disappear.
Swing Trading is a style of trading that attempts to capture gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities.
– Identifying Stocks to Trade –
One of the best sites available to screen for stocks is FINVIZ. Yahoo used to be my go-to, but they became nothing but ads that bog down and lock up my browser.
For my standard go-to swing trades, I run screens in Finviz for Mega Cap Companies and Large Cap Companies. If you hover over the stock link it will show a preview of the stock’s chart. This makes it quick and easy to choose stocks patterns that look promising, to me, for swing trades. I choose stocks that show wide swing patterns over a few days or weeks. I write these stocks down then add them into a list within my charting software.
I filter to trade stock options on stocks that are over $100 and are well known companies that are on everybody’s radar. Stocks that trade high volume, and of course the charts pattern has to have good low to high swing movement. You will see the setting on Finviz.
2) Charting to Make Trading Decisions
– Primary Chart Intervals –
The primary chart intervals I typically use are 4 hours, 1 day, and 1 week time frames. I like these time frames to all be in agreement with the trend of the stock’s price action. I use a charting program and technical analysis to help me with my trading decisions.
Price action is the movement of a security’s price plotted over time. Price action forms the basis for all technical analysis of a stock, commodity or other asset charts. Many short-term traders rely exclusively on price action and the formations and trends extrapolated from it to make trading decisions.
Technical analysis is a methodology that makes buy and sell decisions using market statistics. It primarily involves studying charts showing the trading history and statistics for whatever security is being analyzed.
– Charting program I use –
My Charting Program
I add the stocks I find on Finviz into my charting software. I use tradingview.com. This is free to use but has limitations to how many stock lists, indicators, and templates you can save. with the free version. I purchased a pro subscription that has a few more bells and whistles.
Tradingview will run specials throughout the year. I think I got 50% off after I signed up for the free trial then canceled within the 30 days.
One pitfall of tradingview is that they will want to charge you, on top of your subscription with them, for live data. I do not need this since I typically look at my charts after hours and I do not typically day trade. The data is 15 minutes behind. This is good enough for my needs. If I ever was to get serious about day-trading then I would use another charting system that is tied into my brokerage account.
Once you get your indicators and templates set up for what works for you, you simply just have to scroll down your stock watch list and look for swing patterns that meet your trading criteria. I spend no more than 10 minutes on this.
I have a few chart setups that I use. These are listed on my rules page.
I typically start with a 4hr chart and look for various patterns and trends as outlined on my rules page. StockCharts.com is a good reference for the explanation of various chart patterns and indicators. Once Something spikes my interest, I then move out to the one day chart and then the weekly chart to see if my indicators and perceived patterns are congruent.
Sometimes I use the drawing tools to draw patterns on my charts. After I draw patterns and trends I narrow down the potential trade on a stock by looking at my indicators in order to give me confirmation to help me decide if I want to get into the trade or not, if I need to wait for confirmation, or if I missed the chance for that trade.
3) Indicators and Settings I Apply to My Charts
By analyzing historical data, technical analysts use indicators to attempt to predict future price movements. Examples of common technical indicators include the Relative Strength Index (RSI), Money Flow Index (MFI), Stochastics, MACD and Bollinger Bands
I use various statistical indicators and constantly tweak those indicators based on the price action of the stock I am looking at trading. I advise coming up with what works for you. I am not a professional and would never recommend you trade as I do. I am only showing how I trade for educational purposes. Keep in mind what you see here, I will tweak and adjust since price action of stocks changes and you may be using something that may no longer work. You have to stay dynamic in this game while at the same time stay static with adhering to your rules.
Most of what I use are known chart patterns that are freely available on the web.
The thing to understand about indicators is that the price action for every stock is different and one indicator does not work for all stocks. You have to figure out the best indicators for the stock you are trading and what fits your trading style. Only do what works for you. This is more of an art than it is a science.
4) Mechanics of The Trade and Money Management
– Rules for Position Sizing –
Position sizing refers to the dollar value of your trade and can also be used to define the number of shares or contracts that you’ll trade.
I am only willing to put 5% of my total account down on an option trade. This is a very liberal number as I am willing to take more risk. 1% would be conservative. So basically, If I have $100,000 in my account then I am only going to buy options contracts for one trade that equals around $5,000.
This is all I am willing to lose on any one trade.
With that in mind, I will trade at least 30% of my total account. So If I had 6 trades of $5,000 at the same time happening, this is a total of $30,000 in the market on trades and therefore 30% of my account is trading.
This is the key to money management. The odds are more in your favor if you follow this and you will be less likely to blow up your account if you are on a losing streak.
My current win percentage is 75%. This means I am only losing 1 in every 4 trades.
I follow this formula religiously. I may not make a killing, but over time this scales up and you will exponentially make more money unless you are on a losing streak.
This article. “Money Management – The 2% Rule“, gives a very detailed outline similar to what I do for money management.
If I start losing more than I am winning in any one month, I take a break from trading for the rest of the month. I took off years when I had a personal tragedy in my life.
Trading in the markets is a Zero-Sum Game. It takes focus and clarity. You either win or lose. You are betting against other traders and high-speed computers who are either going to give you their money or take yours. If you are not thinking clearly and are not focused you will lose your money.
– Tools For trading size, profits, and loses –
I typically trade option spreads on stocks that are over 100 because the premiums are usually more expensive. Yes, this limits what I can make, but it also limits what I can lose. Lower priced stocks I will straight out trade calls or puts.
Once I narrow down the stocks that meet my trading criteria, I run them through an option strategy builder or analyzer to determine what my probabilities are in terms of profits versus losses.
Most brokers have these tools built-in. I can set the size of my trade in terms of dollars. Both my Etrade and Interactive Brokers accounts have these tools. It really is a time saver.
I like E-Trade tools better, but do my options trading on Interactive Brokers because it is half the price and faster executions than E-Trade. You can also find free option analysis tools online.
It is not necessary you use these tools, but they will also give you a fair idea of your profit/loss potential. You can just skip this step and go to the next step or skip them altogether. The main reason I use my broker’s tool is that it automatically and quickly calculates the best strategies that have the highest probability to win.
I am a visual person and optionsprofitcalculator.com is one of the best tools if you want to visualize your potential profit or loss. This is not perfect since it uses the Black-Scholes model which pertains to European Options, but it gives a reasonable representation of what your outcome may look like. The model also does not take into account volatility. It does, however, give an idea of the time decay of options. At the moment this is a free service.
5) Entry Rules
Entering a trade is easy for me as long as I follow the rules I set for the indicators and / or patterns I am looking at. For example, if I have a chart that has formed a Bull Flag or Bear Flag I will wait for the price action to break out of the formation and go either long or short based on the breakout direction. I will also take into consideration such indicators as the Relative Strength Index (RSI). Mostly I have my own proprietary indicators.
6) Exit Rules
This can be hard because emotions get in the way. If I am in a winning trade, I will sometimes end up jumping the gun and get out early instead of letting it run. If I am in a losing trade, it is easy to tell myself that the price action will turn around and go in my favor. I have learned the hard way, numerous times, this is not the case.
I strictly get out of a trade if I hit a loss threshold between 20%-25%. This is automatic. I do not second guess myself thinking the trade will turn around. I used to but learned it is better to just take the loss and move on to the next winning trade.
I try not to stay in a trade longer than 5 trading days. If I do stay in longer, then I watch the stock’s price action on the chart closely to make sure there is not a trend reversal happening.
If there is a lot of volume of trades and high volatility pushing the underlying stock price higher then I will wait until the volume slows. This usually nets me 20-40% or better on spreads.
7) Keep a Journal
My Journal is this blog.
All my trades are posted on Profitly
It is important for me to keep a journal and a running tally of my trades. This is so I can look at my own trading psychology, to determine if I have been sticking to my plan, follow good money management, and hold myself accountable to making stupid greedy trades.
This does not mean to beat myself up or second guess myself when I lose a trade. I used to do that and became scared to trade and lose money. I learned it is normal to lose trades and if you use good money management you will typically come out ahead.
Looking back at the history of my trades, I focus on how I could have timed my entries and exits better, whether I follow my plan or not, and to reassess if my indicators are still working or tweak them if they need to be tweaked.