The Rules of The Game

The following entries are the content and results of the task that was given to me a few weeks ago.


Previous Entry: Be My Own Trader



The previous entry have discussed on how simple questions helped me set up a trading plan based on my personal lifestyles. The next set of pointers guided me to know what kind of trader I am. What timeframe to use. Which indicators. How much risk. And lastly, my entry and exits.

Designing the System

Timeframe

Can you look at charts every minute, every hour, every day?

• I can look at charts every day before and after work. I can partially monitor it at work.

What type of trader are you?

• With the time constraints to monitor the market, I choose to be a Trend Follower for now.

How long can you hold your positions?

• I have held to a stock before for 47 days before my trail stop was hit and executed.

Indicator

Trend Identification
First goal is to identify the uptrend as early as possible.

• Moving Averages are one of the indicators used to identify trends. MA20 for short term, MA50 for mid-term and MA100 for long term and overall trend.

Trend Confirmation
Second goal is to confirm the uptrend.

• A good confirmation of trend condition is the alignment of the moving averages. When MA20 is above MA50 and MA50 is above MA100, this is a good confirmation that the uptrend is healthy.

Risk

Define how much you are willing to lose on each trade.

• The main objective of this plan is consistency and survival. I need to protect my capital and set a maximum of 4% loss on each trade.

Entry & Exit

Find where and how you will enter and exit a trade in order to get most profits.

• Breakouts can be an entry for Trend Following setups. Waiting for confirmed breakouts towards EOD is a conservative and is the safest entry. Minimizing whipsaws.
   
• Trend following setups need to monitor price action for few days after entry to check if the setup will go with or against your bias. Cut my losses if market goes against my bias. In the event that the trend goes strong and healthy and went with my bias, I need to look out for the price when it is already nearing my trails stop. If trail stop is hit, execute as planned.
   
• Use Investawatcher for watching entry/exit areas without being glued on my screen.

Write it down

You must write your trading system rules down and ALWAYS follow it.

• Writing down and reciting my rules before trading session opens will help to remind me every day of the objective and goals that I am trying to achieve. I’ll stick to it through thick and thin. I will be disciplined. Rock solid discipline. Because having a solid trading discipline is the most important characteristics of a successful trader.

Just like a warrior forging his own weapon.

Building the System

The Trading Setup

Define your timeframe and indicators based on your trader profile.

• Use Daily and Weekly Chart only (Trend Following)
• Indicators to use: Moving Averages only
• MA20 (Red), MA50 (Magenta) and MA100 (Blue)

The Trading Rules

Determine your Entry/Exit triggers.

Entry Rules

• Stick to up trending stocks. AOTS in Daily Chart (Alignment of the Stars – where MA20 > MA50 > MA100) or PUA (AOTS in Daily and Weekly Chart)
• Darvas Box or Major Resistance Breakout
• Minimum 3-Month High/Resistance Breakout

Trail Stops

• If breakout turned out to be BORG play – use close of previous candle as trail stop, sell 50% of position, let the remaining position ride the trend;
• Use Technical Stop - MA20 as Trail Stop

Cut Loss

• Maximum of 4% loss per trade. Respect you Cut Loss level.
• If bias is already invalidated, cut, even if loss is less than 4%.

Other Rules

• Trade only stocks that are liquid.
• Do not execute unplanned trades.
• Portfolio Allocation – Maximum of 3 stocks (33% portfolio allocation per stock)
• If Trend is strong, add volume on succeeding breakouts (Conviction Trade)
• Use Investawatcher notification to monitor entry and exit areas.
• More importantly, be honest. Be patient. Stay disciplined.

Here's an infographic for quicker read.






Next Entry: Put Into Test