Thursday, September 25, 2008

Tryin2make A Trading Plan For Myself!!!

This plan is based on much of what Dr. Elder advocates and I am deeply influenced by his methods. The main idea behind this plan is to trade short term swings. This plan lays emphasis on trading with the trend and has shades of Triple Screen method. We generally start by paying close attention to the external stimuli and market internals to check the undertones of the overall market. Then we use a wide variety of scans, which one is comfortable with to zero in on the scrips worth trading. This plan lays equal stress on strict money management. Though this plan may sound too boring or appear too long but I feel a trading Plan is essential for the survival of a good trader. All care has been taken while devising this plan to embrace the element of KISS! So here it goes;

1. The Market Internals.

Here we tend to look into a few indicators that show the overall breath and underlying strength and weakness of the general market. There are plenty of such indicators that one can use, I am particularly tryin2limit my list to just a few.

A. Vix: Vix is a volatility index. This is based on the activity of option traders. Vix is a contrarian indicator. Any readings above 35 suggest extreme pessimism and used as a buying opportunity. One should book profits when Vix is nearing 18 on its way down.

B. New High New Low Index: This is created with New Highs-New Lows. This is a very important indicator. It signals important turns in the market when it diverges from the Price. One can also use A/D ratio for the same purpose.

C. Open Interest: It pays to monitor Open Interest. Monitor the changes in Open Interest. Keep a tab on the puts and calls. The max Open Interest in particular calls and puts is suggestive of the resistance and support the scrip is likely to encounter. Along with Open Interest keep a watch on the PCR.

2. Scans For Choosing The Stocks To Trade.

There is a wide variety of scans one can choose from; again this is a matter of personal choice. I like to use;

  1. Price Volume Breakout
  2. MACD Divergence
  3. Triple MA Crossovers
  4. The Visual Scan (patterns etc); I consider this as the most important!

Whenever you run your scans the list needs to be additionally filtered by running the Relative Strength Comparative (RSC) and ADX filters. The idea behind such filters is that we want to zero on the scrips which are outperforming the Index and are showing strength (RSC). The ADX filters those scrips where the trend is strong and the move will be fast and strong. Again I repeat why we use such filters is that we want to get into the scrips which are ready to move immediately (ADX+25) and are likely to outperform (RSC).

3. Chart Analysis.

Armed with the list of scrips we now move on to Chart Analysis. First on our list is;

  1. Monthly Chart. I use Monthly Charts to see the broader trend and some major support and resistance areas.
  2. Weekly Chart. This is very important from the point of view of a Swing Trader. Weeklies are the first things we look into. In here we identify important S/R levels. We look at patterns if unfolding and general Pivot Points.
  3. Daily Chart: This is used for action. In the daily chart we look for Swing Highs and Swing Lows. We also pay close attentions to the patterns. Judicious use of MA’s and Trend Lines intimate us of future S/R levels.
  4. Hourly Chart. This is primarily used for the purpose of fine tuning our entries and exits. For a Swing Trader this particular chart is of no major importance but for the Day Trader this is the most important chart.

Since we are dealing here with the charts, it would be prudent to bring up the topic of indicators to be used. I personally feel the choice of Indicators is a personal one. Use what one is comfortable with. Personally I like to overlay my price pane with 20/50/200 EMA,s. A price Envelope, to identify targets. The Lower panes are occupied with RSI/MACD and Stochastics.

4. ABC Rating.

Once our chart reading is over we yet again rate the charts in the order of their priority. We rate them on scale of ABC. A stands for high probable trade that we our likely to take the very next day. B is for a trade where we think that the trade needs to be worked upon for sometime before initiating an entry into it. C is for the trades where we can see some major patterns unfolding. The trade looks promising but needs time to develop; hence patience is required to let it ripen before we taste the fruit.

5. Taking The Trade.

This is where all the above leads to. Pulling the Trigger. Books have been written about this but I would rather keep it short and sweet. TRADE IN THE DIRECTION OF THE TREND. We only initiate our trade when our Daily Chart is in sync with our Weekly Chart. Anything contrary is sacrilege. After doing all the above exercises we do not want to blow it up by going wrong in pulling the trigger. Even the best of trade setups go awry if we jump too soon. It is said there are three very important rules that can give you the best entry in the world. These rules are Patience, Patience and more Patience! While speaking about taking the trade one of the most important things before initiating the trade is defining of the following; the Entry Price, the Stop Loss, and the Exit price. If you are unsure of any one of these three you are not allowed to enter. The next step after entry is to monitor the trade and take profits when target is achieved. Here if one feels that the target is likely to be overshot then one can use trailing stop. Another golden rule GREED IS GOOD but never ever let your winning trade get into a loss. Love your losses so much that you want to take them as soon as they occur!

6. Money Management.

This pertains to most what Dr. Elder teaches. Never bet more than 2% on a single trade. Never loose more than 6% of your capital in a month. Very simple yet hardest to follow. This is the HOLY GRAIL. If you have mastered this then you are THE MASTER!

7. Organized Trader.

This lead to the finale where all the above ends! Yes the very important part The Documentation. Every trade needs to be carefully documented. Every chart needs to be marked and saved. Every lesson learnt every moment of Glory, every moment of Despair needs to be saved and well documented. This forms the foundation on which you will build your successful trading career.

This is the gist of a good trading plan. This is not a final plan coz there can never be a final plan. We change with times things change there will be changes or rather should be changes in this plan as we move forward in our journey. You need to make a plan that suits you, a trading plan is like a well-fitted suit, every individual has different styles but the basic structure stays the same!!! I am tryin2implemnt my plan, if you have any further additions or refinements to the above then do let me know.


Ilango said...


Good amount of focus you have put in here.
I wish you the very best for your trading plan.
I like to add here that more calmer & Conscious you are infront of the screen (OR better stay away from it at times), the more success will you be.
And never talk about your winnings or count it..Just keep playing those points.(Smart businessmen, I know of, do it that way)

Once again, Good Luck to you.

Tryin2Trade said...

Ilango Hi,
Thanks...making the plan is easiest but implementing it the hardest. Hopefully I will try and achieve the latter also.Will need your help and guidance. Will be writing to you this weekend! I am glad that I have you commenting here more often!!!
Thanks once again and Regards

Anonymous said...

Hi Manoj Sir,
Very Good points and notes you have made and i would also agree with the Ilango sir comment -that it is necessary to keep calm and be Conscious when in front of screen.
I would like to copy and keep this with me as my notes for reminding me these things again and again to make me sincere....I like coming back to your blog again and again..


Anonymous said...


Tryin2Trade said...

Anonymous Hi,
Thanks for your enlightening views and wish you Good Luck TOO!!!

Anonymous said...

Manoj - good write up an the most tough part to it is the descipline to implement it.

The only thing which i personally prefer is not to run scans.. I would rather focus on 2 index securities and two stocks and just trade on them. I believe not all stocks behave similarly under similar circumstances (or setups) and hence its better to understand a handful of stocks, how they behave under different setups and trade them only. If there is no pattern emerging on them.. i would stand aside. I would wait for the right ooportunity to come to me rather than hunt them down by scans.... but just my personal style brother with no offence meant to your system.

I love Elder and his 2%/6% rule.. his triple screen system and the fact that he advocates going with trend with entering closer to the mean..