Trading Rules

Here are some current rules that I am working on for a successful living day trading.  I am feeling very confident about my initial stop order, which is really just based many times on the classic 1-2-3 breakout.  I'm interested in a breakout of the high or low of day that is established in the first 30 minutes of trading.  I WILL NOT trade before 10 am. 

I'm constantly working on my trading rules, trying to get my success rates higher of course!  Here is what I have so far that works pretty well for me.  What i'm usually working on are my trailing stops and where they go and how they get updated when I am in the money.  These "rules" are kind of in the order of how I proceed with a buy or a sell short.

1.  NEVER trade before 10 am.  I am interesting in breakouts of high and low of the day and trading just tends to be too sporadic before 10 am.  Many times however a move is set up for a breakout just after 10 am and usually before 11 am.  (sometimes i negate rule number 1...because screw it, you see a move and you take a measured risk :)....Hardly ever do I see my charts so far be successful before 10 am...hard to predict the pre 10 am market.

2.  Scan your favorite stocks and look for ones that are setting up for a breakout of the high or low of the day.  Many Nasdaq stocks can be frequently volatile and work well for these types of breakouts.  Don't have too many to scan.  Too many and you won't have enough time to chart and decide on some order entries.

3.  Place a stop order after 10 am for a stock that is about to breakout.  TRY to trade WITH the overall market.  There are times that the market is 50/50 and other times where you will have 1 stock out of 100 breaking out high big, but most times the market will work in conjunction with my picks.  Stocks that I usually like have fairly high volume and thus are factored into the overall index price heavily.  Your stop order should be 1 penny above the high of day (or 2 or 3 if you want to be more conservative), or 1 penny below the low of the day if you are shorting.  NOTE: I am playing around with only entering the breakout if the candle that breakouts CLOSES above the breakout level.  Then go in on the next candle.

4.  Place a trailing stop or just a stop-loss price at the same time you place the stop order.  You can place your stop loss at the OPPOSITE position.  Meaning, if you are breaking out long, the stop loss can be placed at the low of the day.  A typically stop loss will be around 1-3% of a retracement.  The key to your money management however is NOT risking more than 1% of your PORTFOLIO on the move.  So if your stop loss HAS to be at a certain level of risk, you need to risk the appropriate number of shares in order for you to be able to hit your stop loss, be stopped out, and at the same time not loose more than 1% of your portfolio on the trade.  NOTE: I have been playing around with the 20 day moving average on the daily chart.  I'm thinking that if i go long for instance and the move retraces I will get out once the price goes below the 20 day ma and not wait for it to go all the way to the low of the day stop loss.  If the position ends up being successful I can always re-play the new high of the day breakout.

5.  Trade between 1 and 6 trades in a day total.  At least for now.

6.  If your trade becomes profitable at, lets say, 1%, consider moving your trailing stop to a .5% trail to protect your profit...or better yet, sell half of your position so that you at least make that and move your stop loss to the original buy position.  This is personal preference and many times this decision can be different as it has to do with the overall strength of the move.  I often times will sell the entire amount depending upon overall market conditions and world news.

7.  There can be more than 1 breakout in a day.  Watch out for strong afternoon moves especially during some boring trading days.  I've seen some major breakouts occur from 3-4 PM with some major profit potential and if you aren't paying close attention you will miss them for sure.

8.  The key is to keep your losses small (hence I'm playing around more with the 20 day ma) and let your gains go until you get stopped out of a strong reversal move.

9.  Hope for a lucky day :)

10. Go hug your wife, kid, or dog if you have them. Trading isn't the end of the world and no one really cares about that breakout pattern that you nailed and made 10% on.

A successful and a failed breakout example is below: