I believe that the best format for creating a trading plan is similar to the Diary we have just reviewed. When you scan a large number of stocks, you can keep brief notes on the potentially interesting ones in a spreadsheet or on a notepad with three columns: Date, Ticker, and Comment. The idea is to narrow down your search to a few actionable stocks. Once you have a handful of candidates, it is time to work them up and create an action plan for each promising one.
When you find a stock that you think you may want to trade in the days ahead, create a plan for it using the same format as the Diary, shown above. Capture a weekly chart using SnagIt, mark its signals with arrows and lines and write on it. Paste the chart with all the markings into a newly created entry in your Calendar within Outlook. Now capture a daily chart, mark it up, and paste it into the same Outlook entry, below the weekly chart. Name that Calendar entry after the stock and label it as a planned trade so that you can easily recognize it. Save and close your newly created entry.
The daily chart shows more bearish divergences and a false upside breakout (a hugely important trading signal we will discuss later). It documents my entry into the trade and grades the quality of my two sell orders on a 100-point scale. We will discuss grading buys and sells in a subsequent chapter. Having these charts in front of me today brings the experience of that trade back to life and allows me to learn from it. What did I do right? What did I do wrong? How could I have improved my entry into the trade?
The weekly chart shows that the price dropped below the value zone, underneath both moving averages. A severe downspike of the Force Index marks a potential bottom. MACD-Histogram has declined close to the zone where upside reversals tend to occur.
Go to your brokerage house website and place an order or orders for your planned trades. Make sure your broker sends you an alert immediately after your order is filled. Once you know you are in a trade, it is a good idea to place your stop-loss and profit-taking orders using an OCO (one cancels other) order. The exact mechanics of placing orders are outside the scope of this book—this is something you need to discuss with your broker.
Once you have created a plan for trading a stock, add its ticker to your monitoring list in the quote window of the program you use for market analysis. The size of the computer screen limits the size of the quote window, which is actually a good thing. I want to monitor only as many stocks as can fit into a single screen, without dividing my attention between dozens of tickers. I like this window (Figure 3.9) to show the key market indexes, such as the S&P500, as well as separate sections for my long, short, and futures positions. I named the bottom section Monitor, and put there the stocks I am considering trading.
The daily chart shows that prices are severely overextended to the downside, having fallen out of their channel. At the same time, there is a bullish notch in Force Index. The bears had a great ride, but all rides must come to an end. The odds of this one continuing are not that good.
I also write down the key trading messages on my charts, especially the price and size of my entry as well as the target and stop. When the markets become active, it is easy to lose track of things. This is why writing on the chart is very helpful, as illustrated in Figure 3.10.
Once you execute your plan and enter a trade, move its Outlook Calendar entry from the day when you made the plan to the day when the trade took place. Update the chart and add an intraday chart if you like. Add a few relevant comments—the size of the trade, the entry grade (we will discuss that in a moment), any comments on the quality of your entry, or the feelings the trade evoked. Change the color of the label from purple (Planned Trade) to yellow (Open Trade), then click Save and Close. The entire process of changing a plan into an entry record should take just a few minutes. Most beginning traders feel out of control and overwhelmed by the markets. This system for creating plans and monitoring trades is a tool that will help you control your trading. When your work becomes better organized, you will be in a much stronger position to take profits from the markets.
My quote window always tracks the latest prices and the net changes for the day. This is the setup I want to see whenever I open my trading program. It shows all the important data at once: the key indexes, my long and short positions in stocks, my futures positions, and my monitoring list. The chart (truncated in this picture) is on the left, the list on the right. I have set up myTradeStation so that whenever I click a symbol in the quote window on the right, its chart automatically appears in the window on the left.
Even a faulty plan is better than no plan at all, as long as you record it. If you keep good records, you will be able to recognize any flaws in your method and fix them. Keep doing this long enough, and you may start running out of mistakes! That’s when your equity curve will be ready to turn up.
When you find a stock that you think you may want to trade in the days ahead, create a plan for it using the same format as the Diary, shown above. Capture a weekly chart using SnagIt, mark its signals with arrows and lines and write on it. Paste the chart with all the markings into a newly created entry in your Calendar within Outlook. Now capture a daily chart, mark it up, and paste it into the same Outlook entry, below the weekly chart. Name that Calendar entry after the stock and label it as a planned trade so that you can easily recognize it. Save and close your newly created entry.
Figure 3.6 Trading Diary—DB, Entry, Daily Chart
The daily chart shows more bearish divergences and a false upside breakout (a hugely important trading signal we will discuss later). It documents my entry into the trade and grades the quality of my two sell orders on a 100-point scale. We will discuss grading buys and sells in a subsequent chapter. Having these charts in front of me today brings the experience of that trade back to life and allows me to learn from it. What did I do right? What did I do wrong? How could I have improved my entry into the trade?
Figure 3.7 Trading Diary—DB, Exit, Weekly Chart
The weekly chart shows that the price dropped below the value zone, underneath both moving averages. A severe downspike of the Force Index marks a potential bottom. MACD-Histogram has declined close to the zone where upside reversals tend to occur.
Go to your brokerage house website and place an order or orders for your planned trades. Make sure your broker sends you an alert immediately after your order is filled. Once you know you are in a trade, it is a good idea to place your stop-loss and profit-taking orders using an OCO (one cancels other) order. The exact mechanics of placing orders are outside the scope of this book—this is something you need to discuss with your broker.
Once you have created a plan for trading a stock, add its ticker to your monitoring list in the quote window of the program you use for market analysis. The size of the computer screen limits the size of the quote window, which is actually a good thing. I want to monitor only as many stocks as can fit into a single screen, without dividing my attention between dozens of tickers. I like this window (Figure 3.9) to show the key market indexes, such as the S&P500, as well as separate sections for my long, short, and futures positions. I named the bottom section Monitor, and put there the stocks I am considering trading.
Figure 3.8 Trading Diary—DB, Exit, Daily Chart
The daily chart shows that prices are severely overextended to the downside, having fallen out of their channel. At the same time, there is a bullish notch in Force Index. The bears had a great ride, but all rides must come to an end. The odds of this one continuing are not that good.
I also write down the key trading messages on my charts, especially the price and size of my entry as well as the target and stop. When the markets become active, it is easy to lose track of things. This is why writing on the chart is very helpful, as illustrated in Figure 3.10.
Once you execute your plan and enter a trade, move its Outlook Calendar entry from the day when you made the plan to the day when the trade took place. Update the chart and add an intraday chart if you like. Add a few relevant comments—the size of the trade, the entry grade (we will discuss that in a moment), any comments on the quality of your entry, or the feelings the trade evoked. Change the color of the label from purple (Planned Trade) to yellow (Open Trade), then click Save and Close. The entire process of changing a plan into an entry record should take just a few minutes. Most beginning traders feel out of control and overwhelmed by the markets. This system for creating plans and monitoring trades is a tool that will help you control your trading. When your work becomes better organized, you will be in a much stronger position to take profits from the markets.
Figure 3.9 The Quote Window in My TradeStation
My quote window always tracks the latest prices and the net changes for the day. This is the setup I want to see whenever I open my trading program. It shows all the important data at once: the key indexes, my long and short positions in stocks, my futures positions, and my monitoring list. The chart (truncated in this picture) is on the left, the list on the right. I have set up myTradeStation so that whenever I click a symbol in the quote window on the right, its chart automatically appears in the window on the left.
Figure 3.10 Writing Notes on the Charts in the Quote Window
A. Shows the purchase day and price
B. Reminds me about the target and stop
C. The trade in question
B. Reminds me about the target and stop
C. The trade in question
Even a faulty plan is better than no plan at all, as long as you record it. If you keep good records, you will be able to recognize any flaws in your method and fix them. Keep doing this long enough, and you may start running out of mistakes! That’s when your equity curve will be ready to turn up.
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