I always believe that, as a trader, we should always have a nice trading setup that suits our lifestyle (time, commitment, etc) instead of the other way round. Most importantly, the trader should feel as comfortable as possible using the trading setup that they chose/created. Most importantly, everything in the setup should make sense. Every bit and little pieces of the entire thing should feel ….. right and comfortable.

I’m a guy who stays outside of the States, in Malaysia actually (12 hour difference), and have a normal 8-5 day job, and thus, day trading was definitely out of the question for me. I’ve tried some other time frames of trading methods, but still, I still find myself most comfortable with swing trading,and thus, this is what I came up with.

Overview

I prefer playing on something which has a higher probability of success. What I’m looking at here, is to find a continuous uptrend/downtrend stock, and get into the trade during a brief pullback/pushback, with an acceptable risk/reward ratio. To even further make my winning probability higher, I will only trade LONG, during and only when the overall market is in a continuous up-trending stage. Vice versa.

Rules

These are the rules that I came up with, to filter out the stocks that I might be, but not necessary will be trading. (Note: All the rules below are mainly for long trades. Short trades is the exact opposite of it). The below are the few definitions of those statements I’ve stated in the overview.

1. Continuous Uptrending stock
- 10MA above 30MA, 30MA above 50MA
- 30MA and 50MA is pointing upwards.

2. Brief pullback
- 5-day Wm%R is below the -70, showing a sign of brief oversold.

3. Acceptable Risk/Reward
- Anything above a 1:2 ratio is acceptable for me.

Trade Management

1. Place an immediate stop lost once the trade is on, based on the previous swing-low

2. Once the trade touches +1R, immediately sell half of the position, and trail the rest of the 1/2 at break-even.

3. Let the rest run. Most of the time, I prefer trailing it 1R below when the close reaches a new R. But if sometimes, there’s a selling signal, I might just sell it of.

Summary

So, let’s go thru the summary again, step by step

1. SPY(Overall Market) has got to be in a continuous up trending stage.

2. SPY has got to be in a brief pullback(oversold).

3. The stock that we are gonna trade has got to be in a continuous up trending stage.

4. The stock that we are gonna trade has got to be in a brief pullback too.

5. The stock that we are gonna trade has got to have a risk/reward ratio of at least 1:2

And with all the rules laid out, Let’s take a look at one of a recent trade.

Here’s the chart of the SPY on 2nd Sept, 2009

1. The market is in a continuous up trend, with 10MA above 30MA, and 30MA above 50MA, and their respective 30MA & 50MA are both pointing upwards.

2. The market is currently in a brief pullback(oversold) session. Notice that the Wm%R(5) is below the -70 region.

And thus, we are going to look for LONG trades.

And here is the candidate that we will be looking, WMB. (I got all my candidate scans here)

1. 10MA is above 30MA, and 30MA is above 50MA

2. Both the 30MA and 50MA is pointing upwards.

3. It’s in a brief pulllback, with the Wm%R(5) currently below -70.

The last thing to check would be to see whether its risk/reward ratio is worth our effort to take this bet.

From the above chart, the horizontal lines are the place of the stops. We can see if we enter the trade, and expect that this trade were to stall around the previous high/peak, it is gonna give us a trade of slightly better than 1:2, and thus, this is a trade which is worth our betting.

And once again, here will be the trading action plan:-

1. We will enter this LONG trade only if the stock trades above 16.28.
2. Once the trade is in place, an initial stop will be placed at the previous swing low, (which is actually today’s low) at 15.80.
3. If the stock touches +1R at 16.76, we will immediately sell 1/2 of our position, and trail the rest at break even, (which is at the entry point, 16.28)
4. The rest of the position, we will trail it below 1R of the close, or based on the condition.

And here’s the later stage on the Trade Management when we’re in the trade:-

After 3 days, the stock gap up and hit our 1st target, 1R(16.76). We immediately sold 1/2, and trail stop at +1R(16.76), as the stock actually closed above +2R(17.24). Furthermore, this newly formed gap should sustain as the immediate support, and if the stock close below this gap, then is shows that the uptrend is somewhat deteriorating, thus, this stop around this point make sense.

A few days later, the stock closes right at +4R(18.20) level. Stop was immediately pushed up to +3R (17.72)

Luck was on our side. The stock closed above +5R(18.68) a few days later. We moved our trailing stop lost up to +4R(18.20)

We finally got stopped out on the 18th of September. All in all, we sold 1/2 of our position when it touches 1R, and sold another 1/2 at around +4R. That makes this trade a +2.5R trade, which is not a bad one.

10 Jan 2010

After detail research looking at my trading track records, and much consideration, I personally found out that, scaling out from my winning trades actually didn’t help much in improving my winning Rs. Instead, the additional commission fee of having to close my trade twice actually ate up a whole big chunk of my profit.

And as such, I’ve decided not to sell 1/2 of my position when it touches +1R.

From now on, the entire position of my trades will be trailed 1 R below the closing R.

===========================================

TAG: rules, strategy, method, swing, trade, wmb, trading, system, trend, follower,