Trading Rules

Basic Steps of start buying a stock

• Assess the condition of the market, sector and the stock in consideration. The idea behind is to make sure that "all the ducks are lined up".
• Opportunity lost is better than capital lost. If an opportunity is missed, forget it and focus on the next one. 
• Don't expect pick the bottom when you buy and top when you sell. Instead, you should be happy that you captured a good move.
• Check the bullish sentiment for the intermediate term (months) and short term (weeks and days), for the market, the sector and the stock. One way of accomplishing this is to observe what the market has been doing in the past week or so.

• Trading pre-market or AH should be forbidden unless you have a good contrarian view that justifies it. For example, a stock's move was subdued due to a recent market weakness where buyers are timid. Regardless, the size should be small. 
• The key in getting involved in the market is to make sure you are on the right side of the market. If you want to buy, the stock should exhibit bullish trend (trend is your friend). For the short term, check the intra-day chart (I use 10 minute chart) to make sure the up legs are longer both in the vertical and horizontal axis. Short and sharp legs should not be trusted, because they tend to be short-term reactionary moves that do not last. 
• Entry and Exit points. Entry point should set based on short-term intra-day chart. There are two ways to set the entry point. One is look for a breakout from a base. The other is to look for the pivot point where the down legs ends and up leg begins. Exit point should be set such that if the stock goes there, it would prove that the bullish pattern no longer holds. Therefore, exit. Once in a stock, the exit point should be set based on the longer term chart (15d-80d MACD) or other patterns such as "head-and-shoulder", etc. 
• Size  Getting into a stock should be a gradual process. Initial transaction should be a small one. Don't add to it until it is profitable. This method helps to get started on the right foot. It has a build-in mechanism of weeding out the potential erroneous trades. If it does not work, exit. 

Do's

• One basic trading idea is always to look for the market confirmation for an investment thesis. If the market does not buy your idea, it won't work or it is too early. 
• Scaling in and out. When getting into a stock, there is a natural urge to get in because you probably like the idea so much so that you are dying to get in. Scaling serves a few purpose. One is to test the market to see if it behaves favorably. It also satisfy your natural urge, so the psychological tension is relieved. It allows the manager to tread water lightly, not getting in too heavy too early. If it does not work, he can get out quickly without too much financial and psychological cost. 
• Scaling out is also a good way of handling a situation where a change of thesis may not be confirmed by the market. 

Don't Do's

• Check your mood, heart beat before any trade. 
• Don't over-estimate yourself and under-estimate your opponent, the market! 
• If you trade too much, there may be something wrong with your method. Good trades don't occur every day. 
• If ideas of your trade are too conventional (Buy on good earnings, loss cutting at the "support", etc.), QUESTION its effectiveness because the crowd are doing the same thing! Figure out a way of avoiding them. 
• Generally, buy a stock with good fundamentals (growth - good, acceleration - better) and the stock is making higher highs and higher lows. Usually the stock should be above 80 day SMA. Sell/Short a stock with poor fundamentals (products are getting obsolete) and the stock is making lower highs and lower lows. Usually, the stock should trade below 50day SMA.
• Don't buy or sell for exposure adjustments (longer or shorter). Do it for a good reason! 
• Don't trade near a cliff: The stock, which dropped off a cliff recently, tends to be volatile. 
• Clean slate: If a trade does not work as planned, exit entirely, or half, or quarter your way out. Keep in mind that even the best traders only get right about 62% of the time (according to SAC).
• When you are cold, don't trade. If must, paper-trade. If really have to, trade really small until your result warrants it.
• Don't assume the stock or market maintain its current momentum. Sometimes, it exhibits momentum, other times, it oscillates or mean-reverts.
• Don't buy or sell a stock based on news regarding its competitors. 
• Buy or sell in extended hours. 
• Try not to do it! 
• Buy on an earnings' gap up: make sure 1) Be careful! 2) The "beat and raise" needs to be significant and surprising, 3) the gap-up needs to be significant (8%+), 4) Stock is a large cap leader, 5) Don't commit to a full position, until the company had its CC (Conference Call), and make sure it is well-received. 6) Don't trade immediately after the news headline, but wait a breakout after the stock finishes its initial oscillation on a minutes intra-day chart. 
• Sell on an earnings' miss: 1) Be decisive, 2) Sell if the earnings' report is disappointing, don't hesitate!
• The strategy goes in streaks. Check the market streak and your own streaks before you trade.
• Study of the intro-day behavior of the stock you want to trade.
• Trade near the close of the trading day if no particular insight is known.
• Don't trade on a steep slope where stock is rallying or sliding, unless you can handle it. Don't get in turbulence unless you know how!
• Fix your mistakes and don't compound them!

• Any transactions (buy rules) only make sense under the right market conditions (market sentiment).
• Don't rush. If must, rush slowly. 
• Don't assume the market direction before the trade. Observe.  
• Don't trade in anticipation of the market direction, whether up or down, let market tell you!
• The factors that can influence the sentiment: price movements, news, sector/industry and company specific conditions. 
• If you want to trade during the day, it makes sense to trade around between 10-12am. The first half an hour should be avoided because there is so much retail flow, which does not tend to persist for the rest of the day. If done right, a stock, bought in between 10am - 12pm, can drift higher if the buying interest is persistent. 
• It is crucial to start trading on the right foot, meaning the position should show a profit on day 1! In other words, buying early during the day to play the "upward drift", you must be ready to exit if the drift disappears or turns negative. You can always get in at the close or the next day. You need to determine the intra-day exit points, where the drift turns. 
• Study of the behavior of the stock, especially from the chart. Think ahead of time how to handle such a beast before the "adoption".
• Check with CAN SSLIM system.
• Wait until at least 10:00am and after to assess the condition of that day.
• Exit points (short-term and long-term) (sell rules) must be in place before the trade! 
• Basic checkups
• Briefings
• Alpha
• MSN
• Chart Patterns
• look for the pocket pivot points: there was none, don't buy
• stock should trade above 15 SMA
• Industry
• Ownership
• Study the past, current and future Catalysts
• Proper entry where the supply and demand break the balance. 
• Sharp imbalance caused by surprises (earnings?)
• Determine the ultimate size of the position and a detailed plan for execution.
• Observe what worked in the market recently!
• Observe your own trading: what worked and what did not recently!
• Pause and think:
• You don't have to do this trade. No trade is a must!
• There is usually a dominant reason that you want to trade. Check other potential factors that can affect the outcome.
• Figure out the duration of the position. Is it long term and how long? Is it short-term and how short?
• Fundamentals of the position. Is time your friend or foe?  
• Don't fight or even argue with the tape!
• Don't pick up a fight with big boys who can crush you with their large ammunition. 

Trading on Break-Out Pattern (BO)

The underlying reason of buying based on BO pattern is that it indicates a pivot point of buying imbalance. Typically, when a stock fluctuates in a range bound for a period (months/years/weeks/days), and one day, it suddenly breaks out of this range with heavy volume. A BO pattern trader would buy the stock either during the day (the chances are that the stock was already trading above average volume) or at the end of the close or buy it after a short-term confirmation of the new trend. The problem is that a one-day move may not be caused by a "buying imbalance" by persistent buyers because a stock can move for so many different reasons. Rumors, news, mis-information, short covering, and the market can move a stock, creating a same pattern. A portion of "false" BO should be expected. A heavily shorted stock should have a higher percentage of "false" break-outs. Usually, a BO pattern caused news (other than earnings or product related) or an upgrade by an analyst has a high failure rate.

This phenomenon was observed and successfully applied by many famous traders. My own observations also seemed to confirm its effectiveness. The reality is a lot more complicated. Ultimately, the price behavior of a stock reflects the collective action of its participants. The behavior and expectation of the participants of a speculative bio-tech stock should differ from a maturing dividend paying blue chip stock. One should be careful in applying the same trading rules in all situations. My experience tells me that a very simple trading rule usually does not work, or does not work all the time. 

Intra-day Pattern