Trading on the Edge

[All rules are stated for long trades and are reversed for shorts]

I use a top down approach for stock picks and entries. Entries are made only if the general market is trending and is in short term oversold condition. Stocks are then picked only from the industries showing strength. And the specific stocks are the strong stocks which are pulling back in an uptrend. As they say a stock’s move is attributed 50% to market move, 30% to sector move and 20% to the stock. Of course many stocks carve their own path and buck on their own irrespective of the sector and market, but those are not what I am looking to trade. Just the slow and steady ones.

Market: US Markets

Instrument: Stocks (Price >10 & Average daily volume(10) > 500,000)

Trading Style: Swing trading (Trying to capture price movement between swing lows and swing highs)

Trading time frame: Daily charts. I extensively use use multi time frame analysis for the complete picture. Weekly charts are used to qualify long term direction. Even if everything is looking really good, I do not trade against the prevailing trend in the higher time frame.
Market timing rules:

1. Long bias if Nasdaq & S&P 500 SMA(10) > EMA(30)
2. Enter only if a trend is in place. I define trend as at least one higher low being formed. I start looking for entries when the second higher low is forming.

Entry criteria:

1. Sort TC2000 industries by 3 month change and pick top 20 industries.
2. Take all stocks in top 20 industries and and screen out the volume and price criteria above.
3. Of the remaining, pick stocks in an uptrend - Uptrend to me is a continued sequence of Higher highs and higher lows. Any time the sequence is broken the instrument is not tradeable and enters category of chop.
4. Stock pulls back in the uptrend - An orderly 3-4 day pullback is the ideal scenario that I look for.

Entry Trigger: Price today crosses over high of yesterday (Enter few pennies on break of yesterday’s high)

Stop loss: 1.5 ATR(10) below yesterday’s low (Chandelier stop)

Trade management: Trailing stop: Keep raising the stop loss based on 1.5 ATR(10) calculation

Exit rules:

1. Target: 5day time stop with market-on-close
2. 2 day time stop if the position is not showing a profit by the day after entry
3. Exit if stop gets hit

Money management: 0.25% of account value at risk on every trade. Position size is calculated after calculating the stop amount based on trading plan such that a 1R loss will not lose more than 0.25% of account equity