Always Go In With a Plan

If you want success in the stock market, before you do anything, you should
develop a plan. The how of your plan resides in a series of concrete guides for
action.

Trading is serious business with real money on the line. Why would you go
into it without a well-though-out plan of action? Yet, most people do.

The ease of entry into the stock market - no license or training required; just
open a brokerage account and go - may give people the false impression that
trading is easy.

HAVE A PROCESS.

There is no such thing as safe stock.

Just because a company is a household name or a well-established

business with experienced management doesn’t mean it’s a great stock to
buy.

A plan lays the ground rules of your trade. It is the what, why, when, and
how of trading. Having a plant won’t guarantee success on every trade, but it
will help you manage risk, minimize loss, nail down profits when you have
them, and handle unexpected events with decisive action, which over time
will dramatically improve your chance of success.

By defining my parameters ahead of time, I establish a basis of

knowing whether my plan is working or not.

Key elements of a Trading Plan.

An entry mechanism that determines precisely what triggers a buy

decision.

How you are going to deal with risk; what will you do if the trade moves
against you, or if the reason you bought the stock changes suddenly?

How you’re going to lock in your profits

How will you position size, and when you will decide to reallocate funds?

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 HOPE IS NOT A PLAN

Wishing and hoping are not the same as planning.

“Be sensitive to the subtle differences between ‘intuition’ and ‘into wishing.’”

Without a plan, you can only rationalize. Often you will tell yourself to
be patient when you should be selling, or you may panic during a
natural pullback and then miss out on a huge stock move.

CONTINGENCY PLANNING.

The best way to ensure stock market success is to have a contingency

plans-using a “what if” process - and update them as you encounter new
scenarios and build your contingency playbook.

Your goal as a stock speculator is preparedness, to trade with few

surprises. To do so, you need to develop a dependable way to handle
virtually every situation that may occur.

Before I make a trade, I have already worked out responses to meet

virtually any conceivable development that may that place.

By implementing contingency planning, you can take swift, decisive action

the instant one of your positions changes its behavior or is hit with an
unexpected event.

Having a disaster plan gives me peace of mind, because should the

unthinkable happen, I know exactly how to respond immediately.

You should have contingency plans for the following:

Where you will get out if the position goes against you.

What the stock must do to be considered for purchase again in the event
you get stopped out of the trade.

Criteria for selling into strength and nailing down a decent gain.

When to sell into weakness to protect your profit.

How you will handle catastrophic situations and sudden changes that
require swift decisive action under pressure.

Your contingency plan should include the following elements:

Initial Stop loss.

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 The moment the price hits the stop-loss, I sell the position without
question.

The initial stop loss is most relevant in the early stages of a trade.
Once a stock advances, the sell point should be raised to protect
your profit with the use of a trailing stop of back stop.

Re-entry criteria.

Some stocks will set up constructively and attract buyers, but then
they quickly undergo a correction or sharp pullback that stops you
out. This occurs when the market is suffering weakness or high
volatility.

A stock with strong fundamentals can reset after such a pullback,

forming a new base and proper buy point.

Very often, the second setup is even stronger than the first because
the stock has fough its way back and, along the way, shaken our
another batch of weak holders.

If you get stopped out of your position, don’t automatically discard it

as a future buy candidate.

It could take two or even three tries to catch a big winner. This is a
trait of a professional trader. Amateurs get scared of positions that
stop them out once or twice, professionals are objective and
dispassionate.

Selling at a profit.

Once a stock purchase you made shows you a decent profit,

generally a multiple of your stop loss, you should not allow that
position to turn into a loss.

You can move up your stop-loss to breakeven or trail a stop to lock

in a majority of the gain.

You may feel foolish breaking even or taking a small profit on a

postion that was previously a bigger gain; however, you will
feel even worse if you let a nice profit turn into a loss.

There are two ways to sell at a profit.

The ideal is selling into a strength, after the stock has done what
you hoped it would do.

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 The other is selling into weakness, because the stock reversed
down to a level that you want to protect.

Selling strength is a learned practice of professional traders.

It’s important to recognize when a stock is running up too
rapidly and may be exhausting itself.

You can unload your position easily when buyers are plentiful.

Or you could sell into the first signs of weakness immediately

after such a price run has started to break down.

Priorities in Order of Importance.

Limit your loss.

Protect your line.

Protect your profit.

The important role contingency planning plays is that it enables

you to make good decisions when you’re under fire - when you
need it the most.

Contingency planning is an ongoing process. As you experience

new problems, a procedure should be created to deal with them,
which then becomes part of your contingency plans.

LOOK FOR FOLLOW-THROUGH BUYING.

The first thing I would like to see after a breakout from a base is multiple
days of follow-through action.

The best trades emerge and rally for a several days on increased
volume. This is how you differentiate institutional buying from retail
buying.

HOLD TENNIS BALLS AND SELL EGGS.

Determining whether the stock is a tennis ball or an egg will tell you
whether you should continue holding it or not.

If the stock is healthy, the pullback will be brief and soon met with buying
support, which should push the stock to new highs within just days.-
bouncing back like a tennis ball.

Tennis ball generally occur after two to five days or even one to two weeks of
pullback, followed by the stock bouncing back up again, taking out the most

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 recent highs.

Volume should contract during the pullback and then expand as the stock
moves back into new highs. This is how you determine whether the stock is
experiencing a natural reaction or abnormal activity that should raise
concern.

Stocks under strong institutional accumulation almost always find support

during the first few pullbacks over the course of several days to a couple of
weeks after emerging from a sound structure.

Minor reactions or pullbacks in price are natural and are bound to occur as
the price advance runs its course.

THE FOLLOW-THROUGH COUNT.

Another characteristic to look for is more up days than down days during the
first week or two of a rally.

I want to see three up days out of four, or six up days out of eight - ideally
seven or eight up days in a row.

This is the evidence that institutions are establishing big positions that can’t
be filled in only one day.

Another nuance to look for during the initial rally phase is more days with
good closes than bad closes. You want to see closes occurring in the upper
half of the daily range more often than in the lower half.

Big winning stocks will display the following characteristics:

Follow through price action after a breakout

More up days than down days and more up weeks than down weeks.

Tennis ball action - resilient price snapback after a pullback,

Strong volume on up days and up weeks compared to down days and

down weeks.

More good closes than bad closes.

WHEN NOT TO SELL AN “EXTENDED” STOCK.

Stocks that continued much higher had the following characteristics that
separated them from the rest:

Momentum. The stock is up 12 out of 15 days.

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 Volume. The volume increases 25% or more during the 15-day period.

Price. The stock price is up 20% or more during the 15 days.

IF THINGS DON’T GO AS PLANNED.

The reality is you will have many trades that do not work out as you
expected.

You should know the signs that a trade is problematic, which can tip you off it
is time to exit the stock or reduce your position - in some cases even before
it hits your stop.

WATCH THE 20-DAY LINE SOON AFTER A BASE BREAKOUT.

The stock should hold above its 20-day moving average; I don’t
want to see the price closes below its 20-day line soon after a
breakout.

If it closes below its 20-day MA shortly thereafter, the probability of it

being successful before stopping you out is cut in about half. If the
stock closes below the 50-day line on heavy volume, it’s even
worse.

THREE LOWER LOWS ON VOLUME SHOULD GET YOUR

ATTENTION.

Three lower lows on increased volume is a red flag.

However, if on the third lower day, buyers rush in and volume

increases to the point that the stock actually closes higher or in the
upper half of the range, I may stay in the trade.

But if the stock closes with a third lower low and without supportive
buying action, that’s another strike against the trade, especially if the
lower lows come on heavy volume.

Sometimes it takes four lower lows. The rule of thumb,

however, is every consecutive lower low after the third
becomes more and more ominous, and even much more so if
volume is high.

LOW VOLUME OUT, HIGH VOLUME IN IS A BIG WARNING.

If a stock breaks out on low volume and then comes right back
in on high volume on subsequent days, that’s a real reason for
concern.

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 WATCH FOR MULTIPLE VIOLATIONS.

Depending upon how many violations occur and how sever

they are, I’ll either reduce my position or get our entirely. Of
course, if my stop loss is hit, then I’m out regardless!

Violations soon after a breakout

Low volume out of the base - high volume back in

Three or four lower lows without supportive action

More down days than up days

More bad closes than good ones

A close below the 20-day MA

A close below the 50-day MA on heavy volume

Full retracement of a good size gain

SQUATS AND REVERSAL RECOVERIES.

A reversal recovery means the stock was able to quickly

overcome the stalling or reversal day, and it’s a positive sign.

If the stock squats, don’t panic; as long as your stop is not triggered
and no major violations occur, wait to see if the stock can stage a
reversal recovery.

AVOID THE PARALYSIS-REGRET CYCLE.

All traders vacillate and struggle between two emotions:

indecisiveness and regret. This inner conflict stems from not
establishing a clear timeline and a solid plan up front.

Indecisiveness

Should I buy?

Should I sell?

Should I hold?

Regret

I should have bought

I should have sold

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 I should have held

The key is to see things as they are - operating in the now - without
seeing things as worse than they are out fear, or better than they are
out of greed.

There’s no sense in having a plan if you’re not going to adhere to it;

that would be illogical.

If you don’t have things thought out before going into a trade, then
likely you will rationalize and you could be gripped with indecision at
the moment you need to act swiftly.

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