Trading Rules of Engagement
From 2003-2008 I managed a team of successful traders at a small hedge fund in Cleveland. We focused on defined risk management implemented with specified Rules of Engagement(ROE). We traded bond future butterfly spreads using standard deviations and technical analysis. In the early years of trading, we were required to debrief our trades and prove there were rules of engagement that qualified the entry of the trade. These debriefs showed our entries, exits and reasons why the trade engaged.
Today, I still trade bond future spreads with a partner, but concentrate mostly on technical analysis in equities with trading options. Rules of engagement are an important guideline to keep your trading structured. In addition, debriefing your trades can be extremely beneficial. ROE are qualified reasons to enter a trade(long or short) implemented with specific technical analysis. My methodology uses the 10 day simple moving average (sma) to trade when the market has momentum. However, the market is not always directional and during corrections I will use many other indicators to determine support, or a change in trend.
Fitzstock Charts Premium Service provides weekly charts (CWUS) and daily email updates. There are often many trades to choose from, and picking the right ones that meets your trading plan and risk profile is critical. It is not essential to take every trade that sets up, but rather the ones that best meet your individual trading style. The charts can be beneficial to both day traders and swing traders(with options and equities). However, many swing traders look for better risk/reward opportunities after the market corrects to the 50sma, or a specific Fibonacci retracement. Not all of my charts or trades are suitable for everyone, so please take the time to identify which trades are best for you. To help you identify which trades are most suitable for you, I have listed some general Rules of Engagement(ROE) below.
Rules of Engagement
1) 10sma
Is the stock above the 10sma?
Is the 10sma rising?
Is the 10sma above the 50sma?
2) MACD
MACD stands for moving average convergence/divergence.
http://en.wikipedia.org/wiki/MACD
Ideally you want to see price moving to new highs, while MACD is confirming this move(MACD hits new highs also). If price is breaking to new highs and MACD is sloping down or not at new highs, this is called Bearish Divergence. When you have bearish divergence that tells you the move is not as powerful and to be more cautious. When you have bearish divergence followed by price breaking below the 10sma you should start to get defensive (build cash position)
3) Price Pattern
Is the stock showing a bullish price pattern?
Bull flag?
Cup and handle?
“W V” pattern?
Trend line break?
Bullish historical chart similarity?
These are all bullish price patterns that I look for when trading the charts. (Bearish patterns consist of bear flags, “M A” patterns, broken trend lines, and head and shoulders).
I always say “TRADE PRICE”, because it is the only thing that pays. Price structure and patterns give you an edge in trading and put the odds of success back in your favor.
5) Risk/Reward
Does this trade provide you with the proper risk/reward? (every trader has a different risk profile)
Ideally you want > 1.5:1 reward/risk ratio i.e- If AAPL was 500, your stop was 496(4 dollar stop), you would want the minimum price objective(reward) to be 4 x 1.5= or 6pts (506 target)
Many of my option spreads could have 100% upside, so if you are risking 50% downside (on 5% of your trading capital), you still have 2:1 reward/risk ratio. Some people are not comfortable with 50% downside risk in options and decide to trade the underlying equity, which has much less risk(but less upside reward also)
6) Relative Strength
Is the stock showing relative strength to the S&P 500? This means , is the stock outperforming the S&P 500 or the sector it trades in. This relative strength could show up intra-day or over a period of time(many weeks/months). Stocks that show relative strength usually continue to outperform.
AAPL showed relative strength in 2012 from Jan-June, and then relative weakness from Sept-Dec.
7) RSI/Bollinger Bands
Generally speaking, if a stock has an RSI reading over 70 it is “overbought”. This is not a reason by itself to be bearish(and short), but just to reduce risk. Under 30 reading is classified as “oversold”, but not a reason in itself to buy. You need other indicators besides this to fade these extreme levels. (i.e- Fib retrace levels or a higher moving average support/resistance)
Bollinger bands are also a critical technical indicators to watch. However, I never place any trades based on this indicator alone. I will reduce risk on longs (above upper BB) and shorts(below lower BB), as the risk/reward is usually not in your favor(price eventually snaps back).
8) Resistance /Support
Where is the closest resistance/support levels on the trade.
How far from the 10sma are we trading?
How far from the 50sma?
What is the resistance above the current price on both the daily and weekly chart?
These questions are also critical when determining if a trade is suitable for your risk tolerance and trade expectations.
9) Accumulation/Distribution
You often hear me talk about IBD accum/distr. Investors Business Daily provides Accumulation/Distribution which tracks the relative degree of institutional buying (accumulation) and selling (distribution) over the last 13 weeks.
A = Heavy buying
B = Moderate buying
C = Equal amount of buying and selling
D = Moderate selling
E = Heavy selling
https://fitzstock.com/essentials-to-trading-success/
Fitzstock Charts now has over 1,000 different stock options that have DOUBLED from our suggested entries, while some options have returned over 600%
We are educating traders around the world with our Rules of Engagement (ROE) based on market trend. If you are under performing the stock market with your trades and investments, it is never too late to upgrade.
What does Fitzstock Charts include?
-Daily email updates include our Focus List with calculated entries and defined risk
-Stock chart technical analysis searching for relative strength and weakness
-Weekly video analysis covering our Focus List and the current market conditions
-Educational videos and posts using our trading methodology (ROE)
-Access to private Twitter (@fitzstockcharts) where I post real time updates and trades
Learn stock trading and how to day trade with Fitzstock Charts. We scan for historical chart pattern comparisons with trading rules of engagements. The #1 Stock trading consultant in the business, teaching you how to get started trading. Learn how to read stock charts with our key essentials to trading success. We find the best stock charts and implement stock options trading strategies with stock chart technical analysis. If you want learn more stock chart analysis, check out my daily blog updates. We are constantly scanning for the best stocks to buy, best stock to trade, and tell you how to trade stock options.
I look forward to helping you meet all your investment and trading goals.
David Patrick
Fitzstock Charts, LLC
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