As of 04/19/2019
  Industrials: 26,560 +110.00 +0.4%  
  Transports: 10,988 +52.62 +0.5%  
  Utilities: 772 +1.55 +0.2%  
  Nasdaq: 7,998 +1.98 +0.0%  
  S&P 500: 2,905 +4.58 +0.2%  
YTD
 +13.9%  
 +19.8%  
 +8.3%  
 +20.5%  
 +15.9%  
  Tom's Targets    Overview: 04/12/2019  
  Up arrow26,900 or 25,500 by 05/01/2019
  Up arrow11,200 or 10,500 by 05/01/2019
  Up arrow825 or 755 by 05/01/2019
  Up arrow8,100 or 7,700 by 05/01/2019
  Up arrow2,975 or 2,800 by 05/01/2019
As of 04/19/2019
  Industrials: 26,560 +110.00 +0.4%  
  Transports: 10,988 +52.62 +0.5%  
  Utilities: 772 +1.55 +0.2%  
  Nasdaq: 7,998 +1.98 +0.0%  
  S&P 500: 2,905 +4.58 +0.2%  
YTD
 +13.9%  
 +19.8%  
 +8.3%  
 +20.5%  
 +15.9%  
  Tom's Targets    Overview: 04/12/2019  
  Up arrow26,900 or 25,500 by 05/01/2019
  Up arrow11,200 or 10,500 by 05/01/2019
  Up arrow825 or 755 by 05/01/2019
  Up arrow8,100 or 7,700 by 05/01/2019
  Up arrow2,975 or 2,800 by 05/01/2019

Bulkowski as Mentor

 

This article discusses tips on learning to trade the stock market by building a trading plan. Thanks to Vicky Wong for her help with the article.

Initial release: 10/17/2017

 

Mentor: Summary

One of the questions I'm asked frequently, is "Will you be my mentor?" I decided to write this article so I can steer those requests to this page. If you follow the tips in this article, you can learn to trade and maybe, just maybe, you can make money trading as well.

That's not a guarantee of success, mind you, but at least you'll understand the basics.

Mentor: Trading Plan Considerations

What we want to do is build a trading plan for each trade. Why? Because as discretionary traders (those not using an automated buy/sell system) the closer we can get to a mechanical system, the better our trading performance.

Think of it as a blueprint. If you follow the blueprint, you'll have a better chance of success. You'll know what to do when the unexpected happens because you're prepared for it.

Here are a series of questions you should know the answer to. If the questions/answers won't change even as the trade does, then there's no reason to include it in your trading plan. Questions specific to a trade should go in the plan.

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Mentor: Trading Example

Picture of the AJRD.

Let's look at an example to see how the trading process unfolds with the building of a trading plan.

Look at the above chart of Aerojet. I found the Eve & Eve double bottom on the daily chart, but will flip to a longer-term chart to check the trend.

This chart is on the weekly scale. AB shows the double bottom, unconfirmed at this point. That means price hasn't closed above the peak between the two bottoms yet.

I drew horizontal red lines to show where overhead resistance might block or hinder an upward move. Peak C is at about 23.50. D is at 24.35. So those are areas where price might reverse.

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Picture of the AJRD.

Let's look at the daily chart, shown above.

AB is the double bottom. C is the confirmation point. A close above C means it's a valid chart pattern.

D is a broadening top chart pattern. It's a top because price trends upward into the pattern. That's clear on the weekly chart (the prior chart).

I extended the top of the pattern, E, because it might become a resistance area as price climbs to meet it.

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Mentor: Trading Plan

How would I build a trading plan from this? Let's begin by filling in information from a template

Date: 7/13/2017
Security type: Stock
Name/symbol: Aerojet (AJRD)
Trade style: Eve & Eve double bottom chart pattern, swing trade using end-of-day data
Max position size: $31,000 (found automatically). 1,400 shares @ 22.52 (breakout+.01)=$31,528.
Thinly traded? No (841k avg vol according to yahoo).
Volatility stop: $21.17 or 4.3% (found automatically). Stop used: below lower of two bottoms, $19.95, just below support at 20 (round number). Potential loss 11%. Ouch.
Trailing stop? No, but I might manually raise the stop as price rises.
Measure rule target: 22.51 + (22.51 - 20.06) = ~25.00. That's the pattern's height added to the breakout price
Scaling in? No.
Scaling out? Sell 500 shares at $23.79. That's where trendline E is on the above chart, on 7/13. Sell 500 at 25, the measure rule target. Sell the remaining 400 at 28.75 which is the median rise (27.79%) for double bottoms with scores above 0 (see my book, "Trading Classic Chart Patterns"). As one order fills, place the next sell order.
Resistance levels: Once it clears 24.35, it's making new highs.
Support levels: 20, 18
Score: -1 (Patternz using manual score).
"After the buy" setup: Figures 5.5 and 5.8 apply. Both suggest a sustained upward move.
Trend start: 4/26/2017 (found using Patternz), the nearby peak, so the inbound trend is short.
Busted chart pattern? No. If it busts, I'll be stopped out.
Leverage? None
Entry conditions: Place a buy stop at 22.52, a penny above the pattern's high.
How long to wait for it to make a move? If the stock hasn't made a move upward in a month, then I'll consider selling.
Exit conditions: See above scaling out targets
Next earnings: 8/3/17, or 3 weeks away. Yuck.
Weekly scale (a scale longer than the usual trade): The stock is near new highs, trending upward.
Reversal or continuation? Reversal
Relative strength (Patternz option): 3 green bars: week, month, 3 months, all of which is good.
1, 2, 6 month S&P trend: Up, up, up. (found automatically)
What are the market conditions Long term up trend, with inverted and ascending scallops predominating.
Industry trend: 1 month: 10 stocks up, 1 down. 2 mos: 10 up, 1 down. 6 mos: 8 up, 3 down (found automatically)
Comments: I'm worried about the stock stalling out at the old high of 24.35. Earnings are just 3 weeks away, so that's a concern. This could dead-cat bounce, but my guess is it won't. The price action over time (see above Relative strength and Industry trends) supports a continued move higher. Once it breaks out to a new high, most overhead resistance disappears.

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Mentor: Trade Aftermath

Picture of the AJRD.

Price hit the buy target the day after it was placed, filling at 22.52 (the buy stop price). A stop loss was entered (see Initial Stop on the chart), priced at 19.95, below A, the lower of the two bottoms and below support at 20.

The stock did not throw back, increasing the score of the pattern to +1. That suggested the trade has a decent shot of hitting the median rise for scores above 0 (meaning a climb to 28.75 looked favorable but not guaranteed).

The stock hit the first target of 500 shares @ 23.79 on 7/25, at the day's open, filling at 23.85. A new target to sell at 25 was placed.

The stock stalled near the 2015 high of 24.35, just as predicted. This formed a small knot of congestion that the stock had to push through (below C).

When earnings came out, the stock gapped up higher on the news, filling the second target (500 shares at 25.00) order, filled at 26.66 on 8/4/17. That's a gift. A new sell order for the remaining 400 shares @ $28.75 was entered.

As the stock moved sideways, it formed an ascending triangle (shown at D, in cyan or whatever color you call it). I placed a stop loss order at 25.80, a penny below the bottom of this pattern. Why?

I know that a week to 10 days after a good earnings announcement, some stocks will start retracing, giving back their gains. That didn't happen in this case, but I didn't want to sacrifice too much profit if it retraced.

Due to the appearance of the ascending triangle with an upward breakout, I moved the target sell order of 400 shares (not the stop loss order) upward from 28.75 to the measure rule prediction for the ascending triangle. The height of the triangle was 27.95 - 25.81 or 2.14 for a target of 30.09. I set the sell target to 29.93, just below round number 30.

The last sell order for 400 shares filled on 9/1/17 at 29.93.

I consider this trade to be risky, given the close proximity of the earnings release. The stock could have tumbled just as easily as climbed. But it worked out well. I didn't expect an ascending triangle to appear, so my trading plan needs to be adjusted to handle additional buy signals.

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Mentor: Scoring

Picture of the sample spreadsheet.

To make a trading plan meaningful, you need to be able to track your performance. I suggest building a spreadsheet (xlsx, 14.5kb, a portion is shown above) to track details of your trade. That way, you can sort by those details and determine which setup is most profitable.

For example, do trades made on Monday perform better than on other days (best for day traders)? Which works best, day trading during the morning hours, lunch hour (east coast time, that is), or during the afternoon session?

Here are some questions you can ask your spreadsheet:

See Also

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.
Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns Bumper's Story Head's Law
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Good advice is something a man gives when he is too old to set a bad example.Smiley