Thursday, November 22, 2007

Daytrading Rules

I am not a daytrader by any means. But every now and then I like to gamble a little bit. As opposed to Las Vegas style gambling where the house has always the upper hand, I believe that with a good strategy and strong discipline, there is a good chance to come out ahead.

I have drawn up some daytrading rules intended to keep me in control of my risk. The basic idea is to keep the losses small and let the winners run.

General Rules

-Use moving averages to plot the trend. Do not trade against the trend.
-Size my position on every trade according to risk taken.
-Use 15’ or 30’ setups.
-Trade only stocks with daily average volume >400K

Entry Rules

-Enter on the break of a narrow range bar (NRB)
For Longs: NRB should close around the opening range (OR) high
For Shorts: NRB should close around the OR low

Stop Rules

-Always place the stop order right after the entry is executed
-Place the stop a few cents below the narrow range bar
-Move the stop to break-even after the stock has moved to one time the risk

Exit Rules

- Consider taking partial profit at two times the risk
- Use a trailing stop to exit the trade.

If I were to daytrade full time, I would work on fine tuning the criteria to enter the trade. For now I will keep it open and try to learn from experience. The opportunities for me to daytrade do not come by very often because of my day job. I will try to log my trades in this diary.

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