As you scroll through the charts of various stocks, it is essential to have a very clear image in your mind of the pattern you’re looking for. Every trading system is designed to handle a specific price pattern. When you find a chart that matches that pattern, work up a possible trade.
Be sure to write a description of the system you’ll trade. What kind of pattern will it look for? What kind of stock? What rules will you use for entries and exits? Write down your answers to these questions. This discipline will put you miles ahead of most competitors.
“I heard good things about it” or “it looks kind a good” aren’t legitimate reasons to put on a trade. Each trade must be based on a specific system. You may have more than one system, but each trade must follow only one.
Let me list several questions that apply to every trade and suggest some answers before we turn to specific systems in the following chapters.
What class of trading vehicles will you trade? The best area for beginners is stocks. Avoid the delusion of buying options as a substitute for stocks, be super-cautious about ETFs and avoid leveraged ETFs like the plague. Leave those for day-traders only.
Which stocks will you trade? Set your minimum daily volume in order to avoid bad slippage in thinly traded stocks. I look for those that trade over a million shares per day. Avoid penny stocks, with their huge percentage swings – set your minimum price around $5.
Where will you look for trading ideas? Perhaps there are stock industry groups you’re interested in – select the most liquid, high-volume stocks in those groups and follow them on a daily basis. Don’t spread yourself too thin. The internet is brimming with stock tips, but trying to follow them is like drinking from a fire hose. Select one or two sources you trust – pay attention to them and go easy on the rest. StockCharts.com has several contributors who publish daily reports; I like piggy-backing ideas of the elite-level members of SpikeTrade.com; SeekingAlpha.com is worthwhile if you track fundamentals.
These and many other decisions are ahead of you. Don’t let things happen by default. Be mindful and alert. And now, let me show you a few systems, two of which are my own and two from the traders I respect.
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