Trading Strategy #2: Inspired by Trading for a Living

Inspired by Trading for a Living by Dr. Alexander Elder. I recommend Elder's newer book, Come into my Trading Room, as a first read.

I want to start with swing trading. However, since my favorite simulator - TradingSim.com - focuses on day trading, my current strategy is based around day trading. Many of the fundamentals Elder discusses in his book show up as I practice day trading, so I don't feel to bad about this compromise.

Dr. Elder's Pillars of Trading:

1. Money Management - Risk

2. Trading System

3. Psychology

MONEY MANAGEMENT - RISK

The three steps of learning to trade:

1. Learn to break even and stay in the game. Learn how to manage risk. Develop a trading system.

2. Earn a small but consistent revenue.

3. Find big wins.

With that in mind, the first section is risk management:

The idea is to prevent big losses and protect profit.

1. Generally, my stop lies at a 0.50% loss of my capital, including commission fees.

----Although a 0.50% loss is a narrow stop, I prefer my trades go my way from the beginning. It's been working so far.

----I will trade with Sogo Trading, so an entry and exit willl cost me $6.00.

----I always use limits to eliminate slippage.

2. Once I hit 0.50% profit, I have to protect that 0.50%.

----If I enter and exit for a profit of about 0.50%, I am done for the day.

----If I gain more than 0.50%, I can enter again, but I can only risk the extra profit I've made.

TRADING SYSTEM

STAY OUT

1. I stay out when the price is in a range.

2. I also stay out if I am at all unsure. It is better to stay out and lose nothing than it is to over-trade or to trade without knowing exactly why you're entering and exactly when you will leave. With this in mind, every time I enter or exit, I write down my reasoning.

ENTRY

1. I enter the market only when price has been trending for two or more days.

2. If the price opens outside of the trend channel, I watch if the price returns to the channel.

----If the price is returning, I enter, but I prepare to bail quickly because price might be entering a range.

----Once the price returns, I watch volume closely to decide if the price gap predicts continuation or exhaustion. (Read Elder's book for more info.)

3. In an uptrend, I enter when the price is at the bottom of the trend channel.

EXIT

1. In an uptrend, I exit when the price is at the top of the trend channel.

2. When the price breaks the trend, I jump ship right away.

3. If my prediction is wrong or I'm not sure, I exit.