My Trading Plan

My trading plan has taken over 10 years to develop as I have literally tried everything I can think of to make money trading. Some have been surprising and others have been just as surprisingly bad. During this process, I have come to know a lot about myself and have recognized some real strengths and weaknesses as a trader/person. My trading plan is designed to put myself in situations where my strengths will be utilized and my weaknesses will be limited or negated. I have found if I avoid trading situations where my weaknesses manifest themselves, I have less internal battles to follow. Here is my trading plan as follows: Trading Style: Over the years, I have found that my best trades have been in the 3-5 day window and that my analysis is definitely more correct over this period of time. Because of this, my trades will consist mostly of swing trades lasting two days to a maximum period of no more than two weeks. Because of this time frame, most of my trades will utilize weekly options with most expiring every Friday. Each week, I will spread my trades out to have at least 5 different trades but no more than 10. At the beginning of the week, I will plan out my ratio of bulls vs. bear trades based on my broad market analysis. For example, on a week that I am bullish the market, I will always have 60% of my trades in bullish trades or 3 out of 5 trades will be bulls and 2 will be bears. This ratio can be adjusted anytime before Wednesday based on market movements but not after Wednesday. If I want to trade longer duration trades, I will utilize monthly options with a strong likelihood of using Diagonal Spreads when looking at longer time frames. Most Mondays, Tuesdays and Wednesdays will be finding and executing new trades and Thursdays and Fridays will be specifically for managing the weekly option trades expiring that Friday. Trade Selection: My main focus will be finding and identifying relative strength and weakness across the market. I will use Finviz to scan the market and I will sort each sector from the best performing stock in each sector to the worst performing stock in each sector over the past month. I will then only analyze the top and bottom 20 stocks in each sector, looking for a setup. My primary strategy will be searching for basing stocks (high bases on the top 20 and low bases on the bottom 20) that have at least 1 million in average daily volume, have weekly options, prices above $20 and have a beta greater than .75. Specifically, I will be looking for a stock that has had a high volume move up or down followed by at least 5 days of sideways action, forming a base. During the base, I will look for declining volume with narrow candles.

Option Strategy Selection: Since I am looking at a shorter time frame of 3-5 days, I will only play weekly options and will trade primarily credit spreads (bull put and bear call spreads). Each Weekend, I will generate my list of high and low basing stocks that have weekly options and place entries on Monday and Tuesday. I will sell the ATM call/put and hedge with OTM calls/puts on the trade. I will look to capture at least 50% of the spread ($.1 credit for a $2 spread, $2.50 credit for a $5 spread, etc.) For example, if there is a stock that had a nice run from 40 to 50 on high volume and had been basing for a week or two between the $50 and $52 level, I would sell the weekly 50/48 bull put spread for close to $1 giving me a $1 potential gain and $1 potential of risk. On a bearish stock, for example the stock has dropped and is basing around the 70 area, I will sell the weekly 70/72.50 call for close to $1.25. Position Management: On my weekly option credit spreads, I will do absolutely nothing until Thursday morning. On Thursday morning, I will exit any positions that are trading above or below my upper or lower strike prices for a gain/loss. For example, I had a 50/48 Bull put spread I sold for $1 and the stock is trading at $52 on Thursday morning, I will exit the position for a nice gain (probably around .70). My other position is a 50/48 bear call spread and the stock has moved up to $51, working against me. I will exit the trade at a loss (probably around .40) and move to cash. There will be no more adjustments done until Friday morning. On Friday morning, I will repeat the same rules and exit any positions trading above or below my strike prices at a gain/loss. After this, I will leave all positions until 20 minutes before the close. At this time, I will leave any positions open that are likely to be max gains or losses and close any other positions that are trading between strike prices for gains/loss. Each Friday I will leave the market with no short term trades and will come back and do the same thing next week. Position Sizing: I have decided that no trade will have a max risk of more than 3% of my account equity. I have also decided that I will not have more than 15% of overall risk in my account based on my entire risk outlook. I will use the Interactive Brokers Risk Navigator to evaluate my entire position risk levels and make any changes I need based on a possible +/-4% weekly move in the S&P 500. For example, If my account equity is $100,000 the risk navigator must show that even if there is a +/4% move in the underlying markets that my portfolio will lose no more than 15% ($15,000) in case that happens. At the end of each quarter, I will withdraw my profits from the account and go back to $100,000 in trading capital.