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14 Jack Schwager s Planned Trading Approach 1.Define your trading philosophy or system 2. Choose your markets to be traded 3. Specify your risk parameters A. Minimum risk per trade B. Stop loss strategy C. Diversification D. Reduce leverage for correlated markets E. Losing period adjustment 4. Establish a planning time routine A. Upgrade system and charts B. Plan new trades C. Update exit points for existing positions 5. Maintain a trader s notebook 6. Maintain a trader s diary 1. Reason for trades 2. How the trades turn out 3. What lessons are learned 7. Analyze your personal trading

15 Jack Schwager s Trading Rules and Observations Differentiate between major position trades and short term trades Don t be greedy trying to get a better entry price for major trend trades Entry into major trend trades should planned not intraday impulses Find a chart pattern that says the timing is correct Place order on a daily analysis, wait for desired entry points When looking for a major reversal in the trend. It is usually wiser to wait for some pattern that suggest that the timing is right. Don t let the fact you missed the beginning portion of a trend keep you from trading with that trend

16 Trading Rules 2 Never fade the first gap of a price move Use market orders not limit orders to enter trades Never double up near the original trade entry point after having been ahead Determine a specific protective stop point at the time of trade entry Exit any trade as newly developing patterns or market action are contrary to your trade Always get out immediately once the original premise for the trade is violated If the market goes dramatically against your trade in the first day, especially a gap, exit the trade immediately If there is a major breakout counter to your position either exit immediately or use a very short stop order If a given market suddenly trades far in excess of its recent volatility in the opposite direction of your position, exit immediately If selling (buying) into resistance (support) and the market consolidates instead of reversing, get out.

17 Trading Rules 3 If you are able to follow the market for a period of time, exit your position or place and GTC order Fight the desire to immediately get back into the market following a stopped out system When trading goes badly Reduce position size ( strongly correlated positions are similar to a large position) Use tight stop loss points Slow up in taking new trades Reduce risk exposure by liquidating losing trades, not winning trades Be extremely careful not to change trading patterns after making a profit Don t initiate risky trades Do not suddenly increase the number of contracts you typically trade Trade small positions with the same common sense as large positions Never say It s only one or two contracts.

18 Trading Rules 4 Avoid holding large positions into major reports or the release of government reports Apply the same money management principles to spreads as to outright positions Don t buy options without planning at what outright price trade is to be liquidated Do not take small, quick profits in major positions trades In a large move in your favor, never take profits on the first day Don t be too hasty to get out of trade with a gap in your direction Use trailing stops instead of profit objectives as a means of getting out of profitable trades It is useful to set profit objectives at the time of initiating trades With larger positions take partial profit Reinstate position on correction

19 Trading Rules 5 If your objective is met and the trade remains good, use trailing stops and remain in the trade In a very strong move, too good to be true, take partial profit Pay more attention to market action and evolving pattern than to objectives and support/resistance areas When you think you need to enter or exit a trade, do it, don t procrastinate Don t trade counter to your view of long term trend Winning trades tend to be ahead right from the start Correct timing entry and exit can often keep a loss small Intraday decisions are almost always wrong

20 Trading Rules 6 Be sure to check your positions before the close on Friday If a market sets new historical highs and holds, the odds strongly favor a move higher. Selling new highs is an amateur trader s worst mistake Narrow market consolidation near upper end of broad trading ranges are bullish patterns. Narrow consolidations near the low end of trading are bearish patterns Play the breakout from an extended, narrow range with a stop against the other side of the range Breakouts from trading ranges that hold 1-2 weeks or longer, are among the most reliable technical indicators of impending trends A common useful form of the above rule is flags and pennants forming right above or below prior extended and broad trading ranges tend to be fairly reliable continuation patterns

21 Trading Rules 7 A breakout to new highs or lows followed within the next week or two by a gap back into the range is a particularly reliable form of bull or bear trap If the market breaks out to a new high or low and then pulls back to for a flag or pennant in the pre-breakout trading range assume the top or bottom is in place. Take a position using the other side of the consolidation for your stop A breakout from a trading range followed by a pullback deep into the range ( ¾ or the range or more) is another bull or bear trap formation If an apparent V bottom is followed by a near by congestion pattern it may represent a bottom. However if the is consolidation is then broken on the downside and the V bottom is approached this may point to a new lower low. The opposite is true for tops. You can play the breakout using the congestion level as your protective stop. V tops and V bottoms followed by multi month consolidations that form in close proximity to the reversal point tend to major tops and bottoms. Tight flag and pennant consolidations tend to be reliable continuation patterns and allow entry into an existing trend with a close stop point.

22 Trading Rules 8 If a tight flag or pennant consolidations breakout in the wrong direction expect the move to continue in the direction of the breakout Curve consolidations tend to suggest an accelerated move in the direction of the curve A breakout of a short term curved consolidation is the opposite direction tends to be a trend reversal Wide ranging days compared to recent trading days with close counter to the main trade is a signal of a trend change (key reversal) Near vertical, large price move over a 2-4 days, coming off a recent high or low, tend to extend in the following weeks Spikes are good short term reversal signals. The extreme of the spike is a good stop point. The ability of a market to hold relatively firm when other related markets are under significant pressure can be view as intrinsic strength. A market acting weak when related markets strong show intrinsic weakness If a market trades consistently higher for most of the trading session, expect the close to be higher

23 Trading Rules 9 Two successive flags with little separation can be view as a continuation plan View a curved bottom followed by a shallower same direction curved consolidation near the top of the pattern, as a bullish formation (cup and handle). Major bottom for stocks. Similar pattern would apply to market tops. Major tops and bottom rarely occur in the absence of extreme sentiment readings (current or recent) A failed signal is more reliable than the original signal. Go the other way using the high (low) before the failure signal as a stop The failure of a market to follow through on significant bullish or bearish news is often an indication of an imminent trend reversal. Pay particular attention is you have an existing position

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