Trading Plan - Swing Trade Breakouts

Below is my written trading plan describing the aspects of my breakout trading system such as market breadth, entry/exit criteria, and risk management.  I am continually researching improved methods for the system, therefore this is a fluid document that will be updated as needed.  All times are central time zone.

Objective:
To buy liquid stocks that are experiencing price and liquidity breakouts, exit the position within 20 days targeting an average gain on the position greater than 15% and an average loss on the position of -5%.

 

Market Breadth:

• Calculate market breadth indicator after the market close each evening
• All stocks used in market breadth calculations have an average daily volume greater than 100,000 shares and closing price greater than $1.00
• Compare the number of stocks up 25% or more from their minimum in the past 65 days to the number of stocks down 25% or more from their maximum in the past 65 days
• If the market indicator is positive for the previous close and there are more stocks up 25% than down 25%, enter any long positions meeting entry criteria
• If the market breadth indicator is negative for the previous close and there are more stocks down 25% than up 25%, no entries are permissible.

Long Entry Criteria:

• Price per share must be greater than $0.50 and less than $20.00 at the time of entry
• Price breakout is defined by a 4% or greater increase in price from the previous day's close
• Breakout candle must be strong with the latest price near the high of the day, the latest price greater than the open, and the candle must have small shadows
• There must not be a huge gap above the previous day's high on the breakout day
• Price must show consolidation or a minor pullback for over 5 days prior to the breakout day
• Volume on the breakout day must be greater than 100,000 shares
• Volume on the breakout day must be greater than the previous day
• Volume on the breakout day must exceed the 50 day average volume by 50%
• Dollar volume on the breakout day must exceed $100,000
• Latest float must be less than 70 million
• Percent shares owned by institutions must be less than 70%
• No breakouts (meeting price and volume conditions) in the previous 5 days
• Preference will be given to stocks with fresh news (earnings, sales, analyst upgrades, new products, stock offerings) or strong sector performance (6 month RS, 1 month RS, percent new 52 week highs)
• Enter orders during normal market hours.  Buy stocks using Limit orders.

Risk Management:

• On average, the maximum loss on any single position should be less than 1% of the portfolio.  The 1% risk and the number of shares purchased will be calculated using and initial stop loss price.
• A stop loss order will be placed immediately once the buy order has been executed for the long position.  The stop loss price will be the low of the breakout day or 5% below the entry price, whichever is smaller.
• The target average profit for each position is 15%
• The target average loss for each position is -5%
• The reward-to-risk ratio is 3:1 and will be more accurately determined with more trading experience.  This ratio indicates that the winning percentage for the trading system must be greater than 25% in order to produce a positive expectancy.
• Position size for each stock cannot be greater than 1% of the minimum dollar volume from the previous 2 days
• While accumulating experience, only 1 new position can be opened per day to help reduce portfolio risk
• A maximum of 5 positions are allowed simultaneously, limiting the total portfolio risk to %5
• No position order will be filled during pre or post primary market hours.

Exit Criteria:

• When a positioned is entered, a stop loss is immediately placed at $0.01 below the low of the breakout day or 5% below the purchase price, whichever is smaller.
• If the stock has not exceeded a 5% return in 5 days since the position was opened, then the position should be exited.
• Once the position exceeds a 10% return, then move the stop loss to the position entry price.
• If the position exceeds a 15% return, using a trailing stop placed at the low of the previous day.
• If there is a breakdown in the stock price greater than 4% on high volume, then exit the position.
• If there are more stocks down 25% in 65 days than there are stocks up 25% in 65 days, exit exit all positions and do not enter any new positions.