Trading Plan - 401k Investments

NOTE:  THIS IS A PRELIMINARY DRAFT OF A TRADING PLAN THAT NEEDS TO BE FINALIZED WITH HISTORICAL RESEARCH.  DO NOT USE THIS FOR TRADING OR INVESTING.

Below is my written trading plan describing the aspects of my 401k investment strategy 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 invest in two different mutual funds, a bond index fund and a 2x leverage stock index fund.  The portfolio should remain invested 100% of the time, with the allocation to the bond and stock fund changing based on market behavior.  The portfolio allocation should be rebalanced on a weekly basis, but each fund should be held for a target of 30 days before changing the position to avoid short-term trading fees.  The goal of the portfolio is to produce an average annual return >15% with max annual drawdowns remaining <15%.

Timeline of Trading Tasks:

• Each evening all market indicators will be updated and tracked.
• Each weekend the market behavior will be evaluated and the portfolio allocation will be determined.
• The fund orders will be placed each Monday morning if changes to portfolio allocation are required.

Market Breadth:

• Calculate market breadth indicator after the market close each evening.
• There will be three measures of market breadth:  stocks up/down 25% in the past 65 days, stocks creating new highs/lows in the past 5 days, stocks creating new highs/lows in the past 52 weeks, number of stocks with SMA10 and SMA20 crossover, and a comparison of SMA 10 and SMA 20 for the IWM.
• Other measures of market breadth may be evaluated in the future and replace one of the measures listed above, but the system should rely upon at least 4 different measures of market breadth.
• Daily or weekly charts may be used to determine the state of the indicator - the time frame will be determined by historical research.
• All stocks used in market breadth calculations have an average daily volume greater than 100,000 shares and closing price greater than $1.00.

Portfolio Allocation Criteria:

• Portfolio allocation will be based on the readings of the market breadth indicators.
• The market will be split up into 7 different behavior zones:  very bullish, bullish, slightly bullish, neutral, slightly bearish, bearish, very bearish
• Very Bullish Allocation =0% bonds and 200% stocks (all 4 indicators bullish)
• Bullish Allocation = 25% bonds and 150% stocks (3 of 4 indicators bullish)
• Slightly Bullish Allocation = 60% bonds and 80% stocks (to be determined)
• Neutral Allocation = 80% bonds and 40% stocks (2 of 4 indicators bullish/bearish)
• Slightly Bearish Allocation = 85% bonds and 30% stocks (to be determined)
• Bearish Allocation = 95% bonds and 10% stocks (3 of 4 indicators bearish)
• Very Bearish Allocation = 100% bonds and 0% stocks (all 4 indicators bearish)

Risk Management:

• The portfolio allocations have been sized to create a max drawdown of 15% over the past 10 years of historical data.
• Future drawdowns may exceed the historically tested drawdown of 15%, but the portfolio should be 100% allocated to bonds in this instance.  So the portfolio should exhibit a drawdown much smaller than the overall market.
• Possible hedging strategies should be evaluated in the future to maintain a worst case drawdown of 15%.

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.

Trading Plan - Day Trade Mean Reversion

Below is my written trading plan describing the aspects of my mean reversion 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 or sell a basket of at least 20 stocks that are over-extended at the close each day, and exit positions on the following close targeting an average daily gain of 0.5% and zero correlation with the Russell 2000 index (IWM) returns.

Market Breadth:

• Calculate market breadth indicator at 2:25pm
• If market breadth indicator is greater than yesterday, then enter stocks long at end of day
• If market breadth indicator is lower than yesterday, then enter stocks short at end of day

Long Entry Criteria:

• Price per share must be greater than $2.00 at time of entry in order to keep the commissions on each stock to less than 0.25% (IB commission is $0.005/share)
• The daily volume must be greater than 250,000 shares for the previous day
• The daily volume must be greater than 150,000 shares at 2:30pm on the entry day
• The dollar volume must be greater than $2,000,000 for the previous day
• The dollar volume must be greater than $1,500,000 at 2:30pm on the entry day
• Sort stock universe by overextended scan at 2:30pm, and select the best 25 candidates.
• Check to see if the stock was selected as a position yesterday.  If it was, see the consecutive entries section.
• Enter orders after 2:30pm each day.  Buy stocks at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the bid price between 2:55-3pm.

Short Entry Criteria:

• Price per share must be greater than $2.00 at time of entry in order to keep the commissions on each stock to less than 0.25% (IB commission is $0.005/share)
• The daily volume must be greater than 250,000 shares for the previous day
• The daily volume must be greater than 150,000 shares at 2:30pm on the entry day
• The dollar volume must be greater than $2,000,000 for the previous day
• The dollar volume must be greater than $1,500,000 at 2:30pm on the entry day
• All stocks that have moved based on mergers and acquisitions news in the past 10 trading days should be removed from the stock universe.
• Sort stock universe by overextended scan at 2:30pm, and select the best 25 candidates.
• Check to see if the stock was selected as a position yesterday.  If it was, see the consecutive entries section.
• Enter orders after 2:30pm each day.  Buy stocks at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the ask price between 2:55-3pm.

Consecutive Entries Showing a Loss:

• A trading candidate may be selected on consecutive days in a row, which will change the entry and exit order procedure because you do not want to waste money on commissions to exit a position and then immediately enter the same position.
• If the position is up for renewal, determine the position size by subtracting the liquidation value (ex. $15,000) of the position at 2:30pm from the normal position size equity value (ex. $20,000).
• Determine the number of shares that can be entered using the last price at 2:30pm for the difference in position size equity value (ex. $20,000-$15,000 = $5000).
• Do not close out the current renewal position ($15,000)
• Add to the existing position ($5000) at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the bid for longs and at the ask for shorts between 2:55-3pm.
• At the end of the day, the total liquidation value of the new combined position should be equal to the normal position size equity value (ex. $15,000 + $5000 = $20,000).

Consecutive Entries Showing a Profit:

• A trading candidate may be selected on consecutive days in a row, which will change the entry and exit order procedure because you do not want to waste money on commissions to exit a position and then immediately enter the same position.
• If the position is up for renewal, determine the position size by subtracting the liquidation value (ex. $25,000) of the position at 2:30pm from the normal position size equity value (ex. $20,000).
• Determine the number of shares that can be exited using the last price at 2:30pm for the difference in position size equity value (ex. $20,000-$25,000 = -$5000).
• Do not close out the entire renewal position ($25,000)
• Exit a portion of the existing position (-$5000) at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the bid for longs and at the ask for shorts between 2:55-3pm.
• At the end of the day, the total liquidation value of the new position should be equal to the normal position size equity value (ex. $25,000 - $5000 = $20,000).

 

Risk Management:

• Target portfolio size is between $400,000-$500,000 with 20 to 25 simultaneous positions.
• Position size for each stock cannot be greater than 1% of the minimum dollar volume from the previous 2 days
• A minimum of 20 stocks must be bought or sold each day to reduce volatility risk from anyone stock
• All positions will be sized equally with respect to total portfolio equity
• A stop loss of 5% will be used for each position and entered after close on the day of entry and before the market opens on the day following entry.
• No position order will be filled during pre or post primary market hours.
• Average maximum loss on any single position should be  less than 0.25% of the portfolio (20 positions = 5% of portfolio equity, multiplied by 5% stop loss is 0.25%)

Exit Criteria:

• The following morning after order entry, a stop loss of 5% is placed before 8:30am  (market open) using a stop order (STP).
• If the stop loss has not triggered between 8:30am and 2:30pm, then the consecutive entry candidates are determined.  Positions that are not up for renewal will be exited on the close using a Market-On-Close (MOC) order.  The MOC order is placed after 2:30pm (on the day following order entry).

Timeline of Trading Tasks:

• 02:25pm - determine market breadth (long/short)
• 02:30pm - scan for new candidates and determine renewal candidates
• 02:35pm - enter MOC exit orders for non renewal candidates
• 02:40pm - enter MOC entry orders for non renewal candidates
• 02:45pm - enter MOC entry orders for renewal candidates
• 02:55pm - enter any limit orders for any candidates that would not accept MOC orders
• 03:05pm - cancel any remaining stop loss orders from the day that did not trigger
• 03:10pm-08:00am - enter stop loss exit orders for all positions based on average position cost and number of shares for position