Sunday, August 17, 2008

Trade Rules - Mid Term Strategies

A mid term trade strategy assumes trading against the S&P 500 via various methods but primarily futures. Mid Term strategies consider only one round trip trade for the entire strategy. Mid term requires a move of at least 2 days against the S&P 500 index or 25 points.

Capital Exposure
A mid term strategy should not exceed 2% of total cash capital available.

Position Size
The position is required to be split into 3 sub positions as each sub position is treated differently in terms of stops. For example if you enter a mid term trade position you may choose multiples of three - for example 30 futures contracts to be able to manage exists and stops appropriately.

Each mid term strategy requires a minimum stop of 6 points for the stop loss. Generally the stop range should try to extend over key support/resistance.

Note: depending on price action and potential for your stop to be run you may split your stops on the entire position into 50% on 9 points and the other 50% at 3 points to still allow the same capital exposure but a wider margin for error in case the entry is done too soon.

Once the position is established and moves into the money the following applies to each sub position.

Sub position 1 will have a trailing stop of the 6 points (from point of being in the money)
Sub position 2 will retain the 6 points stop loss and a limit exit after 12.5 points have been gained.
Sub position 3 will have the stop moved to break even after 12.5 points have been gained with a limit exit of 25 points.

If sub position 1 is still active after 12.5 points, extend the trailing stop to 12.5 points to be able to profit from continuation patterns where the market just runs =)

While the above rules for stops and exists may seem complicated at first, it gives you a much higher guarantee to profit once the market moves in your direction.

Position Planning
A mid term swing position needs to be planned for at least 24 hours ahead of time. A mid term swing position CANNOT be entered unless proper entry, stop and exit numbers have been calculated. If you "feel lucky" take a day trade - but do not convince yourself to enter a swing position that has not been planned just because the market is at some resistance of support level.

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