Trading Account Rules

In the lessons area, a lot of the "philosophy" on how to trade is presented. We know that this fall the new rules will be taking affect, and this will force the smaller traders into holding their positions at least over night. The good thing about this, using time is how to make better profits. Yes some stocks do make good one day moves, and we have options that can be used to protect a position to stop the loss if it moves against you, and options can be used to lock in a gain if it moves in the right direction for you.

We have the Price Signals to help show the likely direction the price will move based just on the previous price action. The one thing not listed so far is using indicators in conjunction with the price signals.

Next money management is discussed about keeping losses small, and picking the right size position based on the risk and your account size. Another thing to consider with position size, is that the smaller the position, the more of a stop you can allow before it causes real "pain" and damage to your account.

Then you can make your plan, and work on the entry to get in, and watch to see when to exit.

All of this is nice, it gives you the philosophy of what to do. What we need to do now is incorporate the philosophy with reality.

What we will do is take a $10,000 account, and use only the stocks highlighted in the Stocks To Watch section to trade with. the only exception is that since we do track the nas on a daily basis, this account will also be allowed to trade the QQQ tracking stock to take advantage of the moves of the index.

What we will do is outline some clear cut goals and rules that will be followed by this "account".

GOALS:

	We want to avoid becoming a "Pattern Day Trader"
	We want to generate growth in this account. With a small balance, it is not an income producing account, so we need to grow it to where it can get to that point.
	Good trades, controlled risk, and letting the winners run.
	To not use margin.

RULES:

	Must limit the number of "Day Trades" so we don't become a PDT. We are allowed 3 Day Trades in 5 business days. It is the 4th trade that causes the problem. So, we will have to keep close track of the Day Trades made, and if we hit 3 in 5 days, will either stop trading, or ONLY focus on stocks that have options, so the options strategy can be used.
	Will limit the amount of the account that can be used on any one position to 25% of the account. The preferred amount will be 20% or less. This will allow for 4 or more positions to be taken simultaneously.
	Margin will be only used as a filler. Example, if we have 4 20% positions, and are $500 short of being able to buy 100 shares of the 5th position, then we will use margin to be able to get that position. We will NOT buy heavily with margin.
	Stops will be used and will be honored. I have been examining some different approaches to stops. There are 3 ways to place a stop. 1. Based on a % of the purchase price, usually 5-7%. 2. Based on a key support/resistance level based on the charts. 3. As a set dollar amount. This is usually a % of the account. For this account I am going to set a 5% of the account as the maximum loss acceptable. This will be the absolute stop. A tighter stop may be used if it correlates to a key chart level, or the 5% of the purchase price.
	QQQ, stocks highlighted on the Stocks To Watch page, and stocks mentioned on the Message Board will be the basis of all trades.
	Most trades will be based on the daily chart signals listed on the STW page. Even though, if a clear intraday setup develops, that can be used.
	Both short and long positions will be used.
	Stock commissions will be $10.00 and option commissions will be $20.00. This is in the range of what different brokers charge, and will also cover the SEC sell fee.
	When there is 2 weeks or less until Options Expiration, then the NEXT month will be used for all new positions. This will give the options time for the stock to make its move.
	The "entries" and "exits" will be "called" in the chat room. The only exception will be if a stop is set and in place. Then its an automatic exit.
	When an entry or exit is "called" the time and sales will be used to determine what likely price would have the transaction taken place at. Benefit of doubt will go to the worse case execution. Most buys will be done at the ask, and most sells at the bid. This is just a method of verification so you can see that I am not posting after the fact.

This is to demonstrate a few of the ideas that I have been trying to show. Most importantly how time can be used to get the most profits possible, and how to reduce our risk. Because we are using a relatively small account for this demonstration, the positions will mostly be 100 or 200 share positions. For stocks over $25, options will be the primary source of the position to keep the dollar value of the position down. There will be times that we may have more than 5 trades open at once, and still not use margin to do this. The other thing is to show that by looking for good entries on stocks that are poised for the longer-term moves, we can make more than the higher risk over-activity that so many are guilty of.

This will also lower the trading activity. By not making day trades, and by having the lower account balance, there will be times where no trades will be placed. Sometimes this will be that the account has all the positions it can hold, other times, there just isn't a good entry showing.

Yes there will be losing positions, this is also to show that even though you will get into losers, by cutting your losses, and how the trades that do go your way will offset the losses, and by letting your winners run, you can create positive gains.

Jim.

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