With the caveat that flexibility and some adaptation is sometimes needed, a veteran trader reveals the eight key guidelines that govern his actions in the markets each day.

It’s important to have a set of rules that you trade by. That doesn’t mean that you follow them each and every time, however, because no stock and no trade is the same.

As a result, some flexibility is required, but overall, you should have good set of rules when trading small-cap stocks (or any type of stock, for that matter). If you are new to trading, it is better that you adhere to rules every time no matter what.

So what I’ve done with this article is provide you with the trading rules that I try to abide by each and every day. While they aren’t written in stone, they are my guide for making wise decisions with my trades, whether it be the entry, the management of the trade, or the exit.

I trust these rules, so I’m not constantly looking for reasons to justify not adhering to them.

1) Trade Stocks on the Breakout

  1. Breakout to recent/new highs
  2. Breakout of resistance
  3. Breakout of a bull flag/wedge
  4. Breakout that confirmed a double bottom, cup-and-handle, inverse head-and-shoulders, or other related price pattern 

2) Don’t Buy in a Down Market

Avoid jumping in plays when the market is moving down unless volume is remarkably strong in the trade set-up and bucking the overall market trend. 

3) Be Careful at the Open

Avoid the first five to ten minutes of the trading session for trading small-cap breakout plays. 

  1. High amount of head fakes during this time 
  2. Large spread in bid-ask. You risk getting a very, very bad fill using a stop order 
  3. Exception would be unless the trade is a high-probability trade, (i.e. very strong set-up with huge volume pouring in (and in previous days) and favorable price action of late)

4) Set Guidelines for Holding a Stock Overnight

  1. All stocks are daytrades until there is a legitimate reason to hold a particular trade overnight. It needs to earn that privilege 
  2. Positive volume buzz, preferably over 100%
  3. Meets the volume requirements and holding the breakout level favorably 
  4. Volume surge at end of day with good price action
  5. Bucking market weakness

NEXT: Set Guidelines for Getting Out at the Close

|pagebreak|

5) Set Guidelines for Getting Out at the Close

  1. Price action on the day is coming off of a huge gap up on the morning open and failing to hold the day’s lows
  2. Failed to maintain the breakout level 
  3. Volume is deteriorating
  4. Large upper shadow on daily candle
  5. Earnings after bell/tomorrow morning
  6. Sold off noticeably into the close
  7. Already seen extensive rally and trading outside the upper Bollinger band with a bad track record for doing so

6) Find Signs That Point to Getting Out Right Now

  1. Stock should do what you expect it to do fairly soon into the trade. When it doesn’t get out. 
  2. Breaking below key intraday support level that has been previously established. 
  3. Breaks the day’s lows. 

7) Set Rules for When to Book Gains Intraday

  1. Two very strong/convincing candles/bars on the 30-minute chart (i.e. 9:30am ET and 10am periods). Usually a good indication the stock has hit the highs of the day, especially when the market is weak (true usually nine out of ten times).
  2. Very, very weak market open and very strong open in the stock. Usually short-lived. Don’t wait to see if the market bounces; just take the gains. 
  3. Very extreme and sudden move higher on the one-minute chart. Particularly if rumor driven. It’s unsustainable and a gift from the market. Will usually get shorted by the bears nine out of ten times 
  4. Can’t break through well-defined resistance on the daily chart

8) Always Place Stops and Be Aggressive

The worst-case scenario is that you get stopped out earlier then you’d like and you have to play the breakout again. 

  1. Don’t sweat being stopped out too soon. It happens and it’s part of trading. The fear of this leads to greater losses long term
  2. Get to breakeven with the stop-loss as quick as possible
  3. Look for breaks of intraday support for stop-losses
  4. Huge move higher try using a 2%-3% trailing stop if no ideal stop area exists. Should be enough to see what kind of momentum the stock has left in it
  5. Place initial stop a shade below the breakout level (one in which your comfortable with the possibility of a loss should it hit) if there are no other ideal stop areas nearby. True breakout plays hardly ever dip back below the initial breakout level

Once again, these are the rules that I use. I would recommend that if you are going to use these, that you tailor them to your style of trading and personality.

By Ryan Mallory of SharePlanner.com