Option Trading Rules
I. Set Your Goals And Objectives
II. Set Your Guidelines for Money Management
1. Do Not risk more than 5% (or less) of your risk capital on any trade.
2. Look for trades that have a 3:1 Reward/Risk.
3. Be prepared for every trade that you make.
III. Keep a Trading Journal to Record Every Trade
Before Placing A Trade: Record exit rules for cutting losses and taking profits, entry point, reason for entering the trade support and resistance levels, general market conditions, how you feel about the trade when you place it.
After Exiting A Trade: Record exit price, profit or loss amount, why you exited the trade, why the trade worked when you win, why it did not work when you lose, what you learned from the trade, how you felt when you exited the trade.
Perform a post-mortem analysis on my trades on a monthly, quarterly, and annual basis.
Analyze what worked and what did not work and write your conclusions in your trading journal.
IV. Entry Rules
Write down the Market Direction, Stock Direction, Support, Resistance, Setups, Entry Signals and Exit Strategy For Every Trade Before the Trade is Placed.
1.Setups (Signals that require confirmation.)
A. 5, 10, 20 EMA Crossover
Bullish when the 5 day EMA crosses above the 10 day and 20 day EMA and price is above 5 day EMA.
Bearish when the 5 day EMA crosses below the 10 day and 20 day EMA and price is below 5 day EMA.
Neutral when the 5 day EMA is between the 10 day and the 20 day EMA.
B. Candlestick Patterns -
Bullish: Bullish Engulfing, Hammer, Morning Star
Bearish: Bearish Engulfing, Shooting Star, Evening Star
Continuation: Doji
C. Breakout of Resistance or Rising Trendline (New High)
or Breakdown of Support or Falling Trendline (New Low)
or Breakout/Breakdown from Consolidation Pattern (Triangle)
D. Failure of Candlestick, Support, Resistance, or Consolidation Patterns (includes double tops and bottoms).
for example close below prior day's low after bullish signal,
or close above prior day's high after bearish signal.
2. Entry Signals (Confirmation)
A. Above average volume and following day close in the same direction of the signal.
B. Combination of Multiple Patterns and Indicators.
C. Stock price bounces off Bollinger Band.
C. Bullish or Bearish Indicator Divergence (Stochastics, RSI, TSV, MoneyStream).
V. Choose Option Trading Strategy to Match Your Expectations
1Bullish Strategies - Buy Call, Bull Call Spread, Bull Put Spread, Diagonal Call Spread.
2.Bearish Strategies - Buy Put, Bear Put Spread, Bear Call Spread, Diagonal Put Spread.
3. Neutral Strategies - Iron Condor (DJX or QQQ), Calendar Spread, Strangle
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