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85

Execution

Although this method has been proven to discover critical reversal points in stocks, proper execution of a trade set-up will determine your success or failure as a trader. The key to successful execution is gauging the price action in the potential reversal zone. There are many harmonic set-ups that do not yield a reversal. The previous example of America Online was a good example of a very harmonic set-up that did not reverse ideally.

In the case of AOL, the execution was very tricky. The stock traded a total of 50 points! Initially, it declined over 20 points, and then the stock rallied almost 30 in the next three days. Although the potential reversal zone was blown out, the set-up still yielded a very substantial rally.

This example illustrates the concept: "Anything can happen in the stock market." The stock market will do anything it wants to, whenever it wants to! Preparing for such uncertainty will ensure greater success. Therefore, it is essential to develop guidelines to act consistently and prudently in these situations.

Trading rules will guide your behavior throughout the trade process, especially since these situations can be extremely emotional. At times, the emotional element can cause flawed executions. Specifically, the emotions of fear and greed could cause you to jump in too soon or sell too early.

I have made more mistakes in trade execution than I want to admit. There have been many times when I have bought stocks when I should have been selling. Also, there have been other times when I have held on for greater profits, only to give it all back. I just want to say that you are going to make mistakes. It is a part of the learning process. But, there are ways to improve your trading and prevent future mistakes.

Trading Plan

A personal trading plan is your own system that will ensure success. It is important to create your "plan of attack." The trading plan will help you identify profitable opportunities and make better trading decisions. I have included my own plan that I use to analyze a set-up. Before I execute a trade, I assess a stock based upon this checklist of questions.



1. Is there a pattem?

2. What is it?

3. Is there an AB=CD?

4. Where does it complete?

5. Are there 3 or more numbers converging in the potential reversal zone?

6. What are they?

7. What are the time cycles (symmetry) suggesting?

8. Are there any waming signs? (price gaps, wide ranges, tail closes)

9. At what point is the potential reversal zone no longer valid? (Stop Loss)

10. How much must I risk?

11. Am I willing to risk it?

If your set-up abides by this checklist and you are willing to accept the risk, the trade is probably a valid execution.

Trade Requirements

There are a few requirements that I use to screen potential trade setups. When looking for potential candidates, it is important to follow highly liquid stocks - stocks that trade an average of a million shares a day. Although I have observed very harmonic price action in stocks that trade only a few hundred thousand shares a day, I strongly suggest that you stick with the big companies. Also, it is important to look at the largely capitalized companies that are frequently in the news. Groups, such as the Dow Industrials, NASDAQ 100 and NYSE top 20, provide good potential candidates for trade opportunities. Also, I frequently review stocks that are on the most active volume.



Requirements:

Liquid Stocks (in excess of 1 million shares traded daily)

Minimum chart time frame = 30 minutes; daily and weekly charts must

be referenced to determine trend direction and other larger possible price

implications

Daily trade joumal: trades must be prepared before market opens or day

before; must record trade action and personal behavior

Chart record: following each trade, I must print out the chart recording

entry and exit points, profit/loss and other comments;

Overall trade record - Equity curve: I must always be cognizant of my

personal equity curve understanding average loss/win, time frames, and

equity drawdown.

These mles provide a consistently effective method of identifying opportunities. It is important to develop your own trading plan. It can be similar to this, or it could contain other mles or techniques, which you create to help determine when to execute a trade.

Once you have developed a plan for trade execution, you need a plan to determine when to take profits or to cut losses. Knowing when to take profits or cut losses can be difficult, especially when you have not planned your execution in advance.



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