Trading Strategies Every Trader Should Know

Building a Trading Plan

Each trade is made up of three parts. The setup, confirmation, and execution. It is important that we define our plan before entering any trade. By defining each element of the trade, we know what we are looking for, why we are looking for it, and know what to do when we get what we are looking for.

Your trading plan should define each part of your trade and must be made before you enter your trade. Good traders wait for their trades to come to them and do not chase or make things up as they go. Not every setup trigger will be traded, and we must methodically go through this process for each position. I make my plans pre-market and focus on technical breakouts, breakdowns, and reversals at key levels.

A breakout, breakdown, or reversal is only a setup. I need to understand how strong or weak that setup is before I commit my money to the play.

Once I have a strong setup, I need confirmation that my idea is correct. Confirmation is my hedge against technical analysis being incorrect.

Finally, when all previous criteria are met, I need to make sure I meet my execution and risk management requirements defined for the trade.

Good traders will be able to define and wait for all their variables to sync up before pursuing a trade. Once you master one setup, you can look into adding more tradeable setups to your tool kit.

What is a Setup?

A setup is the reason you are interested in a trade. It is an area, where if you are correct, you expect a reaction from price action. There are bullish setups and bearish setups.

How to Find a Setup

Your setup can be almost anything. The reality in trading is that nothing works all the time and everything works some of the time. The most profitable setups generally are found at points where trends reverse or price breaks out from consolidation. Generally, most traders find entry signals by using technical analysis and a combination of indicators, trend analysis, and price action to forecast where price is moving next.

Indicators

Indicators are a visual representation of popular financial formulas. They are often used to help traders find setups. Indicators can be things like moving averages, RSI, MACD, Fibonacci lines, or even things like Bollinger bands. There are generally two classes of indicators: 1. Lagging Indicators 2. Leading indicators. Lagging indicators react to price action and leading indicators try to forecast price action. Indicators are never perfect and there is no combination of indicators that is always going to work. Instead, indicators use price, volume, and historical data to help provide context for what the market is doing.

Your setup with indicators occurs when you get a moving average cross, or RSI moves into oversold conditions. It is only at this point that you start looking for your confirmation.

Level Breakout

Traders will often identify key levels and play moves between those areas. A key level is an area of strong support or resistance. Generally, it is levels such as the daily, weekly, and monthly highs and lows or the nearest points of contact around those areas. At those levels you are expecting to see buyers or sellers to take control after a fight. When you get a level breakout price tends to make strong and steady climbs as bulls or bears outnumber their counterpart and eat up the available shares.

Your setup with a level breakout is when price breaches that level. It is only at this point that you start looking for your confirmation.

DTR Method

DTR relies on candlesticks and volume to determine the relative strength of each setup because we only trade A+ setups. If a setup is strong then we will then wait for appropriate confirmation before trading. Your setup can be different for each trade but how you judge the strength of that setup will always remain the same.

At any setup trigger we are expecting 1 of 3 possible reactions

Strong Bulls
Strong Bears
Indecisive Bulls and Bears

If you are bullish, and your setup trigger thesis is correct, you want to see strong bulls push price up after your setup trigger. If you see strong bears or indecisive price action you know that your setup is not very strong and should not be traded.

If you are bearish, and your setup trigger thesis is correct, you want to see strong bears push price down after your setup trigger. If you see strong bulls or indecisive price action you know that your setup is not very strong and should not be traded.

We already know what strength looks like. We define strength as full body bullish / bearish, 2nd most bullish / bearish, and normal body bullish / bearish candles on increasing volume as strong. So, if after a setup trigger we see one of the following 3 candles, on increasing volume, we know the setup is showing relative strength.

Execution is a simple word for a multi-part process. It means traders have defined their stop loss, adjusted their position sizing, determined their risk reward, entered a trade, and successfully managed that position. Our objective is to make the process consistent, repeatable, and reliable.

Execution Rules

Each trade requires a few basic requirements. Traders need to make sure that they can get in and out of their positions when they want at the price they want. We avoid slippage by trading high volume contracts with consistent bid/ask spreads. That means we always get the sizing we want and can get out when we want. The basic rules are:

Option trading volume of 2k or more

Spreads of less than 2%

Setting a Stop Loss

Every trade requires that we define what our stop loss is. Without our stop loss we don't know how to size our position. In general, the stop loss is the low of setup candle for bullish scenarios or the high of the setup candle for bearish scenarios.

Position Sizing

We now know what our stop loss is, that the risk reward is at least 2-1, but we just don't know how big our position needs to be. If we remember from one of the earlier lessons, we use the stop loss x delta divided by option price to determine our position sizing. Once we know our stop loss, we run the position sizing formula and input all the variables. Once those variables return a % we can adjust our position sizing to fit that risk profile.

A 10% stop loss or less is a full position sized play. A 15% stop loss is a two thirds of maximum position sized play. A 20% stop loss requires at half sized play and a 25% stop loss requires a lotto sized play.

Trade Entry

Once you know the stop loss, your position sizing, and risk reward you can finally look to enter the trade. This process seems tedious now, but it will become second nature as you practice it more and more. You will soon be able to do all these calculations, you just need to practice.

Timing a Trade

Your entry zone for a bullish trade is between the high of the confirmation and the low of the setup candle. That means you are looking to enter on a price below the confirmation candle high. Your entry zone for a bearish trade is between the low of the confirmation candle and the high of the setup candle. That means you are looking to enter on a price higher than the confirmation candle low.

Within that zone you can manage your entry technique even further. It is worth nothing that that there is no perfect entry timing technique. An entry inside your entry zone is theoretically good enough. However, if you wait and look to go long calls at the low of the entry zone you improve your risk reward ratio. However, many setups won't pull back that far and you can miss out on a lot of trades that way. If you wait to enter on the first touch of the zone you will catch trades that bounce and run but there will be other trades where you could have gotten a better entry or get stopped out earlier. Each system has its own unique pros and cons and you can simply choose which ever one you think is best. Stick to one system and get good at that method.

Managing a Trade

Finally, once you are in a trade and have live money on the table, your first objective is to lock in profit. You want to put yourself in a scenario where you no longer have any risk but can still make money. Once you've made your money you can leave a chunk of your position on as a risk free lottery ticket and really amplify your gains.

I always look to take profit off once my option contract is up 10%. Once the play is up 10%, I refuse to let that trade go red. That means I close 1/3 - 1/5 of my position off at profit and then push stop loss to my entry price on the options. I then look to trim the remainder of my position on each significant level break, or percentage milestone. Each time I lock in more profit I further raise my stop loss to be 10% behind my previous take profit target. For example, if I close 1/4th of my position at 3 dollars my stop loss would be at 2 dollars and 70 cents. Once I have my last chunk I stop pushing my stop loss up and try to hold the position for the biggest gain I can.

Just like your entry timing there are pros and cons to each take profit technique. Maybe you feel more comfortable taking profit off at a different percentage or want to take more or less off per trade. Each system will have its own strengths and weakness but it is more important that you focus on remaining consistent with your process.

The 5 Types of Pre Market Conditions

3/3 (Trending)
2/3 (trend with volume)
2/3 (trend without volume)
1/3 (no trend)
Inside bar

The objective of this guide is to create a basic framework on each of the pre market conditions. Please use it as a starting point only and add any information that you think will help you improve your trading.

You will notice that the confirmation, execution, and scale out techniques remain consistent. So master those basics and then just apply the different setup triggers based on the appropriate market conditions. You’re trying to find the path of least resistance.

By default, every day you should have two types of setups. But, use your own intuition, gut, technical analysis, or other information to help you filter out setups.

Let’s get started…

3/3 - Trending Price Action

Green Candle (1) + Green increasing vol (2) + Gap up (3)

All 3 elements of price action are telling the same story. Bulls are in control. We can judge how strong or weak bulls are on two variables: the strength of the candle shape, and the relative strength of the volume.

Types of Setups to look out for:

Level Breakout Trades
Dip Buy off of support

Level Breakout Trades

Setups: daily, weekly, monthly, or pattern breakouts. The setup triggers on the pierce through that horizontal resistance.
Trade Thesis: Bulls are strong, so we expect areas of resistance to turn into support
Dip Buy off of Support
Setups: bounce off vwap, previous daily high, fakeout lower then reverse, bb reversal, ma bounce, etc. The setup triggers as price approaches perceived areas of support.
Trade Thesis: Bulls are strong. So we expect previous areas of resistance to act as support on pull backs.

The confirmation standard is the same for both setups. And is described in detail below:

Confirmation standard: occurs on the first 5/10/15 or 30 min candle that closes as a full body bullish, 2nd most bullish, or normal body bullish and holds the horizontal resistance on increasing outlier volume. On a dip buy, the confirmation candle is the first close to meet the same criteria after the bounce off of support.

Because we already have daily (long term) volume support we want to wait for short term momentum to return back to the name. The volume of the confirmation candle should be greater than the previous bar and ideally larger than the 20 volume period average.

Profit Target: I target the next daily, weekly, monthly high or the next point of contact on the trend line as a profit target.

Stop loss location: Under the low of my confirmation candle

Entry technique: Wait for a pull back into your entry zone, prior to price making a higher high above the confirmation candle. We do not want to see bulls fail prior to our entry. Bulls making a higher high and then pulling back to your entry zone implies that bulls met resistance that was different to your intended price target. Which in turn suggests that your current thesis is either not ready or incorrect.

I use the fibanoici tool to find my entry price. I draw the fib from my next profit targets towards my stop loss location. I then use the .236 fib level to help me find my 1:3 risk reward entry. This helps me make my entry binary. As my it either hits my price or it doesn’t.

Position Sizing: I never want to risk more than 1% of my account after stop loss. So I generally wait for pull backs into 1 of 3 position sizing zones.

Half size: when my stop loss is 2 dollars from my entry price and my profit target is 6 dollars away

⅔ Size: when my stop loss is 1.50 from my entry price and my profit target is 4.50 dollars away

Full size: when my stop loss is 1 dollar from my entry price and profit target is 3 dollars away.

Scaling out: I scale out using the R system and focus on trimming my position as my pnl is increasing.

R = the difference between my entry price and my stop loss. So if my stop loss is 1 dollar away then 1R = $1.00.

I want to make sure I am scaling out when it makes sense to do so. That helps me derisk and keep my lottery tickets. My first scale out is at 1r. So if my entry was at 100. My stop loss was at 99, then I’d close ¼ of my position at 101. At that point I don’t want to see this trade turn into a loser. So my stop loss is set at my pnl break even point. Then if the price kept moving, I'd close another ¼ of my original position at 2R. Or 102. Then I would move my stop loss to my entry price. From there I would hold the remaining half of this trade and scale out at my key pre market levels until I get stopped out.

Things to look out for:

Make sure the move hasn’t happened in the gap. The larger the gap up, the more likely you are to be rewarded for waiting for pull back instead of breakout setups.
If you feel like the move is already extended, apply a stricter volume confirmation standard. Either wait for the largest volume of the day or largest volume of the week.
Avoid early morning fakeouts by waiting for general market confirmation. Make sure spy, spx, qqq, nq are telling a similar story. Keep an eye on 10 am data.
You expect breakouts to occur within the first 30 minutes, and for dip buys to occur once weak bears have exhausted themselves. Usually dip buys occur around 10:15-10:30+

2/3 with Volume - Mostly Trending Price Action

Green Candle (1) + Green increasing vol (2) + Gap down (3)

Only 2/3 elements of price action are telling the same story. But, because the candle and volume are strong, we have more confidence that we have trending price action. Our objective is now to make sure that we have bullish price action. We need to counter the gap down and turn this two out of three into a three out of three .

In practice, this gives us the same tradable environment as 3/3 conditions except that the dip buy is significantly more likely than the breakout trade. So just like before we can judge how strong or weak bulls are on two variables: the strength of the candle shape, and the relative strength of the volume.

Types of Setups to look out for:

Level Breakout Trades

Dip Buy off of support

Level Breakout Trades

Setups: daily, weekly, monthly, or pattern breakouts. The setup triggers on the pierce through that horizontal resistance.
Trade Thesis: Bulls are strong, so we expect areas of resistance to turn into support
Dip Buy off of Support
Setups: bounce off vwap, previous daily high, fakeout lower then reverse, bb reversal, ma bounce, etc. The setup triggers as price approaches perceived areas of support.
Trade Thesis: Bulls are strong. So we expect previous areas of resistance to act as support on pull backs. You want to look for dip buys where you have seen bulls dip buy before.

The confirmation standard is the same for both setups. And is described in detail below:

Confirmation standard: occurs on the first 5/10/15 or 30 min candle that closes as a full body bullish, 2nd most bullish, or normal body bullish and holds the horizontal resistance on increasing outlier volume. Because we already have daily volume support we want to wait for momentum to return back to the name. The volume of the confirmation candle should be greater than the previous bar and ideally larger than the 20 volume period average.

The confirmation standard changes, if the volume gets invalidated. If we see selling pressure, that is more aggressive than any of the previous day’s volume, then I would apply a stricter volume standard for a reversal.

Profit Target: On breakout trades I target the next daily, weekly, monthly high or the next point of contact on the trend line as a profit target. While dip buy trades I either target the bollinger band lines or current high of day.

Stop loss location: Under the low of my confirmation candle

Entry technique: Wait for a pull back into your entry zone, prior to price making a higher high above your confirmation candle. We do not want to see bulls fail prior to our entry.
I use the fib tool to find my entry price. I draw the fib from my next profit targets towards my stop loss location. I then use the .236 fib level to help me find my 1:3 risk reward entry
Position Sizing: I never want to risk more than 1% of my account after stop loss. So I generally wait for pull backs into 1 of 3 position sizing zones.
Half size: when my stop loss is 2 dollars from my entry price and my profit target is 6 dollars away
⅔ Size: when my stop loss is 1.50 from my entry price and my profit target is 4.50 dollars away
Full size: when my stop loss is 1 dollar from my entry price and profit target is 3 dollars away.

Scaling out: I scale out using the R system and focus on trimming my position as my pnl is increasing.

R = the difference between my entry price and my stop loss. So if my stop loss is 1 dollar away then 1R = $1.00.

Things to look out for:

Don’t try to catch a falling knife, if the selling is more aggressive than you expected wait for the largest volume of the day on reversal confirmation.
Wait for deeper pull backs. This trade works best when you identify a strong trend, and then get an overreaction sell off into that trending price action.

2/3 without Volume - Weak Trending Price Action

Green Candle (1) + Green decreasing vol (2) + Gap up (3)

Only 2 out of 3 elements of price action are telling the same story. Bulls are mostly in control, but there aren’t as many bulls as we would expect.

Momentum has left this name and we need to see strong momentum return. This lack of volume indicates that we do not have short term trending price action and should not be looking for dip buy opportunities. We want to wait for the market to establish its personality with conviction.

Our base expectation is that bulls will either step in and make new highs, or bulls will fail and bears could then reclaim control.

Types of Setups to look out for:

Level Breakout Trades

Failed Breakouts / Trend Reversal

Level Breakout Trades

Setups: daily, weekly, monthly, or pattern breakouts. The setup triggers on the pierce through that horizontal resistance.
Trade Thesis: Bulls have been strong, so it wouldn’t be surprising to see resistance turn into support
Failed Breakout / Trend Reversal
Setups: bb reversal, ma cross, green to red reversal, or a failed breakout
Trade Thesis: Bulls were strong, but now are exhausted. Bears can reclaim short term control now that bulls are thinning at these highs. Bulls don’t have the need to protect this level and are happy to lock in profits.

The confirmation standard is the same for both setups, but are unique to these pre market conditions. They are described in detail below:

On a failed breakout trade we want to see failed higher highs and 5/10/15 or 30 min candle that closes as a full body bearish, 2nd most bearish, or normal body bearish on a larger volume standard than any of the bullish volume so far today.

The key difference here is that we do not have the basis of volume supporting this trade. We need to see the volume step in. Ideally, that means that the opening 5/10/15/ or 30 min candle has larger volume than any volume bar / candle we saw yesterday.

We need to see evidence of increasing momentum. If you have evidence of increasing momentum, then you only need increasing volume relative to the previous bar as your confirmation standard or as described above.

However, if you do not have evidence that momentum returned, relative to the previous day, then you need to wait for your confirmation candle to give you that volume standard. This means that you will get many close, but no cigar setup triggers.

Fundamentally, this trade is waiting for either bulls or bears to reclaim control. Weak bulls, or weak bears do not imply a trend reversal or that the trend is about to pick back up. That implies possible consolidation or grinding price action. Neither of which are very profitable.

We need high volume conditions for strong trending price action.

Profit Target: I target the next daily, weekly, monthly high or the next point of contact on the trend line as a profit target or the bb lines on reversal plays.

Stop loss location: Under the low of my confirmation candle or high of my confirmation candle (reversal)

Entry technique: Wait for a pull back into your entry zone, prior to price making a higher high or lower low through your confirmation candle.

I use the fib tool to find my entry price. I draw the fib from my next profit targets towards my stop loss location. I then use the .236 fib level to help me find my 1:3 risk reward entry

Position Sizing: I never want to risk more than 1% of my account after stop loss. So I generally wait for pull backs into 1 of 3 position sizing zones.

Half size: when my stop loss is 2 dollars from my entry price and my profit target is 6 dollars away

⅔ Size: when my stop loss is 1.50 from my entry price and my profit target is 4.50 dollars away

Full size: when my stop loss is 1 dollar from my entry price and profit target is 3 dollars away.

Scaling out: I scale out using the R system and focus on trimming my position as my pnl is increasing.

R = the difference between my entry price and my stop loss. So if my stop loss is 1 dollar away then 1R = $1.00.

Things to look out for:

Make sure you have the volume!
The bigger the gap up the better the bb reversal setup. Big gap ups on weak volume create natural areas for profit taking.
Avoid inside bars by seeing bulls or bears fail first. Fake outs that trap one side lead to the smoothest trades. Be very patient and assume that these areas will behave as zones.
Don’t front run bearish reversals in low vix environments.

1/3 - No Trending Price Action / Inside Bar

Green Candle (1) + Green decreasing vol (2) + Gap down (3)

Only 1/3 elements of price action are telling a bullish story. But, if bulls were so weak yesterday, why couldn’t bears take over control? One for three conditions indicate indecision. That price action is consolidating and catching it’s breath. And we need to see a trend step back in. We are looking for trend creating or breakout price action.

We have three likely narratives: a breakout higher, a breakout lower, price remains indecisive.

Treat inside bars like you would a ⅓. You need to see a consolidation breakout in either direction. Price is compressed and needs an expansion event in either direction. The same confirmation standards apply.

Types of Setups to look out for:

Level Breakout higher

Trend Reversal Lower

Level Breakout Trades

Setups: daily, weekly, monthly, or pattern breakouts. The setup triggers on the pierce through that horizontal resistance.
Trade Thesis: Bulls could be strong, so we expect areas of resistance to turn into support
Trend Reversal Lower
Setups: ma cross, level breakout, green to red reversal, volume divergence reversal, failed breakout, bb breakouts,
Trade Thesis: Bulls were not strong and failed. Now bears can reclaim control after a failed move.

The confirmation standard is the same for both setups. And is described in detail below:

The confirmation standard is the same for both setups, but are unique to these pre market conditions. They are described in detail below:

On a trend reversal lower we want to see a 5/10/15 or 30 min candle that closes as a full body bearish, 2nd most bearish, or normal body bearish on a larger volume standard than any of the bullish volume so far today.

Fundamentally, this trade is waiting for either bulls or bears to reclaim control. Weak bulls, or weak bears do not imply a trend reversal. That implies possible consolidation or grinding price action. Neither of which are very profitable.

We need high volume conditions for strong trending price action.

Profit Target: I target the next daily, weekly, monthly high or the next point of contact on the trend line as a profit target or the bb lines on reversal plays.

Stop loss location: Under the low or above the high of my confirmation candle