The Master Plan is a set of rules that determines when to enter and exit a trade. At first, it might seem a little complicated, but once you have place a few trades using the system, you’ll realize it’s really quite simple. The best part about the Master Plan is that you don’t need to use judgment. The rules are mechanical. Two obstacles to successful trading are the human emotions of fear and greed. By following the Master Plan, these emotions will not influence your behavior, nor will they interfere with your success.
To keep it simple, we’ll first focus on the long trade. The rules for a short trade are simply the mirror image of the rules for a long trade. An example of a long swing opportunity is shown below. The price has declined (pulled back) and you are bullish on the stock.
Taking a Profit and Preserving Capital
An important aspect of the Master Plan is setting a profit target and preserving capital. The approach is fairly conservative – the profit target is approximately 7% with a potential loss capped at 4%. The actual profit is likely to be more than 7% while a loss is likely to be smaller than 4%. Here’s how it works.
• Once the target price is reached (7% above the entry price), half of the shares are sold, locking in a 7% profit. The other shares remain invested to benefit from any further increase in price.
• If the price moves against the trade, the maximum loss tolerated is 4%. This preserves capital for future trades.
• Typically, more trades will produce a profit than a loss. The net result is profit.
• The movement of the entire market is very powerful. When the market is moving with your trades, a very high percentage of your trades will be profitable.
• When the entire market is moving against your trade, a higher than expected percentage of your trades will lose. The stop loss protects you from excessive losses.
Profit is taken using a “sell limit” order – once the price is reached, the specified number of shares are sold.
Capital is protected using a “stop loss” order – when the stop price is reached, all the shares are sold.
When to Enter the Trade
Using the Master Plan, swing trading opportunities are identified after the market closes. Trades are entered in the morning, usually within the first half hour of trading. When you enter the trade (and the decision rule you use) depends on whether or not the stock has gapped up or down from the previous day’s closing price. According to the Master Plan, a stock is considered to have gapped up when it opens 50 cents or more higher than the previous day’s close; it is considered to have gapped down when it opens 50 cents lower than the previous day’s close. Most frequently, the stock price will open within 50 cents of the previous day’s close, neither gapping up nor gapping down.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – the order can be placed a few minutes after the market opens.
• Occasionally a stock gaps up 50 cents or more compared to the previous day’s close – the order is placed at least 30 minutes after the market opens.
• Occasionally a stock gaps down 50 cents or more compared to the previous day’s close – the order is placed approximately 5 minutes after the market opens.
• To summarize, if the stock gaps in the same direction as the trade, wait 30 minutes, and if the stock gaps in the opposite direction of the trade, wait 5 minutes.
How to Enter the Trade
As with when to trade, how to enter depends on whether the stock gaps up/down or not. Typically, the stock price doesn’t gap up or down and the entry price is based on the previous day’s prices. When the stock gaps up or down, the entry price is not based on the previous day’s prices, but on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, the entry rules are the same.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – buy the stock the moment it trades 6 cents (1/16) above the previous day’s high. This can be accomplished by using a buy stop order. This increases the likelihood that the price is moving in the direction of the bullish (long) trade.
• Occasionally a stock gaps up or down 50 cents or more – buy the stock the moment it trades 6 cents above the high of the new day. This would be 30 minutes after the market opens for a gap up or 5 minutes after the market opens for a gap down.
What to do After the Trade is Executed
Once the trade is executed, the exit orders are placed.
• The profit order – a sell limit order is placed at a price that is 7% above the entry price.
• The capital preservation order – a sell stop (stop limit) order is placed at 4% below the entry price OR 6 cents below the low of the day that was used for the trade (whichever is higher) – for a stock that opened without a gap the previous day sets the prices; for a stock that opened with a gap, the price action before the day (high and low) sets the prices.
Read More : The Master Plan – Entry and exit rules that insure successful swing trading
