By using the swing trading algorithm we will set up a breakout swing trade. The same steps can be applied in a breakdown. The rationale is also the same for day trading.

Set up of a breakout trade

Step 1: We define market trend using the ETF SPY (below). We have an uptrend.

Step 2: The stock should also be in an uptrend like DIS below. So we are looking for resistance which is at $37.75.

Step 3: Placement of stop at $37.15 (60 cents from trigger).

Step 4: Profit target at $40.70 ($2.95 from trigger).

Step 5: Loss/profit ratio $0.60/$2.95= 1/5. Far better than 1/3.

Step 6: Assume that we have $30.000 capital and we buy 1000 shares. Maximum loss if price hits the stop will be 1000 x 0.60= $600. So, $600/$30.000=0.02 or 2% of our cash capital, so we are fine relatively to risk management principles and we will open a long position when price breaks resistance.

Steps 7, 8: We are reading news relative to the company, that might affect our position and we are being aware about the quarterly report date.

Set up of a breakdown trade

Step 1: We define market trend using the ETF SPY (below). We have a downtrend.

 

Step 2: The stock should also be in a downtrend or sideways movement like WM below. So we are looking for support which is at $34.

Step 3: Placement of stop at $34.65 (65 cents from trigger).

Step 4: Profit target at $32.10 ($1.90 from trigger).

Step 5: Loss/profit ratio $0.65/$1.90= 1/3. 

Step 6: Assume that we have $30.000 capital and we buy 600 shares. Maximum loss if price hits the stop will be 600 x 0.65= $390. So, $390/$30.000=0.013 or 1.3% of our cash capital, so we are fine relatively to risk management principles and we will open a short position when price breaks support.

Steps 7, 8: We are reading news relative to the company, that might affect our position and we are being aware about the quarterly report date.