Let's look at some examples of each of these. I'm going to outline some example trading rules and how they might apply. I use many of these, but others may appeal to other traders.
For options strategies, we already have some limitations imposed. We must be using a stock or ETF that offers options. But what about narrowing down the choice a little further? What underlying stocks will I choose? How about ETFs? Index options?
In addition, I will want to have rules about picking option positions for my strategy. I might define requirements for open interest or option volume. I might define rules for where to select strike prices.
Here are some example rules.
I'll want to have trading rules that define the exact timing of my entry. These might include any technical indicators that would trigger an entry. There might even be rules about when not to enter. For example, I may not want to trade over earnings announcements or at certain times when key economic reports are released (FOMC meetings come to mind).
Here are some example trading rules for when to enter:
Position sizing is simply the implementation of my money management rules. I might have rules dictating that I will only risk a certain percentage of my account. For example...
Trading rules for exit should include rules for exiting when profit targets are reached, when loss targets are reached or for any other reason that might trigger an early exit.
Here, I want to have a framework that offers some routine and can guarantee some consistency to my longer term trading. I might define daily activities such as searching for new potential trades, monitoring for exits, etc. I might define weekly activities like updating my watchlist, looking for new trades, tracking my current results. These aren't so much rules as a list of activities that remind me what to do.
These are things I would do every day like reviewing my current trades, reviewing the day's market action and determining a posture or expectation for the next few days forward.
Weekly routines would be focused on reviewing the week that passed in the perspective of an ongoing trend, reviewing closed trades, updating watchlists, updating trading logs and trade journals.
Monthly activities might include things like record keeping, reviewing monthly performance and determining ongoing success rates, gain/loss rates, etc. This can also be a good time to review events of the month, thoughts on trend, lessons learned, etc. I have often taken the first Saturday following expiration to do this.
OK. Now it's your turn. What will your trading rules be? Rules should be something well thought out and ones that you will be willing to follow. A trading rule makes no sense if you constantly second guess it or routinely disregard it. Rules should be simple in definition, yet very specific so someone else could understand and implement them.
How do you go about creating your own trading rules? Start simple. Begin with one strategy. Define some simple rules for each of the categories listed above. Test the rules over a period of time, first by paper trading and then trading a very small lot size. Don't make adjustments to the rules until you've placed 5-10 trades over a few months time.
The goal for the initial trading rules is not to see how much money can be made. It is to understand the system better, understand yourself better and learn to follow rules consistently. As you grow as an options trader, you can slowly begin to enhance the rules to optimize your success rate.
The measure of success should never be the amount made in a give month or even the percent return on investment. These will fluctuate month over month. The measure of success should be on overall successful trades as a percentage of the total. What the overall long term expectancy is from this strategy and trading plan with a year or more worth of data.