A pre-trade checklist for trendline breaks and loss limits

Read the rules as one procedure

The rule set was first assembled in 1934 after losses in 1929 and was reviewed again in 1974. At that later review, general items 1 through 5 and technical items 1, 4, 5, and 9 were marked as still the most important.

Editorial reading: those surviving items are treated as a checklist-process, a written go, wait, or pass sequence that consumes rule inputs, market state, and execution constraints and emits a single trade decision for the system's holding period.

Decide whether the setup is clear enough to act

When the market state is not clearly defined, the procedure calls for a light-commitment and for concentrating on well-defined moves so uncertain two-way action is more often skipped. A light-commitment is a reduced size used so unclear conditions do not receive full exposure.

The checklist tells the operator not to act at once on widely shared opinion and not to take a position in the direction of an immediately preceding three-day burst until a one-day-reversal appears. A one-day-reversal is a single session that prints against that short burst and is used as a wait-or-add filter.

State a trendline condition that can fail

A trendline is a line through open-high-low-close structure on a chosen chart scale, used so a touch, repeated contact, or break can be stated as a falsifiable hypothesis.

A trendline approached on moderate or dull volume is treated as a watch point, provided the line has not already been touched so often that the condition is worn out. That accompanying activity is volume-on-approach, an input that can allow or block the signal.

Repeated contact that hugs a minor or major trendline is presented as a setup in which that line is likely to break.

A break of a minor-counter-trendline, a short-span line drawn along a pullback that runs against the larger trend, is treated as a place to take or reverse a position, including by using stops at that break.

After a directional move, a sideways-range is a lateral pause the procedure treats as a possible hinge. The technical list then expects a second leg of similar extent in the same direction and then often a countermove back toward that pause.

During an ongoing move, the procedure allows initiating or adding in the move's direction on the following morning after any one-day-reversal, especially if volume declines on that reversal session.

Attach a stop so the loss is already bounded

A stop-loss is a pre-placed exposure bound that uses stop distance and account constraints to keep the loss decision fixed before entry and while the position is open.

Stop orders are described as a way to cap a loss, protect an open gain, and enter from certain chart formations. They are treated as more useful when the stop is placed in relation to the price structure rather than in isolation.

The general list treats limiting a loss and allowing an open gain to continue as a constraint that stands even when it conflicts with the other rules.