A Proper Plan of Attack
When you first get introduced to the world of trading for the first time, you begin to hear catchy little phrases like: “Buy low, sell high” or “Don’t try to pick tops or bottoms” or “Plan your trades and trade your plan”…and so on. Obviously there is some truth to these truisms; otherwise we wouldn’t be constantly reminded of them. Many traders know them by heart but fail to apply them because they lack self-discipline. Today we are going to take a look at planning phase of our trades.
In all probability you have heard the saying "if you fail to plan, you plan to fail." This couldn't be truer in the world of trading. None of us begin to trade with the intention of failing but that is just what we are doing if we aimlessly look for trades to put our money into without a proper plan of attack.
We’ve all sat in front of our computer screens with the trading software ablaze and an itchy trigger finger ready to hit the buy button on the order entry screen. With all the clatter before us, the flashing lights, the constantly changing prices and maybe even audio reminders of price alert, it is easy to get caught up in all the excitement surrounding us. When this happens we may be tempted to throw our trading plan out the window, only self discipline will keep us along the right path.
When we start a new trade, for most of us it begins when we hit the buy button on the order entry screen. In reality, a new trade really begins the night before when we set aside some quiet time free of the everyday stresses. It’s during this time that we review our current trades and plan for new ones. Planning our trades and writing them out can help make them easier to execute with discipline. If it's written out and in front of us every trading day, we are constantly reminded of why we got into the trade in the first place.
I know it can be difficult to take the time each day to set up and review a trading plan, but this is important if we really want to succeed in successfully trading the markets. If you’re just interested in playing the markets and not spending the time to plan your trades then you are setup to have a gambling mentality and your trading career will be very short-lived as you find yourself caught up in fear and greed making irrational trading decisions.
The first step in planning our trades is to devote some time each day. It doesn't have to be a huge amount of time, but I suggest you to start with a 30 minute to an hour block of time. Everyone’s trading approach will be different and should be personalized to your own trading style. If you’re not sure how to start, you might want to first take a look at a market calendar. Look at the economic events coming up for the next day to see if there is anything that might affect the markets like an FOMC meeting, earnings, etc…. Having this basic knowledge may help you decide if you need to tighten a stop-loss on a current trade or what direction to trade the market on a new trade. The last thing you want is to be caught off guard by an economic announcement or a company’s earnings statement.
Next you might want to start reviewing some price charts. Noting the trend of the Dow, NASDAQ and the S&P 500 with give you general strength of the markets. Are they trending up, down or sideways? This will help you set up your trades in the direction of the markets and likely give you the best chances of success. You could earmark roughly seventy five percent of your trades to be in the direction of the markets. If the market trend is bullish I want most of my trades to be bullish, if it is bearish then I want most of my trades to be bearish. The other twenty five percent of your trades could be diversify into finding stocks that are bucking the overall market trend. For instance, in a bullish market I try to find the stocks and sectors that are the most bearish. When the market reverses, (or has some type of temporary pullback) then these bearish plays become very big winners.
Now that you have an understanding of the general direction for the markets, you might want to use some sort of scanning software to help you find trades that will work with the current market conditions. For example, if the market is bullish you might want to first start by looking for stocks with strong fundamentals. In a bullish environment, stocks with a solid base are likely to move higher when the markets move higher. Once you have a list of good quality stocks you’ll want to take a look at the industries these stock trade in. If the stock market is heading higher and a stock’s industry is heading higher then chances are a fundamentally strong stock will also be heading higher.
Next, you want to look for strong trends or chart patterns that suggest a stock will move in the direction of the markets. If a stock has been trending higher for months and the markets are moving higher then we have reason to believe the stock will continue to move higher. Chart patterns like; triangles, wedges and breakouts also are things to consider when looking at price charts. If these are backed up with technical indicators then your chances of a successful trade have just gone up.
Now that you’ve found some stocks that look good for the next day, you’ll want to consider any type of recent news event that could affect the stock’s performance. If you see a positive news article, it will only help reinforce a stock’s bullish chart picture. At this point all that is left to do is to place the order for the next trading day. I personally am able to watch the markets so I like to watch the markets open before I place any orders. However, most of us can’t be there for the opening bell and so we’ll need to wisely select the proper order entry technique for the next trading day. At Active Trader we like to use contingency orders. A contingency order allows you to set a stock price at which you want to buy or sell, when the stock hits that price, your order becomes a live market order or limit order and your trade is executed. This is a great way to go because it allows those with limited time during the day to trade wisely; often as successfully as those traders who are able to watch the markets. The last step is to protect your self by using a properly placed stop-loss.
When evening approaches, it’s back to reviewing your trades and going through the hold process again. Do not forget to manage the trades you’re already in, spend a few minutes checking the charts of your current trades and adjusting the stops accordingly. Following a trading plan and sticking to it is really the only way to consistently profit from the markets. This nightly ritual or routine is extremely important for us to maintain our focus. If we trade strictly from our plan in a ritualistic way, any deviation will become uncomfortable or "unlucky."
