What You Should Know About Your Trading Plan
OK, today’s action got my attention. That
looked like some real selling. A gap up, a consistent downtrend, and big
volume. Mark this one down as a distribution day. As you can see on the chart
below, this is the fourth distribution day for the Nasdaq in the last 14 trading
sessions. We’ve also had four accumulation days. (Blue up-arrow=accumulation.
Red down-arrow=distribution.)
src=”https://tradingmarkets.com/media/2003/Hanna/rh092403-01.gif” width=”761″ height=”429″ />
In my
view, the technical picture isn’t too ugly just yet, but a little extra caution
is warranted. If you’ve been ignoring the short side of the market (which you
should never do —shame on you), now may be a good time to search out some
potential short candidates, just in case things do turn ugly. You should also
review the stops on your long positions and make sure they are at levels you’re
comfortable with. (Which leads me to today’s topic…)
In my
article last Wednesday about breakeven stops I said that each trader should
decide for themselves whether breakeven stops were appropriate for their own
trading. For some people they are appropriate, for others they aren’t. Many
times this will depend on your personality. After this column, I received
several emails with further questions about this. An excerpt from one of them
is below.
“I
think using breakeven stops is like believing the market pays attention to your
particular positions – it doesn’t…Isn’t this a question of letting your
psychological make up run the trade?â€
I
loved this question. It really gets to the very heart of successful trading.
In my
view, it is not a matter of “letting your psychological makeup run the tradeâ€,
but rather finding a trading plan that, based on your psychological makeup, will
allow you to trade without fear and anxiety. There are many different ways to
make money in the market.
For
example, lets look at two very successful TradingMarkets traders that are on
somewhat opposite ends of the trading spectrum — Dave Floyd and Mark Boucher.
Could Mark Boucher be as good of an HVT trader as Dave Floyd? Could Dave Floyd
trade the intermediate-term as well as Mark Boucher? Maybe. Could they do they
other one’s job and be happy? Probably not. HVT’ers aren’t the type that like
to wait weeks in between trading opportunities. Many Boucher followers would go
nuts trying to do the huge number of trades that HVTers do. Both Mark and Dave
have found methods that not only provide them with a trading edge, but also fit
their personality.
Trading can be a mentally exhausting endeavor. Anyone who has traded for any
amount of time will attest to this. There are many ups and downs. It is
difficult sometimes not to second-guess some of your decisions. When things are
going bad many traders make the mistake of beating themselves up. They make
rash decisions, change their plan of attack, do anything to get out of their
perceived “slumpâ€.
All
of this is especially true for beginning traders. This is because beginning
traders normally do not have confidence in their trading plan. They have not
yet had success in different market environments. Traders must find a method of
trading that where they are comfortable, where they have found some success,
where the drawdowns are manageable, and the gains are sizable, and the number of
trades is not too great or too small. Once they are able to find such a method
— or more likely take someone else’s method and tweak it to make it their own –
then they will be able to find their comfort zone. When you are trading using a
method that you’re completely comfortable with, you will trade with much less
anxiety.
Another problem with trying to trade a method that does not fit your
psychological makeup is that you will have a very difficult time executing the
plan. For example, if the required stops for your trading plan are too far
away, you may “chicken out†and sell before you’re supposed to. More often than
not this will cost you (and be especially upsetting since you lost money due to
a deviation from your trading plan). Other times it may help you, and that will
only act as reinforcement of a bad habit. If you don’t have confidence if your
plan, you won’t be able to execute it.
For
myself, like any trader, over the years I’ve had some pretty bad trades. The
ones that hurt the most and that I really remember are the ones where I had a
gain and didn’t take it. This happened to me a number of times early on. Each
time I felt like I got run over by a bull (or bear). I would get up, take a
walk, and think about how stupid I was. Ultimately, I put it into my trading
plan that I would use breakeven stops in my trading. After I did that, not only
did my mental health improve, but so did my profits. I was much more at ease
with my trading and had an easier time executing my trades.
The
person who emailed me above does not – and should not, use breakeven stops.
When someone has such conviction in their technical stops that they feel they
would be doing a disservice to themselves and their account by instituting
breakeven stops, then by all means, they shouldn’t use them.
Make
sure that when choosing a style of trading, it is one that you can stomach.
There are many different components to a successful trading plan. The
utilization of stops is just one of them. Once you are comfortable with all the
components of your trading plan, you’ll find it much easier to take money out of
the market. You’ll also find it much easier to sleep.
Good
Trading,
Rob Hanna