Connors’ Weekly Battle Plan
Trading
Situation Of The Week
Wednesday June 25 was one of those trading days that causes dilemmas for many
traders. I don’t care how long you’ve been trading, it’s the type of day that,
if you traded it correctly, there was very little
chance you could have made money. In fact, it turned into one of those
days where you were likely profitable in the morning, only to see it
turn into a loss by the close.
Before looking at the day, let’s take a quick quiz:
Question: I’m going to assume you have a “firm” set of rules in
place for your trading. That means that you have structured entries
and exits, no matter what the market brings.
For this scenario, you are either a momentum trader or a breakout
trend trader. The markets have been good to you as of late. Today is
no different. The Dow is up over 50 points and you are likely long
again or remain long from previous positions. At a little past 2 pm,
the Federal Reserve announces another rate cut. The market gyrates a
bit and then begins to sell off. The sell-off is not violent but YOU
ABSOLUTELY KNOW THE MARKET IS GOING TO END LOWER FOR THE DAY, POSSIBLY
MUCH LOWER! What do you do? (By the way, you were right, the Dow closed
150 points off its high.)
1. Sell everything immediately.
2. Go into the fetal position while watching analyst after analyst parade
themselves ad nauseam on TV, giving you their analysis of the
event.
3. Stick to your rules and let yourself possibly (and in this case
definitely) get stopped out at much lower levels.
The Correct
Answer With Some Analysis
Let’s take the easy one. If you said B, you should not be trading. The
urge to analyze things to death is fine for long-term investors but it
is not conducive to successful trading.
Now it gets tougher. And here is where you may disagree with me. But
the correct answer is absolutely not A, it’s C. Here’s why…
Here’s What Happened On Wednesday June 26
I was in front of the screen when the market started selling off last Wednesday.
We were long positions and were comfortably net ahead on those positions. AND,
WHEN THE MARKET BEGAN TO WEAKEN AFTER THE FED’S ANNOUNCEMENT, I ABSOLUTELY KNEW
WE WERE HEADING LOWER. You would think the correct thing to do would be to lock
in the profits and go to all cash. Or to even go short. I knew the market was
going down. So why didn’t I do it? BECAUSE I WAS GUESSING! And for every time in
my 22 years of trading "I KNEW" the market was going in a certain direction,
I’ve been correct (at best) 50% of the time. That means I’ve been wrong just as
often as I have been right. There is absolutely no edge in guessing in
situations like this. Even though I would have been better off IN THIS
SITUATION, using my gut, I would just as likely been wrong. That’s why we sat on
our hands, kept our stops in place and eventually got stopped out at lower
levels.
Maybe this time we lost on the situation, but I
will tell you that I believe we are far better off not jumping around from exit
strategy to exit strategy and keeping our discipline in place. Your exit strategies should
absolutely be structured. Ours is a combination of price and time.
That means the stops are in place and as time passes, we move our stops
in the direction of our anticipated move (assuming we have not already
been stopped out). We then take pieces off the table when price moves
in our favor and we raise our stops at the same time. This is only one
of many, many structured ways to exit positions. But, in my opinion
the absolute worst way to exit a trade, is to go into reactive mode
and let every little wiggle and tick force you into making decisions.
The decisions should have been thought out BEFORE the trade, not
during!
You May Not Agree With Me, But…
Now I know what some of you may be saying. You knew the market was
going lower. You should have just broken your rules and gotten out.
Well, that kind of thinking is wrong. A great deal of thought
has gone into the entries, the exits, the position size, and all the
variables that come into play when trading on a daily basis. Maybe
some people really do have the consistent clairvoyance to “know” the
market is likely going in one direction or another. But I do not (nor
have I met such people). Unless there is some other factors that come
into play, reacting in scenarios such as above is just a guess. And
guessing rarely leads to long-term profitable trading.
Leave today’s lesson with this: Go into every
position knowing exactly when your exit will take place. No
matter what the market brings, you should know ahead of time when you
will exit. And yes, days like two Wednesdays ago are no fun,
especially when one knows “for sure” that the market was going to
reverse. Do I regret not breaking the rules and not start hitting the
bids when the urge was there to do? No, not really. Because for every
time I’m “sure” something will happen and I’ve been right, history has
shown that there’s an equal amount of time the opposite has occurred.
That’s why there are rules in place for all my exits, no matter what
happens in the world, and hopefully these rules, longer-term (not one
trade), take a small edge (meaning the entry strategy) and keeps that
edge in place.
If you need help with this or have any questions on it, please feel
free to email me.
New
1. Professional trader Chris Curran has just started writing an e-mini
strategy column for us 3 times a week. You’ll find Chris’s thoughts on
the markets before the opening on Monday, Wednesday and Friday.
2.
TradersGalleria.com is having a 4th of July Weekend Sale with
savings of up to 50% on trading books, training modules, software and
more. You can find the details
here.
3. Beginning in two weeks, I’ll be doing a mid-week market commentary
(along with Paul Taglia) every Wednesday after the close. The first
column will be live on July 16
Summary
Pre-determined exit strategies are critical in order to take advantage
of any possible edges your entry strategies have. Winging it, no
matter how sure you are, is usually just a waste of effort and all it
does is add more chaos to your trading. A good way to spend the rest
of the day is to make sure you have exit rules in place no matter what
the situation is. These rules should include every scenario possible,
starting with your initial stops and your changing of those stops as
you exit partial positions and as markets move. That way you can
assure yourself of not playing a guessing game, something that’s
really easy to do, especially as volatility rises from Fed
announcements and economic events.
Again, if you need help here, please feel free to
email me.
Have a great week trading (and Happy Fourth Of July weekend)!