How to Properly Execute Trades
Yesterday we were looking to go short an initial unit of the SPY if it closed higher for the day. That means that in order to execute the trade in normal trading hours you have to make a decision a few minutes before the close whether or not the SPY will close higher. Most days this is not an issue. The market is either comfortably up or down and you know what to do.
Yesterday was not one of those days. Yesterday the SPY moved from positive to negative to positive a handful of times over the last few minutes. In fact it was only in the finals seconds that you knew it was going to close higher. So what do you do when this happens?
We’ll take a step back here and look at the bigger picture (we’ll look at our strategy) and then drill down to execution.
Our strategy is to be buying (scaling into) oversold ETFs above the 200-day moving average when they pullback and then sell them into strength. It’s also to short overbought ETFs below the 200-day and buy them back as they sell-off. Correct?
We also want to be as model driven as possible. This means the closer we come to executing the strategy, the closer our results will look like the many years of historical testing that has gone into this approach. We want to avoid the stress and chaos of guessing what to do and simply follow a set of rules that has proven successful for many, many professionals for many years. No CNBC with one person yelling “Up!” (and telling us they picked the bottom) and the other yelling “Down!” (and telling us they’re not crazy…the market is!). Our strategy is in place, we block out the noise, and we execute it each day.
On days like yesterday, when it’s moving around the breakeven mark, you should take a step back and look at this as if you had built a computer model which will execute the trade according to the rules. The rule yesterday was green on the close, short the first unit of the SPY. Red on the day, do nothing. At 4 pm, it was green. The order should be placed. Period. No questions asked. Fortunately the SPY trades actively in after hours so you can have your order in at 4:00:01 and the fill will be clean. You did your job and you followed the rules. You’re overall trading strategy is already in place and then it was executed. Perfect.
Questions can arise….what if it closed down but was close to up? What if I missed the trade completely? What if that nice gentleman on CNBC was screaming that the market was going higher and higher and higher? All good questions. But they are irrelevant. High Probability Trading involves trading high probability strategies and executing then as close to your rules as possible. The closer you follow your rules, the closer your results will look to what your strategy brings.
The key to today’s lesson is to start at the top by defining how you trade the market. Then you lock down your rules, and then execute them impeccably. Because the more impeccable you are in executing your strategy, the more successful you’ll be for many years to come.
This is from Larry Connors Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.