This Week’s Battle Plan
In a game, nothing should be given
away. The winner must be better and stronger and smarter. But most of
all, he must be passionate. He must bleed and spit fire. Â
— A quote from Sports Illustrated
Execution Finale
Last week’s piece on Execution generated an enormous response. Many of
you sent me emails detailing your personal experiences in dealing with
Execution issues. As I mentioned last week, strategies with an edge
are critical, but if you don’t properly exploit these edges, the edge
is diminished or lost.
This week I had intended to write about a different topic, but that
will now wait a week. I want to follow-up from last week and further discuss the
role Execution plays in your success as a trader. And I want to do it from the personal
experiences of the members of this site. I’m going to bunch the most
common themes and questions from the emails I received and then answer them here. From these
emails, we can all learn. And hopefully all take our trading to the
next level.
Three Common Execution
Situations
1.”My gut getting in the way is a problem for me. Too much
gut” – These were the exact words of one member. And,
this theme was played out many times over in other letters I received.
Yes, allowing one’s gut to makes decisions the majority of the time is
a problem. I view it as a major problem. That is why I insist on
having rules in writing in order to to be able to avoid “winging
it.” I’ll be the first to tell you that no one likes rules,
especially me. That’s human nature. But take a step back. THEY ARE
YOUR RULES! Neither the IRS, nor the school principle nor your parents forced these rules upon you. You
put them together. They were done with your brain! And, they were
done to add structure to your trading day. A day that is always nothing but
chaos. Not your chaos (hopefully). It’s market chaos. Every
single day. No one knows what tomorrow will bring for the market.
World events, company news, economic events, etc, will each day add
various levels of utter chaos to the markets. No two days look alike.
Ever. There is no way you can come in each day and perfectly execute without
a plan when the chaos is different each day. This is why structure and rules
are essential. Otherwise you’ll get chewed up. You need to have a plan
in place that deals with whatever the market throws at you.
How do you do this? First, you only trade a small handful of the same
strategies each day. That way you are looking for the same set-ups
over and over. It doesn’t matter if the market is up 300 points, even
for the day, or down 300 points. It doesn’t matter if a large company
lied about their accounting or before the opening Abby Joseph Cohen
raised her estimates on the Dow to 52,397 for the year 2080. Each
event will cause a reaction, meaning chaos that was not there before the event. But, it
should mean
nothing to you. Why? Because all you are trading is the set-up.Â
Period.
Second, protective stops and profit taking goals must be in hand. And
they should look the same no matter what the market does. You’re short
SPY’s and the market rises 300 points, you are stopped out along the
way. If the market is dead quiet and even for the day, you do nothing.
If the market collapses 300 points, you have profit taking strategies
in place. Guess what? You just took a 600-point market range and added
perfect structure to it. No matter what the market did, you had an
answer. Not too tough to do when you have rules in place. And if you
think about it, what was your stress level as you were reading this example? It was pretty low. A 600-point range for the day and you
handled it easily. Because you already have your rules in place.
Third, you should know how many shares and how much intra-day and
overnight risk you should take. I can’t tell you what that number
should be. Only you know what is best. But don’t trade 1000 shares one
day, 300 the next and then pass on the next two trades. Because if you
do, you’ve added even more chaos to a chaotic situation. And that for
sure will kill your edge.
In three simple paragraphs with a few simple rules, we have minimized
the chaos that is created by wild news events, large market swings and
intraday and overnight risk. THERE IS NO GUT GETTING IN THE WAY WHEN YOU HAVE
THESE RULES IN PLACE. You’ve replaced chaos with structure. And from here
on, you simply consistently EXECUTE.
2. “I lack focus.” This is
another common theme. Too many strategies and opportunities out there.
And yes, this is a problem. Do I trade Haggerty’s set-ups, or what
about Floyd’s or Landry’s? And the money manager on CNBC said he only
buys stocks that have rising earnings momentum, but 10 minutes later
on the same show they had another successful money manager on who said
he only buys cheap companies who are in restructuring mode.
The quick and very simple solution to this is to find the strategy
that is most comfortable for you based upon your personality and your
goals. Hyper-aggressive individuals usually don’t do well with long
term buy and hold (I still don’t understand why the IRS doesn’t treat
positions held longer than a week as a long-term capital gain). And
conservative librarians probably won’t do too well trading 1-2-3’s on
5 minute bars in the e-minis. You need to find what is right for you.
All of the above strategies work if they are traded properly. But you
can’t trade them all! You can’t belong to every religion in the
world, you can’t belong to every political party in the country, you
can’t root for every NFL team playing this afternoon and you can’t
trade every strategy that is out there. Excellence comes from focus,
and focus first comes from making the proper decision for yourself and
sticking with it. There is no perfect strategy out there. None make
money on every trade (not even close). Many have edges, but the edges
require you to Execute the strategies on a consistent basis.
Here’s how to do this: Choose a trading style that fits your
personality (day-trading, short-term trading or longer
term/intermediate term trading). Then, select 1-4 strategies within
this style. And master them! Become the best in the world in these
strategies. That should be your goal. Once you take this mind frame,
focus is not a problem. It’s your ally. And from this focus, mastery and trading
success is ultimately attained.
3. “I can’t pull the trigger.”Â
This one surprised me. A number of
emails on this one. The problem is likely one of two things First, you probably don’t have full
confidence in the strategy, because if you did, you would take every trade.
You would know it’s a game of probabilities and you want as many signals as
possible in order to exploit these probabilities. If you do not have full
confidence in your strategy, then you should paper trade the strategy on a
bar by bar basis until you do. Or, find another strategy that gets you to
this confidence level.
The second possible reason for the “I can’t pull the trigger” is that
you are likely trading too many shares for your comfort level. And this is
“scared money.” And one of the surest ways to get swallowed up in
trading or in the business world is to play with “scared money.” Get yourself
to a level that is comfortable and focus on the trades, not the money. And if you
need further proof of this just ask yourself, “If I was only trading 5
shares on this trade, would I be able to pull the trigger?” Of course you
would. It’s a well-known fact among professional poker players that ultimately
most successful players will reach a money comfort level in the game they
are playing. They’ll play perfectly until the risk reaches a threshold that
is above this comfort level. Some will be good enough to play in games for $100-$200/card
(where pots go well into the thousands of dollars). But,
double the size of the game and they go on tilt. At this point many blow out
but the smarter ones simply go to the levels that let them maximize their
earnings while at the same time letting them play to their maximum level.
And a few, just keep going higher and higher ultimately mastering all
levels. There’s a martial arts saying that “No one was ever born with a
black belt around their waist.” This is the same for trading. No one was
ever born trading 100,000 shares on their first trade (unless you were born
into the Haggerty family. There you’re considered a loser if your first trade
is only 100,000 shares). You need to build to these levels. And this takes
time. And you can’t get there until you master trading 100 shares, then 500
shares, then 1000 shares, and then more. Take it slow, master the first
level first and then move up. This will immediately help overcome not being
able to pull the trigger.
Perfect Execution
Now, let’s look at a few examples of members executing correctly. I’m not
going to publish how much money anyone made from trading properly. For this
piece it’s secondary to the fact that they executed properly.
One member wrote that after a costly execution problem 13 years ago, he’s
learned the importance of leaving his ego off to the side and totally
surrendering to the daily messages of the market. He’s developed a few good
strategies and “adhering to them provides with greatly reduced stress
levels!!!” Another member talked about the living he makes because he’s
made
his day “boring.” He has a meticulous plan in place and executes the same way over
and
over again. Another member wrote a fascinating email telling me about a real-life story that happened a few weeks ago. It was related to point 4 I made
last week about having a backup plan for uncontrollable events such a
hurricanes, tornados, earthquakes, power outages etc. As you may remember, a
few weeks ago there were a string of severe tornadoes that ran through the
middle of the country that unfortunately killed a number of people. Eight people in the county
next to him died. All power was knocked out and he had a position in
the Q’s. But this gentleman is a professional and he has a plan in place for
these occasions (it’s happened twice before to him). In his words “I follow
the plan. I close out all positions using my cell phone. No hesitation, no
second guessing. I can always re-enter.” It matters little to me whether he
would have made more money had he just waited for power to be restored.
That’s the wrong thing to do! He executed perfectly. He put his trade into
place from his signals and he exited the way the situation dictated. This
situation was far different than what one normally expects, but things like this
do happen. Chaos was
brought into the trade via the form of deadly tornados. Most traders would
have froze because they don’t have a plan in place. This gentleman
simply picked up his cell phone and got out.
Yes, trading is about having good strategies and good trade management
techniques. But it’s also about being a professional. And having an answer in
place for anything the market can throw at you. It’s not that difficult to
do. But it must be thought out and executed. A tornado may never impact your
trading. But I can promise you something else will. Nearly every day something does.
You only need to think back over the past 15 months and look at everything that has
happened, including terrorist acts, accounting scandals, Abby changing her
market outlook, all the surprises companies release daily, etc. Were the past 15
months more chaotic than usual? Will markets be less chaotic in the future?
Probably not. This stuff happens every day. Always has, always will. But when you
put structure in your trading day and
you have a daily plan that you execute on over and over, this chaos can be
minimized. And when you minimize the chaos, your trading (and your life) really
does become simpler and potentially a lot more profitable.
Have a great week trading, put your plan into place (and Happy Thanksgiving)!
Larry Connors and Brice Wightman
PS – I’ve just released my Windows
Strategy Training Module, which is the primary strategy I use to
short-term trade equities. If you would like more information on it, you can
find it here.