This Week’s Battle Plan

Last night my wife and I went out to dinner at an Italian restaurant.
Not any Italian restaurant. It’s an Italian restaurant that you need
to get reservations weeks in advance. And that’s what we did. We
called in early September and got a table, (“the first table
available”) for early October. And that was last night. Now, I
don’t know about you, but when I know I’m in for a good meal, I do the
sensible thing. I starve myself for the entire day. No reason to put
any food in my stomach that may take up room for “the great
dinner.”

So last night, we arrive at this restaurant (in a half-weakened state,
but that’s OK because we know we’re going to shortly be in food
heaven), and spend about 10-15 minutes in line just to tell the hostess
we’ve arrived. That’s because this place is packed and buzzing.
Southern California at its best. And now we’re really excited. And,
when we finally get to the hostess, we’re not only starving, but we
also now have some black and blues from all the jostling that’s going
on. But, again that’s OK, this is the restaurant of all restaurants
and we’ll put up with the minor inconveniences in order to be in cuisine
heaven. The hostess tells us “It will just be a few minutes,
why don’t you wait at the bar and we’ll call you in a few minutes?”

It’s now about 15 minutes beyond our reservation time, but that’s OK,
a “few minutes” more won’t make any difference. Well, after
about 20 minutes I’m getting concerned and after 30 minutes I figure
they lost our name, so I make my way back up to the hostess’s desk
(another 10 minutes of jostling) and she tells me she’s so sorry, it
will be just “one minute more.”  And she was close. It
was only one minute more plus 15 minutes, but we were finally seated,
we had a great table and we were happy. One hour late, starving, but
happy.  And, without going into further details, it was the
happiest we would be for the next two hours. Water spilled accidentally
on our table by the water boy, wrong salad delivered, my shrimp was
overcooked, my wife’s veal was the wrong veal meal (medallions instead
of scalapini), our waitress (and the waitress for too many other
tables) somehow disappeared from the place for about 15 minutes (she
probably went out to get dinner for herself at McDonald’s) and so on
and so on and so on. The meal from hell. Everything that was planned
out with much anticipation turned out wrong. And, by the time we left
the place we got into our car and just started laughing. It was
probably the worst meal we’ve had in many years and it figures it
occurs when we had the highest expectations.

Expectations

When we went into this highly rated and highly recommended restaurant
last night, we had high expectations and expected the best. We
were wrong. Very wrong. And, when you go into a high probability
trade, you have the same expectations. You expect the best and you
expect to make money. But, there are times, where the trade, like
the dinner, goes places where you do not expect it to go. With the
dinner, it’s no big deal. No harm done, and we got a good laugh out of
it. But with trading, a lot of harm can be done. And you can protect
yourself. How? With a built-in plan.

What Ifs

Today I’m going to give you 11 “what-ifs” which I would like
you to think about and have written answers for. These
“what-ifs” usually occur when you have the highest
expectations for a trade. I’ll give you my versions of the answers
next week, but I strongly encourage you do this exercise (in writing!)
this week. And, if you do this exercise correctly, I’ll give you the
name of the restaurant I went to last night and you can recommend it
to anyone who has crossed you wrong over the past years.

Here Are The 11 What-Ifs:

1. What if you are long a position that gaps greatly against you? What
do you do when it opens? Do you take the loss or do you trade through
it?

2. What if you are in an intra-day position right before an intra-day
economic report? What do you do?

3. What if you are in an overnight position ahead of a major economic
report? What’s the plan?

4. What if you are in a solid position ahead of earnings? Do you keep
the position, hedge it or exit?

5. Let’s be an optimist for a second. What do you do with a position
that greatly gaps in your favor? (This may seem easy, but I’ve seen
traders actually let these moves turn into losses.)

6. Let’s assume you put on a swing trade that you feel can run for 5-7
days. What if you have a solid set-up that moves strongly the first
day, gaps in your favor the next morning and then begins to reverse
quickly? Do you take profits, do you move stops, do you let it run?
Remember, you feel it has 5-7 days of good move potential and this is
only day two.

7. Same scenario as above, but it’s the first day’s move that is
substantial, and within a few hours you have a big profit. All of a
sudden, this profit begins to disappear. Remember, you’re looking out
5-7 days. What do you do?

8. A day-trading and a swing trading example. What if you have high
expectations for the set-up and it does “nothing”? It
doesn’t move in your favor and it doesn’t stop you out. It’s just
sitting there. What’s the next move for you? Wait to get stopped out?
Hope it starts moving in your favor?

9. What if you have a high probability and strongly profitable
strategy that works in the SPYs? Do you only trade the SPYs or do
you expand into other markets so you can get more signals?

10. What happens if you see the “mother of all set-ups”
occur? And let’s break this up for daytrading and then for swing
trading.

You have a buy stop in as a daytrader, and the market runs through
your buy stop and you are eventually filled 20 or 30 cents above your
stop. What do you do? The edge is now likely gone. What’s your next
move? Exit? Raise your stop? Immediately get out?

And for swing trading. Same scenario, except your great set-up gaps
open three points higher? Do you chase it and enter? What if you had a
market order in and were filled on the opening three points higher?
What do you do?

11. You have a great set-up again. And you get filled only to be
immediately stopped out. And within minutes, you have the opportunity
to re-enter because the set-up is still valid. What’s the plan? And
what if you get stopped again? Do you run the risk of re-entering a
third time?

These are all real-world situations that you should have answers for.
Great expectations for a restaurant sometimes don’t quite work out as
you expected. And great set-ups that you expect to work sometimes move
in ways you don’t expect. The dinner can be laughed off. The trade
cannot. And that’s why you need a written plan for the situations. They
occur everyday and the traders who properly handle them tend to be the
professionals who have already figured these things out.

Take the time this week to work on this plan and let me know if I can
be of help. Next week you’ll get my answers to these what-if
situations. They may not be the same as yours and you may not agree.
But, you will be in possession of a plan that will lead you to the
next level higher in your trading.

Have a great week trading (and if you’re coming to Southern
California, drop me a note. I can give you the name of a restaurant
NOT to visit)!

Larry Connors