This Week’s Battle Plan

I have a quick quiz for you to start this week. And from this quiz,
next week we’re going to get into the guts of what ultimately leads to
trading success. It’s called…Execution.

Here are just a few questions I’d like you to answer. I have more, but
this is a start. Be brutally honest. This honesty will allow you to
look at your trading and help you find some very obvious ways to
improve it.

Here Goes:

1. Do you ever not take a trade because of outside factors?
This means, for example, you’ve had 3 losses in a row so you decide to
“pass” on the next one?

2. Same as above, but instead of passing, you lower your
position size because of the multiple losses.

3. Do you ever come into the trading day not fully prepared?
This means 100% prepared. The night before you had commitments
and possibly stayed out late and then you come into trading not fully
prepared to execute the game plan of how to make money for the day?

4. Let’s assume you have a full trading plan of attack in
place. And your rules are written out. Do you ever change these
rules intra-day because the market looks strange or “it just
doesn’t feel right”?

5. Do you ever miss trades? No good reason why. You just missed
them?

6. Do you ever increase position size because you have 3 or
4 winners in a row?

7. Let’s assume you successfully trade a strategy in the equity
markets. Do you ever decide out of the clear blue one day to
“try it” in the options market? Or vice versa (trust me,
these are two very different creatures. Because something works in
equities, it sure as heck doesn’t mean it works in options).

8. Do you ever grab profits by gut? This means there is no
“exact plan” to lock things in? Or, you bounce around from
exit strategy to exit strategy (the information below will help you
here on this one).

I have many more of these questions. But this is a good place to
start. And notice that I DID NOT ONCE focus on any particular
strategy. In the above scenarios the strategy is absolutely
insignificant. I’m assuming you have strategies that have an edge.
They are all over the place. What I’m doing right now is planting a
seed and showing you the possibility that most traders (and maybe
you) take strategies with edges and kill them. They kill them by
poor execution. They kill the edge. Not intentionally. But they do it.
And they blame the strategy, or the market or whatever else they can
think of. When in fact, had they just simply done as they planned to
do, and stayed disciplined both in their mind and in their actions,
that edge would still be there. And that edge would fall to the bottom
line. Because every time you don’t execute correctly, and you leave
money on the table, you are that much poorer at the end of the year. It’s
money that can never be replaced. I’m going to go into this in
further depth next week. And, you’ll see why trade execution
ranks amongst the most important things you can do to maximize your
success at trading.

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.

Answer-This is a tough one. But the answer is simple. The
rule, IN STONE, is to never let a healthy profit turn into a loss.
I don’t care how confident you are the market is going to move in your
favor. Gains are there to be locked in. You, nor anyone else, has
any clue where prices are heading on this single trade nor any single
trade. Trading is a game of probabilities and one’s ability to
predict the direction of any one trade is next to nil. We’re simply
looking for edges. And within these edges includes trades that will
move quickly in your favor and then reverse. They’re profitable if you
lock in the gain. They’re unprofitable if you take a stand and become
pig-headed about the trades potential and not lock in a profit.

There are many ways to lock profits in. My goal on nearly every
trade is to get to break-even as quickly as possible with my stops.
This means taking a piece off at a pre-determined profit and moving
the remainder to break-even. Even though you go into a position
expecting a 5-7 day run, there’s no way in the world that you
perfectly know ahead of time where the prices will be in 5-7 days. The
goal is to lock in pieces as the trade moves in your favor and get to
break-even on the rest. I, most times, take 25-50% off the table at a
level equal to my initial risk. Kevin takes half off at double his
initial risk. Both of us then go to breakeven on the rest, assuring a
profitable trade. This is not rocket scientist stuff. But, it many
times is the difference between a profitable trade and a losing
trade. And letting a winning trade, as we described above, turn
into a losing trade is just wrong. Set targets. Lock in a piece
and get to breakeven on the rest. Do this over and over again,
every day, and I suspect your profitability will greatly soar.

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?

Answer-No different than the answer to number 6. If it hits a
pre-determined profit level, you need to have locked -in gains on a
piece and breakeven on the rest. Yes, it’s only day one, yes, you are
confident on the trade, yes, this may the move that is the mother of
all moves. But none of that matters. You trade price. And price
dictates actions. And in this case, price likely hit your first
target and your stop on the rest goes to even. Profitable trade, you
may get stopped out on the rest or the rest may run as you had
originally believed. Either way, price dictates your actions and by
executing as you did, you have assured the trade put money in the
bank.

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?

Another tough dilemma that we face all the time. I’m less mechanical
on this. I use my best intuition but ultimately price dictates my
actions. As you know, if you are correct in your analysis, the trade
should immediately move in your favor. Sometimes it does, and it’s
wonderful, but most times it does not. And that means decision time,
especially on those trades that sit in no-man’s land. I’ll usually
fold my hands and do nothing. But if, for example, I’m in a day trade,
I start getting antsy as time passes. If price doesn’t kick in, then
time does. And the closer we get to the close, the more likely I am to
just scratch the trade and move on. On swing trades I give it a bit
more room, but if things are just sitting there for a few days and
doing nothing, I’ll likely lighten the position or just move on. I got
in for a specific reason, that reason has not played out and the
longer I hold it, the more likely something bad could happen. I’ll
lighten the trade or just walk away.

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?

I get this question all the time. And the answer is it depends upon
your personality.

In the early ’90s I used to predominantly trade Bank of Boston stock.
I knew the company inside and out. I spoke with the president on
regular basis, I could read the specialist in the stock better than I
can read my kids today. I knew this company. And because of
this knowledge I was successful in trading it. But after time, I was
bored. And this boredom required me to look at other companies and
then eventually to additional strategies. Today I trade five main
strategies on all markets (we’re even looking into foreign markets to
take advantage of with these strategies). It’s the way I’m wired. It’s
not right, it’s not wrong. It’s me. Only you know what’s best for you.
Can you be single-minded like Don? Or more eclectic like Dave? Both
answers are correct.

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?

First, you should have a pre-determined specific amount you allow this
to happen on. This means if your average edge on a trade is 50 cents,
you’re not going to let it get filled 30 cents higher (this is done by
placing a proper trade order). The bulk of your edge is gone. But, if
it does happen, you have some decisions to make. Because you’re likely
initial stop is further away than normal. So your risk/reward profile
has changed. You’ve increased risk and lessened your reward potential.
Not good.

First, I’d raise my stop to get the risk equal to what it normally
should be. Second, I would be tightening my stops and taking profits
when they occur much more aggressively. Again, much of the edge has
likely been taken out by the bad fill. You need to be vigilant here
and lock in profits as soon a it makes sense.

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? Same as above. You need to have a predetermined amount
above/below where you’ll allow yourself to get filled. Three points is
way too much. I don’t care how great the set-up is. Tighten your stops
if you are filled but make sure you don’t allow yourself to get filled
like this in the future.

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?

I try to always re-enter a second time. For whatever reason it seems
to be a cleaner set-up. I know many traders who feel the same. But a
third time? Theoretically it might make sense, but for me it does not.
On the few times you get stopped out twice in a row on the same
set-up, I personally like to look to move on. There is a greater
degree of chance that the stock is stuck in some type of churning
trading range and with so many other opportunities out three, I’ll
move my focus onto them instead.

A number of things which might be of interest to you are upcoming:

1. Many of you asked me to see if we could get Richard
Machowicz to write something for the site. I recommended Richard’s
book a few months back, and it created a buzz. For those of you
who do not know who he is, Richard is a friend of mine who is a
10-year Navy Seal veteran. He was also a fighting instructor for the
Seals (teaching some of the toughest guys in the world how to be even
tougher). Richard was recently brought in (with Bobby Knight and Rick
Barry) to work with an NBA team during their pre-season and according
to the newspapers, the players immediately responded to him and his
work. I interviewed Richard for about an hour a few weeks ago where we
discussed the psychology of extreme achievement. We’re in the midst of
putting this interview in print. I’ll let you know when it’s ready.

2. One of the ways that I taught myself how to properly trade
many years ago was by going bar-by-bar on a Computrac program (any of
you remember that software?). On each bar I would ask myself,
“what should I do?”, “what should I do?” I did
this for thousands upon thousands of bars until I felt I had mastered
my strategy. I still recommend this approach to everyone, as this type
of drilling allows you to fully prepare yourself and master your
strategy before going into the market for real.

Over the past few months, we have been working with Kevin Haggerty to
get his strategies taught on a bar-by-bar basis. After you are taught
the exact rules for the strategy (it was translated from Haggerty-speak
into simple English…thank you Duke Heberlein) you then get to trade
Kevin’s strategy bar by bar. And, we’ve gone one step further. You are
put in the position of deciding what you should do on each bar. With
our proprietary trading simulator, you must decide, over and over
again, whether you are buying, selling or waiting. And then, no matter
what your answer is, Kevin’s analysis of your answer comes up. It’s
like having Haggerty next to you as your personal mentor. In my
opinion, this is a superior way to learn. And, there’s nothing like
having Haggerty barking at you “NOT WITH MY MONEY YOU’RE
NOT” when you execute incorrectly (after barking at you, he then
tells you why you are wrong and what you should have done, so you are
assured of learning how to properly execute the trade).

Having the ability to learn from Kevin on a bar-by-bar basis is one of
the smartest things we’ve done. If you would like to see a demo with
his 1-2-3 strategy go
to this page.  Also, if you order it before it’s released
later this week, there is a 10% pre-release discount.

Also, based upon the positive reactions from the beta testers, we’re
working on doing more of these trading modules with other strategies.
Kevin is planning on doing at least two more (the next one will be on
Slim Jims, then he’ll likely go to Trap Doors), I’m doing the same
with my “Windows” strategy and Mark Boucher is working on
one for Identifying and Trading Stocks with Runaway Fuel.

3. On a final note, we’re in the early stages of putting
together a trade management series that will allow members to interact
with each other discussing what’s working for them. This is still
early but I’m hopeful we can have it available for everyone by early
January.

Summary

My focus this week and next is not on strategies. It’s on trade
management and execution. Strategies are critical. If you don’t have a
strategy with an edge, there is no edge. But what you do with this
edge, ultimately determines the level of success you will achieve.