Trade Execution: The Big Picture

September 15, 2004
Chris Curran

Stock
index futures opened Tuesday’s session with small downside gaps after
a tight overnight range and a Retail Sales report that offered no surprises.
The first 2 1/2 hours was an anemic, choppy range before a lunchtime break of
the consolidation range caught some shorts with their pants down. The absence
of follow-through and move right back into the consolidation zone smelled like a
bull trap. With today’s game of tug-of-war, I’d normally say that the futures
are continuing to do a good job of “backing and filling,” but I really can’t
honestly read too much into today’s volume and range.

The
December SP 500 futures closed out Tuesday’s session with a gain of +1.75
points, while the Dow futures added +30 points and also posted its 5th straight
gain. Looking at the daily chart, the ES posted an inside NR7 day just under
daily downtrend line resistance. On an intraday basis, the contract is
contracting into a triangle and closed right on its 60-min and 30-min MA
support. The YM posted an inside doji right at weekly and daily resistance. In
the small-caps, the ER2 posted a hanging man and market structure high just
under its 78.6% Fib resistance.

The
Semiconductor Index (SOX) posted an inside day at it tries to consolidate its
gains under its 50-day MA. The Banking Index (BKX) continues to hold both
weekly and daily bearish Gartley patterns, but found support for the 4th day in
a row at its 10-day MA.

Wednesday
morning gives us the overly-hyped Empire State Index at 8:30 ET, which is
expected to post an increase to 20.0. That’s followed at 9:15 by August
Industrial Production and Capacity Utilization, which are expected to post
increases to 0.5% and 77.4% respectively. During the past few options
expiration weeks, Wednesday has been the day that we’ve seen the best action,
before the range contracted into Thursday and Friday.

Trade Execution (The Big Picture)

Trade execution is more than simply buying or selling. It is the entire
process of executing the procedures outlined by your trading plan. The trader
who follows a set of pre-planned set-ups and procedures during the trading day
has many advantages over the trader who “shoots from the hip.”

First, pre-planned set-ups help to foster a comfort level and relaxed mindset
very unlike that of a trader who attempts to trade by feel, or by responding to
market news, or by using the “latest and greatest” indicators. A trader with a
set of pre-planned and tested set-ups doesn’t need to contemplate what the
market is going to do next, but rather simply responds to what the market does.
In other words, with a plan, you won’t second-guess your trading decisions, and
all you have to do is follow your rules.

After the close, you can review your trades and determine how effective you
are at following your own plan. In effect, you are acting as the boss and
managing the trader which, in this case, is yourself. It may be that in
real-time, you don’t have the patience to wait for exit signals. If that is the
case, then you can review the historical trade data and determine the difference
that would result if you were to use acceptable preset reward targets compared
to your risk. You would not be able to do this if all of your exits were based
on a second-to-second decision process. You would not know what to fix, because
it would be pretty much impossible to even determine the problem.

Finally, if your real-time trading results do not approach your hypothetical
results, then you have the data necessary to determine if it is the approach
that needs modification, if the market conditions have changed, or if you simply
are not following your own trading plan effectively. Will this happen
overnight? Heck, no! It can take a couple years just to figure out what fits
with your personality and risk tolerance.