Trading Rule #6: Have A Plan!

I coach high school soccer.   My team went through a scoring drought in the middle of the season last year, and finally, in practice one day, I asked the kids: “At what point, when you’re going to goal, do you think about shooting?”   I thought this was an easy question.

I was greeted with silence and blanks stares.

Ahhh – I see the problem – we had no plan for how to score goals!   I explained that I thought that at 25 yards they should probably be thinking about getting in position to pull the trigger, and by the time they got near 20 or 18 yards, they were in position to shoot if they had a clear lane.  Generally, of course: everything is situation dependent and player dependent.

Just like markets.

Peter Brandt triggered the impetus for this post when he wrote back to back posts on Tuesday and Wednesday which, if you’re not paying attention at all, might seem to contradict each other.   On Tuesday, Peter wrote “Nasdaq Set Up for a Major Buy Signal,” in which he explained a potential bullish interpretation of the NDX (Nasdaq 100: $QQQ no positions), should the pattern continue.   Peter was, of course, careful to explain in all-caps at the top of his post: “This post presents a POSSIBILITY, NOT A PROBABILITY OR CERTAINTY.”   I am sure that some readers were frustrated on Wednesday when Peter wrote “What Would A Failure Sell Signal in the Nasdaq 100 Look Like?”

The reason some readers were frustrated is because they misread Tuesday’s post as “The NDX is going higher,” and then misread Wednesday’s post as “The NDX is going lower.”  Then they thought that Peter was a wishy-washy non-committal trader.

In reality, all Peter was doing was presenting his plan – he has a plan for trading the potential bull case that might develop, but he also has a plan for when he’ll think that his bull thesis was wrong, and explains which market action would turn him bearish.  In his own words:

“Having painted the bullish picture I would also like to script what a failure sell signal would look like. I am a chartist and a trader. I am not an analyst. As a trader I need to constantly be on the look out for tricks that market might play on me. The job of a chart trader is to respond with flexibility, not to get locked into a bias. If you want to find a blogger who never changes his or her mind, then look somewhere else.”

When you have a plan, you’ll be able to react to the market’s movements intelligently according to your thesis.

When you buy a stock, think about when you’ll want to sell it.  Will it be after the P/E multiple goes from 8 to 10?   Will it be when the momentum wanes?  Will it be when it pulls back to the 50 day moving average?

You may have 50 different reasons for entering and exiting trades – but make sure you have SOME reason and a plan to follow your thesis.

Peter Brandt:  NDX Possible Bull Pattern

Peter Brandt:  NDX Possible Bear Pattern

Kid Dynamite:  The Rules, Trading Series

Edit:  I guess this Rule is pretty similar to Rule #2:  Know Why You’re In A Trade


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