It doesn’t take that long to do all these things; you can knock it out in 30
minutes to 2 hours depending on how much you trade. But regardless of
how long it takes, it’s worth much more than the effort you’ll put into it.
By going over all your trades, you will gain insight into your trading and
you’ll learn what’s working and what isn’t. Those who never review their
trades will never learn what they do right and wrong. Instead, they will
keep making the same mistakes over and over again. By preparing for the
next day, you will get a tremendous head start on the day. Think how much
better you’ll trade if you come in with a game plan and scenarios for all your
trades. No matter what curveball the market throws at you, you’ll be ready.
Hell, they will all look like hanging curves if you are prepared.
Now go and have that beer with John.
Tuesday, November 9, 2010
REVIEW YOUR PLANS AND STRATEGY
Don’t just review the trades but constantly check the plan itself for validity.
You may be losing money and the reason may be that your plan is faulty so keep checking to make sure that it is sound. This is something you will
definitely do during off market hours. It is not something you will do every
night, but every now and then go over all your strategies and make sure
they are doing what you thought they should. If they are, are you following
them? Or maybe you just have strategies that were no good to start
with. Doing this will help keep you on top of your game and ensure you are
trading with a solid strategy.
You may be losing money and the reason may be that your plan is faulty so keep checking to make sure that it is sound. This is something you will
definitely do during off market hours. It is not something you will do every
night, but every now and then go over all your strategies and make sure
they are doing what you thought they should. If they are, are you following
them? Or maybe you just have strategies that were no good to start
with. Doing this will help keep you on top of your game and ensure you are
trading with a solid strategy.
GETTING READY FOR TOMORROW
Now that you have gone over all your previous trades, it’s time to start
focusing on the next day. As you reviewed your open trades you should
have been adjusting your plan for them as you went along. But what about
new trades you may want to put on? You can start looking at charts to see if there are any good setups you may want to trade. You can start creating
entry and exit points for these trades. You can look to see if there are any
schedule reports due. If so, figure out how you will react depending on
what the market does. Say you are trading oil and the American Petroleum
Institute (API) numbers are due tomorrow. If they are indicating a bigger
buildup in reserves than expected, you would expect the market to drop.
But after 20 minutes if it hasn’t dropped then you will go long, otherwise
you will short. If the numbers are weak, you will buy right away and give it
a two-point stop.
Look at your charts and know where all the indicators, trend lines,
and average true ranges are. See how the market closed today and figure
out what you want to do the next day based on different openings. In the
morning, you will follow up on this once you know where the opening is
going to be, but it is better to get a head start the night before.
As you scan charts, have a note of what you are looking for. Are you
looking for a breakout, a reversal, a bounce off of a channel? If you do
find something you like, then be prepared by knowing where you will be
exiting so you can estimate a risk and reward. Do your homework, look at
different time frames, be realistic about what you can expect and what you
can lose. Try to figure out how many contracts you will be trading based
on the risk of the trade. This doesn’t mean you will enter the trade in the
morning, but you are giving yourself a potential trading opportunity that
you have preestablished.
All this is a lot easier if you only trade one market; however, if you
are one of those day traders who has 120 stocks on his screen and trades
almost anything, this reviewing process is a little tougher. What I used to
do when I traded equities was I had a scenario I liked to trade (I looked for
trending stocks that have had a little pullback to a trend line) and I had my
favorite stocks to trade. I would quickly go through them all and see which
fit my setup. I made a list of the stocks that did and these are the ones I
would look to trade the next day if they met further requirements.
By doing the things outlined in this chapter you will be well on the
way to starting the trading day with a solid game plan. You will still have to
make some adjustments to it in the morning, but you should now know how
you will react to different situations in the market. You will have your stops
and exit levels for existing trades. You’ll have entry levels for new trades.
And you’ll even have targets and stops as well as risk and reward ratios.
focusing on the next day. As you reviewed your open trades you should
have been adjusting your plan for them as you went along. But what about
new trades you may want to put on? You can start looking at charts to see if there are any good setups you may want to trade. You can start creating
entry and exit points for these trades. You can look to see if there are any
schedule reports due. If so, figure out how you will react depending on
what the market does. Say you are trading oil and the American Petroleum
Institute (API) numbers are due tomorrow. If they are indicating a bigger
buildup in reserves than expected, you would expect the market to drop.
But after 20 minutes if it hasn’t dropped then you will go long, otherwise
you will short. If the numbers are weak, you will buy right away and give it
a two-point stop.
Look at your charts and know where all the indicators, trend lines,
and average true ranges are. See how the market closed today and figure
out what you want to do the next day based on different openings. In the
morning, you will follow up on this once you know where the opening is
going to be, but it is better to get a head start the night before.
As you scan charts, have a note of what you are looking for. Are you
looking for a breakout, a reversal, a bounce off of a channel? If you do
find something you like, then be prepared by knowing where you will be
exiting so you can estimate a risk and reward. Do your homework, look at
different time frames, be realistic about what you can expect and what you
can lose. Try to figure out how many contracts you will be trading based
on the risk of the trade. This doesn’t mean you will enter the trade in the
morning, but you are giving yourself a potential trading opportunity that
you have preestablished.
All this is a lot easier if you only trade one market; however, if you
are one of those day traders who has 120 stocks on his screen and trades
almost anything, this reviewing process is a little tougher. What I used to
do when I traded equities was I had a scenario I liked to trade (I looked for
trending stocks that have had a little pullback to a trend line) and I had my
favorite stocks to trade. I would quickly go through them all and see which
fit my setup. I made a list of the stocks that did and these are the ones I
would look to trade the next day if they met further requirements.
By doing the things outlined in this chapter you will be well on the
way to starting the trading day with a solid game plan. You will still have to
make some adjustments to it in the morning, but you should now know how
you will react to different situations in the market. You will have your stops
and exit levels for existing trades. You’ll have entry levels for new trades.
And you’ll even have targets and stops as well as risk and reward ratios.
THE CLOSED TRADES
Did You Follow Your Plan?
After you finish reviewing the open trades, you then should go over the
trades you closed out during the day. This is where the real learning begins.
Again, you can do this in any order you like, but I like to go over all my
losers first. I want to learn what I did wrong or right and reviewing is the
best way to do this. The first thing you want to do is to make sure you had
and stuck to a plan for the trades you made.
As you go over every trade ask yourself:
Having and following a plan is so important in being a winning trader.
It is one thing you really need to keep on top of all the time. If you have
a plan and have exit strategies in that plan and you consistently ignored
them, then it’s useless having a plan. You may need someone slapping you
in the back of the head every now and then saying, “Hey stupid, what are you doing? Follow your plan.” If you’ve ever watched the old Pink Panther
movies, you’ll remember Cato, Inspector Clouseau’s martial arts expert
manservant. Cato would constantly jump out of closets and sneakattack
Clouseau to keep his defensive skills and awareness sharp. Well,
maybe we all need to hire a Cato to keep us on our toes and in line every
time we deviate from our plan. It may hurt a little at first, but soon you’ll be
able to stick to your plan much better.
If you didn’t follow your plan, ask yourself why not and what you
should do differently next time to help you follow it. Find out why you
put on every trade, and why you got out of them. If you are diligent about
sticking to a plan, then you don’t have much work to do here, but always
review to make sure you stick to your guns.
The Good Losers
Some losing trades are good trading decisions that didn’t work out and if
you got out with a small loss when you were supposed to, I don’t consider
it a bad trade. A bad trade is when you let it get away or make a stupid, unplanned
trade. Being able to take a good losing trade is the most important
trade of all and this is a behavior I want to reinforce. The reason I think
they are the most important trades of all is that your money is made as a
total of all your trades—winners and losers. You will have losing trades,
and you cannot get around that no matter how good you think you are. But
if you are able to limit losses to a manageable amount and avoid the huge
losses, your net profits will soar and you will be a better trader. I am more
proud of getting out of something with a small loss that would have turned
out to be worse, than I am about having a winning trade. Everyone can get
lucky and make a great winning trade here and there, but only good traders
know how to get out at the right time on the losing side. Even though I may
have lost money on a trade it is a good trade if I did the right thing. When
I review these trades I look to remember what I did to make me get out
quickly so that if I see that situation again I hope to act correctly the next
time as well.
Ones That Got Away
Next you can go over the ones that you just let go. These trades usually fall
into two categories, either you overstayed your welcome and gave back
too much on a winner, or you let a loser go and froze up as you watched it
disintegrate. Either way they are going to really affect your P&L statement.
It only takes one bad trade to wipe you out, even after 10 winners in a row,
so try as hard as possible to not let it happen. You have got to learn to stick
to your exit plans and constantly reviewing this will definitely help.
Don’t be satisfied that you made money on a trade. If you had a 50-
point winner that you turned into a 3-point winner, you screwed up that
trade and gave back your money. At the end of the day, week, month, or
year it’s a total of all your trades that determines how you did, so don’t take
it too lightly if you take a small winner that was once a big one. You lost
that 47 points, that was your money to be had. Find out why.
If I let a trade get really bad, I try to see why I did so, so I don’t do it
again in the future. As you look over the trade, look for the spot you should
have gotten out and try to figure out why you didn’t. It could be because
you had no exit strategy or because you failed to follow one if you did, or
because you got greedy and tried to get more than you could out of a trade.
Or did you freeze up and hope a loser would come back? There are many
reasons you could let a trade get beyond the point where you were suppose
to get out. Figure out why you did so and work on not doing it again. These
are the trades you need to work on the most on because they will draw
down your account faster than the good trades will add to it.
The Good Winners
The last thing I review is my good winning trades and again I’ll try to learn
from them. Good winners are the trades you did everything right on and
made some decent money with. Don’t just look at it and say “good trade”
and move on. Really delve into it. Ask yourself, “Why was it a good trade
and what did I do right?” Did you just get lucky or did you really do something
right. If you did something right, then make sure you keep doing it.
By studying trades you may find that every time you make a trade with a
certain setup it works great, but if a certain variable was changed a little it
doesn’t work as well. Only thorough reviewing will tell you things like this.
If you are a person who has trouble following a game plan, and odds
are you are or you wouldn’t have bought this book, keep track of how you
did on trades where you followed a plan, had an entry point, and came up
with a predetermined exit level. And then keep track of those trades you
put on with little preparation. Next, compare them to see how they do.
Hopefully you will see a big discrepancy and realize that you need to have
and follow a strategy/plan when you trade if you really want to succeed.
After you finish reviewing the open trades, you then should go over the
trades you closed out during the day. This is where the real learning begins.
Again, you can do this in any order you like, but I like to go over all my
losers first. I want to learn what I did wrong or right and reviewing is the
best way to do this. The first thing you want to do is to make sure you had
and stuck to a plan for the trades you made.
As you go over every trade ask yourself:
- Why did I make this trade?
- Did I have an entry plan when I got in?
- Did I have an exit plan for the trade?
- Did I followmy plan?
- What did I do differently and why didn’t I follow that plan?
Having and following a plan is so important in being a winning trader.
It is one thing you really need to keep on top of all the time. If you have
a plan and have exit strategies in that plan and you consistently ignored
them, then it’s useless having a plan. You may need someone slapping you
in the back of the head every now and then saying, “Hey stupid, what are you doing? Follow your plan.” If you’ve ever watched the old Pink Panther
movies, you’ll remember Cato, Inspector Clouseau’s martial arts expert
manservant. Cato would constantly jump out of closets and sneakattack
Clouseau to keep his defensive skills and awareness sharp. Well,
maybe we all need to hire a Cato to keep us on our toes and in line every
time we deviate from our plan. It may hurt a little at first, but soon you’ll be
able to stick to your plan much better.
If you didn’t follow your plan, ask yourself why not and what you
should do differently next time to help you follow it. Find out why you
put on every trade, and why you got out of them. If you are diligent about
sticking to a plan, then you don’t have much work to do here, but always
review to make sure you stick to your guns.
The Good Losers
Some losing trades are good trading decisions that didn’t work out and if
you got out with a small loss when you were supposed to, I don’t consider
it a bad trade. A bad trade is when you let it get away or make a stupid, unplanned
trade. Being able to take a good losing trade is the most important
trade of all and this is a behavior I want to reinforce. The reason I think
they are the most important trades of all is that your money is made as a
total of all your trades—winners and losers. You will have losing trades,
and you cannot get around that no matter how good you think you are. But
if you are able to limit losses to a manageable amount and avoid the huge
losses, your net profits will soar and you will be a better trader. I am more
proud of getting out of something with a small loss that would have turned
out to be worse, than I am about having a winning trade. Everyone can get
lucky and make a great winning trade here and there, but only good traders
know how to get out at the right time on the losing side. Even though I may
have lost money on a trade it is a good trade if I did the right thing. When
I review these trades I look to remember what I did to make me get out
quickly so that if I see that situation again I hope to act correctly the next
time as well.
Ones That Got Away
Next you can go over the ones that you just let go. These trades usually fall
into two categories, either you overstayed your welcome and gave back
too much on a winner, or you let a loser go and froze up as you watched it
disintegrate. Either way they are going to really affect your P&L statement.
It only takes one bad trade to wipe you out, even after 10 winners in a row,
so try as hard as possible to not let it happen. You have got to learn to stick
to your exit plans and constantly reviewing this will definitely help.
Don’t be satisfied that you made money on a trade. If you had a 50-
point winner that you turned into a 3-point winner, you screwed up that
trade and gave back your money. At the end of the day, week, month, or
year it’s a total of all your trades that determines how you did, so don’t take
it too lightly if you take a small winner that was once a big one. You lost
that 47 points, that was your money to be had. Find out why.
If I let a trade get really bad, I try to see why I did so, so I don’t do it
again in the future. As you look over the trade, look for the spot you should
have gotten out and try to figure out why you didn’t. It could be because
you had no exit strategy or because you failed to follow one if you did, or
because you got greedy and tried to get more than you could out of a trade.
Or did you freeze up and hope a loser would come back? There are many
reasons you could let a trade get beyond the point where you were suppose
to get out. Figure out why you did so and work on not doing it again. These
are the trades you need to work on the most on because they will draw
down your account faster than the good trades will add to it.
The Good Winners
The last thing I review is my good winning trades and again I’ll try to learn
from them. Good winners are the trades you did everything right on and
made some decent money with. Don’t just look at it and say “good trade”
and move on. Really delve into it. Ask yourself, “Why was it a good trade
and what did I do right?” Did you just get lucky or did you really do something
right. If you did something right, then make sure you keep doing it.
By studying trades you may find that every time you make a trade with a
certain setup it works great, but if a certain variable was changed a little it
doesn’t work as well. Only thorough reviewing will tell you things like this.
If you are a person who has trouble following a game plan, and odds
are you are or you wouldn’t have bought this book, keep track of how you
did on trades where you followed a plan, had an entry point, and came up
with a predetermined exit level. And then keep track of those trades you
put on with little preparation. Next, compare them to see how they do.
Hopefully you will see a big discrepancy and realize that you need to have
and follow a strategy/plan when you trade if you really want to succeed.
THINKING ABOUT TOMORROW
As you go over all your open trades, you need to keep thinking about them
in the future. You will want to draw up different scenarios for each trade
and make notes as to how you will react if that situation arises. I like to
think up different possibilities of what the market can do and draw up targets
and exit points for them. I’ll anticipate if I will add to or subtract from
a position. Doing this keeps me from getting surprised when something
does happen. Maybe there is an earnings report coming out, and there is
a chance it can cause your stock to move. As a good trader you will be
prepared for anything that stock could do the next day.
For example, if you were long in Figure 7.5 you could start preparing
for anything that could happen the next day and in the near future. You
may say, “If the market breaks above the double top line I will add five
contracts to my position, with a target of 14,300, and I’ll raise my stop to
under yesterday’s low to the Stop 2 level. However, if it drops below the
double bottom, I’ll exit all my longs and reverse and use the double top
area as a stop. If the market stays within the range it is in now, I’ll keep my
current stop (Stop 1) and do nothing.”
Planning out current trades will start to take the gamble out of your
trading as it’s much better to have all your scenarios planned out before
they happen and surprise you. You can get more elaborate and consider
what you will do if the market opens up 50 points and rallies or reverses
after the up open or what you’ll do if it opens below the support line. The
possibilities are endless and the better you have them considered in your
game plan the better you will do.
This isn’t an end-all list of things to look for when going over your
open trades. You may have special criteria you want to keep track of on
your own, or you may have things that are specific to the way you trade or
the markets you trade. I can’t come up with every little thing, but part of
trading is that you should always be learning and finding ways to improve,
so work a little on figuring out other things to look for when going over
your trades.
in the future. You will want to draw up different scenarios for each trade
and make notes as to how you will react if that situation arises. I like to
think up different possibilities of what the market can do and draw up targets
and exit points for them. I’ll anticipate if I will add to or subtract from
a position. Doing this keeps me from getting surprised when something
does happen. Maybe there is an earnings report coming out, and there is
a chance it can cause your stock to move. As a good trader you will be
prepared for anything that stock could do the next day.
For example, if you were long in Figure 7.5 you could start preparing
for anything that could happen the next day and in the near future. You
may say, “If the market breaks above the double top line I will add five
contracts to my position, with a target of 14,300, and I’ll raise my stop to
under yesterday’s low to the Stop 2 level. However, if it drops below the
double bottom, I’ll exit all my longs and reverse and use the double top
area as a stop. If the market stays within the range it is in now, I’ll keep my
current stop (Stop 1) and do nothing.”
Planning out current trades will start to take the gamble out of your
trading as it’s much better to have all your scenarios planned out before
they happen and surprise you. You can get more elaborate and consider
what you will do if the market opens up 50 points and rallies or reverses
after the up open or what you’ll do if it opens below the support line. The
possibilities are endless and the better you have them considered in your
game plan the better you will do.
This isn’t an end-all list of things to look for when going over your
open trades. You may have special criteria you want to keep track of on
your own, or you may have things that are specific to the way you trade or
the markets you trade. I can’t come up with every little thing, but part of
trading is that you should always be learning and finding ways to improve,
so work a little on figuring out other things to look for when going over
your trades.
THE OPEN TRADES
Many of the situations below can apply to winning and losing trades, so
I’m not going to separate them into two sections. Just figure out which
applies to your situations as you read them. A winning and losing trade
can be looked at the same way depending on how long you have held a
position. A winning trade that gives back too much profit is no worse than
a losing trade. You don’t want to give back too much on a winning position
by overstaying your welcome. Even if you close it out as a winner, if you
gave back too much, in my eyes it’s a bad trade at least for the last part of
the trade. Though I prefer to review my winners first, it doesn’t matter if
you do them or your losers first or if you just go down your list of trades
in the order that you put them on. Whatever way you do it, just be sure to
give them all their fair due. If you are a day trader who closes everything
out at the end of the day then the next few pages may not be necessary, but
you paid for the book, so the read them anyway. If you trade one market
or stock, the reviewing part will go faster and then you could meet John at
Moran’s quicker. As you do go over every trade keep in mind that the main
purpose for doing so is to prepare for the next day’s game plan.
Why Did I Make the Trade?
The first thing I do when I look at my open trades is to start with ones I put
on most recently. I ask myself, “Why did I make this trade?” Throughout a
trade’s history you need to keep making sure that it is within your plan’s scope. I want to make sure that the trade is part of my trading strategy and
not some randomly put on trade. I want validation that I made the trade
for a proper reason. If I did, great, I can move on; if not, I want to make
sure it fits into one of my strategies. If it doesn’t, I’ll look to get out as
soon as possible, as I do not want to hold a trade that contradicts my basic
principles. Sometimes during the heat of battle of the trading day, you may
make some random trade and then not get out of it because you had no
plan for it. Hopefully this doesn’t happen often to you, but when it does, be
aware you are doing something wrong and remedy it as soon as you can.
Do the Reasons You Got in Still Hold?
If you shorted the Dow Jones because the 3-period moving average crossed
below the 10-period one as in point A in Figure 7.1, make sure it’s still the
case. If it’s not, it’s time to reevaluate the trade. Don’t wait until you are
stopped out to get out of a trade that isn’t working, if things have changed,
it’s okay to get out. In Figure 7.1 if you got out after the 3-period moving
average crossed back over the 10-period one, instead of waiting for the stop
to be elected you would have saved yourself about 200 points.
If it’s still within the parameters that got you in, look to see if they may
be changing, so you can anticipate an exit. Maybe the trade is still good but
FIGURE 7.1 Daily Dow
Source: © TradeStation Technologies 1999. All rights reserved.
it’s getting close to not being so, so you may have to watch it more carefully
tomorrow. Make a note of this and keep it on your radar screen (I’m not
referring to TradeStation’s radar screen but to your personal one). Make
sure if a trade is getting close to being one you have to exit that you are
on top of it. In the example in Figure 7.1 you can see the 3-period moving
average turning up and the highs of each bar getting higher prior to the
crossover at point B. This could be a sign your trade may not be within
the reasons you sold it for much longer, so you can start getting ready
for action.
Is It Simply Not Working as Planned?
Another thing you should monitor is whether the trade is working like you
planned. Yes, it could still be within your parameters, but maybe you were
looking to get a quick move on the trade and after three days it’s been stagnant,
not doing a thing. You need to consider whether you still want to hold
and monitor this dud? Your time and money could maybe be better spent
elsewhere. So why not get out? The trade is not doing what you wanted it
to, so you can consider moving on, though before you do make sure you
gave it an opportunity to work. If you look at Figure 7.1 again you’ll see this
as well. Assuming you got filled on the short at the first circle, the market
did nothing for the next few days. You expected it to go down right away
and it hasn’t. Even though the moving averages are still confirming a short,
you may consider getting out as it’s simply not performing as you’d like it
to, especially on the fourth day. At this point, you gave it time to work and
it didn’t and now it looks like it may pop back up.
Is It Close to the Target Area?
Once your trade starts getting close to the target area that you should have
established when you put the trade on, you should begin to monitor it more
closely. The target area can be a number, like when the market hits 13,541
or it can be a technical target as in when the market reaches the top of a
channel. It can be a time target as in exit after seven periods. Whichever the
case, you want to be aware that it’s getting close so that you can get ready
to act on it the next day if the target is reached. You may, after reevaluating,
consider moving the target, which is always an option, but make sure you
have a reason for it if you do. In Figure 7.2 I used Fibonacci projections
based on the up trend that started in July, to pick a target for a long using
a breakout of a previous high. As soon as the market gets within about two
normal days range from this target area (13,531), I would monitor it much
more closely to determine when I need to get out. One thing you need to
be on the lookout for is that it may fail to reach the target, in which case
you need a backup plan as to what to do. I do this by constantly moving my
stop up in a big move like this.
Has It Reached the Target Area?
Not only do you have to look to see if a trade is near its target area, you
should also keep an eye out for trades that have already hit your target
area. Let’s say the market traded through a channel you had set as a target.
You didn’t exit because maybe the move was strong and you wanted to let
your profits ride, which is a valid excuse. You now need to reevaluate the
exit points. Should you come up with a new target and stop areas or should
you get out, because your original level was hit? You could maybe keep the
trade and use your old target as your new stop. You really want to be on
top of a trade like this because there is no worse feeling then having a trade
reach its target and then some, then getting a little greedy and before you
know it goes against you and it turns into a loser. These losers are hard to
exit because you keep thinking it will come back to the best levels of the
trade and you end up just watching it fade away. Let’s say in Figure 7.2 you
did not exit at the target level and now the market is trading in the second
circle. You need to now reevaluate the trade as a new trade and determine
if you’d like to keep it as well as make a new target (target 2) and create a
new stop level (stop 2). You may introduce new technical indicators to help
you decide. I personally would have gotten out the second time it dipped
below the 13,531 level. I would have given it one time to test the level and
if it dipped below a second time I would exit. The reason being that I gave
it a shot to work and it didn’t right away, and it has already reached the
target so why not get out?
Is It Approaching a Stop Level?
Just as when the trade is getting close to its target level, you also should
be aware of any trades getting close to their stop levels. The closer it is to
the stop point, the more you should pay attention, or maybe paying less attention
is the better way to say it. Thinking too much about stops is a great
way to cancel or move them, as the market gets closer to them. Sometimes
your stops are mental and now is the time to either place them in or really
watch the market so you can exit it if it does hit the level. If you are
near a stop level, I recommend putting the stop in and forgetting about it.
Do not try to second-guess it. If your original stop was well thought out,
there is little reason to move it as the market gets closer. Most of the time
you will end up losing more money by moving or ignoring a stop. You do,
however, need to go over, review, and adjust stop levels on a regular basis.
But I would not be moving them further away as they get closer for fear of getting stopped out. Look at Figure 7.3 and you’ll see two different scenarios,
the first is the long from the first shaded circle, which is the same from
the previous example. As the market started getting better I would move
the stops S2, S3, S4, and so forth, up along the with moving average until
eventually the market catches up to it at S7 and you get stopped out; this
is the proper way to move a stop. The wrong way is the other example.
Say you shorted at the arrow marked Short and you placed a stop (Stop1)
above previous highs. But a couple of days later the market rallies strong
(oops). Now instead of leaving your stop in and taking it like a man, you
move it up to Stop 2 to give the market room to breathe. All you are doing
here is costing yourself 200 more points for no reason. As the market
reaches the stop level you have reasoned to be good, leave it alone. I’ll get
into this in more detail later in the book.
Did You Ignore Stop Levels?
This section assumes you are a moron and let the market go through the
level where you should have placed your stop. I’ll discuss it later in the
book, but you should not make a trade unless you know where you are
getting out on both the winning and losing side. Maybe you had a mental
stop, but froze and never put it on, or worse, you never even thought about
one and just hoped for the best. Maybe you’ve been in the trade for a while
and are making money and got a little lackadaisical moving a stop along to
lock in a profit. Regardless of the reason, if you ignored a stop you need
to put this trade on your “I must get the hell out of it soon” list and make
sure you are on top of it first thing in the morning. If you go back to Figure
7.3 and for some reason you let the short keep going and did not enter
the stop at Stop 2 and now it’s trading above that, you really need to force
yourself out of the trade the next day. Cutting your losses is something you
need to learn and emphasize as you are making your game plan every day.
Ignoring stops will definitely lead you down the wrong path, so should you
find yourself in a position where you did ignore one and are now in danger,
do not sit there and hope for the best; instead, get out and take the loss.
Should You Add to It or Cut Back?
Position size is another decision you should be thinking about as you go
over every trade. If, as in the example in Figure 7.2, the market reached
your target area and the trade is still working, why not take off some of
the trade and lock in a little profit, but keep a little if you think it still has
room. Maybe, on the other hand, it’s earlier in the trade and the market
just broke above the Break Out X line. Here you can have another strategy
that kicks in when you break out of this resistance level. You are already in
the trade with a nice profit and now you get confirmation of a strong trade
with a new signal. In this situation you may want to consider adding to the
position as the trade just got better in your eyes.
What, however, if the trade isn’t really working as well as you had intended
it to, but you don’t want to get out in case it does take off? A good
strategy here is to reduce the size of the position while still holding onto
some of it, just in case it does end up working. Cutting back and scaling is
one of the hardest things to do in trading, as you can probably make a case
for both sides in every instance. No matter what you do never ever forget
the cardinal rule of never adding to a loser.
Is Your Money Better Spent Elsewhere?
A part of the thinking process in the above scenarios when deciding on adjusting
position size is that if you take off a portion of your trade, it will
free up money to be used elsewhere. As you go over every trade keep that
in mind and ask yourself, “Is my money better spent elsewhere?” If the
answer is yes you may be better off getting out and putting on a different
trade. Or at least keeping money on the sidelines for when a better
setup does come along. You should not be in the habit of being maxed
out, but many new traders have limited funds and can quickly reach their margin levels. Freeing up some money then becomes part of their everyday
game plan.
Should a Trade Be Closed Now or Held Longer?
Which leads to the question, “Should I hold or get out?” If you have a purely
mechanical system then you shouldn’t override it and as such you should
only get out when a signal is given. However, this book deals mostly with
discretionary systems, which leaves a trader to make a lot of decisions.
Althoughmost everything mentioned above comes down to this basic question.
Ask it out loud. “Should I get out or stay in?” Keep singing the Clash’s
song “Should I stay or should I go?” until it becomes second nature. Ask
yourself, “If I didn’t have this position on would I get in now?” If the answer
is no, you should get out and move on. Don’t waste your time, money,
and energy on positions you do not feel like you would have on if you had a
fresh start. There have been many times where I’ve been married to a position
I knew was wrong, but I couldn’t make myself get out of it. I’d be long
losing money and I knew that if I had no trade on I’d want to be getting
short, because the market looked so bearish. Yet I couldn’t bring myself
to take a loss. Eventually I found that taking a loss is okay, and doing it
will save you lots of money over time. So learn to do it. Now this doesn’t
just apply to losing trades, you could have trades that are winners but are
no longer doing anything. You may want to reevaluate those as well every
night, and if you believe or your strategies tell you it’s done, get out and
move on.
Has Volatility Changed?
As I write this, the volatility in the stock market has recently exploded.
As you can see by looking at the Average True Range (ATR) in Figure 7.4,
the S&Ps range has more than doubled in the last couple of weeks of trading.
The average trading range went from under 12 points a day to well
over 20 for the month of August. You must be aware of this as you trade
because the dynamics of any trade made before this just got different. Targets
and stops may need to be moved further away to make them realistic.
The market may now be too dangerous for you to trade and you may have
to reconsider your strategy. If you had a stop that was to get out after two
consecutive days of negative closes and before you thought you were risking
$2,000 dollars, well that risk may now be $5,000 and you may not be able
to afford it. Likewise, you may have a fixed stop that is about $2,000 away,
but now that can easily be hit by a modest intraday swing, so you’ll get
stopped out when technically you shouldn’t have been. When the volatility
changes dramatically you must reconsider your positions. Even if the
volatility changes to be smaller, you should still reconsider your positions.
You may now want to add to your position or move your targets in to be
more reasonable. Volatility may not have drastic changes often but when it
does, be prepared to alter your strategy and game plan accordingly.
What Was in the News?
Another thing I think traders should look at is why the markets moved like
they did. If you were in a trade that acted out of the ordinary, find out why
it did so. It may not help you much on closed trades, but it’s good to know
if you still have a trade open. Though I don’t like trading off of the news, it
can sometimes change the nature of a trade, and you should be aware of it.
Many news events are blips that will give a market a nice swing, but in the
long run don’t make a difference. But there are some that can be the cause
of a market reversal, like when the Fed cuts rates more than expected, or
a central bank tightens its monetary policy, or a company reports really
bad financial news, or a CEO gets arrested out of the blue for accounting
fraud. If news made something move, even just for the day, it’s good to be
aware of it so you can make a more educated game plan the next day. I
always find trading how a market reacts to news to be a powerful tool, and you can take advantage of it if you incorporate that information into your
game plan.
I’m not going to separate them into two sections. Just figure out which
applies to your situations as you read them. A winning and losing trade
can be looked at the same way depending on how long you have held a
position. A winning trade that gives back too much profit is no worse than
a losing trade. You don’t want to give back too much on a winning position
by overstaying your welcome. Even if you close it out as a winner, if you
gave back too much, in my eyes it’s a bad trade at least for the last part of
the trade. Though I prefer to review my winners first, it doesn’t matter if
you do them or your losers first or if you just go down your list of trades
in the order that you put them on. Whatever way you do it, just be sure to
give them all their fair due. If you are a day trader who closes everything
out at the end of the day then the next few pages may not be necessary, but
you paid for the book, so the read them anyway. If you trade one market
or stock, the reviewing part will go faster and then you could meet John at
Moran’s quicker. As you do go over every trade keep in mind that the main
purpose for doing so is to prepare for the next day’s game plan.
Why Did I Make the Trade?
The first thing I do when I look at my open trades is to start with ones I put
on most recently. I ask myself, “Why did I make this trade?” Throughout a
trade’s history you need to keep making sure that it is within your plan’s scope. I want to make sure that the trade is part of my trading strategy and
not some randomly put on trade. I want validation that I made the trade
for a proper reason. If I did, great, I can move on; if not, I want to make
sure it fits into one of my strategies. If it doesn’t, I’ll look to get out as
soon as possible, as I do not want to hold a trade that contradicts my basic
principles. Sometimes during the heat of battle of the trading day, you may
make some random trade and then not get out of it because you had no
plan for it. Hopefully this doesn’t happen often to you, but when it does, be
aware you are doing something wrong and remedy it as soon as you can.
Do the Reasons You Got in Still Hold?
If you shorted the Dow Jones because the 3-period moving average crossed
below the 10-period one as in point A in Figure 7.1, make sure it’s still the
case. If it’s not, it’s time to reevaluate the trade. Don’t wait until you are
stopped out to get out of a trade that isn’t working, if things have changed,
it’s okay to get out. In Figure 7.1 if you got out after the 3-period moving
average crossed back over the 10-period one, instead of waiting for the stop
to be elected you would have saved yourself about 200 points.
If it’s still within the parameters that got you in, look to see if they may
be changing, so you can anticipate an exit. Maybe the trade is still good but
FIGURE 7.1 Daily Dow
Source: © TradeStation Technologies 1999. All rights reserved.
it’s getting close to not being so, so you may have to watch it more carefully
tomorrow. Make a note of this and keep it on your radar screen (I’m not
referring to TradeStation’s radar screen but to your personal one). Make
sure if a trade is getting close to being one you have to exit that you are
on top of it. In the example in Figure 7.1 you can see the 3-period moving
average turning up and the highs of each bar getting higher prior to the
crossover at point B. This could be a sign your trade may not be within
the reasons you sold it for much longer, so you can start getting ready
for action.
Is It Simply Not Working as Planned?
Another thing you should monitor is whether the trade is working like you
planned. Yes, it could still be within your parameters, but maybe you were
looking to get a quick move on the trade and after three days it’s been stagnant,
not doing a thing. You need to consider whether you still want to hold
and monitor this dud? Your time and money could maybe be better spent
elsewhere. So why not get out? The trade is not doing what you wanted it
to, so you can consider moving on, though before you do make sure you
gave it an opportunity to work. If you look at Figure 7.1 again you’ll see this
as well. Assuming you got filled on the short at the first circle, the market
did nothing for the next few days. You expected it to go down right away
and it hasn’t. Even though the moving averages are still confirming a short,
you may consider getting out as it’s simply not performing as you’d like it
to, especially on the fourth day. At this point, you gave it time to work and
it didn’t and now it looks like it may pop back up.
Is It Close to the Target Area?
Once your trade starts getting close to the target area that you should have
established when you put the trade on, you should begin to monitor it more
closely. The target area can be a number, like when the market hits 13,541
or it can be a technical target as in when the market reaches the top of a
channel. It can be a time target as in exit after seven periods. Whichever the
case, you want to be aware that it’s getting close so that you can get ready
to act on it the next day if the target is reached. You may, after reevaluating,
consider moving the target, which is always an option, but make sure you
have a reason for it if you do. In Figure 7.2 I used Fibonacci projections
based on the up trend that started in July, to pick a target for a long using
a breakout of a previous high. As soon as the market gets within about two
normal days range from this target area (13,531), I would monitor it much
more closely to determine when I need to get out. One thing you need to
be on the lookout for is that it may fail to reach the target, in which case
you need a backup plan as to what to do. I do this by constantly moving my
stop up in a big move like this.
Has It Reached the Target Area?
Not only do you have to look to see if a trade is near its target area, you
should also keep an eye out for trades that have already hit your target
area. Let’s say the market traded through a channel you had set as a target.
You didn’t exit because maybe the move was strong and you wanted to let
your profits ride, which is a valid excuse. You now need to reevaluate the
exit points. Should you come up with a new target and stop areas or should
you get out, because your original level was hit? You could maybe keep the
trade and use your old target as your new stop. You really want to be on
top of a trade like this because there is no worse feeling then having a trade
reach its target and then some, then getting a little greedy and before you
know it goes against you and it turns into a loser. These losers are hard to
exit because you keep thinking it will come back to the best levels of the
trade and you end up just watching it fade away. Let’s say in Figure 7.2 you
did not exit at the target level and now the market is trading in the second
circle. You need to now reevaluate the trade as a new trade and determine
if you’d like to keep it as well as make a new target (target 2) and create a
new stop level (stop 2). You may introduce new technical indicators to help
you decide. I personally would have gotten out the second time it dipped
below the 13,531 level. I would have given it one time to test the level and
if it dipped below a second time I would exit. The reason being that I gave
it a shot to work and it didn’t right away, and it has already reached the
target so why not get out?
Is It Approaching a Stop Level?
Just as when the trade is getting close to its target level, you also should
be aware of any trades getting close to their stop levels. The closer it is to
the stop point, the more you should pay attention, or maybe paying less attention
is the better way to say it. Thinking too much about stops is a great
way to cancel or move them, as the market gets closer to them. Sometimes
your stops are mental and now is the time to either place them in or really
watch the market so you can exit it if it does hit the level. If you are
near a stop level, I recommend putting the stop in and forgetting about it.
Do not try to second-guess it. If your original stop was well thought out,
there is little reason to move it as the market gets closer. Most of the time
you will end up losing more money by moving or ignoring a stop. You do,
however, need to go over, review, and adjust stop levels on a regular basis.
But I would not be moving them further away as they get closer for fear of getting stopped out. Look at Figure 7.3 and you’ll see two different scenarios,
the first is the long from the first shaded circle, which is the same from
the previous example. As the market started getting better I would move
the stops S2, S3, S4, and so forth, up along the with moving average until
eventually the market catches up to it at S7 and you get stopped out; this
is the proper way to move a stop. The wrong way is the other example.
Say you shorted at the arrow marked Short and you placed a stop (Stop1)
above previous highs. But a couple of days later the market rallies strong
(oops). Now instead of leaving your stop in and taking it like a man, you
move it up to Stop 2 to give the market room to breathe. All you are doing
here is costing yourself 200 more points for no reason. As the market
reaches the stop level you have reasoned to be good, leave it alone. I’ll get
into this in more detail later in the book.
Did You Ignore Stop Levels?
This section assumes you are a moron and let the market go through the
level where you should have placed your stop. I’ll discuss it later in the
book, but you should not make a trade unless you know where you are
getting out on both the winning and losing side. Maybe you had a mental
stop, but froze and never put it on, or worse, you never even thought about
one and just hoped for the best. Maybe you’ve been in the trade for a while
and are making money and got a little lackadaisical moving a stop along to
lock in a profit. Regardless of the reason, if you ignored a stop you need
to put this trade on your “I must get the hell out of it soon” list and make
sure you are on top of it first thing in the morning. If you go back to Figure
7.3 and for some reason you let the short keep going and did not enter
the stop at Stop 2 and now it’s trading above that, you really need to force
yourself out of the trade the next day. Cutting your losses is something you
need to learn and emphasize as you are making your game plan every day.
Ignoring stops will definitely lead you down the wrong path, so should you
find yourself in a position where you did ignore one and are now in danger,
do not sit there and hope for the best; instead, get out and take the loss.
Should You Add to It or Cut Back?
Position size is another decision you should be thinking about as you go
over every trade. If, as in the example in Figure 7.2, the market reached
your target area and the trade is still working, why not take off some of
the trade and lock in a little profit, but keep a little if you think it still has
room. Maybe, on the other hand, it’s earlier in the trade and the market
just broke above the Break Out X line. Here you can have another strategy
that kicks in when you break out of this resistance level. You are already in
the trade with a nice profit and now you get confirmation of a strong trade
with a new signal. In this situation you may want to consider adding to the
position as the trade just got better in your eyes.
What, however, if the trade isn’t really working as well as you had intended
it to, but you don’t want to get out in case it does take off? A good
strategy here is to reduce the size of the position while still holding onto
some of it, just in case it does end up working. Cutting back and scaling is
one of the hardest things to do in trading, as you can probably make a case
for both sides in every instance. No matter what you do never ever forget
the cardinal rule of never adding to a loser.
Is Your Money Better Spent Elsewhere?
A part of the thinking process in the above scenarios when deciding on adjusting
position size is that if you take off a portion of your trade, it will
free up money to be used elsewhere. As you go over every trade keep that
in mind and ask yourself, “Is my money better spent elsewhere?” If the
answer is yes you may be better off getting out and putting on a different
trade. Or at least keeping money on the sidelines for when a better
setup does come along. You should not be in the habit of being maxed
out, but many new traders have limited funds and can quickly reach their margin levels. Freeing up some money then becomes part of their everyday
game plan.
Should a Trade Be Closed Now or Held Longer?
Which leads to the question, “Should I hold or get out?” If you have a purely
mechanical system then you shouldn’t override it and as such you should
only get out when a signal is given. However, this book deals mostly with
discretionary systems, which leaves a trader to make a lot of decisions.
Althoughmost everything mentioned above comes down to this basic question.
Ask it out loud. “Should I get out or stay in?” Keep singing the Clash’s
song “Should I stay or should I go?” until it becomes second nature. Ask
yourself, “If I didn’t have this position on would I get in now?” If the answer
is no, you should get out and move on. Don’t waste your time, money,
and energy on positions you do not feel like you would have on if you had a
fresh start. There have been many times where I’ve been married to a position
I knew was wrong, but I couldn’t make myself get out of it. I’d be long
losing money and I knew that if I had no trade on I’d want to be getting
short, because the market looked so bearish. Yet I couldn’t bring myself
to take a loss. Eventually I found that taking a loss is okay, and doing it
will save you lots of money over time. So learn to do it. Now this doesn’t
just apply to losing trades, you could have trades that are winners but are
no longer doing anything. You may want to reevaluate those as well every
night, and if you believe or your strategies tell you it’s done, get out and
move on.
Has Volatility Changed?
As I write this, the volatility in the stock market has recently exploded.
As you can see by looking at the Average True Range (ATR) in Figure 7.4,
the S&Ps range has more than doubled in the last couple of weeks of trading.
The average trading range went from under 12 points a day to well
over 20 for the month of August. You must be aware of this as you trade
because the dynamics of any trade made before this just got different. Targets
and stops may need to be moved further away to make them realistic.
The market may now be too dangerous for you to trade and you may have
to reconsider your strategy. If you had a stop that was to get out after two
consecutive days of negative closes and before you thought you were risking
$2,000 dollars, well that risk may now be $5,000 and you may not be able
to afford it. Likewise, you may have a fixed stop that is about $2,000 away,
but now that can easily be hit by a modest intraday swing, so you’ll get
stopped out when technically you shouldn’t have been. When the volatility
changes dramatically you must reconsider your positions. Even if the
volatility changes to be smaller, you should still reconsider your positions.
You may now want to add to your position or move your targets in to be
more reasonable. Volatility may not have drastic changes often but when it
does, be prepared to alter your strategy and game plan accordingly.
What Was in the News?
Another thing I think traders should look at is why the markets moved like
they did. If you were in a trade that acted out of the ordinary, find out why
it did so. It may not help you much on closed trades, but it’s good to know
if you still have a trade open. Though I don’t like trading off of the news, it
can sometimes change the nature of a trade, and you should be aware of it.
Many news events are blips that will give a market a nice swing, but in the
long run don’t make a difference. But there are some that can be the cause
of a market reversal, like when the Fed cuts rates more than expected, or
a central bank tightens its monetary policy, or a company reports really
bad financial news, or a CEO gets arrested out of the blue for accounting
fraud. If news made something move, even just for the day, it’s good to be
aware of it so you can make a more educated game plan the next day. I
always find trading how a market reacts to news to be a powerful tool, and you can take advantage of it if you incorporate that information into your
game plan.
G O O D K I D , B A D K I D
A great example of this is parents with two kids, one who is near perfect, a
straight-A student, captain of the tennis team, doing community service, and
the other is cutting class, failing some classes, getting into fights, smoking
cigarettes, shaving half his head, and so on. The parents can spend so much
time talking about and dealing with the bad seed that the good kid starts to feel abandoned. He starts getting depressed thinking that they don’t love him as much as his brother and soon begins drinking heavily. Then he finds some of
his brother’s pot and because no one pays attention he quickly develops a $5 a
day pot habit. So the moral here is to cut your losses, send the troubled kid to
military school, and praise the good kid; odds are he’ll make more money in the
future than the troublemaker allowing you to retire earlier, as he supports you.
The bad kid on the other hand is going to cost you money for years, military
school, bail, lawyers, counseling, hair dye, and so on. So cut your losses and
concentrate on your winners.
Now back from my tangent, as you are reviewing don’t get complacent
with good trades. Analyze them in depth and always think about how you
will get out. As you review your trades there are several things you can look
at as I’ll describe in the rest of this chapter. I’ll start with the open trades.
straight-A student, captain of the tennis team, doing community service, and
the other is cutting class, failing some classes, getting into fights, smoking
cigarettes, shaving half his head, and so on. The parents can spend so much
time talking about and dealing with the bad seed that the good kid starts to feel abandoned. He starts getting depressed thinking that they don’t love him as much as his brother and soon begins drinking heavily. Then he finds some of
his brother’s pot and because no one pays attention he quickly develops a $5 a
day pot habit. So the moral here is to cut your losses, send the troubled kid to
military school, and praise the good kid; odds are he’ll make more money in the
future than the troublemaker allowing you to retire earlier, as he supports you.
The bad kid on the other hand is going to cost you money for years, military
school, bail, lawyers, counseling, hair dye, and so on. So cut your losses and
concentrate on your winners.
Now back from my tangent, as you are reviewing don’t get complacent
with good trades. Analyze them in depth and always think about how you
will get out. As you review your trades there are several things you can look
at as I’ll describe in the rest of this chapter. I’ll start with the open trades.
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