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The Anatomy of a Trade

As a fellow trader who teaches and mentors new traders, one of the most common questions I get is related to the actual process of planning and making a trade. They understand the setup they want to trade and they know what it looks like on a still chart after the fact, but they have a hard time planning and initiating a trade beforehand so they never enter or enter a trade at the wrong times.  I believe the answer lies in developing a process to your trading.

As a professional educator and engineer, I firmly believe in the process approach to trading.  I can safely say that this is a big secret to my success.  My trading process looks like this:

  • Morning Routine
  • Scan/Develop Watch list
  • Build a trade plan
  • Execute the trade according to plan
  • Reflect

This process is slightly modified when I switch to my reversal scans after the morning session. Intraday I eliminate my morning routine and my watch list becomes the reversal scan.

The first question I get when I start presenting this is, “Does HOW you do things actually matter”? Think about something significant you do.  Then think of how it can best be done. Now, consider how you do it currently. This is a great thought process for traders to have. When you take a trade, you need to ensure that you are focused on the right things prior to entering it as well as during the trade. Creating a system for this thought process will take away most of the emotional hang-ups traders experience when looking to enter into a trade as well as managing it while they are in it.

The first thing we must do is develop a perspective of what matters.  This will come from education and practice.  Once a trader has the perspective of what matters, they can proceed to identify the specific processes on which to focus. In each of the steps in my process, there are key leverage points that often make the difference between me having a successful trade or an unsuccessful trade.  The key to success in most full time traders and, often not sufficiently focused upon by beginning traders, is the planning process that enables a trader to focus the important elements of a trade which maximizes their chances of success.

So why do I feel that developing a process important in trading? It is important because it describes how a trade will be put together, provides the focus for executing and managing them, and after the trade, provide a tool for reflecting on to determine if there is something that you missed or could improve on for the next time.

I start my trading process by following the same routine when I get up in the morning.  Trading cannot be looked at as a hobby.  You have to approach trading seriously and as such I wake up, go work out, take a shower, get dressed, and eat breakfast prior to firing up my trading station.  I am awake, alert, and motivated when I start building my watch list.  This morning routine has helped my mental preparation coming into the market tremendously.  So whatever you do, starting the morning out the same way will pay invaluable dividends.   However, rolling out of bed and throwing water on your face 30 minutes prior to open just doesn’t give you enough time to get prepared for the market open.  Sitting at your computer in your pj’s or underwear does not put you in the right mindset to attack the market.  I know because I have experienced all of these scenarios.

My watch list comes from a specific scan that I use every morning.  I will not look anywhere else because I am confident that the stocks on that scanner will have the best opportunity to setup for me to trade.  I will vet each stock the same way using a checklist I have to determine if it is actually tradeable for me.  My watch list is built by 9am and I will not add anything to it after that time.  This allows me to watch the tickers on my watch list for the 30 minutes into the open.  This actually leads into the next step in my process.

During the 30 minutes prior to open I am watching the tickers on my watch list and developing trade plans for them based on the price action I am seeing.  This helped me with that deer in the headlight look I used to get when the opening bell rung and all of the lights started flashing on my charts. When the bell rings I’ll have my plans in place written on note cards because it is too easy to forget what you saw on each ticker coming into the open.  What is my plan if it sets up to the long side? What’s my plan if it sets up to the short side?  What setup do I want to see? What are my profit targets? Where will my stop be? Is the profit window large enough for the trade to make sense? Just asking yourself questions like these when you are planning your trades will give you a big advantage because you can then go in with a battle plan and stick to it.  If it is written down in my face I can easily refer to it and that eliminates the anxiety that I used to feel when that bell rang.  All I’m doing at the open is looking for my signal and trigger to enter the trade.

Once the stock sets up, signals, and triggers an entry, I will enter without question, well that is the plan anyway.  Sometimes I may second guess myself, but not often.  I have my profit targets written out on my trade plan and well as the technical level that I am basing my stops on, so after entry I am just concentrating on hitting my marks and booking profit.  There are some that say that knowing when to exit is the hardest part of the trade.  It can be extremely tough to not exit the trade too early if you do not have a pre-set plan. So if you have a plan ahead of time and you stick to it, you will have a better chance of letting your winning trades work and cutting your losses off quickly instead of the other way around.  This will also help with managing your emotions while in the trade.  Last week I talked to our Warrior Pro students about filtering out the noise.  This strategy goes a long way to help do that so that you can focus on the trade.

Once the trade is done I will reflect on how well my plan worked and how well I stuck to what I had written.  Most of the reflection on my trades will come in the evening when I review and recap my trades from the day.   I believe one of the key things forgotten is reflection. “What did I do right?”, “What did I do wrong?”, “Should I have sold earlier?”, etc. are all extremely important for the development of your trading. Just because you made good profits doesn’t mean you are a perfect trader. How you play both sides of the table are extremely important.  Write down or do a video recap of the trade and everything that comes to mind lesson wise. Then, file it away with other past lessons and use them as a reference for the future. Some lessons hit harder than others, but be confident that with time you will only get better. It only takes one time of getting your hand slammed in a door to figure out to be more careful, but may take two or three times to learn to turn on the lights before walking around your house at night.

Why are processes in trading important? They are important because they describe how things are done to prepare for a trade and then provides the focus for executing them.  It helps filter out the emotional social noise giving you a better chance for a more successful winning trade.  It provides you with a tool to go back and reflect on your trades and make you a better trader.   If you focus on the right processes, in the right way, you can design your way to trading success.