Thinking ‘Three Moves Ahead’ II

I have to give a presentation tonight so I am posting early.

Yesterday I suggested certain questions we ought to ask ourselves before we take a trade. Today I’d like to take the preparation, ‘the opening move’, one step further.

The questions help the analysis for the trading plan and for the risk management plan. They don’t apply to scalpers and perhaps some of the very short term traders (1 to 3 minute charts) – simply because this group trades predominantly on feel rather than cognitive considerations. For other timeframe traders, the questions satisfy our cognitive requirements prior to a trade. They are asked after determining whether to be long or short and for what instrument.

But that’s only one step of the preparation.

The second step engages our creative/emotional side. I ask my students to visualize:

  • the execution of the entry (including size) and
  • the execution of the exit strategies: initial stop, subsequent management and successful conclusion. By this I mean that we ‘see’ a successful end to the trade – where we exit our core profit at our target. We also see ‘what the trade has to look like to remain in the trade’ etc; we also see the trade proving to be a failure – we ‘see’ the initial stop being hit and we ‘see’ occurring the conditions we ‘need to exit the trade’.

It is important that we accept the profits and losses as planned. I believe the reason why most traders fail to place stop losses in the market is because they subconsciously carry an image of the stop being and only to have the market resume moving in our direction.

But, if we change that image to one where after the stop is hit, the market moves against us big time, we are probably going to ensure the stop is in. Some of you may recall the trauma suffered by the High Probability Trader in the Societe Generale induced meltdown. He kept looking for a rally that never came and had to close the account. If you saw the video, use his image to spur you on ensuring you place a stop – ‘see the market continue to move against you after the stop is hit’.
Let me say this again: it’s that important.

Behind the physical act of placing the stop, is the psychological acceptance of the loss. If you approach position sizing in the same way I suggested in the previous blogs, you’ll automatically include an assessment of the risk for the trade. If you use another approach, I recommend you add a risk:reward assessment to the preparation. Once you know risk, it’s important you accept the risk as a loss. In my own trading, I use Ed Sekoyta’s suggestion to treat the loss as already having been incurred. If you believe this ‘story’, acceptance is a fait accompli since it ‘has already happened’.

Tomorrow we’ll proceed to the role of time in trading decisions.

7 thoughts on “Thinking ‘Three Moves Ahead’ II”

  1. Ray

    Sometimes, a newbie may think it is all right to re enter near the same price as a stop after it is hit.

    For whatever reasons, it is prudent to re- calculate the reward to the risk for re-entering this trade.

  2. MEMO on a weekend seminar in Sept at SMU:

    Cross-ref from http://www.awanginvest.com :

    Quote
    I would like to IMPRESS upon you that trading with a high probability of success is the only way to go.

    * First, use reliable strategies that have a high probability of success.
    * Second, minimize risk. Don’t trade with scared money; make sure that you can easily live with the worst case scenario.
    * Third, think in probabilities: remind yourself that your strategy is reliable and that over a large number of trades, you will profit overall.
    * Fourth, don’t put your self-esteem on the line with your money. No matter what happens, you have value as a person.

    This brings me to share with you that my mentor Ray Barros has made a difference to my trading, especially online. There have been students who have attended his presentations like the one at SGX last night sponsored by eSignal, who came up to him to express how much they have benefited from his talk ( be it free ) compared with many seminars (they paid a fortune) they have attended elsewhere that do not reveal the holistic approach that is so vital to a high probability of success in trading.

    It is no wonder that his credibility as an educator is highly acknowledged. Hence, this first annual seminar for August at SMU was fully sold out within a short period ie by January 2008.

    PLEASE CLICK TO READ DETAILS OF SEPT SEMINAR TO MAKE IT HAPPEN:

    the-habits-for-consistent-success-smu-04-23-2008

  3. Gday Ray,I would venture to say,the hardest part,for me at least,is the execution of exit strategy.I believe i am aware of most contemporary exit strategies but i have never found a’one size fits all’.It really is a critical component and an absorbing study in which even a small improvement in that area, can help vastly, to the bottom line.Whenever the subject matter crops up in your blog,it certainly gets my attention as i truly believe your one of the most knowledgable gentlemen on a wide variety of subjects. cheers Baz

  4. Thanks Baz. Just for you, as soon as this series is over, I’ll do a detailed explanation of devising an exit strategy.

  5. Thankyou very much Ray,I am indeed honoured that you would take the time.I hope i am not monopolizing too much of your blog,with volume and exit topics but i am sure your readers will find a nugget or two also.Thanks again for sharing your wisdom,best wishes,cheers Baz

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