The Art of the Trade: Trading the Plan

The Art of the Trade: Trading the Plan In today's column I'll discuss having a plan, and most important, sticking to it. As traders we're constantly formulating directional opinions. Sometimes it might be as simple as to get long or short and see what happens. Other times it might be a more comprehensive analysis; such as buying a moving average cross, a retracement to a trendline, MACD etc. There are countless studies available to help make trading decisions. Creating a plan and believing in its success translates into making money! Don't waiver. It won't allow you to analyze the results with clear objectivity. Tampering with the trade negates the original idea. Currently, I'm short BIDU (I know, why be short anything). I felt it was under performing the overall market and could retest it's resent lows around 106. My stop is around 111, its resent high. The trade isn't working and I'll probably be stopped out by the close. Even when I'm wrong, I'll stay with the trade according to plan. It's often painful but that's trading. For purposes of full disclosure; my short in BIDU is long put options, which limit my upside risk. By staying with the trade until I'm either stopped out or my target is reached, gives me useful information I can use for future trades. I catalog each trade both winners and losers. The idea is to build a “tool chest” of strategies that work well. Some work better in trending markets. Others work in markets that stay in a range. Even breakouts. Hopefully, the “tool box” fills up with winning, well thought out trading ideas. If I give up on the plan, when the trade first goes against me, it hinders the building of my arsenal. Stops. I don't exit a trade until the close of the trading day. I don't like to get stopped only to see the stock reverse. If the intention is to hold the trade for more than a few days, the closing price makes the most sense. Some traders might get out differently. It doesn't matter as long as it's consistent. Targets. Unlike the above, I do not wait for the close. I don't want to see the price hit and have the stock reverse. Also, since I like to scale out of a trade, selling into strength is appropriate. If there's a gap the next day, so be it. However, I usually keep a few units just to see. Trade management. If the trade is working and my objectives are reached, I will raise my stop accordingly to lock in profits. Since I started this article, BIDU has retraced back below my stop. Waiting for the close might or might not have been smart. Hopefully the trading Gods are with me. In summation; have a plan that incorporates your particular criterion. Once it's in place don't waver. Use that information for constructing new trades regardless of the results. It will add to your success and make you a better trader. Stay tuned for more discussions on the “Art of the Trade”. A personal coaching service is available. Please contact for details. Additional posts can be read at the www.chicagotrading.org. Loren Newman, an independent trader and a member of the CBOE. He's actively traded and taught for over 25 years. He's a co-founder of LaSalle trading, one of the first electronic trading firms in Chicago. He's taught and mentored traders in a variety of venues including proprietary trading. He recruited traders from major universities and helped guide them to be successful in the ever-challenging world of trading. He's also guest lectured at Northwestern University.