Wednesday, April 01, 2015

Objectivity and being prepared

A trader I know asked me to comment on a potential set up for a stock he was looking to trade. I gave my views and his response was that he needed "more objectivity and less interpretation."

He was basically saying that he was looking almost too deep into the chart, when trend following and trying to identify changes in trends is a pretty basic concept. It was almost as if he was looking for ways not to take the trade, when everything that we look for was there.

I had a similar experience in one of our group webinars a few weeks back. Someone asked me to comment on a chart of the Japanese Nikkei.

My basic answer was "It's broken out to new highs - its in an uptrend. You should be long, and if you are already in a trade, there is no reason to look for an exit".

In other words, I want to keep my thinking as simple and objective as possible. The same goes for my daily preparation.

When I am evaluating a set up, there are certain common denominators that I look for. These relate to the basic price structure and visual characteristics of the chart, the volatility measurements and the proximity of the next scheduled trading update or earnings release (if looking at a stock). If a set up meets those criteria, then it manages to get onto my watchlist. If and when the price entry level is hit, and providing nothing has changed, there is no reason not to take the trade.

Anything that does go onto my watchlist then finds its way onto a separate list, which is updated every evening. This details the ideal entry price, the initial stop distance, the position size and also the next earnings date for each stock. Once this is set up, it only takes a few minutes to update every night.

Objectivity and being prepared for action is key when trading. I want all my thinking done outside of market hours, and all my plans ready, so that, when the time comes to place an order, I am fully prepared. Based on my stock selection process, the motto should be along the lines of "See it, plan it, trade it". Going through the processes detailed above helps me achieve that.

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