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. Ill 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 Ill raise my stop to under yesterdays low to the Stop 2 level. However, if it drops below the double bottom, Ill 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, Ill keep my current stop (Stop 1) and do nothing.
Planning out current trades will start to take the gamble out of your trading as its 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 youll 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 isnt 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 cant 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 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:
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 follow my plan?
What did I do differently and why didnt 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 its 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 youve ever watched the old Pink Panther movies, youll remember Cato, Inspector Clouseaus 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 youll be able to stick to your plan much better.
If you didnt 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 dont 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 didnt work out and if you got out with a small loss when you were supposed to, I dont 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 tradeswinners 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.
Dont be satisfied that you made money on a trade. If you had a 50point 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 its a total of all your trades that determines how you did, so dont 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 dont 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 didnt. 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 Ill try to learn from them. Good winners are the trades you did everything right on and made some decent money with. Dont 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 doesnt 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 wouldnt 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.
GETTING READY FOR TOMORROW
Now that you have gone over all your previous trades, its 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 hasnt 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 doesnt 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. Youll have entry levels for new trades. And youll even have targets and stops as well as risk and reward ratios.
REVIEW YOUR PLANS AND STRATEGY
Dont 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.
It doesnt 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, its worth much more than the effort youll put into it. By going over all your trades, you will gain insight into your trading and youll learn whats working and what isnt. 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 youll trade if you come in with a game plan and scenarios for all your trades. No matter what curveball the market throws at you, youll be ready. Hell, they will all look like hanging curves if you are prepared.
Now go and have that beer with John.