What Makes A Good Trade?

What is a good trade as opposed to a bad trade? A good trade is one that you got in to for all the right reasons, you followed your plan and you executed the strategy. Your ultimate goal, your primary objective, your path to becoming consistently profitable, is to make one good trade after another, you need to do this consistently. Some, well, hopefully most of those trades will be profitable. They should be, because the rate at which they are profitable will determine your edge. But you’ll never discover that edge unless you can apply your strategy, and plan consistently.

So the moral of the story is…don’t judge a trade by the results, Jude it only by how well you followed the fundamentals that you would apply to every trade. If you followed those fundamentals well, then it’s a good trade, if you didn’t follow your fundamentals, if you took shortcuts, guessed, took unnecessary risks, jumped in uninformed, etc. Then it was a bad trade. Score yourself on how well you applied the fundamentals. Here are those fundamentals:

  • Preparation
  • Detailed plan
  • Discipline
  • Review

Preparation

As a retail trader you are up against the best and the brightest traders in the world, some from top line proprietary trading firms, others from investment banks and institutions, and still others that are seasoned independents. Most are better capitalized than you are. And let’s not forget the bots, there are tons of bots out there designed to make your job very difficult. This is especially true if you are an intraday trader, slightly less true if you are a swing trader.

As an intraday trader your margin of error is very small, and as a swing trader you need extraordinary analytical skills to be successful. So, every bit of preparation you take will be well worth the effort. You need to know your market, whether it’s stocks, commodities or forex, and you need to understand the current state of the market and its bigger timeframe players.

Following are some things you should become familiar with to get whatever advantage you can muster:

  • If you’re trading stocks, start reading https://briefing.com in the evening and https://theflyonthewall.com in the morning before the market opens. You want to compare what is going on in the after market with the pre-market. If you’re into commodities you need to be looking at https://forexfactory.com and finviz news to see how things developed in the Asian and London markets overnight. Also, knowing if there are any significant economic reports on the docket is critical.
  • Make sure you start early. Generally you should be set to go by 8 AM whether you are into stocks or commodities, that includes forex as well. This means you need to be in by 7:30 AM. Often news breaks at 8 AM, most economic reports in the US report at 8:30 AM, some as early as 7 AM. If you travel into the office and can take a train, do it, that time doing early morning research can really pay off. Watch the pre-market. What are the ranges of assets you’re watching, is there abnormal volume in the stocks you are watching, or in the indexes, or sector ETFs?
  • If you are a PatternCast client, then you already have your working papers, so to speak. You know which futures, forex and stocks are potentially in play, and so now you can focus on those specifics and their related markets. The night before, after you receive the signals in email, you should have set up your charts with alerts and potential limit orders just in case the signal triggers while you’re asleep.
  • If you are a stock intraday trader, work your scans, filter in the potential stocks in play. For those that just missed the cut, create alerts in case they become stocks in play.
  • Set up volume profiles and mark out the structure of important levels. Create a road map and a priority list that should be focused on. Keep in mind the economic reports as they can potentially change the entire landscape. Create if-then scenarios for potential plays. PatternCast members have the benefit that the signals do that for you well in advance.
  • Prepare yourself mentally and physically. Do visualization and breathing exercises. Make sure you have plenty of water and that you’re well hydrated.

Detailed Plan

What is your plan? That’s a question I should be able to ask a disciplined trader, a graduate of this master class, at any time. What is your plan? Your response should be immediate, with a concise explanation, in one or two sentences telling me the plan for each of your trades. Try it on yourself, develop the habit of being able to explain your strategy for each trade you have in play, or are about to put in play. Create a random reminder that pops up on your phone. There are lots of phone apps that do this. I use Yapp – Gentle Random Reminders on my iPhone, it’s free, let’s me enter any number of reminders and set the hours that it’s okay to notify me.

This is the trader’s equivalent to the elevator pitch an entrepreneur would deliver to a prospective investor he meets in a conference, hotel lobby or an elevator. He needs to say in as few words as possible what his business is and the value proposition.

Your plan will include the following:

  • A reason for getting into the trade
  • How you will enter
  • How you will manage it,
  • And how, why and where you will exit.

A plan is the gateway to becoming consistently profitable. Without a plan, there’s no way to evaluate your performance and apply statistical scrutiny. There’s will be no way to do a quantitative and qualitative review, there will be no baseline from which to measure how well you followed your process. This process, these fundamental steps you take in executing every trade is absolutely essential, as everything else you do to continue and enable your development is dependent upon it.

Discipline

What is discipline? it may seem hard to quantify because it’s a quality of your character. Discipline has an infinite scale, where we can have no discipline or be very disciplined, but we are never perfect. Our goal is to continually improve. This is why we break this entire master class down to small discrete units, the trade. We need to become disciplined in producing one good trade after another, with regularity and consistency. No one trade is better than the other, they all are judged based upon our attention to detail and our discipline in executing the plan.

The accumulation of these trades and the statistical story that unfolds over time will be our report card. The various ways we compartmentalize our trades will help in this as well. We have daily, weekly and campaign reviews. At the end of each campaign we reset everything, and carry forward what we learned from previous campaigns.

Never fall in love with a trade, a position, a company or an asset. This doesn’t mean that an asset should be ignored if it’s in a favorable way for a long period of time. But beware of that extended time, don’t get lost in it, don’t allow yourself to lose objectivity. The way you do that is through your discipline, follow your plan, journal everything, conduct reviews, communicate with fellow traders.

Procrastination is the number one enemy of discipline. When you lose focus, your mind wanders and you do things that are nonproductive, like surfing the web, getting involved in a twitter or Stocktwits spat. Perhaps your ToDos are piling up, and that pile just keeps getting bigger, and it’s so much easier to just ignore it…until, it’s too late. Awareness is the way to fight procrastination, and you develop awareness by developing the habit of getting things done and coaching yourself to get things done. Here are some articles on procrastination and ways to fight it.

Discipline is also a matter of perspective. Is trading your life? Is that all that matters to you? If the answer is yes, then you are on the wrong track. There is a life outside of trading, and that life should be complimentary, as it will support both your physical and mental well being. You need to take the same care in your personal life as you do with your trading life. Without that demarcation, and that awareness of the boundaries, you will lose focus and perspective, you will lose discipline. Don’t do that.

Review

You may say to yourself, this trading stuff is hard…I spend all my time on analysis and looking for the right trade, and learning…when in the world do I have time for reviewing what I’ve done? It seems like a big waste of my time, looking over trades that have gone by, compiling statistics, writing narratives in my journal, watching video replays of my trades…all of this is taking away from the time I could be trading…right?

Wrong!

The continuous improvement process is a loop, that starts with first identifying the thing that needs to get done (perhaps a trade with edge), then planning out how you are going to get it done, followed by actually executing your plan, and then the loop is closed with your review of how well you performed. Without the review, there will never be an opportunity to discover where improvements can be made, nor will you have a consistent way to feed what you’ve learned into your next thing that needs your attention.

The review is so critical to the process that we do things during the other three steps specifically to be used in the review. Those things, notably your journaling and all that entails (screen shots, trade records, narratives, etc), provide the evidence and the record of your performance.

Every professional place tremendous importance on the review. The pros that do a better job at reviewing their work are consistently the best performers. This is true in virtually every discipline. Take American football as an example. Do you know what distinguishes Tom Brady and Coach Belichick from all the other players and coaches, the thing that directly contributes to and is the reason for their historic, hall of fame records? It’s their review and analysis of everything they do. That review makes them the most prepared and most knowledgeable players on the field. That is their edge.

No one would ever say that Tom Brady is a physical phenom, actually quite the opposite. He can’t run, jump or throw with the best of them, yet he is the undisputed Greatest Of All Time (The GOAT). And that is because he’s without doubt the best prepared, most knowledgeable player on the field. His knowledge makes up for his lack of physical prowess, in a game where physical prowess is what most people consider the number one attribute of an athlete’s success. Well Tom friggin Brady proves them wrong nearly every time he steps onto the field.

Tom Brady, the 6th round draft pick, the slowest and least physically able choice among all quarterbacks when he entered the year 200 draft. He was dead last in all physical tests, that is out of the 198 players drafted, Tom was 198. And now, because of his hard work and ability to improve every aspect of his game, his knowledge of the opponent on the field, his understand of his and his teams and his opposition’s strengths and weaknesses and how to exploit them, made him the GOAT.

That my friend, is the power of the review. The review is what will make you a consistently profitable trader and on your way to mastery.

 

 

3 thoughts on “What Makes A Good Trade?

  1. Lou says:

    Any updates on the Junto coin program? Kind of lost track of it. I did join with a $100, I believe. I gathered you stop doing YouTube videos, since I haven’t seen any in 2019. Anyhow, I’ve just signed up for the 2.95/month program to be in touch.

  2. Robert Leonardo says:

    Good points on preparation Ernie. The basics are so often overlooked as everyone is waiting for the magic black box to do the work for them, and indeed the “black boxes” are getting more impressive, but you still have to show up prepared for work every day.
    Have a good day Ernie,
    Go Steelers 😎

  3. Dave Bigos says:

    Great article, Ernie . Our journey through trading, investing and life is about
    education, trials & error , overcoming, study & preparation , execution & adjusting .
    I could go on but I think we all get the picture .

    The football field is very much like our lives ,trading & investing . Moving forward…
    Then your sacked for a loss … Gain a little then just enough for that first down….
    You continue –up -down — back — even sideways toward the goal line ! Once in a
    while you connect with a big one .. The Bomb — touchdown ! Yet it is those
    getting those first downs that keep you heading to your achievements .

    You can add many names along with Brady here is two Joe Montana & Mike Singletary.

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