Biggest Thing to Improve Trading Results and Trading Plan for Wednesday
Mar 3, 2020 Trading Blog
Yesterday I posted my review of the market action and a trading plan for today. In that plan, I wrote how I realized that I was likely in a losing trade that I needed to trim down. I sat and looked at my charts after the market closed and it was clear where I had gone wrong. I then wrote down the likely circumstances that would allow me to exit the trade and the price I was looking for. Today the FED surprised the market with a 50 basis point cut and I was able to exit my trades near the high ticks of the day within a 90 second window of opportunity. What allowed me to do this effectively?
The above process seems simple, but few traders actually do it. It’s the one thing that I think will improve someone’s trading more than anything else. What is it? It’s this: Write your trade plan on paper EVERY day while the market is CLOSED.
I know it seems like the stupidest advice, and I thought so too years ago, until I actually started doing it. This habit of physically writing your plans down after/before market hours is great for a few reasons. Most importantly, doing this process when the market is closed allows you to think through situations without interference from the market. I used to always think I could just sit down and review my charts at 8am before the market opened and easily store it all in my head. I finally realized that my brain at 8 am was not the same brain I had at 9:45 am after the market opened. Everything would get scrambled once the bell rang. I needed some type of anchor where I could refer back and see what I was thinking in a calm state of mind. Putting it all on paper solved this problem.
Today was a great example of why this works. The FED surprised the market at 10 am with the 50 basis point cut. The market spiked for about 90 seconds and I was able to get out almost at the highs of the day. I didn’t have to sit there thinking about what I wanted to do, I didn’t have to contemplate or make any difficult decisions. All of the decisions were already made for me, all I had to do was look at my written plan. I knew WHAT I wanted to do, I knew WHY, and I knew WHICH circumstances would allow that opportunity. If I would have had to sit there and reason all this out while the market was moving, I would have missed it and probably still been trapped in this position. The piece of paper isn’t anything magical, it’s the thought process of creating it during calm off market hours that’s the valuable thing. The paper is the safety net, the anchor, the thing that prevents your brain from scrambling in the heat of market action.
It doesn’t matter if the decisions you wrote on the paper ultimately turn out to be correct or not, that’s NOT the point. The point is to calmly think things through and then be able to execute those thoughts when the bell rings. I’ve always found that my decisions made during the calmness of the market being closed are much better than the decisions I make on the fly during market hours when my cash is on the line. Money does funny things to your thinking. Lizard brain, you know.
So anyway, that’s really it, pretty simple advice. Wish I would have learned it way sooner in my career, it would have saved me a lot of frustration and bad decisions.
Technical Action on Tuesday – Trade Review
As for the actual technical action today, total craziness. The FED is desperate and resorted to that 10 am surprise gimmick just to squeeze every drop of effectiveness out of their move. They could have just as easily have released that info premarket so everyone could have made plans. I’m pretty much back to 100% cash now. I exited the XOP position with about a 3% loss, which wasn’t too bad considering that loss was at about 12% at one point last week. Again, I wrote this XOP trade plan out long ago and committed it to paper. When creating it, I didn’t foresee 4000 DOW points down, didn’t expect the need for emergency FED intervention, didn’t realize how the public would receive the coronavirus information. Just because I don’t think it is significant, that doesn’t mean others aren’t totally panicked by the virus. None of these things were in my original written trade plan. Had I known about them, there’s no way I would have taken this trade. If I wouldn’t have wanted to be in it then, I sure don’t want to be in it now. The loss was a small papercut and easy to get back on the next trade. Sometimes you just have to admit you were wrong, take the small loss and correct the situation. The trade wasn’t a bad one when I created it, but in the end I was proven wrong. Accept that, correct it and move on. But in summary, it was that written trade plan that enabled me to look back at what I was thinking when I made the plan versus what is going on now. The written plan won’t let you rationalize or forget or twist the situation. It anchors you, and that’s a good thing to have when the market goes crazy like it has the last few days.
Trading Plan for Wednesday – I still like the energy play, but I’ll be on the sideline tomorrow. I think this market has some price discovery to do on the downside. Nobody knows where the bottom is right now and I don’t see traders being willing to jump back into this market heavily after what the FED has done. I think this market needs to test the lows and build a base to get its confidence back. I’ve posted a few times that I think the bottom of this market is around 271 and I think we take a look at that level sometime later this week. Until then, there’s really not much to do. I have no desire to chase things upward with the coronavirus wildcard still out there. I’m almost back to 100% cash. I’ve got a small 1/4 position in SLB left and that’s it.
As for the coronavirus, I think it’s way overblown and the hype is ridiculous. But it doesn’t matter what I think. It only matters what the market thinks. All that red on the XOP, XLE and SLB in my account said clearly that I’m the one that’s seeing things wrong.
I came into the day watching that 14.86 level on the downside in XOP and it held most of the day and closed right near that mark at 14.85. I’ll be watching 14.86, 14.61 and 14.09 on the downside Wednesday. I’m watching the 15.60 area on the upside. Believe it or not, XOP stayed well within the established range while the SPY rolled over. I wouldn’t call it a big divergence, but it was a bit of a divergence which could lead to some strength. The real problem child out there today was XOM. Luckily, I exited that trade yesterday at 53.20 and now I have a chance to reload it on any decline later in the week. XOM showed some significant relative weakness today, so there could be more downside. CVX held up well, but they were having an analyst day on Tuesday, so the good news flow helped hold that one up. Had they not been holding that analyst day today, CVX likely would have followed XOM and taken the XLE down. XLE closed 45.67, which is about $2 lower than where I was able to get out on the FED announcement. I’d love another shot at that one down in the 43.50 range.
Anyway, hope the written plan idea trading advice helps someone out there. It’s one of those things that I wish I would have found (and done) earlier in my trading career. Try it, you might be surprised how much it helps. Good luck tomorrow, and I’m always around on Twitter DM if you have questions.