After You Plan…Do You Trade That Plan?

From the Community Forum (July 12, 2010)

Tepid action: Team, this is the “anti-Jerry Lee Lewis” day.  Not a whole lot of shakin’ going on in the market today.  Why?  Because Alcoa kicks off earnings season.  By itself, it’s not a big deal — expectations are really low.  Are they too low?  The only thing that I know for certain is that I certainly know nothing about Alcoa’s earnings.  The technical trade was last week when AA was way oversold, the worst performer in the Dow, and the Dow was poised for an oversold bounce.  But that was last week’s trade.  Now?  Refer to my prior comment re/ the thing I am certain about.

I got nothin’.  :o(

But as someone noted a while ago (my apologies, I forget who mentioned this), there are many sectors right at resistance.  Now, doesn’t this set up a “sell the news” situation, where substantial buying energy has been expended in pushing those stocks up to resistance.  Those buyers are no longer buyers — they are potential sellers (“TA for Non-Technician” Stuff).

I am being very, very cautious right now.  I just don’t have that much going on.  Very small positions in some tech stocks I like so that I am “involved”…but my current “big picture” bias is for a choppy market within a head-and-shoulder pattern.  That means…I’m not expecting a big multi-week rally.  As such, my positioning is in sync with my bias — I’m not completely flat (i.e., 100% cash).  Why?  Because I’d only be flat (or short) if I was expecting an immediate selloff.  That’s not my expectation.  Do I think we go lower?  Sure — but I just don’t know when.  I’ll let Mr. Market make that timing decision and will follow it like a loyal dog following my master.

I am not aggressively buying dips…because I don’t expect the market to move much without me.  I don’t perceive much risk in missing my chance to hop on the Love Train before it pulls out of the station and heads north.  Again, I perceive the market to be choppy.

Now, others may have a different take than mine…and I think that’s a good thing.  My only suggestion is this: Make sure that your positioning and your actions are in accordance with your stance on the market. 

This is important (and one of those obvious things only after it becomes part of your awareness): We have the most lucid thoughts when the market is closed.  That’s when we do our best thinking (at least I do).  So we make well-reasoned decisions in a calm environment. 

But then the opening bell rings and the market moves 0.5% in the wrong direction.  Suddenly the heat of the battle gets in your way and you completely forget about your calm, well-reasoned thoughts and conclusions and opt for taking action based on the immediate action that is flashing before your eyes.

Then the market closes.  You go about your business, but also have a nagging feeling that something is wrong.  You then come back to do  your homework after the family is taken care of and you have some quiet time.  That’s when the fun starts — you look at all the things you did earlier in the day and realize that you completely abandoned your analysis right when it was most needed.  Put another way, you cleaned your gun and polished your holster, but then ran into battle so fast that you forgot to bring your gun.  That scenario rarely ends well…except for the other guy who brought his gun, shiny holster, and plenty of ammo.

Trade according to your plan.  Do that, and you get instant feedback!  If your trading is not going well, then re-evaluate your plan.  Perhaps it needs revision and/or adjustment.    But you’ll only know that if your trading is in accord with your plan. 

If there is a conflict between your trading and the plan that was crafted by your thoughtful analysis, then you are in a really bad position.  If trading goes well, was it because you were lucky or because your plan was…wrong?  (Remember — we’re talking a conflict between your trading and your analytically-based plan).  If your trading is going poorly, is it because you’re a lousy trader with a good plan…a good trader with a lousy plan, or a lousy trader with a lousy plan?  You just don’t know!  And you don’t know because you’re getting no feedback — only input.

Here’s an analogy: I’m taking some golf instruction from a very, very good instructor.  His mind works the same way mine does (not altogether a positive for him).  We “connect”.  He isn’t worried so much about whether I’m putting or chipping the ball close to the hole.  He’s focused on me doing things the exact same way every time.  He is focused on my technique, not the results of that technique.

Why?

Because once we get the technique dialed in and consistent, then we can adjust the little things that will make a big difference in the results.  A sniper does the same thing.  You can’t make the adjustment in your sighting if you don’t see where the last round hit.  When you see the dust pop of the last round, then you know that you’re off a bit to the left, right, etc.  But if you don’t see the dust pop, then you get no feedback.  You’re shooting blind.

So take a sec, withdraw, and now focus on your plan…which should be based on your analysis.  Write your plan down.  Keep notes.  Each day I put my pre-recording Strategy Session notes in my Calendar.  They’re not perfect, but they’re sufficient for me to look back at any given day and see what I was thinking.  I’ll often look back at those notes.  I want to know whether my view turned out to be correct or not.  When I do that, it’s pretty easy to be humble because I see a lot of mistakes I have made.  But if I don’t reflect on those mistakes, then I am missing a key ingredient for learning.  I am cheating myself out of one of the big benefits of doing what I do.  Fail to reflect on your mistakes and you are leaving yourself open to very unrealistic self-assessment: Depending on your most recent results, you’ll either think you’re better than you actually are; or worse than you actually are. 

Most of us are somewhere in the middle — at least that’s where I think I am.

Hope this provides some perspective.

Dan