August 06, 2008 at 11:49 am | | Comments 0

Blending Trading Plans & Flexibility

In my previous post, I discussed the biggest enemy of traders. Among other things, I mentioned “formulating a flexible but well-defined trading plan.” Let’s unpack the ‘flexible’ portion of that comment today.

Sidestep Risk & Stupidity

If I plan to stop out of a long position in XYZ below $25, and the stock falls through that level and I hang on in hopes of a recovery, I’m not being flexible – I’m being stupid.

However, let’s say news surfaces from XYZ that they’ve modified their earnings announcement date to tomorrow afternoon as opposed to a week from now as had been planned. For me to be flexible means I roll with the punches and modify an exit strategy accordingly so that I’m not holding the stock when that major news is announced (as per my Trading Rules).

See the difference? Flexibility is crucial in today’s environment, but it must be implemented with some discretion.

‘Outline’ Your Plan

How about another comparison? What if we thought of a trading plan in the way a public speaker uses an outline. The speaker knows what he needs to say and when to say it, but just in case he gets distracted he’s got an outline right in front of him to bring him back on course at a glance without missing a beat.

Similarly, a good trading plan lets us know at any point in time what move we need to be making – whether entering a position, standing pat on an existing trade, or closing out a position at an appropriate level. At times we’ll be distracted by the price action, so the trading plan prevents us from becoming panic-prone.

The ability to pair flexibility with that trading plan comes with experience, but it does come. Just as a polished speaker can read his audience and recognize when certain topics may need additional time and attention based on the response (or lack of) of his listeners, an experienced trader can read his position and gather some feedback from it in order to determine when stop or target levels may need to be modified. But just as a first-time public speaker should stick with his outline, new traders should stick with their game plan.

Cater to Your Account, Not Your Feelings

Many traders think of a trading plan as something which is too rigid to allow for modifications which might be warranted, but that simply isn’t the case. A trading plan should be implemented to benefit you. Only allow it to hinder your poor habits. If you find yourself in a situation where it isn’t accomplishing that, or if the landscape has changed in a way that your original plan did not account for, then don’t think twice about making an adjustment.

The key is that you don’t want to go about making changes in order to accommodate your feelings. Because remember, great traders control emotion by trading without it. So get a grip and utilize your trading plan purely for functional reasons.

As you begin to gather the experience which builds ‘gut feel,’ you’ll come to recognize situations which warrant a modification to your trading plan. But until that comes along, don’t rush it! Stick with your plan like a speaker watching his outline, knowing that it will keep you focused and on the right track.

Trade well out there!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

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