Creating Your Own Trading Plan

Investing successfully requires a plan. As you build your trading business, you need to continually develop, refine, and adjust that plan. Recent volatility in products like Crude Oil, the Swiss Franc, individual stocks, gold, and certain other sectors reminds us all that we need to build money management into that plan. Controlling risk is not an exciting topic. Whenever I bring it up in a class, most people acknowledge that it’s a critical part of developing their business, but no one seems excited to talk about it. You should be. If you can develop and create risk controls in your strategies, system, and business, you will become a successful and profitable trader. If you can’t, then you won’t. It’s fairly straight-forward. There’s no magic strategy, signal, indicator, or trigger that works for every trader. Those skills must be developed, but they are not universal. Each of you will develop unique skills, whether you realize it or not.

I love stand-up comedy. When I do yard work, walk my dogs, ride the train, or want to de-stress, many times I’ll turn on one of my favorite podcasts, internet radio shows, or recordings and listen to stand-ups. Great stand-ups like George Carlin, Bill Hicks, Louis C.K., Chris Rock, and others have a presence and voice on stage that is so unique and startling that they can approach and tackle topics that many of us don’t get to in our lives. Stand-ups call this developing a voice. If you went out to your local comedy club and got up on stage for open-mic night and didn’t have anything prepared, practiced, or rehearsed, you would likely bomb. But even if you did have your 2 minutes dialed in, you still would have a low chance of making the room laugh. And you’re not going to do it the way Big Jay Oakerson does it. Those comics have developed their voice and delivery over many years of trial, error, practice, and success. And constant feedback. In comedy, you know pretty quickly whether you’re doing well because either the crowd is laughing and enjoying it or they aren’t. I find that fascinating.

What does this have to do with trading? If you took one of the greatest comic’s material, got up on stage and tried to do it yourself, you still wouldn’t necessarily be a success. To be a great comic, there’s no way you can just imitate someone else. Can we be influenced by great traders and coaches like the team at Tackle Trading? Yes. But to become great yourself, you need to develop your own voice: your trading voice. You have to build your own skill set. That skill set may take the same basic framework as another successful traders, but it needs to be yours. You have to choose the strategies you want to use. The time you want to trade is something that will fit YOUR life. I mostly trade in the morning. I wake up, get coffee and breakfast, light my computer up and trade. I use products that are best used at that time of day. I use strategies and order entry techniques that also best fit for that time of day. If someone trades at night, they have to adjust their techniques and the way they communicate with the market. They may even have to build an entirely different trading business. Why? Because the market is different at 10 pm EST than it is at 8 am EST. That’s reality. There’s different information, different catalysts, different players in the game, and yes, different strategies that work. How does this affect you? One of the most important things you can do as a new trader is to identify when you will trade, and THEN you can identify how you will trade. Create a schedule and a routine. It’s important.

This is all part of developing your trading voice. Just like a great comic, when I talk to a great trader, they always have something about the way they see markets, charts, products and opportunities that’s unique to them. I can pick up very quickly if someone is trying to imitate what they learned in a book or if they’re making decisions from a unique perspective that’s developed, refined, and worked on from their own experiences. You want to do this in a way that allows you to build the business that works for you. And here’s the good news: to be a great trader, you don’t have to be funny. Just profitable.

The big news over the last week was in the currency markets. On Thursday morning, the ECB reported that it will initiate a quantitative easing program where they will buy $60 Billion worth of public and private securities per month starting in March. The program announcement created a reaction in the currency markets that was volatile. The Euro was pummeled against the Dollar and other major currencies. The selling continued for a few days, and the currency markets are left with the same basic trends that have been in place for a long time. The Dollar is showing strength. The Euro is in full collapse mode. The Yen is moving into a channel and the Swiss Franc had a gap in response to the Swiss National Bank’s removal of the peg from the Euro last week. Currency markets are active, and if you’re a trader, you need to be paying attention. If you trade Currency pairs, focus on developing skills based on technical analysis. You must know when economic data is due to be released for any currency you trade and other major pairs. You also need to learn when banking hours are open for any currency because when banks are open you have expanding volatility patterns and more movement from the pair. The placement of your entry, stops, targets, scaling in, position sizing, and general trading plan will be predicated on this information.

If you don’t trade currency, should you even pay attention to this information? Yes; you have to. The value of equities, commodities, interest rates, and general market sentiment is driven by currency valuation. It’s something that you need to learn how to read to identify what’s happening. At a minimum, put the Dollar Index on your watch-list and watch it daily. In Thinkorswim, the symbol is /DX.

There were over 50 companies that reported earnings in the previous week that trade more than a million shares a day and are greater than 10 Billion dollars in market capitalization. Earnings results have been mixed, and companies have generally not seen much crazy and wild gapping. There have been a few to take note of, though. One in particular is Netflix (NFLX). The company beat earnings expectations and came in nearly 3 times higher than those expectations. The result was an upward gapping stock that continued to run days after the earnings into Friday’s close. When you make any trade, you must know when the earnings are happening. It’s so central to trading that if you don’t check earnings before you pull the trigger, then you are making a rookie mistake. Develop a routine wherein you identify the earnings date for every company you trade.

Some traders use earnings as a way to identify trading candidates. There are 3 basic approaches to trading earnings:

1. You enter into a trade and hold it as the days approach the event and then exit,
2. Enter into the trade with the intention of holding through the earnings and then exiting, or
3. Enter into the trade after the event has happened as a response to the earnings.

All of these approaches can be used profitably, but only if you have a developed strategy for the situations described above.

Let’s examine each unique situation above and how you could approach them as a trader. The 1st scenario (trading into earnings and then exiting) is generally going to be a time decay or volatility increasing trading strategy – or both. Using strategies like calendar, diagonal, double calendar or diagonal, ratio calendar or diagonal spreads can generate both positive theta and positive Vega. That can be one way to trade the earnings in this way. Another way would be the simple straddle or strangle trade. Some traders prefer this because it generates an open-ended risk graph without the complexity of using separate months. You need to test out what works for you, practice it, and build your rules out on how you will position size the trade and manage it.

The second scenario (trading through the earnings) is generally done by traders who can calculate, understand, and estimate volatility. This includes the gap projection (through tools like the MMM, IV projection, probability cone, etc.) and the Implied Volatility drop that will come from trading the earnings. A classic approach is a Naked or short strangle where you simply sell a call and put on the same stock at the same time. This strategy is a very good way to approach trading earnings. But, you must be an experienced trader who knows how to deal with intraday volatility, hedging, risk graph adjustments, and have a detailed money management system to use it. It’s not for beginners. If you’re a beginner and want to use a strategy like this, do it about 100 times in virtual and detail your rules before you ever build it out live.

The third scenario (trading after the earnings) is a wonderful approach for strategies like bull puts, bear calls and Iron Condors. I love teaching this approach to new traders because it is simple, straight-forward, and is easy to find trade candidates. If you go into a scanner in the morning and look at all of the stocks that had earnings either after the bell last night or before the bell that morning, you will have an instant pool of candidates. Filter it for volume, price, and volatility, and you have a watch-list. To trade the day after earnings, you will need to study gaps, gapping behavior, and learn how to get a good fill price. It’s a venture worth taking on.

The Gold market continued its rally this week as investors bought the precious metal. The general thinking around that market is that it’s seen as a safe haven for those who are concerned about global economic slowdowns, currency devaluation, and risk from equities and bonds. It will be interesting to see how Gold traders respond to the next pullback in prices. Will buyers step in and set a new higher low or will it just be another chance to drag Gold back down to the yearly lows? Only time will tell, but if you’re investing in Gold, it’s probably not for a short term trading reason. The charts show strength for those of you who are simply trading it.

The big event next week comes on Wednesday when the Federal Reserve releases its statement and monetary policy decision. The market is awaiting for any change in the language the Fed has used over the last year in regards to potentially raising interest rates in 2015. I’ll be interested to see what the Fed has to say about the Swiss National Bank, ECB, and currency volatility in general. The release is one of the only economic reports that comes during the middle of the trading day. If you’re day or swing trading at the time, consider building your plan around that meeting.

Each week you get another chance to get up on stage and work your craft. Think of each opportunity as another chance to get better at running your trading business. Just like those great comics, you have to work hard to become great. Over time, you’ll develop your own voice and perspective that no one can take from you.

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