BarroMetrics Views: Execute Your Plan!
Advances in neurology have suggested that the trading paradigms of old need to be revised. One of these is the admonition that traders need to execute their plans.
There are two telling points:
- The first is one I have raised in a number of previous blogs: the fact that humans are hard-wired to make decisions like a ‘risk manager’ or by ‘thinking from the gut’ (Impulse Factor). By knowing our decision-making style, we can make the necessary adjustments to make our style even more effective. It’s also my contention that the ‘thinking from the gut’ style makes for a better intra-day trader.
- The second is closely connected.When I first started trading, I was told to execute my plan. Any deviation was considered a breach. The first inkling that this was not how ‘real traders’ executed their trades was when I had the opportunity to watch Pete Steidlmayer in action.
At his boot camp, Pete would run through the possible strategies before the market opened. Then I’d see him take diametrically opposite trades after the market opened! It was only much later that I realised that Pete was unconsciously running scenarios of how the market would look like if he was correct and how it should appear if he was incorrect. In the latter case, under the appropriate conditions, he’d do the opposite of what he had planned.
A good example of this thinking took place for me last night. I described the process in detail as it occurred in the Forum/Twitter service but here is a synopsis.
Prior to the market’s open, I discounted the probability of a trend day up because I felt that with GDP tonight, there would not be aggressive buying activity. When the market gapped open by 10 points, I was keen to fade the open-gap for a day trade. I did so when selling came in the first 15 minutes.
When the market reversed and strong buying volume came in, I did the same before my stop was hit. I did this automatically and without conscious thought. After I initiated the trade, I determined my stop, exit and whether the Reward:Risk justified my staying in the trade,
When I wrote my journal, I recorded that I took the long trade because:
if I had been right about the return to the previous day’s close, I would not have seen the buying volume that took place immediately after the attempted sell-off.
Did I act on my ‘gut-feel’? Sure but that ‘gut-feel’ was based on the patterns I had observed throughout 30 years of trading. Did I breach my plan? Yes so far as the letter of the plan was concerned but in my view this was correct to do: I have a rule which says I can choose not to follow my rules (plan). In this way, I give room for my intuition to come into play.
I’d add that unless our trades are executed via a robot, then some element of intuition must come in to our execution - especially if we are intra-day traders. We are better off recognizing this; just as we are better off recognizing our decision-making mode.
Refer this blog post to a friend or colleague…
