This is the time of year that I like to take some of my favorite trading books off the shelf and also find a few new “classics”. I am re-reading one of my favorite non-trading, trading books which is to say it’s a book that has nothing to do with trading techniques but helps my trading process none-the-less. It’s written by a Navy SEAL names Richard J. Machowicz and it’s called “Unleash the Warrior Within”. The book it a fast and entertaining read about one man’s journey as an undersized Navy SEAL and how he overcame is limitations. In the book he outlines and discusses his “Four Critical Keys to Overcoming Anything” that he has as acronym for, ACTE. If you are looking to build a trading plan, or perhaps searching for ways to tweak and improve this 189 page book for you.
It reminds me of an acronym I use and developed when I was teaching myself to trade: DECIDE. Now this was designed to keep me on track and also to prevent me from overlooking aspects of the trade that “newbies” tend to leap past in the all-out excitement of entering a trade.
DECIDE, my three C’s and my three R’s are still all tools I use to this day, some twenty years into my trading. DECIDE stands for Direction, Entry, Chart, Investigate, Deal, and Exits. The first step, Direction, includes something that I have been covering a great deal as of late which is Directional Bias. Direction also reminds me that each time frame can have its own specific market trend (or phase) and that I must identify this first. The second step, Entry, can only be determined AFTER I know the Directional Bias and market trend since the underlying psychology of the market is what I use to choose which entry is most effective in a specific environment. (e.g. trending market = swing trading or Wave reversal)
The third step, Chart, brings me to specific price levels, price patterns, and other tools that I will use on the price chart. It’s the chart itself that I watch for my entry and confirmation, not news. That doesn’t mean I ignore fundamentals. In fact, the next step, Investigate, is to make sure that I respect the data releases, speeches, and other events on the calendar that I call “hot zones”. These hot zones can increase the volatility of the market and I must be aware of what “stories” and data the market is considering and reacting to aka discounting.
Deal, the fifth step brings me to my order entry platform and I consider what orders I can proactively place as limit or stop orders so that my trading plan is ready to be sprung like a trap for price movement. (*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results.) I can’t always do this and sometimes I must wait but I am always considering how and when I can park an order to keep me from having to depend upon watching the right chart at the right time and using market orders. Sometimes just a few moments of distraction – a ringing cell phone or a knock on my office door – can take my eye off the chart and I can miss a crucial entry (or exit) so I want to have as much ready as possible to prevent this. Speaking of orders, do not forget your Exits, the sixth and final step. Exits are both profit target and stop losses. I want to have both these prices written down at the very least. I will admit that I do not always have my stop order live, and that after all these years I do have the discipline for mental stops but I have never been one to say that a stop order is always best to have waiting in the market. There are occasions I have outlined in my first book and also taught for nearly 15 years, that include what I call “time-based stops” and these are used around economic releases. I call them “60 second stops” although very rarely they can be extended to three to five minutes. Of course this is only for advanced traders with the risk tolerance and capital to take (sometimes) significant losses! I believe that trading around economic releases always involves higher risk. (*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results.)
Between now and the New Year I will be outlining discussing DECIDE, my three R’s and Three C’s. It’s a perfect time to review these ideas as we prepare for 2011.
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