Run Your Stock Market Trading Strategy Through This 3 Question Filter for Greater Success5 min read
Any stock market trading strategy much be looked at critically and objectively before it is employed in the market. A seemingly perfect trading strategy often fails because the traders does adequately understand the strategy or them self. By asking the following three questions in regards to our trading strategy we are more likely find a strategy that works for us personally, not wasting our time and money on something which stands little chance of bringing in profits.
These questions can actually be employed for any situation, not just trading. These questions focus us, and make sure we are constructing a proper plan for action whether it be in relationships, business or negotiation. It is recommended that you write down your thoughts on each question so you reach a sense of finality, truth and self-awareness.
After you have devised a stock market trading strategy, make sure you run the plan through these three questions. You can also go through these questions before you create a trading strategy, but make sure you do it after as well.
1. What outcome do I want to achieve in (or through) the stock market?
Simple enough, but not so fast. This is actually a more complex question than most people realize. Do not say”Make more money” or “Be able to quit my job to trade stocks.” These are vague and mean nothing-you must get precise in what you want to achieve. The results must also be tangible and measurable-“get rich” is not measurable (how much is rich and how will you get there?).
You must also consider the short-term and long-term and how the two need to work together for the same ultimate goal. For instance, if your goal is simple to make money as quickly as possible you will likely try for home-run trades, usually risking too much on each trade. While you may get lucky and have some short-term success over the long-term you will lose everything you have with such reckless action. In other words, this short-term goal is likely at odds with a long-term goal of sustained capital growth into retirement (which is also vague, get specific!).
Take a phrase like “I want to get rich” and widdle it down to a specific target outcome which is measurable and achievable. Write all your thoughts and considerations down, and then take the final result, and put it next to your trading computer so you will be constantly reminded of the outcome you want to achieve.
Your final question related to outcome is: Does my trading plan get me to the outcome I want in the short-term and the long-term? If it does, proceed to the next question. If the trading strategy falls short, go back and rework the trading strategy so it is in line with your desired outcome.
2. What are the consequences of my trading strategy?
You now have an outcome you want to achieve, and everything looks great on paper. Yet, most of us like to indulge our fantasies especially when it comes to our trading strategies. We assume we are smarter than others, and our sheer brilliance will make us money. Wrong. Therefore, write down everything that could go wrong with your trading strategy. Be brutally honest and specifically critique what could blow your strategy to bits.
After you have your list, go over it and ask yourself once again if the outcome you desire is still achievable given the potential consequences of the strategy? Given the realities of the market (no delusions here) can your plan make money? If your trading strategy meets your desired outcome and you can handle the consequences then proceed to the next question. If you can’t handle the consequences your strategy may dish out, then re-work your plan till it is within your personal risk tolerance given the harsh reality of the market.
In this step also consider other consequences outside of the markets. For instance, will the time required to execute the trading strategy take away from family time or beers with the buddies? Can you deal with those consequences? Can your family and friends deal with it? We don’t live in a bubble; our actions affect others, and their actions affect us. Consider the consequences of what you are doing and the effect it will have on yourself and others. Make sure you can handle such consequences.
3. Is my trading strategy consistent with who I am?
This is by far the most important question, as it is where most people fail to account for their individuality. Your trading strategy may look good on paper; it meets your objectives, you can handle the consequences/losses which may result from it, but if it is inconsistent with who you are it is all for not. If you do not like stress and constantly having to watch the market, no matter how much you want to be a day trader it is not going to work–your plans will fail because it is at odds with who are. Alternatively, someone who can’t sleep while they have an open position in the stock market (or any market) is unlikely to achieve long-term success as a swing trader.
Look at your plan and then take inventory of you who you are. Do you and the trading strategy mesh? If not, re-work the strategy. If you feel you will constantly need to fight internal urges and aspects of yourself, then your strategy will likely fail. Or you may need to set physical barriers to keep you from your tendencies, such as turning off monitors after entries, stops and profit targets have been set. This will help you to avoid exiting positions too early if this is one of your tendencies. It may mean having to leave the house or trading office during lunch if you continually violate your rules during this sedate part of the day.
Know yourself, and then build your trading strategy so it factors you and your tendencies into the equation. If you and your trading strategy do mesh, make sure you are not lying to yourself, and then proceed with executing your plan in the stock market. If the plan has passed through these questions in an honest fashion, you will be well on your way to achieving your stock market and financial objectives.
If you are struggling in life in or in trading, run your decisions and trading strategies through these three questions. The questions, if fully and honestly answered, will clarify your objectives, make you aware of potential risk and ultimately determine if the strategy you have chosen is right for who you are. Trading is more than just plunking a plan on paper or striking the buy and sell keys, you must make sure your trading strategies align with your life and your personality. Stop losing money in the stock market (any market) and get honest with yourself. Trading strategies that do not align with who you are will result in let-down after let-down. Trading strategies that have passed through the three question filter honestly and completely, are more likely to bring you success.