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Management
of
Trading

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Never look for the perfect trading strategy or never try to forecast market movements. Embrace Scenario Planning to eliminate guesswork and frustration from your trading. Enhance both your concentration and your outcomes. No matter what the market does, you know what you have to do. 

There is not any strategy that guarantees consistent victories or accurately foresees market movements with certainty. Even if a system is highly accurate in picking in direction, it may suffer from timing issues (being either too early or too late) or it may subject us to excessive risk relative to potential profits.

 

Many successful traders don't try to predict the market at all. They have discovered an alternative approach. Personally, I've realized my shortcomings in predicting future price movements. While I might get the market's direction correct, I often find myself either too premature or too late in my actions. Or sometimes my timing is great, but the big move I anticipate fails to materialize.

 

Fortunately, for people like me, and perhaps you too, we don't need to have enough skill of predicting future events with unwavering certainty (and if you can, that's fantastic, but this article may not be for you).

 

For those of us who are mere mortals, who misplace our car keys regularly and inadvertently provoke our partners without realizing it (surprise arguments, anyone?), our predictive abilities leave much to be desired. Therefore, we should seek an alternative approach.

The Psychological Shift: It's About Me, Not the Market

"It's not about what the market does. It's about what I do."

 

There is not need to engage in the futile exercise of predicting the market's movements. Instead, we prepare for our actions, regardless of price fluctuations.

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By embracing this mental shift, your trading will significantly improve. You no longer need to waste time predictions that lead to frustration when they do not materialize. Instead, you will chart out your trade from start to finish, no matter what the market does.

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With this approach, you would not b subject to the market influence; you will be in control of your decisions and how you navigate the market.

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And itn't that what many of us aspire to achieve in all aspects of our lives? It is not about controlling our surroundings, as we can never control others, the stock market, the weather, or economic forces. However, we can control our own actions and reactions in response to others, the weather, the stock market, and economic forces.

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We can plan for what we will do if the market (or something else) does X, Y, or Z. And we can even have a plan for when we are unsure..!

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Let me give you a non-trade example. You could have a rule that if something is "may be" you will say "no" until you have time to decide whether it is a "yes" or a "no".

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Or let's say someone asks you to do something, but you are unsure....

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Instead of offering ambiguous responses like "may be", which leaves both the parties handing and necessitates potential future clarification, or, even worse, saying "yes" when you'd rather decline an offer, simply opt for a direct "no' and then add, I'll inform you if I change my mind."

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This approach may not be everyone's cup of tea, but it undeniably promotes transparency and sets clear boundaries for what you are willing to accept. It also spares you the mental strain indecision when you are uncertain.  

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Just imagine, what happens when you apply this rule to your trading. Suppose you have a well-defined strategy, and you come across a potential trade setup, but there are certain aspects for what you are unsure about. In this case, it is a "may be trade". Following this rule, you would abstain from entering the trade unless it evolves into a "yes". To convert it into a "yes" you would need to outline how you intend to manage that trade, despite your uncertainties, and provide yourself with convincing evidence as to why it's a viable trade. It may become a "yes" or may stay a "may be" or a "No" (in either case, you stay out). 

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Life and trading both come with inherent uncertainty, but that doesn't mean we should refrain from taking action. Instead, we can prepare ourselves and take action in the face of uncertainty.

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Imagine, agreeing to a blind date with optimism, only to find it's not going well once you are there. In this situation, it's beneficial to have planned ahead. You could have an exit strategy or even rehearsed a gentle conversation to gracefully end the date and make a quick exit. This proactive approach prevents the mental distress of being stuck in an uncomfortable situation, unsure of how to process. If you had not planned for it this time, it serves as a lesson to prepare for such scenarios in the future.

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The same principle applies to trading. When you have a predefined plan, you have clarity and you can act without the burden of mental anguish. This allows you to stay engaged in present and you can be true to yourself based on the information coming in. But this level of certainty can only be achieved by establishing rules and boundaries for how we act or don't act in certain situation.

 

Before we enter a trade, we must ask ourselves, "what should I do?" Plan it out, and then take a trade, if there is a plan in place. 

Planning Trading Scenario

Scenario Planning is an integral component within a process I refer to as "Analyzing Price Action." In this process, we engage in discussions to assess our understanding of the situation and the critical factors influencing our trading decisions. Analyzing Price Action also entails discussing the prerequisites for executing a trade and establishing a strategy for managing that trade once initiated.

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It is basically re-confirming how we will manage the trade based on our strategy as the trade unfolds.

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In simple words, scenario planning just like saying as "I will stick to my stop loss or target no matter what."

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Or, it may add some rules such as, "I will stick to my stop loss or exit, but I need to out before earnings or any news.

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Or, it may become more complex when using different exit methods on the quality of the trade signal or the quality of the market conditions. 

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People often argue saying "It is difficult to plan for every scenario!" But in fact, we actually need some rules to help in this case.

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Prior to executing a trade, a trader should mentally evaluate each trade, and then follow a specific set of guidelines for managing the trade. 

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Good Conditions + Good Trading setup: Keep the stop loss and target levels unchanged throughout the trade. Consider an early exit only if the price lingers very close to the target and a substantial portion of the profit has been secured. If the price is advancing smoothly and nearing the target, think about implementing a trailing stop loss to safeguard most of the profit and possibly capture more than the initial target.

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Poor Conditions + Good Trading setup: Either stay away from taking the trade altogether or opt for the aggressive trailing stop loss, with the original target remaining unchanged. If conditions are extremely adverse, it's advisable to avoid the trade. However, if they are acceptable, employ the aggressive trailing stop loss, but ensure there is sufficient evidence to justify entering the trade.

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Good Conditions + Poor Trading setup: Although the overall conditions are positive, there are some instances where we find trade setups that suggest both long and short positions, specially at critical levels. In such situations, a trader has flexibility to choose the direction which is favorable as per his thinking and plan accordingly. But he must have enough reasons to justify entering the trade and must keep aggressive stop loss.

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Poor Conditions + Poor Trading setup: In case of unfavorable conditions with poor trading setup, a trader should refrain from trading. Very often, he should close his trading platform so that he cannot place the trades. If conditions show signs of improvement (with chart displayed but the platform closed), he should reopen it and start watching. But as long as conditions and trading setups are poor, he should stay away from trading.

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Good Conditions + Conflicts in setup: Sometimes overall conditions remain favorable, but a trader finds conflicts at critical levels where he encounters trade setups with both long and short possibilities. In that case, he can opt to retain the flexibility to select the direction as per his choice and plan accordingly. Subsequently, he makes the decision whether to allow the trade to unfold or to implement a trailing stop loss.

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Furthermore, a trader has the option to initiate a trade as soon as the first signal appears. In such cases, he uses a trailing stop loss, as a trade in the opposite direction may materialize. If he decides to enter this trade, he must also determine whether he will engage in a trade in the opposite direction when he gets stopped out.

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Improving or deteriorating conditions while in a trade: Conditions can shift while a trade is in progress, either improving or deteriorating. If conditions take a turn ugly while in a trade, a trader should implement an aggressive trailing stop loss. Conversely, if conditions improve during a trade, a trade should grant the trade the same flexibility as one conducted under favorable conditions, as outlined above. In essence, conditions can go from good to bad, or bad to good, and when that happens, a trader should adjust and manage his trade in accordance with the established rules.

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To successfully navigate through this process, a trader must have a clear understanding of what constitutes a favorable trade setup and what characterizes an unfavorable one. While searching for specific patterns, a trader should identify the elements commonly found in trades that exhibit strong performance. Likewise, he should take a note of components present in patterns that tend to underperform.

Stages in Planning Scenario of Trading

To formulate trading scenario effectively, it is important for the trader to possess a specific level of comprehension regarding his trading strategy, the market conditions in which he want to operate.

A trader must need to understand the fact of his knowledge-expertise, competence and capacity for strategic planning are confined and limited to the strategies he has practiced and are good at work. He should not engage himself in predicting precise price movements nor attempt to capitalize on every minor price fluctuations.

Step 1 involves mastering a trading strategy and understanding the market conditions in which it thrives.

At this point, a trader should choose to conclude his trading journey. If he is satisfied with his strategy's performance when adhering to predefined exit methods and leaving traders untouched, that's perfectly acceptable and a trader should continue with this approach.

However, if a trader believe that his strategy can benefit from real-time insights into market conditions and trade setup quality, if he wants to exit winning trades earlier when conditions sour mid-trade, or if he prefer to cut losses swiftly when price does not move as expected, then he should incorporate Scenario planning as an enhancement.

Step 2 entails learning the art of scenario planning and devising potential trade adjustments while the trade is in progress. This preparation occurs prior to entering the trade and involves enacting the trade plan as the price action unfolds during the trade.

For those who utilize automated trading systems, trade management protocols are already integrated into the strategy. They do not need to scenario plan. Nevertheless, scenario planning can potentially elevate system performance by exploring alternative exit strategies rooted in prevailing conditions and setup quality.

Scenario planning can become a part of a trading strategy. It is simply improving our trade rules based on rea-time information gathered both prior to and during the trade.

Scenario planning affords the trader the opportunity to fine-tune parameters based on real-time information. Over time, it becomes evident that not all trades are identical. Some trades exhibit superior while other slightly inferior patterns, but still offer profit prospects. This can potentially enhance the performance of the strategy.

As for whether scenario planning in trading is suitable to a trader, that's something only practice and experience can determine. 

Practicing Trade Scenario Planning

While the price action unfolds, engage in a discussion yourself about the components necessary for establishing a high-quality trade setup:
 

  1. What constitutes the trade trigger?

  2. What will be the appropriate stop loss level?

  3. What is the target for this trade?

  4. How are the overall market conditions at this moment?


As the setup takes shape and the trade trigger approaches activation, scrutinize the available information and make a decision on how to manage the trade. Determine whether to leave it undisturbed, employ a trailing stop loss, or execute a manual exit (and the rationale behind this choice)

If you encounter uncertainties or questions during the trade, make note of them. These questions should be integrated into your scenario planning process. Ideally, a trader should not have any questions while he is in a trade. If any uncertainties arise, scenario planning should provide solutions for these situations, ensuring the trader is well prepared. 

Knowing how to navigate a trade should not be the most challenging aspect for the trader, although it can be a source of stress for many. Scenario planning offers a solution to this issue, yet it requires mental effort and concentration, like meditative practice. 

It is much easier to let the mind drift, take random trades, and hope for favorable outcomes. But this approach often leads to mental turmoil in the long run. In fact the goal is to reverse this mindset. By investing the mental effort before executing a trade, a trader saves himself from future mental distress.

In most of the strategical courses, videos or articles about trading one finds data regarding how to find trade ups, where to place the entry, stop loss and target, and possibly some additional rules and guidelines for trade management.

This essentially constitutes fundamental scenario planning where essential elements of the trade have been meticulously outlined.

A trader is required to evaluate how the strategy performs when applying these fundamental elements. It may perform exceptionally well, or you might identify areas for potential enhancement through more comprehensive scenario planning.

A trader should formulate a set of rules governing how he can elevate performance with scenario planning. He should define the methods and rationale for exiting trades prematurely and cultivate the habit of conducting this planning before initiating a trade.

He should compare the outcomes achieved with the fundamental rules against those obtained through scenario planning. Over time, one approach will emerge as the superior choice.

For certain individuals or specific strategies, adhering to basic entry and exit rules might prove to be the most effective approach. However, for others, reaching a higher level of trading proficiency may necessitate the incorporation of scenario planning into their strategy.

Anyone can integrate scenario planning into their trading approach. It essentially involves determining how a trader will manage a trade before entering it and continuously reaffirming this plan throughout the trade's duration.

Scenario planning can also serve as a tool to enhance trading strategies by proactively preparing for potential developments during a trade. 

Do you have a plan if the trade behaves unexpectedly? 

If the trade is performing exceptionally well, have you considered adjusting your target or implementing a trailing stop loss instead of sticking to the initial target?

Initiating this type of questioning about your strategies and trades is the initial step towards uncovering opportunities for strategy improvement. This process may lead to capturing additional profits or minimizing losses on trades you are already engaged in or analyzing. 

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