Making a Plan & Trading a Plan are Two Different Things
Not knowing what you're looking at is frustrating, but knowing what you're looking at and NOT being able to execute it is utterly demoralizing!
Does this sound familiar:
You took the time to analyze the market from top to bottom…
You created a plan…
You have an ideal trade…
The market is doing precisely what you anticipated…
Your A+ trade is lining up…
You start to question your thesis when it's a few ticks away and cancel the order…
It bounces where you thought it would…
It runs up a few points, and you think, "shit, my thesis was right..."
Then you market order late and out of position…
Price comes back down to retest your original desired entry and stops you out…
Everything happened as planned, just without you.
It's a common issue; it's not just you. This very scenario has happened to me countless times and it used to knock me off my game plan, or worse, revenge trading to get it back.
But why is it happening, AND most importantly, what can you do about it?
Each of the 3 phases - analysis, planning & execution- is KEY to your success! Execution is the hardest one to master.
When we analyze the market and write our plan, we're operating from the prefrontal cortex, our brain's center for planning and critical thinking. We're not under stress; we're just looking at the market in context and coming up with high probability scenarios; no emotions are necessary here.
On the other hand, we're under fire when it comes to execution. The market is open; prices are flying around. Doubt kicks in - real money can be gained or lost. We can be proven right or wrong. Fear that we're going to miss out and fear of future regret pops in. This is where emotional decision-making overrides our carefully laid out plan.
Some things that will knock you off your strategy:
Taking an early stop on a planned trade - stops are part of the game, and not every planned idea will work. But, when we allow one misfire to derail our plan, it can lead to anger trading or quickly throwing all context out the window. The first trade of the day is vital.
Unanticipated opening strength/weakness - perhaps an overnight inventory correction briefly runs its course, and we overvalue it, immediately throwing out our plan and chasing price.
Overtrading - getting too sucked into the smaller timeframe lends itself to trying to catch every little move, which will usually distract us from the critical turning points and ideal trades we mapped out just an hour before.
Second-guessing our work (fear) - we see the price coming down/up to our ideal entry, and we allow doubt to creep in because it's coming too fast or we lose confidence. It bounces, and we hop in very late, or worse, try to fight it in the other direction out of anger that "we missed it."
So, how can we avoid these pitfalls? We need to take action.
As someone that had worked with countless executives and others struggling to reach peak performance in the past, I quickly realized I needed to create a system that would ALIGN my ability to ANALYZE the market with the ability to EXECUTE the plan. (and also realizing when my plan was shit)
Things began to change when I focused on fixing my broken decision-making process. So here are some actionable things you can start doing today to work on your alignment. Remember, job one is protecting capital.
Actions to take to STAY ALIGNED:
- In the premarket, take a moment to visualize your plan playing out - take a few minutes to breathe and get into a calm state (away from the screen). Bring to mind a chart and prices whipping around. Allow some of your ideas to win and some to fail. Breathe through this process - continue zooming your mind out to the larger context and ideas rather than zooming in. I do this every day for 5-10 minutes after I write my plan for the day.
- During the market hours, if something doesn't go your way, immediately zoom out. Revisit your thesis; is it still intact? Has anything changed? If you’re not sure, wait for confirmation of these answers before your next trade.
- Pause and be mindful of the thoughts and emotions popping up - are you getting angry, feeling like you want to fight the market, upset that you missed the move? If yes, it's best to step away for a few minutes; the worst thing we can do is take action from here.
- Ask a few more questions - which way are we trending on a larger intraday timeframe (30-min)? Would stronger sellers/buyers allow this price action? How can I realign with what I'm seeing (rather than what I think should be happening)?
- Be honest with yourself - am I biased in the wrong direction? Am I able to execute my edge with the current action? Am I seeing the bigger picture of what is developing in front of me? Do I have an edge today, or am I baffled by the action and feeling out of step?
- Take action one way or another - if you CAN align with what's happening and see clearly what's going on after zooming out, wait for your spot, and drop back into your strategy. If you're NOT able to make sense of what's developing, SIT ON YOUR HANDS. Do nothing, go for a hike, run some errands, clip your toenails, really anything other than putting money at risk.
- Journal what is going on with all of the questions asked in 1-6 so that you can come back to it later, see where your thinking was right/wrong, and try to identify whether your read on yourself/the market was correct in hindsight.
I recall the frustration of knowing exactly what to do - and still failing to do it. It's painful, hits our self-esteem, and causes us to question if we’ll ever make it. It can feel like everyone has it figured out except you.
But, habituation of proper plan implementation and when to realign takes time. There will be many ups and downs along the way.
The key to any growth is to identify mistakes and course correct. Allow the lows to happen without the self-destructive thoughts and learn from them. It's a process that will take time, but being honest with ourselves will give us an added boost of resilience to weather the storm and preserve capital.