I was talking with a new trader in my office with our floor manager trying to get him on track.

“How do you think you are doing?” I asked.

The new trader said, “I think I am doing a better job of sensing what sectors will move next.”

So this is good work but not the whole game as many think.  This is just the start of the game.

Let’s say you think you see money rotation out of a sector.  You conclude that sector will go down.  That is an idea.  That is just an idea.  That is not a trade.

A trade requires the following:

a) What stock(s) in the sector is best to short?

b) What price offers an excellent risk/reward for your short?

c) Will the market take the entire sector higher even with money rotating out of this sector?

d) How long will you hold your short?

e) Is there a catalyst from price action that you can spot to improve your risk/reward?

f) Is there a pattern that you recognize for the trade opportunity that you have seen before?

g) How much size should you take with the trade?

h) How much are you willing to risk if you are wrong?

i) Where will you lighten up if the trade works in your favor?

j) What do you want to see with the price action to get you bigger in the trade?

k) Will you hedge the position?

l) Can you use options to express this trade better?

m) Are there better trades worth your emotional, financial and intellectual capital?

 

Okay I will stop here though I suspect I can think of more questions.

When you answer the questions above, and develop a trade plan then and only then are you now trading well.  Before that your thoughts are just ideas with unprepared trades.

 

You can be better tomorrow than you are today!

Mike Bellafiore is the Co-Founder of SMB Capital and SMBU, which provides trading education in stocks, options, forex and futures. Bella is the author of One Good Trade and The PlayBook.

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