How many decisions go into a single trade
Think of your last trade and count how many decisions it involved. Whether to get in, with what size, where the stop goes, whether you move it, whether you add to it, when you get out. Each of them is made either beforehand, calmly, or during the trade, when price is moving and your money is already in the market. And for each one you have a clear answer, a rough one, or none.
In skydiving, as much as possible is decided on the ground, and in the air you only carry it out. The decision is made before the jump. A trading plan moves as many decisions as possible to before your first trade, and nine questions show you where your plan already stands and where you still say "roughly".
What is in this article
- How to answer the nine questions
- Before your first trade: your state and your risk
- The entry: only on your signal
- In the trade: stop and target are already set
- The emergency plan for a bad day
- After the session: a grade for every rule
- The worksheet to fill in
How to answer the nine questions
The psychologist Brett Steenbarger writes in The Daily Trading Coach which rules belong on the list at a minimum: rules for risk, for taking breaks after large or multiple losses, for entering at defined signals and for preparing for the trading day. In the evening, every rule gets a grade.
From this I have built nine questions that follow the trading day, from the first look at the charts to the review in the evening. Answer each with one letter. Y means yes, you have a clear answer. R means roughly. N means no, you have no answer.
Wherever you say "roughly", you decide in the moment, from your gut. I call it the swimming zone. Most traders keep their rules in their head, and that is where the rules get renegotiated at the decisive moment. Be honest when you tick, nobody sees it but you.
Before your first trade: your state and your risk
Before anyone gets on the plane, they check the weather and listen to their body. If you are not fit, you do not jump.
One of my clients trades the 9 a.m. open. In the morning he first takes his child to daycare, then sits down at his computer. He came to me because he could not concentrate and was not really present in his trades. His child had been at a new daycare for six months, and every morning he handed over a screaming child reaching out for him. Anyone with children knows that feeling. Inside, he was waiting for a call from the daycare, right into the session. What helped was a small addition to his preparation, a short check on how he is doing before he looks at the first chart. Today he sits there with a completely different level of concentration. What such a check can look like is described in Trading psychology: the four phases of your trading day.
1 Do I know how I can tell that I had better not trade today?
The second part of preparation is your risk per trade. That must not be a feeling, it has to be a clearly named number. "I'll see how much I risk" is a hole in your parachute, and you do not know how big it is.
Think in percent, not in dollars or euros. Steenbarger writes that experienced traders think this way, and then a 20,000 dollar loss on a 2 million account feels no different from 500 dollars on 50,000.
With a prop account there is an extra trap. The firm gives you an account of 50,000 dollars, but you may only lose 2,000 of it. If you risk the usual 1 percent and calculate it from the 50,000, you put 500 dollars on each trade. That sounds careful, but it is a quarter of your buffer. After four losses in a row the account is gone, and with a 50 percent hit rate, four losses in a row show up within 20 trades almost every second time. With a prop account you therefore calculate your risk from what you are allowed to lose.
2 Do I know what percentage I risk per trade at most, and how large my position is as a result?
The entry: only on your signal
You only jump over the right spot. If the spot is not right, the plane flies another round, and another. The risk of jumping in the wrong place is so high that it is better not to jump at all.
In trading, you have to know how you recognise your entry signal, and not roughly or a little. If your plan calls for an A+ setup and you see a B setup, you do not jump. Doing nothing is a strategic decision. Brad Barber and Terrance Odean analysed the accounts of more than 66,000 households, and those who traded most earned 11.4 percent a year on average. The market returned 17.9 percent over the same period.
3 Do I know how I recognise my entry signal?
The less comfortable moments are the ones in which you want to get in although your signal is not there. The urge feels like a signal, but it comes from you and not from the chart. Sometimes it is boredom, sometimes you want to win back the last loss right away, sometimes price takes off without you and you want to be part of it. What winning it back feels like and how to notice it early is what I describe in Revenge trading: catching the moment emotion takes over.
4 Do I recognise the moments when I want to get in although my signal is not there?
In the trade: stop and target are already set
In freefall, the opening altitude is fixed. I look at my altimeter, and when the altitude is reached, I pull. It is decided on the ground. The opening altitude is not negotiated, and neither is your stop.
Before you enter, it has to be clear where your stop is, where you take profit and what you are allowed to change while the trade is running. Whenever your thinking starts to drift in another direction during the trade, you are on the wrong track.
Profit needs a rule too. The market does not set it, your exit rule does. Common ones are a fixed price target, twice the risk, a stop that trails the price, or partial profits at fixed points. Steenbarger counts clear profit targets and stops among the rules to start with.
5 Do I know where my stop is before I enter?
6 Do I know where I take profit and what I may change while the trade is running?
I do not control the market. What I set in advance, I control.
The emergency plan for a bad day
Nobody in skydiving likes to think about the moment when the canopy does not open properly. That is why you practise on the ground until every move is automatic, and decide in advance by which altitude the decision has to be made. For the case that you can no longer act at all, there is the automatic activation device, a small unit in the harness that opens the reserve by itself. If it fires, something has already gone wrong.
The emergency in trading is the day that goes wrong, with two or three losses in a row and a daily loss that hurts. Days like that are not rare, they are normal. With a 50 percent hit rate you have to expect around six losses in a row within 100 trades. And that is exactly when clear thinking is at its weakest and the urge to win it back is at its strongest. Joshua Coval and Tyler Shumway studied professional traders at the futures exchange in Chicago. Those who had lost in the morning took above-average risk in the afternoon about 16 percent more often than those with a morning gain. So it is not you, it is the moment, and that is why the rule has to be in place beforehand.
For a day like that you need two rules. The first says when you take a break and what you do then. The second says when you stop for the day and what is off the table from then on, meaning no new trade, no larger position and no moved stop. A time of day can be that limit too. "After three hours I stop" is a rule in its own right.
7 Do I know after how many losses in a row or at what daily loss I take a break, and what I do then?
8 Do I know at what point I stop for today and what is off the table from then on?
With a prop account, the firm sets a daily limit. That is your automatic activation device, not your rule. Your own limit sits above it and kicks in earlier, for example at half.
After the session: a grade for every rule
After every jump there is a debrief, even though almost everyone lands safely. After the trading day, every one of your rules gets a grade. Steenbarger suggests a report card for this, from A to F, and anything worse than a B becomes the goal for the next day. It is a nuisance, and that is exactly what a trading journal is.
9 Do I check after the session whether I kept my rules, regardless of profit or loss?
The worksheet to fill in
Now look at where you have the most R and N answers. At those points you still decide in the moment today. Take the one question where you are swimming the most and turn your answer into an if-then rule, for example: If I have lost half of my daily limit, I close the platform and write the day into my journal. How to build a sentence like that so that it holds under pressure is described in Why you break your own rules even though you know them.
The worksheet contains all nine questions, space for your answers and for your first rule. You can fill it in on your computer or print it. For now it is only available in German.
Download the worksheet (PDF, two pages, in German)
Read your rule every day for two weeks before your first trade. In the evening, note in your journal whether you kept it, with yes or no. And if you already have a fixed setup, test it on 100 trades. Under pressure, only what has become a habit holds.
How I work with this
In coaching we take the questions where you ticked R and look at your real trades to see what happens in those moments. Sometimes the rule is missing, sometimes it is there and does not hold under pressure, and we work on those two differently.
The first step is a short, non-binding intro call.
About the author
Angelika Behling is a performance coach for traders. More than eleven years of coaching experience and over 410 traders and teams supported. Contact and booking at coachfortraders.com.
Sources
- Steenbarger, B. N. (2009). The Daily Trading Coach, Lesson 15: Pressing: When You Try Too Hard to Make Money (minimum set of rules, end-of-day report card), and Lesson 27: Build Emotional Resilience (percent instead of dollars).
- Barber, B. M. & Odean, T. (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. The Journal of Finance, 55(2), 773–806. (66,465 households at a large discount broker, 1991 to 1996)
- Coval, J. D. & Shumway, T. (2005). Do Behavioral Biases Affect Prices? The Journal of Finance, 60(1), 1–34. (Proprietary traders at the Chicago Board of Trade)
- Losing streaks: own calculation at a 50 percent hit rate. Four losses in a row occur within 20 trades with a probability of 48 percent; the longest streak in 100 trades averages six.