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Scenario Building

As I posted a while back planning for all scenarios in this market is a must.  If you aren’t ready for the unexpected, when it happens you won’t know what to do and will be prone to making a mistake.  But to take this concept a little further, are you planning for all scenarios in each individual trade you take. 

When you put on a trade are you the type of trader who when executed just puts in a stop and hopes for the best?  If you get stopped do you get discouraged and get mad when the stock reverses back into the direction you thought?  The reason that most people don’t make money isn’t for a lack of ideas, it is the planning of these ideas where most traders go wrong.  Most traders have no problem planning for what they are going to do when the stock trades in their favor and think they are planning for their downside by just putting a stop in the system.  What you need to be doing is coming up with a detailed game plan for what you are going to do if the stock trades against you.  Yes you should have a price where if the stock trades there you are exiting the trade, but you should have a detailed plan for how you are going to exit.  Are you going to bid/offer to get out or are you going to just hit out of the trade?  Are you going to scale out or take everything off at once?  If you are bidding/offering, are you prepared for the trade to keep going against you and where do you hit out?  If the stock pauses after you get out and trades back in the direction you thought are you reentering?  If the stock trades to your stop price but doesn’t print are you still exiting.  These are all things that need to be figured out before you even execute a trade. 

As I was reading the great new book by Mike Bellafiore, One Good Trade-Inside the Highly Competitive World of Proprietary Trading, I was reading one particular section where I realized I wasn’t planning my exits well enough.  Now I’m not the type of trader who uses stops, I generally am disciplined enough to bang out of a stock when it hits my price.  Also I know with the algos these days that I need to see volume around my stop price and to make sure it stays there in order to exit the trade.  But when I was reading this great book I realized I am not planning enough.  Mike has one section where he presents an example of the if/then statements that his traders have for each trade.  There was about 30 if/then statements ranging for what he needs to see to hold on to the trade, to what he is going to do if the stock blows through his stop price. 

I know one of my weaknesses is when a stock I am trading or the markets reverse their direction and explode.  This happened to me Friday in Las Vegas Sands(LVS) and to our firm Friday afternoon in the markets.  I paused when LVS hit the high of the and reversed because I was only thinking about my profit target.  I didn’t plan for the stock ripping against me so when it happened I was unprepared.  I think the main reason that we are sometimes caught off guard is that we aren’t planning for every single scenario.  If you know what you are going to do then you will just react instead of wondering what is happening.  Best of luck in the coming week and have a great weekend. 


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