Drive The Bus!
- Posted by downtowntrader
- on January 31st, 2012
“Drive the Bus” is an analogy that I always refer to when I talk to fellow traders about managing entries and exits. In life and in trading, you want to be the one driving the bus. You don’t want to be the one getting driven, because when you get driven you have the propensity to get screwed. Screws get driven, you see.
So what the heck does that even mean? Well, in trading, you want to make sure that you are in as much control of a trade as you can be. While it is impossible to control the outcome of a trade, as a trader there are several things you can do to remain in a position of strength in a trade. You want to be in a position where all your outcomes have been thought through in advance, so that you are not having to react on the fly to a stocks movements. Any trader who has been at this a while has certainly been involved in a stock that stops them out, then turns around. As a trader you get angry that you got suckered and chase the stock higher. Once in, it promptly reverses and stops you out again. Now that you have been burned twice, you may get angrier and jump in early trying to preempt the next move, only to have it go against you a third time. This is what reacting to the stock is, or being “driven on the bus” . You want to do as many things as you can on your terms, and not the markets. You want to drive the bus.
One of the most important concepts a trader must understand, is what time frame they are trading. This is critical. Entries, stops, and targets are all relative to the time frame a trader is working in. Are you playing for a day trade, one swing, an intermediate swing, a position trade, etc. ? I tend to trade for a single swing, which means I am trying to get the meat of a move between pivot points. I am not trying to capture a several month move. As such, my entries, stops, and targets are aligned with this time frame.
Once you understand what you are trying to capture, you can focus on the entry. The entry is also critical to trading from a position of strength. Also, the shorter your time frame, the more important your entry becomes. If you have a bad entry, then you will be at the mercy of the stock even during routine retracements. While the fear of missing out on a trade is understandable, chasing a stock is a losing strategy. One way I force myself to have a good entry is to always focus on a narrow range to base my setup off, or sticking close to pivot highs or lows.
Once you are in a stock, make sure to take profits on strength. By locking in profits, you maintain your position of strength. When the stock pulls back, you have the comfort of profits and the option of adding the shares you scaled out back. It sucks to have a trade be well in the money only to have it reverse back and end up in a loss. My buddy @jfahmy refers to the concept of “mental capital” all the time. Trading is psychologically very difficult, and all traders go through periods where they feel like they have lost it. You want to keep as much of your confidence as possible and reducing exposure on your terms is a great way to stay in control of your bus.
Another important aspect is to understand the environment. Is the market in an uptrend, downtrend or range bound? Are there any important announcements coming up? Is it earnings season? While you can’t control the outcome of any of these, you can make the appropriate adjustments so that you control everything you can control.
One last point to make. Every once in a while, someone will try and usurp you and take control of your bus. This can come in the form of a gap, or surprise news event. Having a strong methodology where you have a solid entry, scaled out profits, and protective stop will allow you to reduce the damage of an event as much as can be controlled. At that point you simply get out of the trade, or step out of the bus so to speak, and wait for the next one.
Good Trading (or bus driving),
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Joey Fundora is a private trader who has been trading for over 8 years. Joey specializes in discretionary swing trading of stocks almost exclusively through the use of technical analysis. (More)