Planning For Contingencies
No one likes to think about the worst-case scenario, or to make a detailed plan to recover should it happen. It’s just one strategy for learning how to trade in a relaxed but focused way so that, should you ever face a severe financial setback, you can recover from it. Trading requires intense concentration and focus, and it’s difficult to maintain this posture when the pressure is on you to perform. Therefore, you have to do whatever you can to minimize any expected or even unexpected psychological pressure.
The most obvious way to relieve such pressure is to think in terms of probabilities and carefully manage risk. By that I mean avoid overtrading, fast markets, and exceptional tick size—be careful just ahead of reports that might drastically affect price movement. Avoid illiquid markets, avoid adding new risk when it appears a trend or swing may be nearing its end.
It’s useful to remember that you may not win on any single trade, but after a series of trades, you will have enough winners to make a profit in the long run. It’s also important to manage your risk. Determine your risk up-front and risk only a small amount of trading capital on a single trade. Doing that will ease a lot of the pressure, allowing you to be more open to see the opportunities that the market offers. Don’t break under the pressure of a potentially fatal loss. Think about the possibility, and be ready to recover from it.
These days planning for contingencies must of necessity include short-term planning. Because the markets have changed so considerably in recent years from what they were many years ago, contingency planning has to include trading simple methods and scalping-type setups. We are in an era of thousands of traders jumping in and out of markets using extremely short time frames. Such trading has introduced an incredible amount of noise into the marketplace.
No longer can the industry claim that speculators are there primarily for the purpose of providing liquidity to the market. I have to wonder why it is not plainly stated that trading from a 1-minute chart is simply speculating? In what manner can it be said that jumping into the market one minute and out of the market 3 minutes later is in any way providing liquidity for the hedger, whose sole purpose is the long-term protection of his position?
Short-term noise is a contingency that must be planned for. Erratic, jerky moves caused by scalping must be planned for. This includes having your own plan for making scalping trades if those suit your personality and comfort level.
Plan for sudden drastic moves in the market caused by stop-running. Increasingly, and especially in the stock market, I am seeing more and more of the sudden and unexpected price melt-down, or equally sudden and unexpected price explosion. You have to learn how to protect yourself from such moves, and you might even learn how to profit from such moves.
Joe Ross
Trading Educators Inc.
Joe Ross, trader, author, trading educator is one of the most eclectic traders in the business. His 50+ years include position trading of shares, and futures. He daytrades stock indices, currencies, and forex. He trades futures spreads and options on futures, and has written books about it all - 12 to be exact. Joe is the discoverer of The Law of Charts™, and is famous for the Ross hook™ and the Traders Trick Entry™.
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