Defensive Traders Finish Last

The topic for this week is to review what high-end traders strive for as they trade.

After 16 years of coaching many different levels of traders, common threads have shown up with those that are very successful. I always look for commonalties that seem to be prevalent and foster successes.

One that I kept seeing was a common way high-end traders traded in an offensive mode as much as possible.  That defensive trading was a fleeting thing and it would be a warning sign that they should exit a trade or start to reduce their exposure.

What do I mean by this? Well, there always seems to be a plan before each trade that begins from an offensive mode. The plan always has all factors of the trade in place, the entry, stop loss, and profit target price. The direction is very clear and the plan is precise.

The definition of offensive: the position or attitude of aggression or attack: to take the offensive, and an aggressive movement or attack: a carefully planned navel offensive.

Successful traders know ahead of time what they’re going to do, what their goal is, and most important what to do if the market throws they a curve along the way. Think about the game of football, if it was played only with a defensive team what chaos it would bring on the field.

High-end traders stay offensive, first, with a plan of attack. One that is carefully thought out and clearly defined before they enter the trade in fact the more precise the better the results and the less the emotion.

Great well thought-out plans minimize or remove emotions because things are defined and there is really nothing to think about but the execution of the plan.

The fact is emotions are eliminated and keep in mind the mental goal is to trade emotionless.  Having a preset plan for the trade accomplishes this.

Lets break the trade down into three parts, the entry, profit target, and finally the   stop-loss, all designed to stay in an offensive mode as long as possible.

The entry – every trade should have a specific plan for the entry price.  Entry points can be refined too. If your trading strategy initiates from a 15-min. chart lets say, and you use a 3-min. chart for your entry, possibly a 25 tick could refine the entry even more. After all, the price will move up and down between the high and low on the 3-min. bar several times. During that time you can determine the best price to get in.  But be conscious of your emotions. The smaller the time frame you focus on runs the risk of greater emotions.

Next, is the profit target. I can’t tell you how many traders DO NOT define this when they enter a trade. It’s important to KNOW what you want to get out of the trade to lock in profits. After all we trade to make profits. If you care to take advantage of a trade and it’s movement “catching a runner” than use SIZE to leverage the trade taking some off and locking in profits and leaving some on to catch a runner. 

Another trait of high–end traders is to lock in cash and use scaling in and out of a trade to leverage the profits and possible movements of the trade.

Lastly, is the stop loss. This is a MUST for traders to protect their profits. It’s NOT wimpy, as you might think to use a hard stop but a smart way to protect a trade from an unexpected wild market moves.

In fact a good trader will usually exit a trade when it goes against them BEFORE the stop is hit, preserving cash and because there is no reason to give Mr. Market money if the reality is, the trade is just not working. Sometimes the best plans don’t work.

Have you ever seen a strategy work 100% of the time?  NO. If that existed we would all be running to trade that way.  Good strategies tend to work 85% - 90% of the time.  So remember losing is just a part of the game and if your trade goes wrong it can be as simple as falling into that 15% - 10% range, and that’s OK.

Experienced traders tend to work at staying in an offensive mode as long as they can and only switch to a defensive mode if the market throws them a curve and they have to do something different.  Defensive mode has they readjusting the approach, minimizing the loss, or taking a smaller profit. They stay in control and know the market is what it is, they don’t second guess it.

Finally the stop loss. I can always tell an inexperienced trader when you rely on the stop all the time.  They will call me and say: “I took 10 trades this week and I was stopped out of all of them.”  This can only mean; 1) they relied on the stop, stayed in too long and went into the hope - wish – pray mode 2) the stop was not set correctly to give the trade room to work or 3) their entry could have been better.

The definition of offensive: serving to defend; protective

An experienced trader will paint a different picture and say I had 30 trades this week and 4 were losers and I got stopped out of one with the rest winners.  They very rarely say they got stopped out of all their losers. Why? Because they use the stop ONLY for emergencies when the market moves too quickly to exit they trade. It’s protection. They exit the trade when their strategy goes off and is not working. They are able to define that it is possible to be in that 15% - 10% range.

So here is the goal for each trade and how to stay in offensive mode as much as possible.

1)     Have a well defined plan and strategy that allows you to have flexibility and precision on the entry and exits

2)     If a trade doesn’t work the way it’s supposed to, go into defensive mode and exit the trade, minimizing the lose or locking in a small profit.

3)     Remember great traders know when the trade is not working and they exit. They don’t allow their EGO cloud their judgement.

4)     Stops are used for protection, they are not to be used to prove a trade is right.

5)     Have specifics in mind to determine the trade is NOT working.

6)     Stay emotionless with well defined plans of attacking the market.

7)     Trade Offensively not Defensively as much as possible