The world is madness, full of chaos as we scurry through our happy little lives. You may be doing well today, have everything figured out, and things are just clicking. But bam! Mean-spirited and seemingly random outside forces can swoop right in and ruin your life’s pleasant party. Just like that, you are swept up in it, with thoughts and emotions going a million miles per hour. Off-kilter and off-balance, you are now more likely to operate out of fear (looking at the future with negative thoughts or outlooks can do a number on you). As traders, we can’t allow this to happen even for a moment.
Unforeseen outside forces are quite common for us traders, crashing our party. Have you been buying up dips for the past six months? Have you been banking on a surefire setup that has been working for the past year or more? Well, guess what? That may not work anymore. Adapt or die. Acknowledge this or be prepared for some long-term pain. This is why as traders, we need a playbook: some bedrock of knowledge that we’ve compiled for ourselves that we can look to, cultivate, nurture, and fine-tune over time. When the world turns to madness, we know what to do, even if the best play is simply no play at all, or at least until you figure out how to retain an edge over the market again.
A big point that needs expanding upon is “edge” and the everlasting efforts dedicated to keeping it. The ultimate goal of that playbook is to possess details and steps on how to retain that edge. From my own experience, all of my written down or documented setups are all about having the best odds if (most) everything lines up. Doing that over time, under the right market conditions in accordance with that play, you have yourself a reliable setup in the ol’ playbook that you can fall back on.
Know when that edge is best kept and in what ideal market conditions, and know when not to apply that play. Each overall condition of the market determines what play to refer to in the playbook. For example, I like buying dips on overall uptrending markets (this is overly simplified, folks). Once you have that corresponding market, you know what play/setups to start looking for. Another example: I just try to have a solid play for uptrending (greed), downtrending (fear), or consolidating/choppy markets (indifference/confusion or lightly bubbling fear or greed). If you are just starting out and have not been able to thoroughly test that market condition, then paper trade, trade in small positions, or just sit back and watch/take notes.
In that chaos of fear, or blinding momentum of greed, it’s just nice to have something solid and set in stone in front of you. It ties in with keeping up a routine, focusing on the process (not the profits), and the constant maintenance of a playbook, which actually has another big purpose that helps you grow as a trader. Personally, it incentivized me to collect data over time. That way, you not only know the stats on how your setups are actually working and if they truly give you that edge, but also it really helps you know if you are expanding and improving. How will you know if you are good at playing stocks on earnings during market open? You will have to paper trade it if you are any good at it. It’s time to backtest, experiment, and test. Let’s see what finds its way into the playbook!
Note: Please paper trade or trade with small size. I don’t like to use the words “never” or “always,” but never use big money when you are testing, experimenting,
Having a playbook is almost mandatory for long-term success. Here’s a list of what I believe is essential for each play or setup in the playbook. This is just a running example, you can create your own criteria for technical or fundamental setups:
- Overall market conditions
- Sector
- Type of stock, ETF, commodity, etc. to play.
- Time of charts (day, week, 5 minutes, 4 hours???)
- When to execute trades (morning, afternoon, closing, pre-market)
- Technical or fundamental details (indicators or company analytics that you base things off of)
Again, all of this is just an example. Include a running in-depth criteria and multiple layers to get to the A+ trade setup that you know you can consistently execute. The play that gives you the best odds, the best risk to reward. You know all this because you’ve tested over hundreds of tests over time and over different market environments. You have this all written down (more than likely digitally) and as you notice finer and finer nuances, you make note for the future.
I’ve worked on one setup for a year plus. Most of my plays/setups are usable after several months of practice and collecting data. Even when they’re playable, I still find myself tweaking and refining each of them. I believe for real longevity, a fully utilized playbook that you can refer to when outside elements throw at you is mandatory. If the markets are the ocean, then your playbook/rules/guidelines is the boat. When the seas are rough, you know what kind of line to use and what kind of fish you should be going for. Or maybe, the ocean is telling you to reel in your lines because it’s unsafe and not worth the risk. Better to stay on the shore today.
Thank you, playbook, for keeping me safe.
