Most Traders Don’t Plan to Fail - They Fail to Plan

Most Traders Don’t Plan to Fail - They Fail to Plan

Most traders’ approach to researching, analyzing, and planning a trade evolves over time. When I first started trading, I was just looking for someone to tell me what trade to take along with entry and exit points.  Eventually, I moved from developing a greater understanding and insight into these “specified” trades to researching and finding trades and managing my own positions. To get to this stage, I couldn’t just do a little research or take a trade that “felt good” or “made sense”.  I had to come up with a process, a checklist, a specific step-by-step plan to guide each and every trade. Let’s walk through a methodical approach to developing a trade idea from the Masters In Trading Week Ahead Trade Spreadsheet, focusing on $DDD.

Where to Start With a Trading Plan – Take a Wide View

The first step in a structured approach is to review markets, sectors, and upcoming major earnings and economic announcements.  Specifically:

  • Review the major indices ($SPX, $NDX and $RUT) and the $VIX on daily, weekly and/or monthly basis relative to the 100- and 200-period simple moving averages and with the Masters In Trading tools (High Value Target Tool (HVT), EDGE Tools (ET), the VIX Trading System and Volatility Visualizer (VV)) to develop an overall view of the markets. For example, here’s a quick look at the $SPX using the weekly expected moves on the VV and the expected range for the upcoming week.  Notice how the lower end of the Expected Move for this past week acted as support?  Also, notice the expected range for next week for planning and monitoring the overall market:
  • Conduct the same review for bonds, metals, energies, and any other sectors that might be of interest to look for broader opportunities using the same tools.
  • Review upcoming economic announcements. For example, there are several major events this week: The Treasury will release their Quarterly Refunding Announcement, The Federal Reserve Board will meet and most likely raise interest rates at least .50% and give further details on their path forward with monetary policy and Non-Farm Payroll will be released on Friday. Each of these can cause significant market and volatility movements.
  • Review any upcoming potential market moving earnings announcements. For example, last week’s earnings releases by $AMZN and $AAPL clearly had a market impact.
  • Finally, review your current portfolio to determine your risk exposure (long or short deltas) and potential trade size/capital commitment.

How To Screen For A Specific Opportunity

With the $DDD trade, our team established an impressive five overlapping reasons for taking action. That's why we always look deeper; one key reason for taking a trade is simply not enough to risk your  money – having multiple angles provides a strong case for investing in smarter trades. Below are 6 reasons that attracted us to this trade.

  • Announced that CFO is leaving
  • Being investigated by a private law firm – internal control/accounting problems
  • Upcoming Earnings while $DDD options trade with inexpensive option premium 
  • $DDD has traded straight down this month
  • Unusual Options Activity – 4,000 June 10 strike puts traded
  • Has moved between the weekly expected move 4 out of the last 7 weeks

What Does an Analysis of the Volatility Visualizer Show

A second reason to consider the trade is based on a review of $DDD on Masters In Trading Volatility Visualizer, detailing the weekly expected moves for the last 3 months:

$DDD has traded beyond the weekly expected move at some point 4 out of the last 7 weeks indicating continued volatility beyond what is priced into the options.

How Does the High Value Target Tool Help Identify Trade Opportunities

Masters in Trading High Value Target Tool compares $DDD price action with 3 and 4 standard deviation price moves based on recent volatility:

Again, this is more support for the trade as $DDD’s recent volatility is significantly higher than expected.

What Other Factors to Consider For Trade Opportunities

There are several other factors to consider in finalizing a trade opportunity, all which support the $DDD trade:

  • Are there upcoming earnings?
    • $DDD’s earnings will be released on May 9th. A review of the options chain and implied volatilities indicate that the options are reasonably priced given the recent history of price moves after earnings
  • Are the options liquid with reasonable bid/ask spreads?
    • $DDD’s options are liquid with narrow bid/ask spreads that make sense to trade.
  • Has there been any recent news, SEC filings or insider trades that could have an impact?
    • $DDD recently announced that their CFO is leaving. There is also an independent investigation concerning internal control and accounting issues.

Looks like full steam ahead for the trade!

How to Determine the Trade

We generally like to go 30 to 60 days out for most trades.  In looking at the option chain, we are targeting the June 17th expiration and suggesting a strangle, buying the 13 calls for $.87 and the 10 puts for $.91.

Review the process identified above and modify for whatever works for you.  If you’re new to trading or this approach, paper trade before risking your hard-earned money.  And remember, sizing your trades relative to your risk parameters and trade management are more important to your success than a perfect trade entry point.

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