Starting the new year fresh can be a great idea. Despite the drop and pop we saw last year, it may still be a good time to think about resetting your trading strategies and get a fresh start.
Let’s face it: 2020 was a big year. Unprecedented circumstances created unprecedented volatility (vol), which likely tested your trading strategies and psyche. Did the swoon, recovery, and election-year vol leave you scratching your head or licking your wounds? However you landed, it may be time to take a step back and reassess.
Think of hitting the reset button as a realignment of head, hands, and heart back to their default settings. If you do it right, you might even get a free upgrade to a new optimized operating system.
Your head—actually, your mind—contains the psychology of trading. It’s about the mental game—keeping your emotions, cognitive biases, and lapses in logic and reasoning in check. Your hands are in charge of the taps, click-and-drags, and selections you make as you set up and monitor your charts and fundamentals. And the heart? That would be how you manage trades—from entry to exit. It’s what pumps the blood to your hands and head and keeps your trading strategy alive. Ready to hit reset?
A year like 2020 was probably tough on the mind. But it wasn’t just about the markets.
Many of us had to deal with the stressful realities of illness in our families, kids home from school, and the transition to a socially distanced life. How did anyone manage it all and still have mental capital left for trading? For the future, consider some of these helpful strategies:
1 – Stick to routines.
Some people approach trades with a disciplined approach, but then abandon the plan mid-trade due to fear, greed, or boredom. If you have a profit target and a stop order all set, don’t obsess. Of course, you don’t want to “set it and forget it,” but you don’t need to watch every tick, either.
2 – Don’t fight stress; manage it.
Markets are uncertain. Uncertainty is risky. Risk is stressful. But that’s not necessarily a bad thing—stress is a natural mechanism that lets us know when to be alert and focused. Fighting it can amplify discomfort and create distraction. What’s your response? Get up from the computer, get some exercise, practice mindfulness. If you’re still stressed out, that might be a sign your risk is outside your comfort zone. So, consider dialing it back.
3 – Consider cognitive bias.
Psychologists can point to a dozen or more biases and fallacies that humans fall prey to when making decisions. Here are a few common ones:
We’re all human, but that doesn’t mean we need to fall for these and other lapses in thinking. Recognize them for what they are. Work to keep them out of your trading decisions.
How are your chart setups doing these days? Did 2020 blow a hole in your strategy? Did a spate of vol cause you to monkey around with your parameters? If so, it may be time to reassess and potentially revert.
For example, when the COVID-19 pandemic first hit, the markets reacted violently—on the downside and upside—and much of the chartist’s tool kit went out the window. Support and resistance levels, crossovers, overbought and oversold measures, and vol overlays (the Cboe Volatility Index [VIX] went from the mid-teens to the mid-80s in about three weeks) are just a few of the metrics that didn’t display much certainty.
Did you make adjustments? Are you ready to revert back to your old strategies? Maybe you want to consider something new. Chart Describer is a newer tool on the thinkorswim® platform from TD Ameritrade. It scans the universe of technical indicators and shows you which ones are in play. If an indicator flashes potentially significant results, the platform will ask if you want to add it to your chart (see figure 1).
FIGURE 1: CHART DESCRIBER HAS YOUR BACK. On the Charts tab in thinkorswim, type in a symbol and hit that box with the little “i” (right next to the Edit studies beaker). In this example, Chart Describer identified three indicators—exponential moving average crossover, a standard deviation channel, and the nine-day moving average—to keep an eye on. Chart source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Monitor the markets brain-free with Alerts on the thinkorswim platform from TD Ameritrade. Under the MarketWatch tab, select Alerts, enter a ticker symbol, and set alerts based on whatever criteria you want: price or vol levels, crossovers or other technical signals, or even fundamental triggers such as dividend or earnings information. They’ll pop up on the screen when you’re logged in, and you can also set up email or text alerts.
If you decide to try something new, you can always do so without risking a dime with the paperMoney® simulator. Test out new strategies and indicators. Experiment with position sizes or entry/exit points (more on that next). And when you’re done, you can literally hit the reset button. Just select an account, and under the Monitor tab > Activity and Positions > Adjust Account, select Reset All Balances and Positions.
It’s too bad the real world doesn’t work like this.
The trade life cycle: It’s the entry, exit, and everything in between. So, all that stuff about trading psychology and checking those charts—the head and the hands—comes down to pulling the trigger on the way in and the way out. That’s the beating heart of every trade.
Does this scenario remind you of volatile years? Suppose all your go-to indicators converge on one entry point, so you place a trade. Then the market hits a pocket of illiquidity—common during vol spikes—that blows through your limit order straight to your stop order, then sharply reverses. Your instincts were right, but on this trade, you lost money and a potential opportunity.
If 2020 taught us one thing, it’s that going all in or all out at one price can potentially be a disadvantaged way to trade. But there are a couple of alternatives.
Scaling orders. Instead of putting your entire unit size at one price, consider dividing it by two or three, and place orders above and below your target level. That way you can participate even if you “just missed it” and average your entry point if the market overshoots your level by a bit. In other words, scaling can help to spread out your risk. You can also potentially scale your exit points. Zero commissions for online stock, exchange-traded funds (ETFs), and options orders have changed the math behind order scaling. This applies to U.S. exchange listed stocks, ETFs, and options. A $0.65 per contract fee applies for options trades.
Options for protection. In the scenario just described, instead of a stop order, what if you had bought a put option at a strike price at or near your stop? Consider weekly options to get short-term protection. If there’s a sharp move and reversal, you can participate in the upside, minus the cost of the option.
At its heart, trade management is really about managing your objectives and adjusting as needed.
The flow of your trading life is often at its best when your mind, heart, and hands work in sync. As market conditions evolve, check in with yourself and occasionally reset if necessary.
Find your best fit.
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Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Doug Ashburn is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
The paperMoney® software application is for educational purposes only. Successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period, as market conditions change continuously.
A trailing stop or stop loss order will not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
Because they are short-lived instruments, weekly options positions require close monitoring, as they can be subject to significant volatility. Profits can disappear quickly and can even turn into losses with a very small movement of the underlying asset.
Market volatility, volume, and system availability may delay account access and trade executions.
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