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Traders, Who’s “Driving Your Bus?”
02/02/2012 9:45 am EST
Traders who chase the market or don’t properly manage their entries and stop levels are trading at the mercy of the markets, while those who are “driving the bus” control their own trading destiny.
“Drive the bus” is an analogy that I always refer to when I talk to fellow traders about managing entries and exits. In life, and in trading, you want to be the one driving the bus. You don’t want to be the one getting driven, because when you get driven, you have the propensity to get screwed. Screws get driven, you see.
What Does “Driving Your Own Bus” Even Mean?
Well, in trading, you want to make sure that you are in as much control over a trade as you can be.
While it is impossible to control the outcome of a trade, as a trader, there are several things you can do to remain in a position of strength in a trade. You want to be in a position where all your outcomes have been thought through in advance so that you do not have to react on the fly to a stock’s movements.
Any trader who has been at this a while has certainly been involved in a stock that stops them out and then turns around. As a trader, you get angry that you got suckered and wind up chasing the stock higher. Once back in, it promptly reverses and stops you out again.
Once you have been burned twice, you may get even more angry and jump in early, trying to preempt the next move, only to have it go against you a third time. This is reacting to the stock, or being “driven on the bus.”
You want to do as many things as you can on your own terms, and not on the market’s terms. You want to drive the bus.
One of the most important concepts a trader must understand is the time frame in which they are trading. This is critical.
Entries, stops, and targets are all relative to the time frame in which a trader is working. Are you playing for a daytrade, one swing, an intermediate swing, a position trade, etc.?
I tend to trade for a single swing, which means I am trying to get the meat of a move between pivot points. I am not trying to capture a several-month move. As such, my entries, stops, and targets are aligned within this time frame.
Once you understand what you are trying to capture, you can focus on the entry. The entry is also critical to trading from a position of strength.
Also, the shorter your time frame, the more important your entry becomes. If you have a bad entry, then you will be at the mercy of the stock even during routine retracements.
While the fear of missing out on a trade is understandable, chasing a stock is a losing strategy. One way I force myself to have a good entry is to always focus on a narrow range on which to base my set-up, or sticking close to pivot highs or lows.
Once you are in a stock, make sure to take profits on strength. By locking in profits, you maintain your position of strength. When the stock pulls back, you have the comfort of profits and the option of adding the shares you scaled out back. It sucks to have a trade be well in the money only to have it reverse back and end up in a loss.
My buddy, Joe Fahmy, who is also a Traders Expo speaker, refers to the concept of “mental capital” all the time. Trading is psychologically very difficult, and all traders go through periods where they feel like they have lost it. You want to keep as much of your confidence as possible, and reducing exposure on your terms is a great way to stay in control of your bus.
Joe Fahmy: The Myth That Could Be Your Downfall
Another important aspect is to understand the environment. Is the market in an uptrend, downtrend, or range bound? Are there any important announcements coming up? Is it earnings season? While you can’t control the outcome of any of these, you can make the appropriate adjustments so that you do control everything you can.
One last point: every once in a while, someone or something will try and usurp you and take control of your bus. This can come in the form of a gap, or a surprise news event. Having a strong methodology where you have a solid entry, scaled-out profits, and a protective stop will allow you to reduce the damage of an event as much as can be controlled. At that point, you simply get out of the trade—or step off the bus, so to speak—and wait for the next one.
Good trading (and good bus driving) to you!By Joey Fundora, trader and blogger, Downtown Trader