The Three-Step Process for Trading or Investing—Part I

04/10/2015 6:00 am EST


Bruce Bower of SMB Training Blog and highlights the three steps of his strategy for trading and investing in any style and goes further in depth by outlining the specific details of Part I: Plan the Trade.

When investing or trading, we obviously all want to be a success. We get in to the markets because we want to make money, to have a good retirement, and want to feel successful in what we’re doing. That’s certainly a possibility.

As we have discussed numerous times, trading and investing are peak performance activities. They require us to have to make difficult risk/reward decisions under pressure. They push us to our mental limit. We can learn a lot from other peak performers about how to push ourselves and reach the next level.

But there’s one key difference. In our field, there’s no game plan. There is no real instructional manual. There is no well-trodden path to success. There’s no Little Leagues and no farm system. If you want to make it, you’ll have to succeed on your own.

Wouldn’t it be nice to have a game plan? A roadmap for success? A way of thinking about the markets that would put you on the path to success?  It may not grant you the instant capability to make millions of dollars a year, but it won’t hurt. It could even get you on your way.

My new book is designed to do just that. It is a holistic look at investing and trading of any style. The recommendations and lessons are designed to be broadly applicable to anybody, at any stage. It’s more about instilling some basic principles and best practices that anyone can use. I am trying to help you build your own game plan and approach.

The model that I use to describe trading and investing is three-step:

  1. Plan the Trade
  2. Trade the Plan
  3. Review/Tweak

Overall, we should be thinking very carefully about crafting the right plan in advance. Then we make sure that we carry out the plan to the best of our potential and capabilities. Lastly, we look over how we did—both overall and compared to our plan—and we come up with the relevant tweaks.

If this three-part plan sounds somewhat familiar, that’s because it should. It draws on the research about peak performance and the development in expertise in many fields. Peak performers prepare for their practice and main events diligently, always having a plan. They choose several specific goals and train hard to get there or they have a game plan for the big event. Then comes the practice for the big game, where they give it their all and try to stick to their plan, in order to get the most out of their preparation. By planning well, they can stay rooted in the face of stressful or unexpected conditions. Lastly, they diligently review their performance and then think of the many areas where they could improve. They are obsessive about improving their performance in every way possible, never settling.

What does it mean, practically, speaking for your own investing and trading? How do you put this three-part model into effect and make it happen? Let’s drill down into each step and see what’s required, how it works, etc.

NEXT PAGE: What Are the Steps to Planning the Trade?


Plan the Trade

“Failing to plan is failing to plan”—Benjamin Franklin

A plan is your strategy, your game plan for the markets. It is designed to give you a workable plan of action, so that you know what you will be doing. It also should give you a strong filter, so that you can block out the many things that don’t matter and avoid doing stupid or distracting things. Your goal is to have a solid checklist for how you think about and research the markets, for exactly when you put on and take off individual positions, and managing risk overall.

The most basic part of the plan is knowing which markets you will be in. You should define or clarify which markets you will be trading or investing in. Are you in commodity futures or all kinds of futures? Are you investing in corporate bonds? Trading forex intra-day? You should define it in advance, because you’ll want to restrict your focus to these markets and to make sure that you’re getting the most out of it. You will find it helpful to specialize in and focus on the markets that you know.

Not only should you know the markets that you’ll be in, you should have a clear idea of your edge: what you can to do to make money and why it works. If you are a long-term investor in stocks, then you know that a Warren Buffet-style approach relies on buying good businesses at a discount to intrinsic value. If you trade futures using technical analysis, then you are taking advantage of short-term supply/demand dynamics. If you are a macro investor, then you are putting on positions when the macro variables get too far out-of-line with the underlying fundamentals.

You should have a good idea for a style and strategy if you draw upon your own experiences. If you are a complete beginner, remember, it’s okay to copy someone else’s strategy. The more difficult part will be implementing it correctly, because that will come down to psychology.

Your plan should be a checklist. This means a methodical, step-by-detailed-step plan of how you take all of the information in the world and condense and filter it down into something useful and actionable. It should guide you along the way as you see what needs to happen before you put on a position or take one off. You can also use it as a way to determine your overall conviction level in a trade or the right position sizing. You want to have a system to get from A to Z, and have it transcribed.  Mohnish Pabrai, the famous value investor, has a checklist with dozens of items on the list. He uses this list to both to determine what to invest in and also to decide position sizing. He credits the introduction of a checklist with giving him more intellectual rigor in his investing and with creating a significant improvement in his results.

One of the last reasons why we’re so deliberate about how we get into a position is because we use the same criteria to judge when we get out. For instance, your investment process could have three main criteria for buying a stock. Once those three criteria are no longer valid, either because of the stock’s price performance or because you got some of your analysis wrong, then you close the position.

Next, we will discuss Parts II and III of this process.

Bruce Bower, Contributor, SMB Training Blog, and Blogger,

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