Do You Have a Trading Thesis?

07/08/2010 12:01 am EST

Focus: STRATEGIES

The past few weeks has been one of my least active string of weeks as far as swing trading goes in the past year to year and a half. While the markets have presented ample daytrading opportunities, I've found that I've only found a few one- to three-day windows in the past two months worth attacking. I'm sure longtime followers on my Twitter account have noticed my decreased updates, and this is directly related to simply not seeing that many attractive opportunities. However, despite knowing that I would be unlikely to initiate new swing positions the next day, I have still been faithfully reviewing my typical 300-500 charts per night and running through hypothetical trading scenarios to try and build a trading thesis for the following few sessions. Sometimes I will play devil’s advocate with myself and build the case against a thesis to see where I will call the thesis invalid.

The reason I am mentioning this is because I think it’s very important for traders to remain open minded and objective when preparing for the markets. I often see traders fixated on one side of the market, and this leaves them very vulnerable to being blindsided. The markets are not always rational, and even if you're right, it could take weeks or months for the markets to agree. The best traders prepare for multiple scenarios and then react to the markets accordingly. Instead of attacking the markets at the open with preconceived trades, why not build a couple lists and wait to see if the markets confirm any of them? With that in mind, here are a few theses I have been running through and will be watching in the markets.

  • With the markets seemingly fixated on a weakening economy again and possibly pricing in deflation, I am looking to the consumer discretionary sector as a possible target on the short side. In fact, I wrote an article on the recreational vehicles group on Monday night that has a few weak-looking stocks.
  • Another thesis I have revolves around some oil stocks that have held up well through the recent weakness in the group. With the markets oversold and this group coming off several weeks of selling, it’s possible that they could get a short squeeze in their favor soon. I wrote an article on this thought as well, and it should be published on Chart Advisor. Some stocks to look at include CLB and CRR.
  • One thesis I had been working with was rising gold and silver prices, and while that looked promising, I have to admit that it looks like it may need more time or simply not happen. However, I continue to monitor this group and remain open minded to either scenario.

While these are only three thoughts, notice how it covers both a rising or falling market. This allows me to be prepared for either scenario, and while I may not trade anything, at least I will be prepared for either side of the market. While I can't guarantee I will hit every trade, I can guarantee that I'm not underprepared. More often than not, this is enough to provide me with a good risk/reward opportunity and an edge.

By Joey Fundora, trader and blogger, Downtowntrader Blog

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