I started trading when I was 21. Within 3 years, I had my own trading company with over 100 traders and I was responsible for training them all.
My company was featured in Fortune Magazine for our success in a difficult market. When I was 30, I began teaching individuals how to trade.
I worked with lawyers, doctors, engineers, members of our military, drivers, farmers, housewives, athletes and officers.
By assembling a core group of coaches, we were able to train thousands of people on the same basic principles of success. One of my longtime coaches, a really intelligent gentleman and a great man, put together a document that highlights what goes into each trade.
I wanted to share that with you today. This goes perfectly with the same book we give to every trader, Full Contact Trading. It’s the story of success, failure and success again. There are great trading principles in the book and inspiring stories.
This is our Anatomy of a Trade:
Here are the 12 steps involved in making a trade. I found this checklist to be very useful in getting my own trading under control. Special-case trades, such as earnings plays or 52-week highs and lows, have their own risk-reward and stop/exit conditions—substitute those as appropriate. As you gain experience you will do these steps automatically.
1. Find “good-enough-to-trade” stocks and organize them into “sector watch” lists.
This is known as the “Build Your Master Stock List.” My method of organizing does not require a master stock list, though I keep a spreadsheet of “other stocks” that ALMOST looked good enough to trade…in case I need to find a new stock for a particular sector.
You will make the most of your time and reduce emotion if you stick to a manageable list of stocks you know, in particular sectors, rather than trying to chase whatever is on TV today. AVOID THE TEMPTATION OF INFORMATION OVERLOAD!!! If you get confused you are overloaded; so, reduce what you are watching until you are back in control.
For each sector, find an UNLEVERAGED ETF and put it first in that sector’s watch list. This is your basis of comparison when looking for the strongest stocks in this sector.
2. Determine each stock’s levels—where you would enter a trade.
This means the level prices below AND ABOVE the stock’s current price. You don’t know which way stocks in no-man’s land might go. Early on I missed a ten-point move in BEN, simply not giving myself an alert on the upside of the current price! Ouch. Ouch. Ouch.
3. If necessary, set email alerts for .50-1 point before the price gets to each level.
When one of these appears in my email, I look at the market, sector and stock to determine if now is a good time to trade the stock. You can also call this step the first part of Patience; in essence, wait for the trade to come to you.
4.When the stock moves into the trading range, put the stock on your “Today’s watch list.”
This is the list of stocks you are monitoring TODAY only. You don’t have to watch every stock every day, only the ones that are close to a trading price.
5. Check the earnings date for the stock.
We don’t hold stocks into earnings—too much manipulation and speculation skew the stock’s behavior. A good rule is don’t start a trade in a stock within three days before earnings. If you’re carrying it already, you might want to tighten up your stop, and get out an hour before they close the session and before the earnings announcement.
Following the earnings announcement, the two applicable trades are the earnings trade and the standard-level trade, IF the stock settles at, or near an already-existing level talk with your coach about earnings trades.
6. Determine the protection stop price for the trade, and evaluate risk-reward.
This is the crux of my trading method. The first part of risk-reward is to determine a stop price and evaluate risk-reward for this stock at this price. We want to see a reward of about 5 for a risk of 1, or better. Stop prices are case-by-case—you might choose past behavior around levels, yesterday’s low, today’s low (the three most common), an “Adam-standard” stop or something else for special-case trades.
The other part of risk-reward is to evaluate the marker and the sector this stock is in, in order to determine if we want to trade the stock now or wait for a better overall condition for our trade.
7. EXECUTE! Put in the order or advance order.
When the stock hits your price and conditions are good, EXECUTE the order! As you gain experience you will be able to do the prior step and this step almost simultaneously. Whenever possible, I use stop orders to buy (or short) stocks at my pre-determined price points. This way, I can go about my day and check in periodically to see if the stock got me in it. Good stocks get you in, good stocks take you out. If the order doesn’t trigger, I didn’t miss anything AND I didn’t waste my time watching orders tick by for hours. Setting orders in advance really helps eliminate emotion and frees up time and brainpower.
8. Once you are in, put in your protective stop order, or your bracket sell/stop order.
ALWAYS put in at least a protective stop order! Ideally you do this immediately after the entry order executes. If you use advance orders, check periodically to see if they have triggered. You can do this by simply looking at the real-time price and chart on Yahoo finance.
You might also be able to check stock prices on your cell phone. If the price of the stock moved through your order price, assume you are in the stock, log into your brokerage account ASAP to verify, then set the stop or bracket order.
9. Wait for your stock to hit either the stop or your first profit target.
This is the second part of Patience—waiting to see what happens with your trade. One of the two things WILL happen. If you have a bracket order in place, the bracket order will reset your stop for you or take you out of the trade if the stock drops. If you are using a regular stop it will take you out of the trade if the stock drops.
Stops are VERY IMPORTANT to help remove emotion from your trades! I find bracket orders are hugely useful because I don’t have to worry that I’ll miss a sudden pop and retracement, and I don’t have to worry about the stock violating my risk limit by dropping out.
10. Move your stop up or reset your bracket order as your trade progresses.
Remember that “Good stocks need room to succeed.” Once you have enough profit to protect, use my Rule of 5 and your own understanding of how this stock moves to follow the stock along.
If the stock goes through its next level without taking you out, you can increase your position to try to maximize results. It doesn’t happen a whole lot, but it is GREAT to hit a home run once in a while!
11. Exiting the trade.
Generally the stock will take you out by backing into the last stop you set, or by hitting the topside of a “sell” bracket order. The other typical exit condition is to sell out of the stock an hour or so before the end of the trading session, immediately before the earnings announcement.
For special-case trades, you should know before you enter the trade what your exit strategy is. The other two situations that might cause you to press the Sell key yourself are Fed announcements and “major geo-political events.” Your coach can discuss these with you.
12. Review what happened, then on to the next trade!
As a trader, every well-executed trade makes you stronger. Review all your trades, winners and especially losers, to find and eradicate flaws in your strategy or execution. Not all trades make money, but you want to make sure you are not making mistakes or holding yourself back. Congratulate yourself on doing it well!
As you make these steps part of your routine you will find you don’t need to watch the marker every second—you can go to a movie or ballgame, take the kids to the park, go for a drive with the top down on a sunny day, etc. A better lifestyle should be part of your goal!
If this helps you see things easier, then you must check out this book.
Adam Mesh is CEO and Founder of The Adam Mesh Trading Group. For the past 18 years he has coached thousands of students to all levels of success in trading. He is also creator of the revolutionary Full Contact Trading