Taking a Trade

Before entering a trade, you need to answer a few key questions to ensure you have a clear plan and strategy. This approach will help you manage risk, maximize potential rewards, and stay disciplined throughout the trade.

Key Questions to Ask Before Taking a Trade

Why Do You Want to Take Action?

• What's Your Thesis? Clearly define the reason behind your trade. Are you anticipating a breakout, a breakdown, or some other significant price movement?
• Example: You might take a trade based on the breakout of a key resistance level or the breakdown of a major support level.

Which Capital Bucket Are You Using?

• Determine which part of your portfolio you are using for this trade. Is it for short-term gains (day or swing trading) or part of a long-term strategy (accumulation or cycle positioning)?
• Example: Short-term trades may involve smaller, more agile positions, while long-term positions might involve more capital and a broader strategy.

What Is the Risk to Reward Ratio?

• Assess whether the potential reward justifies the risk. A good risk to reward ratio ensures that even if some trades fail, you can still be profitable overall.

What Are the Possible Scenarios and Their Probabilities?

• Possibilities Example: A certain price could trigger a significant move, such as a short squeeze, or certain news could move the market in a particular direction.
• Probabilities: Probabilities are often analyzed as prices move, assessing the likely outcomes of different scenarios. For example, what is the probable outcome if a stock breaks support or resistance?
• Plan out the different scenarios, including both favorable and unfavorable outcomes. Consider what actions you will take if the trade moves against you.
• Action Plan: Have a plan in place beforehand to avoid making emotional decisions under pressure.

Am I Scaling In or Is This a Single Order?

• Decide whether you will enter the trade with a single order or scale in gradually to reduce risk.

Balancing Position Size and Emotions

• If the Coin Went Up Significantly, Do You Wish You Had Bought More? Reflect on whether you are comfortable with your position size if the price rises substantially.
• If the Coin Lost Significant Value, Do You Wish You Had Bought Less? Consider whether you are overexposed if the trade goes against you.

Finding a balance between these two questions is crucial. Winners often feel too small, and losers feel too large. Aim to position yourself in a way that you are satisfied with your decision regardless of the outcome.