I will be the first to admit my gut isn’t always right about the stock market. Sometimes I overthink a situation or assume a move has more potential than it really does. Regardless, if I traded exclusively on gut feel, I would have a lot less money than I do. My secret weapon? Planning my trades and sticking to my plan. It doesn’t get any more straightforward than that.
Every time an opportunity arises in the market, look at it and ask, “what would take to get me to buy this?” Moments after answering that question, ask yourself the follow-up, “okay, if I’m in, what would it look like if I’m wrong?”. Answer those two simple questions, follow through on those commitments, and you will be miles ahead of almost everyone else who trades stocks.
Let’s look at a few recent examples where my gut was wrong but my trading plan got it right. Back in December, TSLA moved to the upper end of its trading range. While my gut is reluctant to believe TSLA is the second most valuable car company in the world, the stock was at an important inflection point. Either it hits its head on resistance like it has done so many times over the last several years. Or it smashes through resistance and keeps on going. While my gut was cynical, my trading plan said to buy $TSLA above $390 and stick with it as long as it stayed above this level. Here we are nearly two months later and the stock is up almost 50%.
Gut 0 – Plan 1
Bitcoin is another one I don’t trust. I even wrote a post last year questioning its viability after the $10k rebound tumbled back under $7k. But you know what? I was wrong. Instead of tumbling back to the lows, Bitcoin rebounded and retook $7k. My trading plan said that level was the line in the sand and no matter what my gut felt, as long as Bitcoin was above $7k, I had to give it the benefit of doubt. Here we are a few months later, up 35% and pushing up toward $10k again. While I still question the viability of Bitcoin over the long-term, it has been trading well over the short-term and there was only one way to trade it after it retook $7k.
Gut 0 – Plan 2
And lastly, this week’s Coronavirus tumble. I like taking some profits proactively and keeping a trailing stop on the remainder of my winning positions. That discipline meant I locked in profits when the S&P 500 was above 3,300 and had a lot of cash ready to buy this week’s dip. That said, I was a little nervous along with everyone else when the market gapped 1.5% lower Monday morning. Most of the time these emotional selloffs get carried away and go far further than anyone expects. My gut was hesitant to buy Monday’s early bounce because I feared another waterfall selloff, but my trading plan told me to buy the bounce and protect myself with a stop under the opening lows. While it didn’t feel good, this was my plan’s entry point and keeping a stop nearby limited my risk. It was a very good entry even if it didn’t feel good. And here we are a few days later, well above that entry point.
Gut 0 – Plan 3
No one can correctly predict the market’s every move, but if we plan our trades intelligently and stick to that plan, we will do a lot better than most.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $BTC Bitcoin $TSLA
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.