As a therapist, when dealing with adjustment disorders and/or anxiety issues, one of my favorite questions to ask my clients was “what will your life look like in 5 days?” The logic that spewed from that point would offer up a window into that individual sitting in the chair on the other side of the room. If the client was unable to construct a life plan a few days out, I knew I had my work cut out for me. So simple yet powerful.
I like to ask traders I work with a question along the lines of the question I’d asked my therapy clients. The question goes something like this: “Where is this stock going to be in 3 days?” or some derivation thereof. So much can be learned and planned for by asking such a simple question. Most common responses typically favor a move in the direction they are trading but not much else. Usually the lack of depth in the answer is due to a lack of knowledge about how to gauge a potential move. Here’s a few simple suggestions:
- Use the Average True Range (ATR)
- Gauge tendencies with shorter period moving averages like a 5 day SMA. How does the stock react to it?
- Is there a measured move that can be used?
- Check the peers and/or sector etf and see where the stock is in relation to them. Is it under/over performing, etc.
- Look to the left for levels of significance (support/resistance)
Life can be difficult if we fail to give any forethought as to what’s on the horizon and do our best to plan for it. Opportunities can be missed and simple setbacks can seem insurmountable. The same can be said of trading.
It’s my belief that without targets, we participate aimlessly in the markets eventually leaving broke and disgruntled. Without an idea of where a trade would be in 5 days the possibility of leaving profits on the table increases significantly amongst other unhealthy scenarios. Targets are good for:
- Setting personal goals
- Knowing when to scale out of a winner
- Keeping a proactive approach, versus a reactive one, to the markets
- Managing risk
It’s hard to imagine not wanting to set parameters for the potentiality of each trade I take, directional or not. I’ve seen many a “day trade” turn into a “swing trade” and eventually end up a large loser because there was no forethought given to possible scenarios. It’s amazing how we as humans can justify the crap we do. We don’t need to know the future to be successful in the markets with any kind of longevity, but having an idea of the possible scenarios goes a long way.