The importance of a trading thesis

Posted by downtowntrader | 7/07/2010 12:58:00 AM View Comments

The past few weeks have 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 day trading opportunities, I've found that I've only found a few 1-3 day windows in the past 2 months worth attacking. I'm sure long time 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 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 devils 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 I think its very important for traders to remain open minded objective when preparing for the markets. I often see traders fixated on a side of the market and this leaves them very vulnerable to being blind sided. 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. 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 thesis' 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, its possible that they could get a short squeeze in their favor soon. I wrote an article tonight on this thought and it should be published by tomorrow afternoon 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 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 under prepared. More often enough, this is enough to provide me with a good risk to reward opportunity and an edge.

Good Trading,


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