Scenario Planning: To Improve Trading Performance & Better Manage Trades – TradeThatSwing

Stop looking for the perfect strategy or even trying to predict the market. With Scenario Planning you take the guesswork and frustration out of trading, improving your focus and your results. No matter what the market does, you know what YOU have to do.

No strategy is going to win all the time or predict what the market will do with certainty. Even if a system is highly accurate in picking in direction, it may have poor timing (be too early or too late), or expose us to too much risk for the profit potential.

Many successful traders don’t try to predict the market at all. They don’t have to. They have found another way. I personally found myself to be quite poor at predicting where prices will go in the future. I may get the direction right, but I am way too early or late. Or sometimes my timing is great, but the big move I was expecting fizzles out.

Luckily, I, nor you, need to be good at predicting future events with certainty (and if you can, great, this article isn’t for you).

But for us mere mortals, who don’t know where our car keys are and who constantly stir up our partner and don’t know why (we didn’t see that coming!), we suck at prediction and should therefore find another way.

The Mental Flip: It’s Me, Not the Market

“It’s not about what the market does. It’s about what I do.”

There is no need to predict what the market will do. Rather, we plan for what we will do no matter what the price does.

If you integrate this mental flip, your trading will drastically improve. You are no longer need to waste time predicting, and being frustrated when it doesn’t pan out. Rather, you plan the trade, start to finish, no matter what the market does.

Do this, and you are no longer at the mercy of what the market does. You are in control of your actions, and how you navigate the market.

And isn’t that what many of us are striving for in all areas of our life? NOT to control our surroundings. Because we can never control others, the stock market, the weather, or economic forces. BUT WE CAN CONTROL how we act and react to others, the weather, the stock market, and economic forces.

We can plan for what we will do if the market (or something else) does X, Y, or Z. And we can even have a plan for when we are unsure!

Let me give you a non-trade example. You could have a rule that if something is a “maybe” you will say “no” until you have time to decide whether it is a “yes” or a “no”.

Someone asks you to do something, but you are unsure.

Instead of saying “maybe” and leaving them on the hook (and you on the hook to clarify at some point), or worse yet saying “yes” when you don’t want to do something, you say “no” and follow up with “I’ll let you know if I change my mind.”

You may not want to adopt this rule. But you can see how it creates clarity and boundaries around what you accept and avoids mental wheel spinning when you are uncertain.

Imagine applying that rule to your trading. You have a strategy and you see a trade setup, but you don’t like something about it. It’s a “maybe trade”. A rule like this states you stay out, unless it becomes a “yes”. To become a yes, you will need to tell yourself how you will manage this trade given that you are uncertain about it, and provide evidence to yourself for why the trade is acceptable to take.

Life is filled with uncertainty, and so is trading. But that doesn’t mean we never act. We can plan and act in spite of uncertainty.

Assume you said “Yes” to a blind date, but now you’re there and it’s NOT going well. You could have pre-planned for that scenario. Have an exit plan or have rehearsed a little speech to let them down easy and make a quick exit. This avoids the mental anguish of sitting there wondering what to do. If we didn’t have a plan this time, we now know to spend some time making one for next time.

Same with trading. If you know what to do already, there is clarity. No mental anguish. You can stay present (in a situation or trade) and be true to yourself based on the information coming in. But we only get this if we have created rules/boundaries around how we act or don’t act in certain situations.

If we notice ourselves asking “What should I do?” while in a trade, we have a hole in our scenario planning or strategy. There is something we didn’t consider. Look at what it is, and consider how this situation will be handled if it comes up again. This puts you back in control of your trading.

“What should I do?” should only ever be asked BEFORE we enter a trade.

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Trading Scenario Planning

Scenario Planning is part of a process I call Commentating the Price Action. With Commentating we talk through what we know and key factors that affect our trading decisions. Commentating also involves talking through what needs to occur to take a trade and how we will handle that trade once we are in it.

This latter part is Scenario Planning. It is basically re-confirming how we will manage the trade based on our strategy as the trade unfolds.

Scenario planning can be as simple as saying “I will stick to my stop loss or target no matter what.”

Or it may adding some additional rules, such as “Will stick to my stop loss or exit, no matter what the market does, but I need to out before earnings/news at X time.”

Or scenario planning can become more complex, such as using different exit methods based on the quality of the trade signal or the quality of market conditions. We plan for whatever scenario arises while in a trade.

It may seem complex. People often say “I can’t possibly plan for every scenario!” But we actually only need a few rules to help navigate any trade.

Here’s how I Scenario Plan every trade I take. Before I trade I mentally grade each trade, and then I have a rule for how I will manage that trade.

  • Good Conditions + Good Trade Setup: Don’t move the Stop loss or Target during trade. Only consider an early exit if the price stalls right near the target and most of the profit is being collected. If price is moving well and is approaching the target, consider implementing a trailing stop loss to both protect nearly all the profit and potentially capture a bit more than the original target.
  • Poor Conditions + Good Trade Setup: Either don’t take the trade, or use the aggressive trailing stop loss and the original target stays where it is. If conditions are really poor, don’t take it. If they are acceptable, use the aggressive trailing stop loss. There must be some evidence to warrant taking the trade.
  • Good Conditions + Poor Trade Setup: Either don’t take the trade, or use the aggressive trailing stop loss and the original target stays where it is. If the trade setup is really poor, don’t take it. If it is acceptable, especially since conditions are favorable for trading, use the aggressive trailing stop loss. There must be some evidence to warrant taking the trade.
  • Poor Conditions + Poor Trade Setup: Don’t trade. Oftentimes, I will close my trading platform so I can’t place trades. If conditions improve (I have the chart up, but my platform isn’t open), then I re-open it and will start watching. But as long as conditions and trade setups are poor, I am staying out.
  • Good Conditions + Setup in Conflict: Overall conditions are good, but sometimes at key levels I will have a trade setup for both a long and a short. I can pick which direction I prefer and plan for that trade. I then decide if I let the trade play out or if I will use a trailing stop loss.

    I also have the option to trade the first signal that develops. In this case, I will use a trailing stop loss because a trade in the opposite direction could occur. If I opt to take this trade, I also have to decide if I will take a trade in the opposite direction if I get stopped out another trade trigger develops in the opposite direction.

  • Conditions improve or deteriorate while in a trade: Things can change while a trade is ongoing. If conditions start to get ugly while in a trade, I utilize an aggressive trailing stop loss. If conditions improve during a trade, then I give the trade the same freedom a good condition trade would warrant based on the scenarios above. Basically, conditions can go from good to bad, or bad to good, and when that happens I shift how I manage those trades based on the rules above.

To be able to go through this process, you need to know what a good trade setup looks like and what a bad trade setup looks like. In my trading courses, I discuss what good patterns look like and things to avoid. Your strategy should do the same. If you look for a certain pattern, for example, note the elements that seem to be present in trades that do better. Note the elements present in patterns that tend to perform worse.

You also need to know when to trade and when not to. <—This article discusses how I analyze market conditions for my strategies, as each strategy may require different things for taking trades.

The Stages of Scenario Planning

In order to plan our scenarios, we need a certain amount of knowledge about our trading strategy, the conditions we trade, and we also need to understand a few things.

What we need to understand: our knowledge base, our skill set, and our ability to plan are limited to the strategies we have practiced and are good at. We aren’t predicting where the price will go and we not trying to trade every price the price makes.

Step 1 is learning a strategy and the market conditions that work well for it.

You may decide to stop at step 1. If you are happy with how a strategy performs by leaving the trades alone using a pre-defined exit method, that’s great! Stick with that.

If feel your strategy could be improved by incorporating more real-time information on conditions and trade setup quality, exiting winning trades earlier (before they turn into losses) if conditions turn unfavorable mid-trade, or cutting losses quicker if the price doesn’t move as expected, then incorporate Scenario Planning. It is an enhancement.

Step 2 is learning to scenario plan and mapping out any adjustments we can make to the trade while it is ongoing. We do this before the trade, acting out our plan as the price action unfolds during the trade.

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Is Scenario Planning a Violation of the Strategy?

Aren’t we supposed to take every signal our strategy gives us?

Aren’t we supposed to stick to our strategy no matter what?

I have backtested a strategy and it is profitable based on using set parameters, shouldn’t I just leave the trades alone?

These are great questions. And not everyone needs scenario planning. If you use an automated trading system, you’ve already programmed into the strategy how you will manage trades. You don’t need to scenario plan in the moment. Although, scenario planning may help you enhance the performance of your system by considering alternative exits based on conditions and setup quality.

Scenario planning can become part of a strategy. It is simply improving our trade rules based on the real-time information we have leading up to and during a trade.

How we Scenario Plan should be included in your Trading Plan.

In this way, what looks like a highly discretionary trading system can actually be rather automated. I’m applying rules to how each trade is managed based on my strategy which provides the basic pattern, entry, stop loss, and target.

Scenario planning allows me to make slight adjustments to these parameters based on real-time information. Because over time we begin to see that not every trade is equal. Some trades are better than others, but there may still be profit potential on a slightly worse pattern. Yet we may not want to trade them exactly the same.

This can potentially enhance the performance of the strategy.

Is scenario planning for you? I don’t know. Practice it, and then test it against leaving trades alone.

Practicing Trade Scenario Planning

As the price action is unfolding, talk through what needs to happen to form a quality trade setup.

What is the trade trigger?
How big will the stop loss be?
What will the target be?
How are the overall conditions?

As the setup forms and the trade trigger gets closer to triggering, look at the information and decide how you will manage the trade. Will just leave it alone, utilize a trailing stop loss, or exit manually (how and why?)?

If you have questions during the trade, note them. You will need to include that in your scenario planning. You shouldn’t have questions while you are in a trade. If you do, the scenario planning is lacking an answer to your question. Create an answer for next time that situation arises.

Knowing what to do in a trade shouldn’t be the hard part of trading…yet it causes a lot of anguish for many people This is alleviated with scenario planning. BUT, it is mentally hard to scenario plan for every trade. It takes work. It requires focus…similar to meditation.

It is much easier to let the mind drift, take random trades, and hope they work out. This causes a lot of mental anguish down the line. We need to flip that around. If we do the mental work before a trade, we save ourselves the mental anguish later on!

Compare Scenario Planning and “Leave alone” results

Most strategies you learn in courses, videos, or articles show how to find trade setups, where to place the entry, stop loss, and target, and possibly some additional rules and trade management guidelines.

This is basic scenario planning. Key elements of the trade have been planned out (entry, stop loss, target).

See how the strategy performs using these basic elements. It may perform great, or you may see areas for improvement with more in-depth scenario planning.

Come up with rules for how you will improve performance with scenario planning. How and why will you get out trades early? Practice doing this planning before the trade happens.

Compare the results using the basic rules to your scenario planning results.

Over time, a winner will be revealed.

For some people or strategies, just sticking to a basic entry and exit may work best. For others, they may reach the next level through scenario planning.

You Still Need a Strategy

Scenario Planning enhances a strategy. The strategy already provides an edge by giving us entries and exits that are likely to produce a profit over time. Scenario planning helps us stick with that plan, or potentially increase profit by realizing that not all setups and market conditions are equal. That always avoiding or always taking a certain type of trade setup or market condition may not be the best answer for profit maximization or our personality.

The Key Takeaways

ANYONE can incorporate scenario planning. It is simply confirming how you will manage a trade before you take it. You will want to re-confirm this throughout the trade.

You can also use it to enhance your strategies by pre-planning for scenarios that may arise during the trade.

If the trade isn’t acting right…do you have a plan for that?

If it is acting very well…do you adjust your target or implement a trailing stop loss instead of the original target?

Even starting to ask such questions about your strategies and trades can start you down the road of finding ways to improve those strategies. Potentially grabbing more profit (or reducing losses) on trades you are taking or analyzing anyway.

Cory Mitchell, CMT

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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