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Stop Overthinking Trades: 1 Filter That Changes Everything Fast
Hey! Geof Smith here…
Every decision you make in the market comes down to answering one simple question with three possible answers: Should you be long, should you be short, or should you be out of the market?
That's it. Three choices.
If you can successfully eliminate just one of those options, you're already ahead. Now you're choosing between being long or staying out, or between being short or staying out. That alone simplifies everything.
Sometimes you sit there and realize you'd rather be long than anything, which means your next job is figuring out where to buy and how you want to trade it. From there, the possibilities open up.
You might buy calls, puts, or lean on a simple vertical spread. Direction is only the first decision, execution is the next.
One of the easiest ways to eliminate an option is by identifying the prevailing trend. If a market is clearly in an uptrend, the short side naturally drops off the table. If it's in a downtrend, being long is the first thing you eliminate.
That initial glance at structure, higher highs and higher lows or the reverse, instantly narrows your choices.
But even before those trends take shape, the opening price can tell you a lot. The opening price is the beginning of the race, where the tone is set and the first clues show up. Momentum, hesitation and pressure often reveal which decisions you should avoid before the day even gets underway.
The Market Is the Boss
The market is our boss. We have to do what it tells us to do. If we don't listen, we get fired, and in this business, that means losing money.
This is where the psychological side of trading matters. You can't force your will or your bias onto price. You can't decide the direction ahead of time and then try to make the chart agree.
That's how traders get stubborn, emotional and ultimately wrecked. Your job is to stay objective enough to let the market eliminate choices for you.
I once met a guy down in Boca Raton who drove a white Chevrolet Suburban with a license plate that read UPTICK. Back in the day, you couldn't short a stock unless it ticked up first. He loved the concept so much he built his entire identity around it.
He was a pure bear. His dog was named Bear. His sailboat was named Short Sale. And he was convinced the Dow was going back to 1,000 when it was trading near 7,000.
That's what happens when bias overruns discipline: You stop listening.
How to Use the 3 Decisions
You start with structure. In an uptrend, eliminate the short side. In a downtrend, eliminate the long side.
In sideways markets, if you're trading directional options, you might eliminate both and stay out. But if you're selling premium, sideways action becomes a playground: Put spreads below support and call spreads above resistance.
The point is to let the market remove choices for you. You don't need to act on every move. You just need to answer the real question: Is this thing trying to go up, trying to go down, or should you stay out for a while?
Long, short, or out of the market. Let the charts make the call. | | | | |
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