Scenario Planning is a Key to Success

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss: What are you doing for scenario planning?

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

If you want to be a great trader, doing your scenario planning is a key aspect of having success.

When we look at doing scenario planning, we’re going to focus on three separate scenarios.

1. The first scenario we’re going to focus on is the worst case scenario.
2. The second scenario we’re going to focus on is the best case scenario.
3. The third scenario we’re going to focus on is the annoying case scenario.

When we talk about these three scenarios, what we’re doing is we are in advance, working through what would qualify as a worst case, a best case, and an annoying case scenario, and we document what those scenarios are, and how we think those scenarios would affect our positions. How much money do we think we would lose? Or how much money do we think we would make? Then what we’re going to do is we’re going to outline our plan of action if that scenario occurs.

First, we’ll talk about the worst case scenario. The worst case scenario is the scenario, that’s the worst possible thing for a specific position or for your portfolio. Recently, there are lots of traders that went through worst case scenarios. We can see worst case scenario was Russia invading Ukraine. a worst case scenario was the Chinese commercial who got stuck in nickel, and nickel exploded, or crude exploded, or unleaded gasoline exploded, or copper exploded. If we look over the last three weeks, so many commodities just absolutely exploded. These are worst case scenarios for many traders and potentially for you. What we want to do is we want to be working through scenarios like this where yes, a war is a worst case scenario. A bomb is a worst case scenario, a terrorist attack, a tidal wave, the exchange malfunction, a really bad miss on earnings, a surprise FOMC announcement, these are all things that could qualify as a worst case scenario for your positions.

You want to identify what could that scenario be? How much money do you think you’ll lose if it happens? Then what course of action should you take to address the situation? You do all of this in advance, and then once you identify it, you go through, and you do a mental visualization of that worst case scenario happening. Then actually executing the plan that you have in place. You do that for the worst case.

We’re gonna move on to the best case. The best case scenarios, the one that people often never think about. One of the interesting things in life is the best thing that could happen to us in life actually happens to us a lot more than what we think. The problem is, is that when the best possible thing happens, we’re not prepared. We either don’t see it, or if we do see it we’re not ready for it.

What if you actually were long gold, or long, crude or long copper, and the last few weeks it exploded? You had a ton of money come into your account. Were you ready for it? If you weren’t ready for it, all these markets have reverted hard and fast, and you give all your money back. When the best possible thing happens to you what is that best case scenario? Identifying that in advance. How much money will you make if it happens? Then what is your plan of action to address it? Are you going to hold it, try and go for more? Are you going to get out? Take your profits? What is your answer? That’s the best case scenario.

Then the last is the annoying case scenario. The annoying case scenario, this is a list of scenarios are not the worst case. There’s worse things that could happen, but they’re annoying things that happen to you that if you’re not prepared for them mentally could take you off your game and cost you a lot of money.

What are examples of annoying scenarios?

You could have your wife come in or your husband come in and say something to you that just triggers you. Right while you’re in the middle of trading. Takes you totally mentally out of your game. and you can’t even think about what you should be doing because you’re so angry at them for what they said. That’s annoying case scenario.

Another annoying case scenario I had one recently where I had an error in the software of Interactive Brokers. This error popped up, and when I tried to address the error, it completely locked up Interactive Brokers and it completely locked up my machine. The only way to fix it was I had to literally do a hard reboot, where I literally had to rip the plug out of the back of the computer, plug it back in, and start from the beginning. Having redundant software platforms, redundant accounts, things like this, that’s where that comes in. That’s an annoying case, because I can have positions on, it could be in the middle of putting an order in, I could have orders out there working, and I have to address this and I have to do it quickly. Other types of annoying scenarios are, it could be some bad news in a position that you weren’t expecting. It’s not a worst case, but it’s annoying. Things like that.

You make a list of all these annoying things that could happen. Then same thing, you make the list. You think about what that could cost you, and what is your plan of action. So when Interactive Brokers locked up, it was no big deal. Because one, I had Interactive Brokers on another machine, too. I had it on my phone. Three, I had other accounts, and other places that I could go to offset. So in my mind, I go through and I visualize something happening Interactive Brokers, and they see myself rotating over to Interactive Brokers on another machine, or rotating to an entirely different platform.

What are some annoying scenarios for you?

Now, here’s the thing with an annoying case scenario, oftentimes, you won’t pick the right one. I mean, the chances of you picking the right one are low. That’s not the point. The point is to go through the exercise of visualizing it, and by visualizing it, you will be in a positive and strong mental frame when you complete it, or when it comes along, that you can just respond to what’s going on with being calm, being poised and not getting angry or upset.

I find for me that annoying case scenarios are actually my worst scenario. Worst case scenarios, there’s no time to be upset, you just got to go to work, you got to follow your plan. Best case scenarios Well, those are awesome, but it’s the annoying case scenarios where I’ve always had a temper. Annoying scenarios be the things that set me off. So just going through consistent effort, making sure that you that you make an inventory of them, and you visualize them will have a massive impact.

Doing these three scenarios daily, or whatever timeframe you trade, it will have a massive impact. The reality is everybody wants to make like $1,000 a day or $10,000 a day or whatever the number is they want like they want to like a salary. That’s not how trading works. Trading comes in bunches, and so these scenarios help you maximize the scenarios where crude explodes or nickel explodes or copper explodes in a day or two or a week. They help you maximize those, because those don’t come along every day and you need to be at your peak. You need to be at your best when stuff gets crazy. It’s the wrong time to be trying to be figuring shit out, you need to have done it all in advance. So scenario planning can have a huge impact on your p&l.

So what are you doing for scenario planning?
Do you actually go through this?
Do you map out how much you could lose?
Or how much you could make?
Do you map out your plan of action?
Do you visualize it?
Are you trying to be a pro or are you just jacking around?
What do you want to be?
Do you want to be a great trader or do you want to be perpetually mediocre?

This is a no bullshit game. This is a game you bring your best or you get smacked. So there’s not “I dont want to do it,” you’re gonna get your ass kicked. How would you feel if a sports coach of your favorite sports team had no scenario plans? And no backup plans? You’d be pissed You as a trader have to play at the elite level. No excuses. So are you in or not? You got to ask yourself this, because I get pretty fired up about this. A lot of people have bad habits then a bitch and complain that they can’t make money. It’s bullshit, get great habits, you’ll get great results. So think about that.

I will see you next Tuesday. Take care God bless. Bye

~Chuck Whitman