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The idea of IF-THEN scenarios in trading is often misconstrued one. I often see it being interpreted in a sense of predicting stock’s action. A trader trying to apply it in this sense tries to think in terms ‘If a stock does this, it’s going to do that“. This approach is more acceptable if a trader thinks in terms of probability instead of certainty in which case the above sentence becomes “If a stock does this, it’s likely to do that“. Nothing’s wrong with that as long as a trader realizes that probability is just that – a probability that is going to work in a statistically valid number of samples but will not predict the outcome of each given case.

I, however, apply IF-THENs in a slightly different manner. For me it’s about defining my own action in response to market fluctuations. My IF-THEN is a scenario where IF is what market does and THEN is what I do in response. My intepretation thus becomes ‘If a stock does this, I do that”.

Certainly, it’s a derivation of the version above – you can arrive to it from “if a stock does this then it’s likely to do that, so I am going to react in such and such way”. My version is just more cut and dry.

What are the advantages of this aproach and why do we need to build a set of such scenarios? (more…)