Journalists use it to ensure a story is complete. Investigators use it to ensure a case is understood. Business analysts use it to define requirements. Traders can use it to build a complete trading plan.
After writing this article, and especially after putting a title on it, I recognized an interesting 5:1 ratio that seems to appear in several areas of life.
Perhaps you’ve heard the saying that it takes five positive interactions to offset one negative one, and that you are the average of the five people you spend the most time with.
Those are interesting observations and, believe it or not, they’re also important when it comes to a trader’s mindset. The people, information sources, habits, and influences surrounding us can have a profound impact on how we think, make decisions, and ultimately perform.
For now, though, let’s focus on another framework built around the number five: The 5W1H Framework …
Who. What. When. Where. Why. And How.
Who, What, When, Where, Why, and How
Most trading services do a good job of telling us What to trade and Why we should trade it.
They provide stock recommendations, option ideas, technical setups, and fundamental stories. In many cases, the analysis is sound. The problem is that knowing the What and the Why is only part of the equation.
To consistently execute profitable trades, we must also understand the Who, When, Where, and How.
Without those answers, a great trade idea can still become a poor trade.
What
What should be traded?
This is the question most services answer. They identify the stock, ETF, option, sector, or strategy that appears attractive based on technical, fundamental, or macroeconomic factors.
Why
Why should it be traded?
The best services explain the reasoning behind the opportunity. Perhaps capital is rotating into small caps, earnings are improving, interest rates are falling, or relative strength is emerging.
Knowing the “why” helps build conviction, but conviction alone does not produce profits.
Who
Who should take the trade?
Not every trade is appropriate for every trader.
The right trader is the one who can clearly define the When, Where, and How before entering the position. If those questions remain unanswered, the trader may have an idea, but not a plan.
When
When should the trade be entered?
A trade should be entered only when the conditions for execution are clearly defined.
The entry point, trigger, confirmation level, and risk parameters should already be known. Once the Where and How have been established, the When often becomes obvious.
Where
Where should the trade be placed?
There are many choices available today. Stocks, ETFs, futures, options, and even different brokerage platforms may be used to express the same thesis.
The correct “where” depends on the strategy. Once the How has been determined, the appropriate vehicle and platform usually reveal themselves.
How
How will the trade be managed?
This is the question that separates traders from spectators.
How much capital will be allocated?
Where is the stop loss?
Where is the profit target?
How will adjustments be made if the market moves against the position?
How will profits be protected if the trade works?
The “how” defines risk management, position sizing, trade management, and exit strategy. It is the operating system behind every successful trade. More later …
A thousand traders can receive the same recommendation. The results will be different because each trader brings a different How.
SMELLS LIKE RAIN
The Missing Piece
Many traders obsess over finding the next great idea. In reality, the market is full of ideas.
What separates winning traders from losing traders is often their ability to answer the remaining questions:
- Who should take the trade?
- When should it be entered?
- Where should it be executed?
- How should it be managed?
The What and the Why generate opportunities.
The Who, When, Where, and How determine results.
More about “How”
This is where traders begin turning a recommendation into an executable plan.
Ask yourself:
- Will I buy the stock?
- Will I buy an ETF instead?
- Will I purchase LEAPS for long-term exposure?
- Will I use a vertical spread to reduce capital requirements?
- Will I take an initial starter position and add later?
- Will I scale into the position over time?
- Will I take the other side of the trade if the setup fails?
- Will I hedge the position?
- Will I use options or shares?
- Will I deploy capital all at once or in stages?
- … and there is more —
The recommendation may be the same, but the execution can look dramatically different from trader to trader.
For example, if a service recommends a bullish position in a company, one trader may buy 100 shares, another may buy a two-year LEAPS call, while a third may establish a small starter position and add only after confirmation. A more conservative trader may decide the best expression of the idea is through an ETF that reduces individual company risk.
The recommendation is the What.
The execution method is the How.
The What is public. The How is personal. That’s where performance is created, and where every win or loss is born.
SMELLS LIKE RAIN
The “How” also includes position sizing, risk management, profit targets, and exit criteria. Before entering any trade, you should know:
- How much capital will be committed?
- How much can be lost?
- How will additional positions be added?
- How will profits be taken?
- How will the trade be managed if the thesis changes?
- A recommendation without a “How” is merely an opinion.
- A recommendation with a clearly defined “How” becomes a trading plan.
The professionals focus less on finding trades and more on defining how they will execute them. The better your “How,” the more consistent your results are likely to become.
Anything can be traded for profits – and I do mean ANYTHING —-
It’s ALL in the HOW → IMO
