As it relates to the markets, being long or short is an implied thesis – you are making a guess on what is likely to happen next and hoping to profit from being correct in your thesis.
Often, we start by expressing a trading or investing thesis in a conversational way. For instance we may say to a friend, “Apple is going to go up after everyone sees the good earnings.” Or, maybe, “Beef is going to keep getting more expensive this year.” Maybe you keep these thoughts to yourself. Either way, a trade or investment usually begins with an informal thesis like these examples above.
For many, there is a challenge in translating a thesis into a good trade. This is especially challenging in options where you have to pick a duration and strike along with a directional or non-directional thesis.
When it comes to translating your trading thesis into a trade it is helpful to break down the thesis into as many parts and account for each. If you think Apple will rise after earnings do you mean the day of or for some time after? Is it going up 10%? More?! Less?!?! Nailing down the details is important. Then you can match it to the right trading set-up.
One of the biggest issues traders have is risk management around the thesis not planned appropriately. In any trade, we always want to have a price in our thesis where we concede and get out of the trade. (remember a plan can contain a re-entry approach before you whine about being stopped out and then price going your way).
A lot of traders see potential positive results that they were unable to grab because they didn’t turn their ideas or thesis into a good, actionable plan to profit. These situations can really frustrate traders , especially newer ones and deter them from continuing. Spending time on all the details of your thesis is important to learning how to take your thesis into a well-managed trade.