If You Can't State the Trade in One Sentence, Skip It

Why are you in this trade?

Answer in one sentence, before the order goes in. The sentence must name four things: the setup, the reason it should work, the price at which you’re wrong, and what will get you out. If you can fill all four, you have a plan. If you can’t, what you have is a feeling about a stock, and a feeling won’t tell you where to put the stop.

The template

Fill in the blanks:

Long (or short) [stock] on [setup] because [reason]; wrong below (or above) [price]; out at [target] or if [condition].

That’s it. It fits on one line of a journal and takes under a minute once you’re practiced, and every blank in it is a question you’d otherwise end up answering later, in the middle of the trade, when the answers get shaped by whatever the price is doing.

Four blanks, four rules

Rule 1: name the setup

The setup is the pattern you trade, such as a breakout from a range, a pullback to a rising average or a gap that holds its opening level, and naming it ties this trade to every earlier trade of the same kind, which is the only thing that lets a journal tell you anything useful about how that pattern performs for you. “It looks good” doesn’t count.

Rule 2: give a reason that could be false

The reason says why this setup should work here, today. It has to be falsifiable, because a reason that can’t be wrong can’t be checked either. “Volume expanded on the break and the broader market is firm” can be false tomorrow morning. “It’s a great company” can’t be false in any way that matters to a two-day trade.

Rule 3: state where the idea fails

This price is where the reason stops holding. Add a buffer and it becomes your stop. Choosing it from the idea, and skipping the round number nearest your entry, is argued in round-number stops. Leave this clause out and you have no position size either, since the share count comes from the distance between entry and stop, so a sentence with no invalidation price is also a trade with no honest way to decide how many shares to buy.

Rule 4: say what ends the trade

A target, a time limit, or a condition. Ideally more than one.

The time limit is the blank that’s easiest to skip, and it’s worth the few extra words. A breakout that should run and instead drifts sideways for days has told you something, and “out if not above 32.00 within three sessions” turns that information into an action you decided on calmly.

Three hypothetical sentences

A good one: “Long the stock on a breakout above the three-week range high at 31.20, because volume expanded on the break and the sector is firm; wrong below 30.40; out at 33.80 or if it is not above 32.00 within three sessions.”

Every blank is filled. The stop sits under the old range, where a failed breakout would put the price.

A vague one: “Buying because it’s moving and everyone’s talking about it.” There’s no setup, no invalidation and no exit, and “everyone’s talking about it” is what fear of missing out sounds like out loud.

Another vague one: “Short, it’s gone up way too much, should come back.” It has a direction and a hope. It has no price at which the trader is wrong, which on a short means the loss has no defined ceiling. Yikes.

Repaired, the short might read: “Short the stock on a failed retest of 48.00 after a steep run, because the retest came on falling volume; wrong above 49.10; out at 45.50 or at the close of the second session.” Whether that trade is any good is a separate matter. At least now it can be judged, sized and closed on schedule.

Rule 5: if the sentence will not come, skip the trade

A vague sentence usually tells you something. When the blanks won’t fill, the trade is often being taken for another reason: the session has been slow and you’re bored, a stock is running without you, or the last trade lost and you want it back. None of those fits in the sentence, which is exactly why writing it drags them into the open.

Skipping costs nothing. Record the skip, with the reason “no thesis”, in a skipped-trades log, and over time you’ll see how many of your impulses would have paid (possibly fewer than you’d like).

Build the template into your pre-trade checklist as the first line. The best time to decide which setups you trade, so that the setup blank has a short list of permitted answers, is when you write rules while the market is closed.

Rule 6: the sentence is fixed once the order is in

Write it before the order, then leave it alone. The moment a trade moves against you, the temptation is to rewrite the sentence so the position still fits it: the stop drifts lower, the time limit stretches, and the reason slides from a breakout to a long-term hold. Any of those edits is a new trade. Judge it the way you’d judge a fresh entry at the current price, with the original sentence set beside it, and if the new version wouldn’t pass on its own, close the position.

The one edit that keeps faith with the plan is tightening a stop to lock in a gain, and even that should be a decision you’d defend in writing.

Where this does not apply

Some systematic traders run rules with no narrative at all: a signal fires, the system trades, and the reason is the tested edge of the rule itself. Fine. For them the rule is the sentence, already written, with its exits defined in code. If you decide trade by trade, write the sentence.