Scenario Planning: Writing If-Then Rules Before the Market Moves

[Fairman]

Scenario Planning: Writing If-Then Rules Before the Market Moves

Prices do not follow your forecast. Scenario planning replaces prediction with preparation, by defining your response to several possible paths.

For a given setup, write three scenarios. In the base case, price moves as expected: describe the entry, management, and exit. In the adverse case, price moves against you: define the stop and what you will do after being stopped, such as waiting for a new setup. In the surprise case, an unexpected event occurs, such as a news release or a large spike: define what you will do, such as closing the trade or leaving the stop in place.

Add if-then rules for common branches. If price breaks above resistance and closes above, then I add a half position on a retest. If price rejects the level twice, then I exit at breakeven. If the spread widens beyond a set value, then I do not enter.

Writing these rules before the trade removes real-time decisions, which are most vulnerable to emotion.

The process also exposes weaknesses in the idea. If you cannot describe what happens in the adverse case, you have not defined your risk.

Keep scenarios short, a few lines for each. Use a template, and store it with the trade record.

Review after the trade: which scenario occurred, and did you follow the plan?

Over time, you will anticipate more branches and be surprised less.

Practical step: write three scenarios for your next trade idea before entering.

[Fairman]

The surprise scenario is the one people skip. Having a line that says if a big spike hits, I leave the stop where it is stops a lot of panic decisions. Worth settling beforehand whether you'd take profit into a spike in your favour. For example, if price jumps more than one full ATR in my direction within a few minutes, I close half and move the stop to breakeven. Without a rule, people either grab the money too early or freeze and watch it retrace. The surprise doesn't need to be predicted, only the response. A one line rule for both directions covers most of it.

[Fairman]

If you can't write the adverse case in one line, that's a strong sign you haven't really decided where you're wrong. A good adverse line looks like this: if the 4 hour candle closes back below 1.0820, the breakout has failed, I exit and wait for a new setup, no re-entry today. It has a price, a timeframe, an action and what happens next. Vague versions like if it goes against me I'll see usually turn into moving the stop or adding to a loser. Writing the last part, no re-entry today, matters as much as the exit itself, because the revenge trade straight after a stop is where a lot of damage comes from.