Forming a Trade Thesis
Writing down what you expect to happen, and what would prove you wrong.
Overview
A trade thesis is a short written statement of what you expect to happen, why, and what would prove you wrong. Writing it down before entering is the single cheapest improvement available to most traders.
Why Writing It Matters
An unwritten thesis is free to change. Price moves against you, and the reason for the trade quietly becomes something else that still justifies holding.
A written thesis is fixed. You can compare what actually happened against what you said would happen, which is the only way to learn whether your reasoning is any good.
The Four Components
- The observation — what you see. "Price is returning to weekly support that held twice, with the daily trend still up."
- The expectation — what you think happens next. "Buyers defend this zone and price returns towards the range high."
- The invalidation — what proves you wrong. "A daily close beneath the zone."
- The plan — entry, stop, target, size.
If you cannot write the third component clearly, you do not have a trade. You have an opinion.
Keep It Short
Three or four sentences. A long thesis is usually a sign of rationalisation — you are assembling reasons rather than stating one.
The best theses are almost boringly simple: a level, a direction, a condition that ends it.
The Invalidation Is the Important Part
Most traders can explain why they entered. Far fewer can state precisely what would make them exit, other than "if it goes down."
The invalidation must be a specific, observable price event — a close beyond a level, a break of a structural low — not a feeling or a percentage chosen for comfort.
Testing Your Thesis
Before entering, ask three questions.
- Would I take the opposite trade if I had no position and saw this chart fresh?
- Am I describing what price is doing, or what I want it to do?
- If this hits my stop, will I understand why?
The third question is the most useful. A stop-out that makes sense afterwards is a cost of doing business. One that makes no sense means the thesis was never clear.
Reviewing Afterwards
Store the thesis with the trade in your journal. Reviewing later, the question is not whether you made money but whether your reasoning was sound — profitable trades taken for bad reasons are more dangerous than losses taken for good ones, because they reinforce the wrong habit.
Weaknesses & Limitations
- A well-written thesis can still be completely wrong
- Writing takes discipline and is easily skipped in fast markets
- Articulate reasoning creates false confidence
- Markets are not obliged to respect any of it
Example Use
"Daily trend up. Price returning to the 95-97 zone which held twice in March. Expect buyers to defend and a move back towards 115. Invalidated on a daily close below 94. Entry 97, stop 93.5, target 113, risking 1%."
Risk Management Notes
If the thesis is invalidated, exit — whether or not the stop has been touched. A daily close beneath your level with the stop a fraction lower is still the thesis failing, and waiting for the stop to be formally hit adds loss for no information.