How I build a trade idea from the market down

A trade idea is only useful when it fits the portfolio. I work from the economic setting down: the environment first, then the sector, then the two names, and only then the size, the catalyst and the exit.

This is the order I work in, and I still use it every week. It is what stops an interesting chart from becoming a position I cannot size, hedge or close.

1. The economic setting comes first

I begin with where the economy is and what policy is doing to it: the level and direction of interest rates, what the central bank has said, the stage of the business cycle, the shape of the yield curve.

The aim is not to forecast. It is to describe the environment I am trading in and note which parts of the market tend to be helped or hurt by it. Rising real yields, for example, weigh on long-duration assets such as high-growth equities, while a steeper curve widens the margin banks earn between what they pay for deposits and what they charge for loans.

I end this step with a bias, not a ticker.

2. I look at sectors before I look at names

The next question is which sectors sit in the path of that view. Sectors respond to the same macro conditions at different speeds and in different directions, so this step usually does more work than picking the individual name later.

If my view is that energy supply stays tight while demand holds up, energy is a candidate long. If my view is that higher rates keep pressure on commercial property valuations, that points at a short somewhere in real estate or in the lenders exposed to it.

3. How I pick the names inside the sector

Inside the chosen sectors I then look for the specific companies.

• On the long side: businesses with visible earnings, a balance sheet that can survive the environment I have described, and a direct link to the reason I am bullish.
• On the short side: businesses facing the opposite. Deteriorating fundamentals, a valuation that assumes the old environment persists, or direct exposure to the pressure I identified in step one.

Pairing a long and a short within the same sector is a standard portfolio technique, used across the industry long before I came to it. Holding one name long and another short strips out most of the broad market move and leaves the difference between the two companies, which is what my analysis was about.

4. Choosing how to express the idea

Cash equity is the plain expression: two positions, long and short, sized against a risk limit and judged as a pair. Nothing about the sequence above requires options.

Where I do reach for a defined-risk options structure, the reason is usually mundane. The maximum loss is fixed before entry, which makes the sizing arithmetic simple and removes any argument with myself later about where the stop was. That is a property of the instrument. It says nothing about whether the idea is right, and an option adds a second thing to be wrong about, because now the timing and the volatility have to cooperate as well as the direction.

5. A catalyst gives the idea a deadline

I attach a specific event to each idea: an earnings date, a data release, a central bank meeting, a contract award.

The catalyst is what turns a view into something reviewable. If the event has come and gone and the position has not moved the way the thesis said it would, the thesis is the thing to question, not the timeframe. Without a date, a losing position can be held indefinitely on the grounds that it has not happened yet.

6. Writing down what would prove me wrong

Before the position goes on, I write the thing that would tell me the idea has failed. A price level, a policy change, a revision to the data I built the view on.

I do this because I am a worse judge of a position once I own it. Deciding the exit while I am neutral produces a better decision than deciding it while I am losing. That is a habit anyone can adopt, and plenty of people trading professionally have had to learn it the hard way too.

Where I run this

The Workbench on this site is my own software, and it is where I keep the written record: a trade plan card for the thesis, the levels and the invalidation, a position sizer for the risk, and a review log for comparing what happened against the plan I wrote. The toolkit is something I provide, not ITPM, and it is included when you enrol in an ITPM course through one of my marked links and the referral is verified. The Position Sizer is free for everyone, course or no course.

The Macro Dashboard covers step one. It is free after an email signup, with no payment and no course purchase required.

If you want the same decisions taught properly, PTM is the ITPM course I value most, because it treats macro context, security selection, sizing and portfolio construction as connected decisions rather than four separate subjects.

These are tools for analysis and record-keeping. They do not produce trade signals, and nothing on this page is financial advice or a recommendation to buy or sell anything. Do your own research.