Write a thesis you can review5 lines that turn a feeling into a plan.
A trade thesis is your reason for a trade, written before you enter, plus what would make you get out. 5 short lines are enough, and they give you something to check when price moves against you.
The $100 million question
Imagine you pitch a big investor, and he gives you $100 million to buy the euro. Your reason: growth in Europe came in strong. Then he leans back and asks 2 questions. What does that mean for interest rates in Europe compared with the US? And what are positioning and sentiment doing right now? If you freeze, the money is gone.
A prepared trader can answer. The strong growth number lowers the risk of a recession and keeps inflation sticky, so the ECB is likely to stay on hold while the Fed has a clearer path to cuts. Sentiment is still cautious, so money is only starting to flow into the euro, and the COT report shows that the big funds have not bought in yet. That gap is the opportunity.
Professional capital asks for a professional reason. That is why institutional traders write down a thesis for every trade, so it can be reviewed, judged and either repeated or refined.
5 lines before you enter
A thesis is simply your reason for the trade, written down before you enter, plus what would make you get out. It turns a feeling into something you can check, and 5 short lines are enough.
Your view: which currency you expect to get stronger or weaker. The driver: what moves it, such as interest rates, inflation or growth. The mood: whether traders are reaching for risk or running for safety. What comes next: the data release or central bank speech coming up. And what would prove you wrong. If a line stays empty, especially the last one, the idea is not ready yet.
The same parts also fit into a single sentence. Below, a thesis on EUR/USD is taken apart into the market, the horizon, the idea, the evidence, the next event and what would change it.
EUR/USDMarket this week:Horizon EUR can outperform USDIdea because the policy gap is narrowing.Evidence US CPI on WednesdayEvent changes this if it comes in hot.What changes it
A worked example: AUD/CHF
Here is one. View: the Australian dollar weaker against the Swiss franc. Driver: weak growth in China, because China buys more from Australia than any other country. Mood: traders want safety, and in nervous markets money often moves into the Swiss franc. Next: Chinese inflation data this week. Wrong if: that data comes in strong.
Every line can be checked during the week. A fuller version adds evidence to the lines, for example COT data showing that leveraged funds are cutting their long Australian dollar positions, or a Swiss inflation release that could support the franc if it surprises higher.
AUD weaker against CHF
Weak growth in China, Australia’s biggest customer
Traders want safety, money moves into CHF
Chinese inflation data this week
That data comes in strong
Does my thesis still hold?
Now the thesis does its real job. When price moves against you, you check the 5 lines instead of the candles. If the Chinese data comes in strong, the thesis no longer holds, so you step back instead of hoping. If the data confirms your view and price is only pulling back, your reason is intact and you stick to your plan.
Write it before you enter, never after: written afterwards, it only describes the trade you are in instead of testing the idea before you commit. Look at it again every day, and keep it in your trading journal next to the trade. Over time you will see which reasons actually worked and which ones were just feelings.
Mistakes to avoid
- Leaving out what would prove you wrong. Without it, every move against you turns into hope.
- Writing a driver you cannot check. “The euro looks strong” cannot be tested. “The ECB holds while the Fed cuts” can.
In short
- A trade thesis is your reason for a trade, written before you enter, plus what would make you get out.
- Write 5 lines: your view, the driver, the market mood, the next catalyst and what would prove you wrong.
- When price moves against you, ask whether the thesis still holds. If the wrong-if condition happens, step back instead of hoping.
Key terms
- Trade thesis
- A short written reason for a trade: what you expect, why, what could confirm it and what would prove it wrong.
- Catalyst
- An event that can set a move in motion, such as a data release, a central bank decision or a speech.
- Risk-on and risk-off
- Risk-on: investors feel confident and buy stocks and higher-yielding currencies. Risk-off: they get nervous and move into safe havens.
- Safe haven
- An asset investors buy when they are scared, such as the Japanese yen, the Swiss franc, gold or US government bonds.
- Invalidation
- The price or event that proves your idea wrong. That is where your stop belongs.