Gems from Paul
This is a compilation from the tweets posted by @PaulStifler3 (AsymTrading) from early
May 2023 to present. Over these months, the subjects and depths reached by Paul’s tweets
had been truly impressive. The contents ranged from technical aspects, practical
implementation, mental makeup and traps, biases of all sorts, and much more. Most
important of all, he discussed these with well-considered terms and composition, mixing his
personal development as a trader and deep observation of psychological and philosophical
aspects of trading. It has already profoundly affected my own trading. I am compiling these
gems out of my appreciation for Paul’s work, and also possibly helping the trading
community.
Selection of tweets are totally by my own personal choice. It is very likely I have missed
valuable posts.
The format of this compilation is simple. It is in chorological order. The date of each selected
tweet is in bold, with a short characterization by me, in italics.
I plan to add comments to some of selected tweets.
I also plan to add more tweets from Paul as time goes on.
Suggestions for improvements are always welcome.
Declaration: The content here belongs to @PaulStifler3. I, @qgu, will deliver this content
to him or desist if and when he so decides.
May 9
Survivorship bias, people posting only working charts, fomo
Based on breadth numbers for mid and small caps from today, selling pressure has dried up
in the avg small/mid-cap name. This is just step 1. Need to see NHs expand, setups step up
to the plate and then follow through. I might miss a few early movers by waiting, but also
miss a bunch of head-fakes and failed breakouts.
Don't let survivorship bias or people posting only trades that worked as some indication of
their actual results. It's easy to get FOMO when you see people posting these charts and
examples of working trades, but they fail to post the 9 others that didn't work. These
people don't have superior stock picking skills that allows them to overcome the odds of a
crappy mkt. They just don't show you all of their trades.
Like stockbee said, "In a year you will probably find 5000 to 10000 such 3 to 5 day setups
when both bullish and bearish setups are combined." Missing a few setups doesn't bother
me. Getting beat the fuck up trying to make something happen in a shit market bothers me
a lot. Why? Because I spent years doing just that.
May 10
What great traders prioritize
1. Huge move and riding the 10/20 MA
2. ADR %
3. Volume
4. Liquidity
5. Earnings quarter over quarter
6. Momentum over last few months
When asked what he prioritizes, @Qullamaggie said 4, then 1 and 6, 2, then 3 and 5.
So one of the greatest traders of modern times prioritizes liquidity above all else,
momentum/trend and volatility next, and lastly volume and earnings growth. Quite
insightful.
May 10
Participate when follow-through is likely and avoid chops
My objectives with the things I just outlined are twofold:
1) Participate on the long side when I likely get follow-through and positive expectancy
(based on mkt context and pattern timing).
2) Avoid chop and slop and downtrends in the meanwhile.
According to @ivanhoff2
“There’s an unwritten market rule called the 80/20. Many stocks have 80% of their
appreciation in just 20% of the days. The rest of the time they spend in sideways
consolidation. A swing trading approach aims to put us in stocks during their range
expansion period.”
My objective is to participate when expectancy is high and sit with heavy cash positions
otherwise. This means I’m waiting and doing nothing for long periods of time, waiting for
things to line up properly. I’m not interested in fighting for hard pennies in a shitty market.
I’d prefer to wait for easy dollar environments with a lot less stress. That’s my general
approach. Not for everyone, but works well for me.
May 12
Ebb and flow of KK positions over time
This study of @Qullamaggie positions from @inninuM is very insightful. Note the ebb and
flow, over the course of different mkt phases, how many positions are held, stopped out,
added, etc. The key is it's an ebb and flow in response to the market, not some static
proposition.
May 14
Market context tells odds of follow through
One reason I care so much about mkt context is it tells me the odds of follow through - not
just on the day I enter but also in the coming days and weeks after I enter. I don’t want
some random 2R or 3R trade to make up for losers. I want 5 and 10R trades and lots of
them. While I can’t control what the mkt does after I enter, what I can control is when I
participate and to only meaningfully participate when the odds are in my favor of getting
lots of 2, 3, 5, 10R trades - not some random, low probability R multiples interspersed with a
LOT of losers. Positive expectancy doesn’t favor such a proposition. I don’t do this perfectly
and put on some positions even when I suspect they will likely fail based on the
environment. My desire to “be a trader” and put on trades sometimes outweighs my good
sense.
May 17
Violent, puking reaction whenever I buy a biotech
I'll trade just about anything moving, but I have an almost violent, puke in my mouth
reaction whenever I buy a biotech. Maybe it's just a long bad history of getting f$*!ed by
biotech gaps to the downside.
May 17
Step up and buy at pivot
You have to be decisive at the pivot. While I'm not suggest just buying shit, when the stars
alight - good pattern, good price and volume action, etc - you have to step up and buy. It
will either work or it won't - you have no control over the distribution of wins and losses.
Look for tight patterns and wait for a decisive breakout through the pivot - then let the odds
do what they may. If this isn't working for you, then odds are, the mkt environment is poor.
In a good mkt environment, you should get traction quickly and follow through in the days
after.
May 18
I never anticipate
I never anticipate what a stock will do and buy before the breakout. There is zero guarantee
it will ever breakout or in the manner you thought it would. Anticipation is not required to
get good entries.
May 18
No chasing stocks already up 2-3 days
Rule of thumb - don't buy stocks that are up 2 or 3 days in a row unless you want to go
broke. A stock should be down or tight for AT LEAST one day - preferably you want a multiday range to work with. The sweet spot is 3-5 days of sideways range.
May 18
Leverage through asymmetric situations, number of names
Leverage is gained through asymmetric situations - risking 5% in a stock that normally
moves 10% - a 10% move (which is normal) will already be a 2R profit. If the stock moves for
3-5 days up, you can get 3, 5, 8R or more.
The dumb way to do this is to trade large positions and on leverage, thinking this is the best
way to leverage trades. Most of my positions are 5%-10% of equity - less during tough
markets. If I'm fully invest (200%), I have 20-30 positions or more of various sizes,
depending on where I am in the position management phase.
But this only happens when things are really popping and the mkt is in sync - otherwise, I
might have 5 or 10 or zero positions.
May 19
No watchlist
This may go against conventional wisdom, but I usually don't use a watchlist. On any given
day, I have no clue which stocks are going to move ahead of time, so IMHO a watchlist does
little more than bias my opinions toward a group of stocks that may or may not do anything
at all. Also, based on past experience, having a watchlist gave me the urge to "do
something" with the watchlist stocks - they're on the watchlist after all and are somehow
now special lol.
The slippery slope on the other side with not having one is you don't want to get in the habit
of chasing shiny objects either - chasing breakouts and high volume moves.
What I do to get around this is have my scans so specific and focused, that whatever comes
through the scans effectively becomes my "watchlist". Some days there are 20 stocks
coming through and I have to use price, volume, and some discretion/experience to
determine which few I will trade. Other days, there are zero stocks coming through and I do
nothing.
But I let the mkt determine this ebb and flow for me - it's not some subjective thing that I'm
doing. It helps me to be aggressive when I need to and do nothing or little otherwise.
May 22
Experience is crucial
If it's not your experience, it's not your truth.
Experience in trading is crucial. You can read and study all you want. You can pay lip service
to all the trading axioms and market principles. But without experience in the trenches as to
why these axioms and principles exist in the first place, you'll just know them on a surface
level.
Until you get steam-rolled by the mkt after oversizing and over trading, you won't truly
respect the mkt. Until you experience FOMO and chasing, you won't truly know the
importance of patience. Until you fight the mkt and the trend, you won't truly understand
why the trend is your friend. Until you sell early, only to watch the stock go up 100%, you
won't truly understand the importance of trailing.
I don't fear the market because the mkt is inherently bad and out to get me. I fear the
market because I'm the one behind the wheel and I know the damage I can cause. So
ultimately, it's not just about understanding the mkt, but understanding yourself. Most of a
trading strategy isn't to control the market (which isn't possible), but to control you and
your actions in response to the market.
May 22
Market phenomena and trading strategy
Your trading strategy needs to be built around some kind of mkt phenomenon that occurs
often enough and reliably enough to give you a positive expectancy over time. The main
two premises I trade around is that the mkt goes through phases of expansion and
contraction and that a trend in motion tends to stay in motion.
The first leg up of the trend tends to fulfil both of these - the trend kicking into motion and
the strong expansion of price upward. This isn't something that I'm anticipating or guessing
about - it needs to be there already. This shows some kind of strong demand for the stock,
based on news or fundamentals or sector theme or whatever it might be. I don't care
usually (except maybe in regards to post earnings drift, which is a highly studied
phenomenon).
The second part of the equation is the contraction after the expansion. I'm looking for
something that was going 100mph and is now going 10mph. Something with an ADR of 10%
that's now compressed down to 5% - like a spring that's coiling and ready to uncoil. I want a
minimum of one down or tight day - preferably 3-5. This is the setup - setup does not mean
buy. Setup means watch.
The last part is the trigger - the call to action. This is the event that would cause you to put
money at risk, granted the first two considerations are met. My call to action is an expansion
(remember expansion, contraction, expansion?) of price and volume. I want a trend that
was in motion, that paused for a few days, to continue it's motion. For me this is a breaking
of the upper bollingerband (15m BB for 1-2 day pauses; 60m BB for 3-5 day pauses) on
strong volume buzz. Again, I don't anticipate this. I have zero clues which stock on my
"watchlist" will actually give me this trigger on any given day. Frankly I don't need to know
or what to know. All this does is introduce my own personal bias, which the mkt gives zero
fucks about. I want price and volume expansion to be the only bias I have for the day. The
mkt's opinion is all that counts.
And that's it! Simple, but not easy. Do all of these steps guarantee success? On a trade by
trade basis, no. I don't have a clue as to distribution of wins and losses or which ones will be
winners vs losers on an individual trade. No idea. But on a macro level, over a series of 10 or
20 or 100 trades? Yes absolutely. In the right mkt context, this method will put you in the
fastest moving names with the least amount of risk at the point of least resistance. Then it's
just a matter of risk and position management at that point.
This is my method in a nutshell. After 23 years in the trenches, making all of the mistakes
one could make, studying the greatest traders of the last 100+ years, distilling their wisdom
down to the simplest, most repeatable form that I could engineer.
May 23
Index proxy and market cycle
One thing to consider if you use index proxies to help you understand the mkt environment
- they are just proxies. The SPY tracks 500 stocks, the QQQ 100, the DIA 30, the IWM 2000,
the MDY 400. There are many occasions where a small handful of stocks will basically prop
up the index and mask what's going on under the surface. This can be a bit confusing, as the
index looks "healthy", but trades just aren't working and things under the hood are less
clear. It's for this reason I take a "weight of evidence" approach - realizing that no one
indicator or proxy will tell me everything I need to know to make an informed decision.
Some of the things I look at:
1) Index proxies - what is the trend of $IWM $MDY for mid/small, and $DIA $QQQ $SPY for
large cap?
2) Breadth - how many stocks are hitting 10 and 20-day new highs vs new lows? This tells
you about participation in the trend.
3) Sector RS - which sectors and industries are leading the mkt? If the top 5 sectors are
things like industrials, energy, materials, healthcare, etc, that's a sign that it's not a "risk on"
growth/PE expansion kind of market. Interest rate environment affects this on a macro
level.
4) Setups - how many of my setups are out there in the right sectors and mkt caps? I mostly
trade mid and small cap tech and consumer. That's not to say I don't trade other things, but
these tend to be the growth oriented and speculative sectors where some of the biggest
moves originate. If I don't see either a bunch of flag poles being built from expansions
upward and/or flags being built from the subsequent compression, then that's a good sign
the mkt isn't quite right.
5) Positions - how are my positions acting? If I'm getting stopped out repeatedly, that's not
good. If I'm getting immediate follow through on most of my trades, that's a good thing.
These data points aren't static - the mkt is constantly ebbing and flowing. My job is to
evaluate and assess these different things to determine what my odds of success are. It
takes time and experience, but you need something that tells you when to be aggressive
and when to be defensive. The market is driven by cycles - methods that work in some
environments are out of favor in others. Like @ivanhoff2 says - if you do the same thing in
the mkt, you are guaranteed to get different results. This just speaks to the fact that the mkt
is ruled by cycles and you need to understand when your setups work and under what
conditions.
May 26
Dave Landry’s wisdom on pullbacks
Love this snippet from Dave Landry’s “Layman’s Guide to Trading Stocks”. A lot of wisdom
here.
May 27
After 99 perfect trades, one bad can take you out of the game
Execute 99 trades perfectly - one bad trade can take you out of the game. That sounds
incredibly unfair, but no one said trading was fair. Oversizing a position, fighting the trend,
gambling on earnings and news calls, overuse of leverage. Just don't.
May 31
Dave Landry on swing trading
May 31
No crystal ball
I don't have a crystal ball and neither does anyone else. I rely on analysing supply/demand
pressures and trying to stay on the right side of the trend. It's not perfect but it's the best
thing I've found in 20+ years of looking and studying just about every method out there
June 1
Digging a deeper hole under stress leads to blow up
The worst thing you can do is turn a normal drawdown into a blowup. It's easy to get
frustrated after a series of losses and do dumb things trying to claw your way back increasing size thinking the next one "has" to be winner. This is essentially the Martingale
betting system - it has a 100% success rate until you lose 100% of your capital.
June 1
Function of probes
What is the point of putting out probes with half or quarter size? The point of these probes
isn't to make money - it's to provide information. How are your probes performing? Good?
Then slowly step up exposure. Poorly? That’s a good sign things aren’t quite right.
June 2
Why market condition is important
One reason I focus so much on mkt conditions is you must get follow-through in the days
and weeks after you enter - not just on one stock, but on average. This is regardless of your
particular long strategy - pullbacks, breakouts, undercut and rally, whatever. You have to
get follow-through after entry on average. Can you make money if only 2 out of 10 stocks
follow through? It's certainly mathematically possible, but not likely. Unless you have some
uncanny knack for stock picking (odds are you don't), it's incredibly hard to make progress
that way. Can you make money if 5 or 6 stocks out of 10 follow throughs? I sure the hell
hope so. If you cut your losers and ride your winners, odds favor that you'll make money
over time. For newer traders, it's incredibly easier to make money when the current pushes
you along than to try swimming upstream and wearing yourself out. If you fight the river,
chances are much higher you'll drown than make progress towards the shore.
June 2
Brutally honest about trading experience, invaluable lesson (this post affected and helped
me the most)
I'm quite possibly the worst trader that has ever lived. In more than 20 years of trading, I've
blown up multiple times - some of them with one trade gone wrong - others with a
Martingale death spiral from hell. Options, futures, currency, stocks - you name it, I've
probably blown up or done incredibly stupid things with it. It was never due to a lack of
knowledge. I've always been a steadfast student of the mkt. I've studied many of the
greatest swing and position traders of the last 100+ years. I've studied and tried just about
every indicator out there and made more "indicators of indicators" than I care to recall. All
in an attempt to give me some sort of "certainty". But in reality, all they ended up doing was
giving me a false sense of confidence. What turned things around for me that last 5 or 6
years to profitability? Understanding that the mkt doesn't care how smart I think I am.
Understanding that I'm not the one in control - the mkt is. Understanding that trading is
about odds and probabilities, not certainties. Understanding that mkt environment is one of
the most important parts of trading edge, especially for swing and position traders.
Understanding that I can do the exact same thing and get different results - not because my
system changed, but because the mkt conditions changed and I must change with them.
Understanding that one lapse in judgement, one revenge trade, one oversized position can
set me back days, weeks, months or years. Just one. I've literally had periods where I
flawlessly traded for months and months and then let one wayward trade wipe out all of
that progress. Happened so fast it made my head spin. You have to apply discipline and risk
management on every trade, not 99 out of 100. Trading is not easy, simply for the fact that
it's not fair. The odds are stacked against you - financially, psychologically, mathematically.
Even losing trades aren't fair - the simple fact that losing 20% requires to make 25% just to
get back to even shows the geometric degrade. The fact that one trade can doom you. The
fact that someone like Jesse Livermore, regarded as one of the most talent traders in
history, ended up killing himself after too many blowups. Most turtles never make it to the
ocean. This is a long way of saying to stick it out, if you have the willpower to do so. Your
journey from suck to profitability doesn't have to be as painful and long-lasting as mine. If
you do the work and improve your trading over time and honestly look at and assess your
results, you'll be surprised that one day, it'll all come together. You'll realize how far you've
come.
Trading is a probabilities and numbers game. I bring up trading math a lot because you can
learn a lot about trading if you understand the variables and how to manipulate them. You
start to understand how it is possible that successful traders can use a variety of approaches
and get positive outcomes. You can change the expectancy variables a number of ways and
still get a positive output. If you're not making money, you can look at your trading outputs
and isolate the problem. maybe your batting average is really low and your profit factor (avg
win/avg loss) isn't high enough to push you to positive. Ok, that's useful information. You
either have to find ways to improve your batting average or you have to find way to push
your profit factor higher or both. Maybe your timing of stocks sucks or you're trying to trade
in a poor mkt - both of these affects your batting avg. Focus on being more patient to wait
for the right R/R setups or favourable mkt conditions. Maybe you suck at trailing stocks and
getting those higher profit factor numbers. Focus on way to trail your trades better. Maybe
you're getting stopped out a lot right before big moves. Focus on putting your stop a tad
outside the noise to keep you from getting chopped out on intraday volatility and keep you
in a few more trades that add to your bottom line. If your batting average is good, but you
aren't making money, then it can only mean that your profit factor is too low to make you
profitable. You are likely choking off your winners (to get a higher batting average) or you
are letting your losers get out of control, wiping out whatever gains you make on the
winners. Understanding the expectancy formula variables can help you quickly figure out
your performance problems. You can then develop a plan to fix things and put you on the
road to positive performance. People who claim you must do things a certain way are
professing their ignorance of basic math.
June 2
Follow up to the previous post added more context to his development as a trader
I didn't realize my post yesterday would strike such a chord with struggling traders. As
someone who has done incredibly dumb shit in trading, I can empathize with many of the
comments and I'm sure many can empathize with mine. I've felt the gut-wrenching pain, the
loneliness, the mental anguish more times than I care to remember. I've "quit" trading
probably 15 times.
Each blowup or series of losses just further reinforcing my sense of worthlessness - as if
some evil part of my brain was sabotaging my efforts if for no other reason than to say "I
told you so".
These ppl that say "Well just don't bet it all on one trade" or "Don't fight the trend" or
whatever market axiom they want to parrot. No shit, Sherlock. Their lack of empathy shows
me that they are either in-human and never made those mistakes or they've never made
money in the mkt and are just good at parroting. I'll go with the latter.
My struggles in the market have always been psychological. I had an awful self-esteem
growing up. I had to prove myself. I needed to feel right so I didn't feel like a piece of shit. I
needed to win at trading so I didn't feel like a loser. Every loss piled onto my mental
anguish. Every blowup pushed me further from my dreams and goals. So I tried to "avoid"
losses by just ignoring them. Then I'd double or triple down, so I could "be right", so I didn't
feel like shit for being wrong. That obviously worked. Someone in a downward spiral of
poor decision making doesn't suddenly snap out of it - they have to hit rock bottom or have
a life-altering event. Ask any addict or alcoholic. People on the outside can't seem to
fathom what would drive people to do such things. Human psychology is a fickle beast.
My biggest victory in trading was after doing a lot of introspection and self-work. Fixing
those psychological hurdles. Subordinating myself to the mkt and releasing my need to be in
control. Disassociating losing with being a loser. Being able to walk away from my screens
and being ok with whatever outcome I come back to. If you have a fragile ego or poor selfesteem, I'd say if you don't do the inner work, you'll always self-sabotage. Maybe not
immediately, but it'll creep in like a cancer and then derail you when you think everything is
going fine. Refer back to Jesse Livermore.
I know I spend a lot of time waxing philosophically. Trading is literally one of the hardest
things I've ever tried to be successful in. Not necessarily because trading is difficult. Anyone
can "trade". But to trade well requires an almost in-human ability to get past your
psychological pitfalls to be able to see clearly enough. For me this didn't come easy or
quickly and came at great cost, financially and mentally. Some people can just "get it" - I
know I didn't and I don't believe most can. Otherwise, you'd see a lot more successful
traders.
June 3
What to do when market conditions deteriorate
When mkt conditions deteriorate, some advocate tightening up stops and taking even
smaller losses. Imho, this is a recipe for death by 1000 cuts. Many newer traders, trying to
do the right thing, get chewed the fuck up using tight stops in a poor mkt.
When conditions sour, I like to trade smaller and wider. If my normal size is 5%, I use 2.5%. If
my normal stop is low of the day, my stop becomes the lower BB. If I normally enter on the
15 or 30 min bar, I move to the 60 min bar and later in the session. I get more selective,
demand more confirmation.
This ensures, at a minimum, that I avoid much of the slop and false breakouts associate with
the higher volatility. This doesn't mean I'm going to somehow overcome the poor conditions
and make a bunch of money. It does mean I'm playing defense and keeping expectations in
line with reality.
June 3
Sizing advice for beginners
In the beginning, your focus should not be making money. It should be building skill and
discipline. As someone who struggled for many years, I wish I took this advice sooner in my
career. Instead of trying to "get rich", I should have been focused on skill development.
Traders scoff at the idea of trading with 1 share or $1 of risk, but then wonder why they fall
apart when they are trading 1,000 shares or risking $1,000. If you can't trade with discipline
for 20 trades with 1 share or $1 risk, wtf makes you think you'll be disciplined with more
than that? If you can trade 1 share, unwaveringly, for 20 trades in a row, then move to 2,
then 4, then 8 and so on. At some point, you'll reach a threshold where you feel emotions
on the trade. Stay there or slightly below that point. Once you can trade without emotion at
that level, then bump up again. Don't scale to the next level until you've proven discipline at
the previous level.
If you can't put a trade on and walk away for 2 hours while letting your stops do the work,
then you're too emotionally involved in the outcome. That usually means you're trading too
large or you haven't accepted the fact that the distribution of wins and losses is random on
any given trade and you're trying to control the outcome.
June 3
Trading is about trade-offs
Trading is ultimately about trade-offs - pros and cons. Sell into strength and you might miss
a big move. Don't sell into strength and you might give it all back. Use the low of the day
and you might get poked out to the penny only to see the stock turn around. If you sell
every winner at 20%, you're guaranteed to never get a 100% winner. If you love the
homerun triple digit gains, then be prepared to sit through 20-30% pullbacks and watching
perfectly good 20% gains go to zero. Use a wider stop and you have to use a smaller position
size. Anticipate the breakout and it might go nowhere. Trade high ADR stocks and you can
get higher gains, but then you have to trade smaller size and deal with crazy volatility. Wait
for the breakout and now you're paying up several % higher. Trade large size per position,
now you run out of capital quicker and have to be very selective. Trade smaller size, now
you have a bunch of small positions to manage. Choosing these 5 stocks means you can't
get those 5 stocks. There's an opportunity cost and a trade-off behind almost everything.
Trading decisions don't have to be an all or nothing proposition. You can sell some into
strength and trail some. You can buy a piece in anticipation and add on the breakout (if it
does). You can stagger your stop with half at the lows and the other half further away
outside normal volatility. You can trade a mix of high ADR stocks and some mid/lower ADR
stocks to smooth things out. You have to figure out what you can mentally handle and do
consistently. You have to be in touch with your mental and emotional state, knowing what
triggers cause you to usurp your trading plan.
If you can't stand a long losing streak and a low batting average, why on God's green earth
would you use a very tight stop? That almost guarantees you to have a low BA. Most people
don't have the mental fortitude to deal with being stopped out multiple times in a row
without flinching. You're better off trading wider and smaller, giving you a higher batting
average, fewer stop outs, and greater mental clarity.
Find your triggers - trust me, they're there. Develop ways to structure your trading to
minimize the triggers and maximize your strengths.
June 4
Stop loss math
Let's do some stop math, shall we. Bear with me.
Let's say you use tight stops because that's what's universally preached. Because of your
tight stop regimen, you get a 5 to 1 profit/loss ratio - $150 avg winner and $30 avg loser.
However, because you get stopped out so often, your batting average is around 30%, which
is common for tight stops.
Tight stop - $150*.3 - $30*.7 = $45-$21 = $24
You make $24 per trade on average and your profit factor is high, which is good. The bad is
that you have to endure wicked losing streaks, getting stopped out on random noise only to
have to re=enter, and mentally it just feels awful to lose so often, so you tend to fiddle with
your stops to avoid another loss.
Let's say you listen to Uncle Dave Landry and loosen your stops. Your average gain remains
the same - $150 - but your average loss is now double, because you're putting your stop loss
further away. However, since you're getting stopped out less often on noise, your batting
average has now gone from 30% to 50%.
Loose Stop - 150*.5 - 60*.5 = $45
Not only do you have less stop outs, more mental clarity and no longer have the urge to
sabotage your stops to ease your mental suffering, but you end up with almost double the
profits, despite having a 2:1 vs a 5:1 profit/loss ratio.
You can't look at expectancy in a vacuum. The largest profit factor isn't always the best
math, especially if it comes with a price tag of a shit win/loss ratio. I've tried it both ways
and I personally can't handle a low batting average. I sabotage the fuck out of things.
June 4
Difference between method and principle
As to methods there may be a million and then some, but principles are few. The man who
grasps principles can successfully select his own methods. The man who tries methods,
ignoring principles, is sure to have trouble.
The Pareto Principle, also known as the 80/20 rule, states that roughly 80% of the effects
come from 20% of the causes or inputs. It is named after Italian economist Vilfredo Pareto,
who observed this principle about wealth distribution in society.
How does this relate to trading? There's honestly a lot of bullshit in trading (the
inconsequential 80%) that accounts for 20% of the results. People hyperfocus on the
asinine details of trying different methods, thinking this is the answer, while ignoring or
paying lip service to critical trading principles that account for 80% of the results.
That's why you hear Kris in his videos often say "it doesn't matter" or "that's not important"
(about the unimportant 80%) - and talks again and again about the same shit (the important
20%).
Yes, there comes a point where the remaining 20% matters and you'll spend 80% of your
time trying to fine-tune and hone in that last bit to boost results. But you don't start there.
You start with principles first, not with the minor details that amount to 20% of the result.
A golfer will spend 1,000 hours on 5- and 10-foot putts. A basketball player will spend 1,000
hours shooting free throws and 3s. A pitcher will throw 1,000 pitches of just a handful of key
pitches. Free throws aren't glamorous. 5-foot putts don't look cool. But they are important
aspects of the game.
Stop looking for the "optimum" indicator parameter, while you continue to oversize your
positions. Stop looking for perfect way to draw a trendline, while you continue to look for
action in poor mkt conditions. Stop looking for the "perfect setup", while you hesitate to sell
the stock when your risk level has been hit. Stop looking for shortcuts, when you haven't
even done the work to learn principles.
June 6
Advice for beginners – feelings and discretion vs system and plan
If you are new to trading and most of your trading is guided by feelings and discretion, then
your money will likely be flowing into the pockets of traders with a system and a plan. You
can’t look at an experienced trader and how they use feel and judgement. They have
decades of experience and probably thousands of trades under their belt. Feel and
discretion is something you develop with time and experience. You don’t start there. Crawl,
walk, run. Tricycle, training wheels, bike, motorcycle. You don’t just jump on a fucking
motorcycle and use “judgement and feelings”. Great way to end up on your ass.
June 6
Tough love for fellow traders
I don’t say these things to be harsh, but from a perspective of experience. I wasted a lot of
time and a lot of money by not having a plan, gambling, oversizing, not respecting risk, not
paying attention to mkt conditions, system hopping, you name it. I’ve got the t-shirts. I’m
the club president. My learning curve would have been much shorter if I internalized the
things I’m telling you. I paid lip service to all this shit for years, but my actions told a
different story. Discipline, risk management - over used verbally, but under represented
with actions.
June 7
We don’t know which particular trade will work out
Expect half of your trades to not work out. Which half? If you knew that ahead of time then
we wouldn’t be having this conversation. Set your stop, don’t oversize, don’t fiddle fuck
with the stop. Let the stock breathe a little, despite your urge to choke it off immediately. I
know your favorite guru said stocks need to take off immediately or they need to be cut.
How well is that working for you? In a good mkt back drop, you’ll feel some pressure on
some stocks, but the rising tide will lift most of your boats. If you’re jumping out like a
scared rabbit at the first sign of pressure, then trade smaller until you aren’t scared.
June 7
Cool names for setups
I was trying to think of cool names for my setup. Here's a few I was toying around with:
BBC Explosion (Bollinger Band Contraction)
CROTCH (Contracted Range on to Continued Highs)
TAINT (Trend and Intensity, Narrow, Tight)
QUEEF (Quick upward expansion explosion follow-through)
June 8
Correlations between poker and trading
As I was playing Texas Hold 'Em on various planes the last two days, the correlations
between poker and stock trading seemed pretty evident - and I'm not the first to note this.
Some of my observations, based on kicking the shit out of all the NPCs at every virtual table I
played:
1) It's all about probabilities. You don't know how the hand will unfold ahead of time and
your odds change with every subsequent showing of the cards. As the flop, river, and turn
are shown, your odds are constantly changing. You can start out with a pair of aces, then as
cards come out, your once "strongest hand" now gets beat by two pair. If you go balls out
based on that initial outlay and "expect" you're going to win the hand, be prepared to be
disappointed and losing money. In the same way, your setup can look amazing at the start that doesn't mean you'll make money. Just like you don't go all in on pocket aces, don't go
all in on any setup, no matter how good it might look at first.
2) There are many permutations of some of basic hands, but it still has the same structure.
For example, a straight is a straight, but the composition of that straight can vary drastically.
It's still a straight. In the same way, setups can have a great deal of nuance, but the basic
structure remains the same.
3) Risk management is job number one. Sure you can get away with doing dumb shit like All
In, and you might get away with it a few times. But it just needs to not work once to be
game over.
4) Most of my winning hands are one pair, two pair...maybe a flush or straight. Simple and
not sexy, but they can win hands. Stop over focusing on sexy, complicated pairings that
have really low odds. It looks cool if you get it, but it's not very likely you will. Keep your
trading focused on simple, higher odds plays and win hands over time.
5) The odds of one hand working have nothing to do with how the next hand plays out. You
can have the exact same starting cards and have a completely different outcome. The
distribution of cards is random, how others play their hands is unknown, how the flop, turn
and river come out is random. This is exactly why you have to think in probabilities and not
assume, especially in the beginning of the hand, that you're going to win.
6) You're going to fold - a lot. Don't take it personal - the mkt doesn't know you. The mkt
doesn't care about your hopes, dreams, wishes, etc. Your job is to assess odds, manage risk,
and take high probability hands. The distribution of wins and losses is unknown ahead of
time, but if you assess odds, manage risk, and take high probability hands, the odds favor
you'll make money over a series of trades. Micro view - random - macro view - the odds are
in your favor. It's hard to hold those two opposing views at the same time, but you must.
7) I'm sure there are more, but I'm about to board the plane again. Last hop to Baltimore.
June 8
What does “trading in the flow” mean?
Trading in the flow, also known as "being in the zone," refers to a psychological state where
a trader is fully immersed and focused on their trading activities. It's a state of heightened
concentration and engagement, where the trader feels a sense of effortless performance
and time seems to fly by. In this state, traders often make decisions intuitively, without
overthinking or being influenced by external distractions. Think of a river that is calm and
steady.
Most traders have the opposite experience. Their trading is full of chaos and out of sync
with the mkt. This river is full of rapids, strong currents, agitated water, strong drops. These
conditions can be dangerous and deadly, except for the most experienced rafters.
Oftentimes, the difference between the smooth flowing river and the chaotic rapids is due
to obstructions in the river - rock, boulders, etc - or rapid changes in elevation in the
riverbed.
Wtf does this have to do with trading? Everything. The natural state you want to be in with
trading is in the flow. The rocks (fear, greed, ego, control) and the sharp elevation changes
(emotional instability) prevent you from getting there. As long as you have obstacles in your
path and an uneven emotional temperament, trading will always be chaotic and dangerous
for you. You’ll never truly experience trading in the flow until you, one by one, chip away
the boulders and regulate your emotions. You have to do the inner work to see the outer
change.
June 8
Addendum to trading the flow
As an addendum to my last post on trading the flow, the question then becomes - how do
you regulate your emotions? how do you remove the obstacles?
For me personally, I spent 15 years getting smashed against the rocks, living in constant
chaos. Things that helped me get more in the flow:
1) Size down - the bigger your position size relative to your total, the harder it is to maintain
an even keel. With all due respect to Mr. O'Neil (RIP), the advice of only having 2-3 positions
for a small account was probably the worst advice I ever tried to implement. I would live and
die by almost every trade. It wasn't until I went from 25-33% position sizes down to 2.5-5%
position sizes that I had the emotional clarity I needed. To all the math rangers out there
saying you can't make large returns with smaller positions, it's just simply not true. Ask
@Qullamaggie. Small positions, higher turnover.
2) Think in probabilities - once I understood that every trade, no matter how well thoughtout or how 7 star on a 5-star scale it looked, it could fail. With the knowing that any trade
can fail, no matter how good, then why would I ever oversize a position? Why would I ever
not put a stop to protect myself? Start thinking on every trade that "this trade could fail"
and size and stop loss it as if it will - then be pleasantly surprised if it doesn't - rather than
assuming it will win and then being disappointed if it doesn't.
3) Stop trying to "get rich" - trying aggressively to make my small account into a big account
is exactly what kept my small account small or my small account go to zero. It wasn't until I
stopped "trying to get rich" and started treating trading like a business that I finally started
to make progress toward actually being rich. Every trade is just one trade in a series of
1,000 trades. No one trade should make or break you. Your edge and strategy over time will
make you rich, not doing dumb shit.
4) Respect mkt conditions - this is a biggie. With all due respect to some of my mentors,
setups and indicators are not the starting point for great trading. Market conditions are.
The best setup falls to pieces if not traded in the right mkt. Almost all long strategies
perform well in an up trending mkt. As much of a "no shit" statement as that is, many
people also scoff at the idea that the opposite would be true - that almost all long strategies
do poorly when the mkt is choppy or down. To me that's also a "no shit" statement, but
many people will beat their heads against a poor mkt because their "setup is back tested to
do XYZ". Ok, sparky, have fun with that. I don't give a shit about your curve fitted back
testing. Your long strategy will fall to pieces if the backdrop doesn't favor upside and follow
through.
June 8
Being too specific does not help
I feel like people's obsession and need to have very specific criteria, indicators, scanning, etc
is it gives them some level of confidence and certainty to find winning trades - because they
are looking to be "right" - without realizing that in many ways, you "luck into" winning
trades by being present. You have literally nothing to do with what happens after you get in
and neither does your scan or indicator setting or any of that shit. Yes, those things help you
identify high probability setups, but that's not why most people care about criteria. I would
bet my trading account most traders don't think in probabilities - truly understanding the
random distribution of wins and losses. They just don't - it goes against human nature,
which is why most people don’t' trade very effectively. They are looking for certainty and
control. Just my opinion.
June 13
How to assess performance?
Your last 10 trades are a great "canary in the coal mine" - if you aren't making progress,
there are only two things possible - what you're doing doesn't have an edge or is random or the mkt conditions are hostile to your approach. Many think or assume they have an
edge (positive expectancy after a series of trades) but are just trading randomly. In other
cases, there is an edge there, but the trader chooses to trade that strategy in a hostile mkt
backdrop - then, thinking there is something "wrong with the system", proceeded to further
back test and change the system (thereby adding randomness and constant changes).
It's hard to know the difference between random results and the mkt backdrop. The best
thing you can do is to do something consistently for 3 months or 6 months and then
honestly assess the results. Let's say you have a long strategy. Was the mkt favorable and up
trending and you still didn't make money? Then you probably have no edge and are just
doing random things. Were you making progress and then it stopped suddenly? Then the
mkt might be the culprit. Maybe the mkt/sector rolled over or entered a choppy period.
Identify those conditions and make sure you avoid the conditions that negatively affect your
expectancy. Over time, you'll learn the difference between random outcomes and hostile
mkt conditions.
June 13
Relation between randomness and edge
When I say there is a random distribution between wins and losses, this isn't suggesting that
you trade randomly with no edge. It means, on a macro level, over a series of trades, your
system produces positive expectancy (hopefully) - while at the same time on an individual
trade by trade basis, you don't know ahead of time which will be winners or losers. Sure, in
a positive backdrop, you get more winners. Sure, you can change different aspects of the
system to improve the batting average or the profit factor. That still doesn't change the fact
that the outcome on individual trades is unknown.
I know, based on rough averages, that half of my trades will be losses (less in a strong mkt,
more in a poor one). Which ones? I have no idea ahead of time. Which will be full losses vs
partial losses? I have no idea ahead of time. Otherwise, why the fuck would I even trade
those stocks? Some trades will be large winners. Which ones? I have no idea ahead of time
- otherwise, I would oversize those positions or only trade those. Sometimes the mkt
backdrop is favorable and I have long runs of large winners. Could I oversize positions then
and take advantage of the backdrop? I could, but I would rather take on more positions, not
larger positions.
I didn't realize that probabilities-based trading was a contentious issue rofl. Maybe I'm
reading "old school" books and somehow times are different. I suspect not.
June 13
Losing sleep over entry, stop and exit
I was up last night thinking about precise entry and tight stops vs random entry and loose
stops. Why? Because I'm a nerd and this is what makes me lose sleep at night rofl. These are
two completely opposite lines of thinking, but very successful traders have employed both.
On one hand, you have the precise/tight group. Their methods seem heavily focused on
chart patterns (which they believe increase the probabilities) and precise entries (which
they think reduces risk and leads to higher profit factor).
On the other hand, you have Basso and others that have extensively tested betting and
game theory probabilities saying entries can be completely random (thereby contradicting
the chart pattern crowd). They use consistent bet size and very wide stops to take
advantage of the power of trends. To them, bet size and staying in the trend is of
paramount importance and the specific entry is not very important.
Was Qullamaggie so successful because of his chart patterns and precision? Or was he
successful because of his consistent bet size and managing winning trades correctly? Maybe
both, but interesting to ponder.
June 16
Some specifics do not matter much
One thing that used to trip me up a lot is when Qullamaggie talked about using the 1, 5, or
60m open range highs. Or he says "You can use whatever timeframe or a combination of
them. You don’t even have to use any intraday chart, just look at the daily chart and enter
when the stock is starting to break out."
Say what, Master Yoda? Which one is it? There can be big differences in all of these. This
used to drive me insane, and I lost a lot of sleep at night wracking my brain with
spreadsheets and all kinds of stupid shit. The same thing with his trendlines all over the
fucking map and slicing through all kinds of bars.
After reading about the Basso random entry experiment and other similar probability
studies, I started to realize entry precision isn't the most important factor - position size and
position management are. This is likely why KK doesn't really give a shit which one it is and
essentially says it doesn't matter.
Don't get me wrong, you still need an edge and asymmetric reward to risk is still important.
You need to take high R/R trades that will give you multiples of your risk on average. This is
more to point out that hyper focusing on precise entries is probably a less useful use of your
time than focusing on the more important factors of position size and position
management.
June 22
Boring and necessary math
Math is boring, but some math is necessary to understand critical trading components. If
you are struggling in trading, it's likely because you are violating some important aspect
necessary for positive expectancy.
((win rate * avg win size) - (loss rate * avg loss size)) * frequency
If your expectancy is negative, there are a few things likely going wrong:
1) Eat like a bird, shit like an elephant - this is a common problem traders have. In an effort
to have a "high win rate", they are quick to take profits and lots of them (keeping their avg
gain small), but then they let losses get out of hand (usually a few large, uncontained losses
that drive their avg loss size up). The couple of large losses annihilate all of the small gains
and then some.
Ex. (.70*$100) - (.30*$300) = -$20
2) Death by 1,000 cuts - this is another common problem, especially when traders employ
very tight stops, particularly in tough or choppy mkt environments. By employing super tight
stops, their win rate is usually very low and stop outs happen rapidly. These traders also
usually don't trail their winners properly and never get the large winners to make up for the
many many small losses.
ex. (.30*$100) - (.70*$50) = -$5
Frustrated trader: "But I'm getting 2:1 and cutting my losses short" - ok, bud, how's that
working for you?
The other problem is death by 1,000 cuts usually comes with a high frequency of trading so
take that negative expectancy and multiply it by lots and lots of trades.
The fix for these problems is understanding expectancy and correctly isolating your
particular problem. These are just two common examples - there are a number of other
issues and nuances, but these are probably the most common that I see. If your problem is
that you don't trail - then fix that. You have to get your avg winners much larger than your
losers or you need to stop letting a few losers get the best of you - or both. If you're cutting
winners short because you're scared of it going to a loss or you're not getting follow
through, then you're likely trading in a poor mkt where follow-through is difficult.
If you're suffering from death by 1,000 cuts, then stop beating your head against a tough
market and stop thinking that tight tight stops is somehow the answer to your problems.
Trading in a poor mkt with tight stops is probably the worst thing you can do. Either don't
trade, trade smaller, or don't use super tight stops.
The last point to make is these numbers will not be static. Your win/loss rate and avg
gain/loss amounts will fluctuate strongly based on mkt environment. A long setup that
produces strong positive expectancy outcomes in an uptrend will often be very negatively
skewed when the mkt turns south or choppy. Traders who don't understand this get
chewed the fuck up when they think their "high probability system" will just keep producing,
while ignoring the fact that the mkt conditions changed. They will take trade after trade
after trade because their "5-star setup" is supposed to be their holy grail without
understanding most 5-star setups fail in a poor mkt. Market conditions affect every part of
expectancy, so it's not something you can overlook or get around.
June 22
Market conditions and trends
Market conditions affect every aspect of expectancy of a system, which is why I spend so
much time on assessing and understanding market context when I trade. In general, here is
how things play out for long systems:
Uptrend - Long setups in an up-trending mkt (let's generically say 10 is over the 20 and
sloping up) generally perform very well. Most positions hit buy points and follow through,
either instantly or within a day or two of hitting the pivot. This momentum continues for
days and weeks after entry. Batting average is high, average gain is high, avg loss is small.
This is what Minervini calls an "easy dollar" market or what KK calls a momentum market.
Sideways/Chop - Long setups in a sideways or choppy market (mixed/rotating sectors, back
and forth) are very hit or miss. Breakouts tend to be fake outs or reverse quickly. Followthrough, when it does happen, tends to be short-lived. These kinds of mean-reverting
markets are very difficult for breakout traders, particularly those that use tight stops. There
is a tendency to get "sucked and fucked" by many setups and stopped out quickly. The ones
that do make progress, the progress is often slow. The very very few that do make decent
moves aren't enough to make up for the lots of small losses. Methods like "undercut and
reversal" and other mean-reversion systems can be successfully employed in these
conditions, but most breakout setups do very poorly. Batting average is mid or low, average
gain is mid or low, avg loss is small or mid. This is often where the "death by 1,000 cuts"
happens.
Downtrend - Long setups in downtrends (let's say 10 under 20 and sloping down), often
times, are easier than choppy markets. Volatility is high, so there is often a lack of tight
constructive setups. Even still, those that do setup, even if sloppily, often don't even
breakout - they just kind of slop around and then fall apart. All long setups and systems do
poorly in these markets, even the mean reversion ones that do better in choppy mkts. There
are few setups, few breakouts, little follow through except to the downside. This is a sit out
and do-nothing market, particularly on the long side.
These three scenarios are generic, but instructive on what actions you should take in
different markets. In an uptrend, money will come easily and quickly and trades will often
not give much pressure at all. These are the best situations to sit and trail and "double or
triple" your accounts, like the great KK mentions. In a choppy or range-bound market, trade
less, trade smaller, maybe wait for more confirmation before entering, or use some sort of
mean-reversion method. In a downtrend, either do nothing or employ some sort of
shorting methodology, but don't be aggressive on the long side. Don't go "looking for
action" in a poor market - you'll regret it.
My goal every day is to assess what kind of mkt I'm in, using a "weight of evidence"
approach with index/sector breadth and trend. The most important metric is what are your
positions doing. Are you getting follow through and making progress quickly on many
positions? Then the mkt or sector you're trading is probably favorable. If you have the
opposite problem, doing more isn't the answer. Cash is a position. Waiting is an option.
The mkt will still be there. But if you dig a massive hole in your equity doing dumb shit in a
less than favorable mkt, then you're just making it that much more difficult to make
progress when we do eventually get an uptrend. And we always get an uptrend eventually.
June 23
Market stages and how it affects swing trading
"The stock market is not a game, where for one party to win, another has to lose. It is a
game, ruled by cycles - periods, when almost everyone is a winner followed by periods,
when almost everyone is a loser. If you learn to distinguish between those two periods, you
will achieve substantial returns."
@ivanhoff2
The mkt is cyclical and by extension, trading is and must be viewed as cyclical. The strategies
and tactics you employ must be aligned with these cycles. Using the same exact approach in
every market environment won't get you the same exact results. In fact, doing the same
thing is guaranteed to get you different results.
New traders, and even experienced ones, have a hard time understanding and actually
internalizing this market truth. They constantly optimize and tweak their systems and
indicators, etc in search of the perfect "set it and forget" parameters that will bring them a
steady, consistent return regardless of conditions. Sorry, trading doesn't work this way.
I use a variety of indicators to let me know where I likely am in the cycle. I can't ever be
"certain", but I can get a pretty good gauge. Overlaying these onto a Stan Weinstein-esque
stage analysis is instructive:
Stage 1: Bottoming or Consolidation. After a long Stage 4 downtrend, the market indices
( $SPY $QQQ $MDY $IWM ), while maybe not in confirmed uptrends yet, will stop making
lower lows and will start to build higher lows. Breadth and trend may start to turn up in
some sectors, but is likely a mixed bag, with some sectors moving up and other still mired in
downtrends. Participation may be narrow with some early leading groups or stocks, but
progress will be cumbersome.
Stage 2: Uptrend. New Highs breadth outpaces NLs breadth, major indices and sectors are in
uptrends with the 10EMA above the 20EMA and rising. Participation is broad with most
sectors in uptrends. Most long-based systems and setups work well - progress is almost
effortless. Stocks hit buy points, follow through quickly, and trend for days or weeks.
Trading almost seems too easy. You just buy and trail. The main problem is there are more
setups and trades than you have capital to get them all - but that's a good problem to have.
Stage 3: Top or Consolidation. At this juncture, some sectors will likely turn down, with
breadth going red and trend rolling over. The indices may still be going up and give the
perception that everything is still fine, but under the surface, things a much less certain.
Participation starts to wane and the proliferation of setups starts to narrow. What was once
an "easy dollar" market, becomes more challenging. Breakouts start to be more like fake
outs and stop-outs from new positions and trailed positions begin to increase rapidly.
Progress has come to a halt and it feels like you're fighting a battle every day just to make
anything.
Stage 4: Downtrend. Eventually, the narrow leadership that was holding the market up
caves in. Ultimately, even the generals get taken behind the woodshed and disposed of. The
indices are in downtrends, with the 10 under the 20 and sloping down with the breadth
bleeding red across most sectors. There is almost a complete absence of setups, except in
maybe very small pockets of defensive names, healthcare, energy, or other non-growth
areas. In some ways, this is easy to manage for long-setup traders. The increased volatility,
lack of participation, and lack of overall constructive momentum setups (should) keep a
trader mostly on the sidelines. The only real way to get in trouble here is to go looking for it
by being overly active, taking sloppy setups, not paying attention to the very clear and
obvious signs that the mkt is sick.
Does the mkt go through this exact progression? Of course not. But by looking at the clues
from things like index/sector trends and breadth, the plurality (or lack) of setups, how your
stocks are acting and performing after you buy them from sound setups, etc - you should be
able to get a pretty good idea of where you are in the cycle and how to act. It takes time,
but over several years and several cycles, you should be able to modulate your actions to go
with the flow, instead of trying to think the mkt is somehow supposed to bend to your
wants and needs.
June 27
Waiting with a clear head
While it's true that you have to put on trades to participate and profit, most of trading,
especially swing and intermediate-term trading, is waiting. You wait for favorable
conditions, you wait for setups, you wait for those setups to trigger. Even after you're in the
trade, you're waiting for your stop-loss to get hit. If the stop doesn't get hit, you're waiting
for your target or trail to get hit. Trading is a game of patience and waiting.
The time it takes me to put in buy orders and set stops might add up to 10 mins of actual
activity, spread across the first 30-60 mins of the session. Once the movers have moved,
the rest of my day is just scanning to see if any other opportunities popped up after the
open. I don't sit there and watch the 5 mins bar and hyperactively move my stops around - I
usually walk away and do other things. If my stop is hit, I usually find out long after the fact
when I come back to my computer. Many days, I don't put on any trades and just wait and
watch, especially when things are a little uncertain.
Trading can be boring and lonely. No one in my family shares the same passion I do for
trading. They really don't understand it at all nor do they care to. I've tried to excitedly
explain things I was working on or my experiences to glazed-over expressions. They don't
share in the highs or understand the lows. That's totally fine. I don't expect them to share
the same enthusiasm that I do for trading.
This is a long way of saying if you got into trading for the excitement and adrenaline rush,
you're in for a rude awakening when you find out that good trading is boring, monotonous,
and often a lonely adventure. No one sees the long nights or thousands of hours studying,
looking at charts, and practicing your craft. Traders often suffer in silence, dealing with
drawdowns, losses, and setbacks unbeknownst to those around them. However, you trade,
structure your trading in such a way that you can maintain a clear head, handle the lows
without blowing up or giving up, and absorb the highs without getting too cocky. Like
@Qullamaggie said, it's you against you.
June 28
He is not cooking his dinner – nor does he cook the outcome of his trade
I don't know what I'm eating for dinner tonight, let alone know what any of my stocks will
be doing next week or next month. All you can do is position yourself for opportunity in high
R/R situations and release the outcome to the mkt and the odds. It either hits your stop-loss
or it hits your trail - you have zero control over which or when (except if you start fiddle
fucking with your stops and micromanaging your trades).
June 28
Increase exposure by increasing number of positions – not by increasing position size
I prefer to increase exposure by increasing number of positions - not by increasing position
size. I've gravitated to this approach after realizing too many times that the bigger my
positions got, the more I would get emotionally involved with a position. I'd start to forget
about probabilities and started becoming a cheerleader.
Also, the problem is that trends take time. Maybe I'd start off with smaller size at the start
of a market uptrend and by the time I'd see progress and gradually ramp size up, I'd
invariably be the biggest right into a correction or sloppy period, and then I'd have to turn
tail and go back small. The short-lived rallies of 2022 were especially bad for this.
Instead, I let the plurality of setups and breakouts determine my exposure levels and this
number will ebb and flow as the mkt does. If you ever see me with 5-10 positions total,
that's a good sign I haven't seen much worth playing or there haven't been a lot of setups.
Maybe it's due to volatility or poor mkt backdrop or whatever, but this protects me from
overcommitting in a poor mkt.
When the mkt picks up, NHs expands, and things are going great, I might have 20-30
positions or more. This can only happen if there are many breakouts, things are following
through, the mkt is on solid footing, and things are going well. Between new positions and
trailed positions, I get more and more exposure as setups breakout and work.
It also keeps me from becoming emotionally invested in any one position. No one position
will make or break my month, but it lets me be maximally exposed during an uptrend and
minimally exposed during a downtrend. Also, having many positions gives me a lot of
information about the mkt. If I have 5 positions and get stopped out of 1, what does that
really tell me? IMHO, not much. If I have 30 positions and get stopped out of 6, that's
giving me a lot more information for a similar amount of risk.
This isn't to suggest throw a dart, buy a bunch of random shit, and hope for the best. You
still need positive expectancy and you still need to take good R/R situations. I'm just
suggesting that I didn't start making progress until I stopped trading 20-33% positions with
1-2% risk and started trading more 2.5-5% positions and only .5% account risk. It's certainly
not perfect, but it's what I've come to adopt over the years.
June 28
How many days to get to 20+ positions? 5
One final comment on number of positions before I go to bed - in a solid uptrend, where
there are lots of setups, stop outs happen less frequently, and stocks trend longer, how long
would it take to get to 20 positions? I can easily get into 5 or more positions a day if setups
are popping. After 5 sessions, I might be at 20+ already. Now imagine a multi-week uptrend.
As you get new positions, sell part on some, trail the rest, you’re going to accumulate quite
a bit pretty quickly, even with stop outs.
June 28
Understanding themes and groups by deduction and induction
Understanding themes or group dynamics in the market can be either deductive or
inductive.
Top-down (deductive) - isolate the top sectors and/or industries by relative strength, then
drill down to the stocks in those groups. You're essentially deducing that the top stocks will
be in the top groups.
Bottom-up (inductive) - look at the top stocks by relative strength and make assertions
about groups or themes based on plurality and participation. You're inducing that stocks
move like schools of fish in groups and by isolating these themes, you'll be in the top areas.
You can probably combine these two as well and make sure your bottoms up analysis
matches your top-down and then if there's a conflict, then you have to decide what to do
about that. Either one of these approaches is a fine way to look at the market. There are
top traders that employ both approaches with success.
I'd say personally, the top-down approach is easier to understand and you get to a "right"
answer quicker - you're just looking at maybe the top 3 sectors and/or the top 20-30
industry groups. However, there's often a lag factor there - by the time a group is high on
the RS charts, then the move has often been going for a while. This method is often the
easiest to employ for newer traders and keeps them in the top performing groups and out
of the trash.
The bottoms up approach is more anticipatory - you can "see things coming". However, you
have to look through hundreds and thousands of stocks sometimes to get this perspective.
You also have to be really good at building a weight of evidence in your mind and
understanding and reading plurality to get an accurate sense of what's going on. Patterns
and clues crop up and proliferate across stocks and this is what builds themes from the
bottom up. This method is often used by more experienced traders who have the time and
experience to look through and assess hundreds of charts.
Trading and market analysis is all about trade-offs. If the top-down approach gets you 80%
of the solution in 20% of the time, then why not use that to your advantage? Will this get
you the same answers as the bottoms up? Usually, but not always.
June 29
No certainty in the market
I've been trading for over 20 years and in that time, I probably have thousands of hours of
"in the cockpit" time - not the mention countless of hours of after-market time - studying
stock market behavior and studying the greatest traders from that last 150 years. Despite
this, I fully understand that I'll be wrong - a lot. I can form an opinion based on the weight
of evidence and feel strongly about it, only to have one day of action completely change my
mind. Does that make me feel stupid sometimes? Sure - the mkt has a way of making a fool
of everyone. Does that mean I double down on my opinion and act like the mkt is wrong?
Only if I want things to end very poorly. At the end of the day, nothing you do will provide
certainty about the future - only probabilities.
Just like pocket Aces in poker doesn't guarantee a winning hand despite being the strongest
starting cards, neither does the initial outlay of the odds that you assess from the start. As
the flop, turn, and river get thrown out, your odds are constantly changing, no matter what
your starting hand was. In the same way, no matter how the mkt looks at one point in
time, as things unfold, you have to adjust your assessment of the odds in relation to the new
information.
June 29
Incredible runs by greats are rare and not easily reproducible
Stories of trading greatness always fascinated me. Zanger turning 11k into 48 million in 18
months. Darvas turning a few thousand into 2 million. Chris Kacher producing 70,000% in 4
1/2 years. Even recent incredible runs by Charles Harris, Oliver Kell, Qullamaggie and many
others demonstrate what is possible having the right method and the right mindset in the
right market.
While these stories are very inspiring and you can learn a lot from these traders, what
newer traders often overlook is the fact that these incredible runs are incredibly rare and
are incredibly specific to blowoff periods in the market. Newer traders, in their haste to
replicate the exact methods of these incredible traders, fail to account for the fact that they
are probably not in the same kind of blowoff market.
In fact, probably much like myself, they got into trading AFTER the massive blowoff move,
thinking that the same techniques would apply across the board. I started trading in 2001,
all bright-eyed and dreaming of the amazing gains I would make. I was going to be the next
Dan Zanger. Little did I realize amid my naivety that we were beginning a multi-year bear
market and I would spend the next several years proceeding to get my ass handed to me.
By the time the mkt actually bottomed in 2003, I had blown up several times and learned
the hard way that trading was not as easy as I imagined it would be.
This isn't to say these great trading feats are worthless to study or learn about. These stories
kept me going and motivated me when I was at my lowest. "If they can do it, so can I" was
my mantra as I would pick myself up off the floor and try again. My point is that if you study
these great traders, either keep in mind that these runs are rare and NOT the norm - or
study these traders during a period similar to what you're in now. Don't study
@Qullamaggie 2020/2021 - study him now after the parabolic move pops. Study him from
2015/16 when the mkt chopped sideways for two years. How did he handle the pullback of
2018 or the slop of 2019? These periods are far more instructive than studying a parabolic
like the 2000 or 2020/21 run and deluding yourself into thinking that's what you will do
after the fact.
June 30
Why most traders can’t replicate KK?
IMHO, what @PradeepBonde discusses here is exactly why most traders can't replicate
@Qullamaggie. While KK might have the mental fortitude to endure a 20-30% win rate, a
vast majority of traders don't. I know that I couldn't do it mentally, which is why I had to
modify a few tactics of K's approach to increase the win rate, while trying to maintain the
core of his setup approach. Using super tight stops might get you a higher profit factor and
will perhaps yield maximum raw returns - but this comes at a cost of a really low BA and
longer drawdowns.
This is precisely why I use stops that are a bit looser and positions that are a bit smaller.
Personally, to stick with my system and not sabotage things, I had to do what my personality
could handle, even if mathematically, it might not be "optimal". Who cares about optimal if
you can't follow it? Who cares about an "optimal" diet and exercise regime if it's so mentally
and physically exhausting that you quit after a few weeks or you only do it sporadically?
Maybe that's why there's only 1 KK and a bunch of followers. Maybe I'll never reach his
achievements, but if my slight modifications get me 50% of the way there, while allowing
me to maintain my sanity and trade with a clear head, then fuck optimal.
https://youtube.com/watch?v=yidu6gURSlI
June 30
Trading rants
You can luck into a few winning trades, but there is no lazy person's path to consistency.
There is no path where you do very little and get paid handsomely. That only happens in
the imaginations of lazy people. You have to be willing to read continuously, learn
constantly, invest the time and do the self-work. Trust me, you have psychological and
emotional baggage that will wreak havoc on your trading. Even professionals aren't
immune, regardless of their track record or previous accomplishments.
I have an extremely streamlined trading approach that takes me little time each day to
execute, but it was paid for with blood, sweat, tears, and blowups over the last 20 years. It
took thousands of hours of time and probably more than $100,000 of "education" tuition
that I paid to either learn from courses, books, and other traders, and to learn from the
school of hard knocks and getting my ass handed to me. I didn't learn to trade through
being passive and waiting for someone else to give me the answers. I was relentless in my
pursuit.
My difficulties in trading were never a lack of effort or lack of intelligence. I'm not a fucking
genius, but I'm pretty smart. I have a Bachelor of Finance, a Master of Cybersecurity, and I'm
working on my PhD in Technology Management. I was a Warrant Officer in the Army. I've
been a lot of places and I know some shit. That doesn't mean trading came automatic to
me. While I am mentally intelligent, what I lacked and what caused me the most pain was
emotional disregulation. I could paper trade and shadow box all fucking day, but once I got
in the ring and real P/L started punching me in the face, I was a whole different story. It was
like Dr. Jekyll would come out and show me who was really in charge.
I learned over time that leverage, large positions, low win rates, prolonged drawdowns and
other factors would wreck me psychologically. I had to develop strategies to counteract
those mental and emotional flaws. This took a lot of work and introspection. A lot of
understanding myself and building a system that worked with my psychology. When people
tell me what I'm doing isn't optimal or there's this, that, or the other formula or study - ok,
then use it. I personally don't give a flying fuck about your study. The only thing I care about
at this point in my trading career is consistency and longevity. Everything else can take a
back seat, for all I care. You have to do the work, you have to learn yourself, you have to
decide what works for you. At the end of the day, if you're not consistent or what you're
doing doesn't lead to longevity, you won't last long enough anyway, regardless of anything
else.
Do the fucking work and stop expecting to be spoon fed. I shake my head every day at the
blatant lack of willingness of some people to do the smallest amount of work. You won't
make it. I promise you.
July 3
Burn this section from Mark Boucher into your brain
Read this section from Mark Boucher until it's burned in your brain. While most traders
hyperfocus on tactics and indicators, the first order of business is identifying runaway
"markets" (stocks). Only after you've found the strongest, fastest horses should you even
consider looking at indicators and tactics. To do the opposite doesn't make sense. Imagine
putting the best saddle and horseshoes on the slowest horse and then being upset when he
isn't very fast. "But he has the best equipment, the best nutrition, the best XYZ". Ok, he's
still the slowest horse and he'll never beat the fastest horse. It's the same way with stocks.
Focus on the strongest trends and most explosive markup phases.
July 3
Bias and limitations in heuristics and patterns
These descriptions and patterns are simply heuristics. A heuristic is a mental shortcut or rule
of thumb that helps people make decisions or solve problems more quickly and efficiently a practical approach based on past experiences or general knowledge rather than a strict
logical or analytical method.
The point of showing these is help you make judgments or decisions about the stock you're
about to trade - a simple mental filter to ask yourself "Is my stock showing momentum
characteristics?" By using heuristics, newer traders can simplify the decision-making process
and make educated guesses based on available information, until such time as their
intuition matches their experiences.
Heuristics, just like chart patterns, are not foolproof and can sometimes lead to errors or
biases. They can result in cognitive biases, where traders rely on mental shortcuts that may
not always lead to accurate or optimal decisions. Common examples of heuristics include
availability heuristics (judging the likelihood of an event based on how easily examples come
to mind), representativeness heuristics (making judgments based on prototypes or
patterns), and anchoring and adjustment heuristics (using an initial piece of information as a
reference point for making judgments even if things have changed).
Overall, heuristics and chart patterns can be helpful in many situations, allowing traders to
make reasonably good decisions quickly. However, it's important to be aware of their
limitations and potential biases when using them.
July 4
What momentum really is?
@DanZanger: "Many people have sent me pattern recognition software that they have
setup on various software platforms such as TradeStation, or some other software. They run
all these scans and here are all these patterns. They come up with all these patterns, but
nothing moves. So you really have to find what moves and then find the patterns that they
create. I have initially missed the first move of a stock, but I will track it for a month or two
waiting for something to set up as opportunistic to buy either a breakout to the upside or a
potential sell to the downside."
Let me emphasize that again - you have to find what moves, then find the patterns they
create! This is the same thing that Boucher was talking about with his "runaway" stocks.
Don't guess what moves. Find what is moving and then wait for a favorable R/R situation.
Momentum measures the velocity of an asset. Velocity refers to both speed and direction.
I see a lot of stocks ppl post and they assume themselves to be "momentum" traders, but
based on what they are calling "momentum stocks", it seems they have severe
misconceptions about what momentum actually is. They aren't heeding Zanger or Boucher's
advice.
They say to themselves "The stock has a high ADR" and think that means it has momentum.
A stock can have volatility (high ADR) and no momentum. The ADR shows the daily average
fluctuations or volatility, but says nothing about speed or direction.
They say to themselves "The stock is in an uptrend". A stock can have trend and no
momentum. Slow, upward grinding stocks have an uptrend, but that doesn't mean it's doing
so quickly. Direction without speed.
They say to themselves "The stock has a high relative strength". A stock can have relative
strength and no momentum. This is especially true during downtrends, where more
defensive kinds of stocks drop less, rather than move up more than others. This is an
important distinction. To drop less than others doesn't mean it somehow has momentum it just means it's holding up better. Also, depending on the RS calculation period, the stock
could have a "High" RS value in the 90s based on a 6 or 12-month calculation but is far off its
highs. Just because a stock had momentum in the past (thus a high RS value) doesn't mean
it currently has momentum. A stock can have a high RS, but lack the right direction and
speed in the current moment.
If you study these past KK trades https://kj-gets-better.notion.site/Swing-Trading-SchoolNotes-c8649c120ae9480890eef59d49bd4c03, you'll probably notice the stock has all of
these things. These stocks had strong relative strength, high ADR, strong trend - strong
velocity, direction, speed, momentum. These qualities were there at the time of purchase not some relic of something the stock did six months ago. KK tracked and followed the
stocks that were moving with the highest velocity and waited for a favorable pattern. He
didn't trade second-rate, run of the mill stocks and hope they would pick up momentum at
some point.
As you're looking for stock to trade, look for things that have recent/current direction and
speed - velocity/momentum.
July 5
Musings about nuances
Ok, great, I war gamed and showed you stocks after the fact. How does that help you now?
Well the main way it helps you is to learn how price action unfolds in the real world. Books
can be misleading by showing you the choicest situations, but the mkt does its best to shake
and fake. If you want to learn about fish, study fish. If you want to learn about momentum
moves, study momentum moves. Learn the nuances. Learn the commonalities and
tendencies. Even if you study them after the fact, it still helps to burn these concepts into
your brain.
Study recent moves, not just ones from months or years ago. I was in $UPST $OPEN $IONQ
$MGOL $QBTS $CVNA $AMTX $BBAI and a whole bunch of these stocks recently. I'm not
just cherry-picking things after the fact.
As I've stated ad nauseum recently, I trade two primary setups, both pinned in my profile. I
trade these setups in stocks that are in the context of a big picture, weekly ADX markup
phase in 95% of cases. The rare 5% of cases I don't, it's usually some stock blasting off the
bottom and the ADX hasn't had time to catch up yet.
One way to build your watchlist is to wait for the stock to have a down week or pause week.
This does several things - it helps you be patient and not chase. It also gives the stock time
to rest a little, which helps your odds. KK recommends 2 weeks to 2 months for a
consolidation. That means on a weekly chart, you're going to see at least two weeks of
sideways or down action. If the only thing you try to play are little 1–3 day pauses, sure that
can work, but you also can miss some of these bigger, more meaningful moves.
Once you have your watchlist built, then use trendlines, use bollingerbands, use whatever,
but wait for pivots to form - usually will be 3-5 days of narrow, tight ranged action in the
stock. If you're a breakout trader, the best time to trade is once this 3-5 day range is broken
on heavy volume and strong price action. That's your go trigger. If you can't sit there and
wait for pivot breaks and a volume, then try to hang stops out there and get "stopped in".
This is less effective IMHO, but still viable. You can even use the weekly bar highs as a
reference. Once you get a down week or a pause week, put a buy stop at the top and a sell
stop at the bottom of the weekly bar. If you don't get triggered that week, and the stock
still has the right momentum look, then move it things down to the next week's range. The
stock will do one of two things - it will either keep bleeding out and shit the bed, or it'll
bounce off the MAs and stop you in. You don't even have to be there.
Yes, this is more passive and your positions will likely have to be smaller, but what's worse?
Having smaller positions or having no position in a potential leading momentum stock? You
can even trail with the 10-week MA instead of the 10-day MA. You can even add in pieces start with 1/3, then add 1/3 on subsequent breakouts as long as your trail isn't violated.
There are so many options and strategies to trade. You just have to find out what works for
you and the amount of time you can commit. In some ways, being more passive and using
the weekly will help you to not micromanage your way out of perfectly fine positions.
July 6
Sequences of events when the market gets shitty
It doesn't always happen this way, but the typical sequence of events when the mkt gets
shitty happens like this:
1) New trades start to struggle - stopout at a higher rate and/or fail to make much progress
after breaking out
2) Existing trades start to roll over and stop out by breaking through the trailing MAs or
having a climax kind of move up that stretches and extend far beyond the MAs
3) Proliferation of setups shrinks - there are far fewer things setting up and even fewer
things breaking out.
4) Indices, leading sectors and industries start to roll over - the first sign is price breaks the
10EMA and the MA starts to slope down.
5) By now, breadth of the indices and/or the sectors start to go negative or have already
done so - that means the breadth of NLs is now exceeding the breadth of NHs.
6) As the mkt continues to bleed out, then the top sectors and groups will now be below the
20EMA and that will start to slope down.
Things don't unfold exactly like this, but these are warning signs. If number 1 happens, that
doesn't mean you automatically to go cash and run for the hills. However, the more of these
things that happen, the more defensive your mindset should get. When these things
happen, it doesn't matter what you feel or think, your train of thought should be getting
more defensive, not getting more aggressive. Your actions should be to reduce size, reduce
trading frequency, maybe take profits in extended names, wait for more confirmation
before taking any new trades, raise your timeframe from daily to weekly, etc.
July 6
Sequence of events when the market gets better
On the opposite side of things, these same criteria can be used to determine when to be
more aggressive:
1) New trades start to work - stop out rate decreases and stocks make more progress after
breaking out
2) Stocks start to roll up and break through the declining MAs and start to turn key MAs
upward
3) Proliferation of setups grows - more and more stocks setup and break out.
4) Indices, leading sectors and industries start to roll up - the first sign is price breaks up
through the 10EMA and the MA starts to slope up. 5) By now, breadth of the indices and/or
the sectors starts to turn positive or have already done so - that means the breadth of NHs
is now exceeding the breadth of NLs.
6) As the mkt continues to rally, then the top sectors and groups will now be above the
20EMA and that will start to slope up.
Similarly, if number 1 happens, don't go balls deep and get 100% exposure after two days.
Incrementally step up your exposure as things start to work and the weight of evidence tilts
in your favor. Trading is like a dance and the mkt has to be the one doing the leading. If you
don't follow the cues and clues, the mkt will step on your toes over and over again.
July 7
Luxury of access to wizards nowadays vs before
I remember when I started trading in 2001 - how fascinated I was by the Market Wizard
books by Jack Schwager and The Best by Kevin Marder - the ability to get into the heads of
top traders and try to understand their thinking was invaluable to me and such a
motivation.
With the advent of social media platforms, this information is widely available, infinitely
more frequent, and often free. There are so many resources to learn how to trade and get
perspective from great traders. A simple google search unearths a treasure trove of
knowledge from @markminervini, @theEquilibrium, @1charts6, @PradeepBonde,
@Qullamaggie, @drmansipd, @dryan310, @MarkRitchie_II, @RyanPierpont,
@Trader_mcaruso, @Upticken.
Yet people clamour around and act like they have no idea what to do or where to start.
Start with traders with a proven track record. If something they say contradicts what you
think, don't brush it off - try to understand why. In all likelihood, you're the one with the
misconception, not the top trader.
As you listen to their interviews and try to understand their approach and mindset, you'll
notice a significant confluence in their principles, despite the nuances of their tactics. These
principles are what you need to latch onto - not the nuances. Success leaves clues.
July 7
Information overload and rigor of study
One comparison I can make regarding trading information overload and learning is
something I have started to understand in my PhD studies. One of the reasons you are
required to read so much literature is not just to pick up on different perspectives but
repetition of information. Your brain builds strong neural pathways not by rotely reading
and memorizing the same material but by reading large swaths of material and seeing the
same principles from different viewpoints. You start to see patterns and build connections
This is where true learning and understanding builds. Do the professors think this is
information overload to assign 20 different papers a week and make you synthesize the
material? I'm sure they couldn't care less. Could they simplify things and spoon-feed you
the answers and tell you the principles up front? I'm sure they could, but that doesn't quite
help deepen your knowledge - leaving you with a surface understanding of the topic. As you
read more, experience more, learn more, apply more, this immersion of principles and
perspectives starts to take on more meaning.
The same can be said about gaining knowledge and proficiency in trading. Yes there is a lot
of material and methods and nuances and perspectives. In a lot of cases, many people are
just unwilling to do the work and put in the time. They want instant results and they want
them now. People are intrinsically lazy and apt to distractions. They would rather scroll on
their phone than watch a Minervini interview. They would rather watch a meaningless show
than read a book or study charts. I know as much as I do about trading and methods
because I put time in every single day and have done so for more than 20 years. No great
trader I've ever studied somehow just "became great" - they worked on it day by day,
month by month, year by year - many many hours of reading, studying, backtesting,
wargaming, failing, retrying, failing again, retrying. Minervini, Qullamaggie and many others
stuck at trading for years in the beginning, but they relentlessly studied and improved their
trading. You have to study trading with the same rigor as a PhD student studies their
profession.
July 7
Ranting about meta-analysis
"Meta-analysis is the statistical combination of results from two or more separate studies.
Potential advantages of meta-analyses include an improvement in precision, the ability to
answer questions not posed by individual studies, and the opportunity to settle
controversies arising from conflicting claims."
To continue my rant from earlier now that I'm finished driving LBR's "Holy Grail" pattern looks an awful lot like Schaap's ADXtender pattern. Jeff Cooper's
"jack in the box" pattern looks an awful lot like Schaap's ADXpress pattern. Zanger,
Boucher, and Qullamaggie all talk about finding strong momentum stocks and trading the
patterns they create. Almost every top momentum trader I've ever studied uses relative
strength and trades stocks near new highs. Minerini VCP patterns are a characteristic of
nearly all good stock patterns across all timeframes. I only noticed these connections and
similarities because I've studied hundreds of trading systems and hundreds of traders. Even
if you're new to trading and you don't understand exactly why these traders do things a
certain way, just do it and understand later as you gain experience. Let their experience and
wisdom guide you until you have enough experience and wisdom to call your own shots.
When you study lots of traders, lots of themes emerge. You are essentially doing a "metaanalysis" of the greatest traders in the world, past and present. You are looking for
convergence and divergence. You are studying the sum of their greatest methods, lessons
learned, decades of study and experience. This is literally the greatest shortcut you can ask
for. You are learning from their greatest failures and studying the outputs of decades of
work. When you do this across a wide swath of top traders, it's a gold mine of learning. At
some point, something will resonate with you. Do a deep dive on it. Over time, no matter
how much you admire a trader, you'll develop your own style. I have the greatest amount
of respect for KK, but after trying his style, some things didn't sit well with me or I couldn't
do some of the things he does based on psychology or time or whatever. So I modified a
few things to suit my personality. I didn't just throw his wisdom out the window.
This is a long way of saying, there are no shortcuts except learning from the wisdom of
successful people. Even then, you have to put in the time, to do the meta-analysis of
greatness along with your own empirical evidence over time.
July 8
Dumpster diver on 52-week high
At the end of the day you have to pick a style that works for you. I'm a dumpster diver - I'll
sift around in a pile of shit if I think there might be some coin there. After watching
stockbee time and time again show how some of the biggest winners every year start their
moves far off their highs, many with zero fundamentals to speak of, I started to not be so
rigid about the 52-week high thing, even though all my heroes insisted on it. I want the
stocks I'm trading to be near recent highs, but it doesn't have to be 52-week for me. I'm also
a strict technician, so don't usually give two shits about fundamentals. Again, my mentors
would scoff at that, but I've found that it doesn't hurt me as much as I assumed it would. To
each his own.
July 8
One, maybe two setups
What are your one, maybe two setups?
@inninuM had a great @Qullamaggie quote where Kris is saying no matter what, you
eventually have to settle on just a few setups you trade over and over again. Regardless of
top trader you’ll study, this is the case in 99% of cases. They don’t have 100 or 20 or 10
different setups. They have 5 or 3 or 1. And they are usually simple concepts - phenomena
that repeat in the mkt and offer solid expectancy characteristics. They know these setups
inside and out. They know when the setup doesn’t work. They know when things are “off”
for their setup and when to push hard.
July 8
Fundamentals and other biases
I used to obsess about fundamentals. Nearly all of my trading mentors emphasized topnotch fundamentals so why would I do anything less. Many of these traders were O'Neil
disciples, so earnings, sales, ROE and the like were front and centre. I had all the IBD
subscriptions and obsessed over all the metrics. The more I tried to do this, the more
confused I became about what was "optimal". Well, this guy uses 25% for the last two
quarters, but that one uses 30% for the last quarter and last FY, while this one cares about
forecasted earnings, and yet another cares about changes in projections. But then we don't
want it "too expensive", so the PE needs to be 75% or less of the growth. Well, this one
over here cares more about PE versus the sales, not the earnings. What about ROE? 13%?
20%? I would add criteria, massage criteria, slide it up this way and down that way. 25%
earnings today. No, wait, that's not high enough 40% now. On and on this goat rope would
go. I can't recall how much sleep I've lost mulling over fundamentals and perfect
combinations.
Eventually, after coming across enough traders, it became apparent to me that plenty of
successful traders didn't concern themselves with fundamentals at all. Or it was a
preference, but not a requirement. Most of these were swing traders like Larry Conners,
Dave Landry, Jeff Cooper, Stockbee, LBR or any number of swing trading technicians. They
were confidently taking trades day after day with almost no regard to any fundamental
criteria. In fact, Market Wizard Ed Seykota once said that, “Fundamentals that you read
about typically are useless as the market has already discounted the price, and I call them
‘funny-mentals’.
That being said, I think Mark Boucher's two classifications are spot on - fixed stars and
meteors. There are few fixed stars and they are always guided by strong fundamentals.
These are the top-notch stocks that keep producing over and over. These are the
institutional must-own "big stocks" that O'Neil relentlessly pursued. Then there are the
meteors that have an explosive movement but fizzle almost as fast as they came. They are
still tradeable, but these aren't the stocks you tuck in your portfolio for years. You trade
them for a season and then they disappear. If you want to obsess about treasure hunting
and picking the next monster stock, then look for fixed star kinds of stocks. There have been
many many successful traders that have done that. If you trade meteors, then also
recognize them for what they are. These are tradeable momentum stocks, but they don't
usually last for more than a little while after their day in the sun. Or if you want a gardening
analogy -make sure you know the difference between perennials and annuals. Perennials
go dormant but come back for multiple seasons. Annuals only last one season.
July 9
Picking on IBD
I'm not trying to intentionally dog IBD - ok maybe I am after all the money I spent over the
years - but I'm more trying to make the point that ppl put WAY too much faith in
fundamentals. An almost religious-like belief in them. And think that if only they somehow
picked the "best of the best of the best, Sir" (Men In Black reference anyone?), then they'll
be on the golden road to profit city. Sadly, IBD makes a lot more money from dreamers
dreaming big dreams than those dreamers make off of IBD selling slickly advertised products
to find "true market leaders" or whatever they want to call them.
July 10
Statistics of returns after volatility compression
Nuggets from https://adamhgrimes.com/volatility-compression-2/:
"The tendency for a sharp directional move to come after a volatility compression is a
tradable tendency."
"a sharp move, up or down, is likely to continue for some time." (Look at the table)"
"In consolidations, volatility contracts, almost as if the market is gathering energy, and then
the market makes an explosive directional move. In time, that move exhausts itself, the
market rolls over into a trading range (consolidation) and volatility begins to contract. The
most fundamental technical cycle, the alternation of trend and trading range, is actually a
cycle in the volatility of the asset!
One of the reasons I use ADR and intraday Bollingerbands is not because they are some kind
of magical formulas. They are just tools to help understand and visualize one of the most
common and tradeable tendencies of market action - the expansion and contraction of
volatility and price. People get so wrapped up in the precise calculations of these things
and completely miss the forest for the trees. From a principles first perspective, the
principle is expansion and contraction - the tactics can be a variety of things that exploit
this.
Numerous traders throughout my last 20+ years of market studies use methods that
exploits this expansion/contraction phenomenon. The VCP pattern, which is literally
"volatility contraction pattern", is the basis behind almost all of minervini's methods.
Qullamaggie's flag pattern looks for "an orderly pullback and consolidation with higher lows
and tightening range in the consolidation phase" - this is a volatility contraction. LBR's holy
grail and Schaap's ADXtender are merely pauses and consolidations after an expansion
phase up/down. Even the handle in a cup with handle is merely just a volatility contraction
in the context of a bigger basing structure.
If you chose to incorporate volatility expansion and contraction into your trading, keep in
mind the principle - we're looking for stocks which had an expansion in volatility - a strong
directional move - which then consolidates/contracts over some period of time and the
volatility reverts back to or below some mean - and then we're looking for the stock to
expand back out of that equilibrium point. There are numerous tactics to exploit this. The
first step is learning how to identify this setup over and over again. Looking at numerous
past examples helps burn it into your brain.
July 11
Trading expectations in monetary terms
One reason I mention the trading for a living thread is you have to have reasonable
expectations. I think a lot of newer traders have very unrealistic expectations of what they'll
be able to do in the mkt. They think they can take a 10 or 25k account and make a few
thousand a month. Or turn that into 200k in a year. I spent many years trying to
aggressively turn a small account into a large account, which led to a lot of impulsive and
destructive trading behaviours in an effort to "push performance". I had some really high
highs, followed by blowups or severe drawdowns. My equity curve looked like a roller
coaster. I wanted to make massive returns like my trading heroes, so I pushed leverage and
large positions sizes, thinking this was the way to get there. It wasn't until I took a more
reasonable, conservative approach where I started to make real progress.
I started to understand that 100% up on year one, followed by 50% down the next year put
me back to zero gains after two years. That's not fucking fair - but that's how trading math
works. Or losing 50% in one year meant I had to make 100% the next year just to get back
to where I already was. I started to understand that minimizing drawdowns and
compounding gains was the secret sauce - not having massive gains one year only to have a
nasty drawdown wipe it all away. It took me many years, in fact, for this to finally register in
my thick head. I started to realize that 10% + 5% - 2% + 20% - 2% -2% + 10% + 5% - 2% +
20% - 2% -2% + was a much faster way to make gains than 100% - 50% + 100% -33% etc.
Even though none of the months are necessarily "mind-blowing", it's the consistency,
controlling drawdowns, and compounding returns that matters most - even though this is
much less "sexy" than saying you had some massive year. That's not to say you won't have
massive months or massive years with compounding. It's more realizing that I have no
control over that.
Some markets will be very good for swing trading and I'll make some big months. Other
periods of time (in some cases, weeks and months of time), the mkt sucks for just about all
long methods. No matter how much you try to "push performance" during these periods,
you just aren't going to make much progress. In fact, pushing in these kinds of mkts is very
destructive, as I found out time and time again the hard way. I started to learn not to fear
the market, but to fear the destruction I could cause in the wrong market. The mkt is neutral
and doesn't give a fuck about me as a person. The mkt can be your best friend or your worst
enemy - your only job is to determine what mood the mkt is in and follow suit. Happy wife,
happy life.
My personal metric for when I make the leap is when I can replace my current 11-12k a
month after taxes with trading profits. When I can, using a consistent, conservative trading
approach, average more than what I'm making now, after taxes, then and only then will I
feel like I've "made it" to the point of being a professional. That means I need to make about
15-20k a month on average - up months, down months, big months, small months and
everything in between. That's between 800k-1 million or so, if I take a conservative estimate
of averaging 2% a month. Whatever your personal benchmarks are, those are yours and
yours alone. My point is, you have to be reasonable with your expectations if you ever hope
to make any progress long-term.
July 11
EPs are not easy to trade
Qullamaggie: "The beautiful part of this method is you find stocks that have a
FUNDAMENTAL REASON to go up, stocks that have rocket fuel that can generate alpha for
your portfolio. Look at the VXF chart below (or IWM if you so prefer) and you will see the
majority of stocks went sideways during this period where these EPs made 50-100% moves
post opening range highs." https://qullamaggie.com/how-to-master-a-setup-episodicpivots/
While many people will hyperfocus on the positive aspects of EPs and latch onto these kinds
of statements above, I also want you to pay close attention to the examples he uses. It's not
all sunshine and rainbows when trading EPs. It can get frustrating. There are plenty of
whipsaws, shakeouts, and fake outs. Does that mean to avoid them? No, it just means to
go into trading them with reasonable expectations. You might have to enter more than once
on the same day. Many EPs don't lead to monster moves or do much after that initial gap.
Many EPs reverse after sucking a bunch of excited traders in. Even Kris said it might take 5-8
earnings seasons to get good at them. That is several years of fumble fucking your way
through them. If they were easy, it wouldn't take 5-8 seasons. Be realistic with your
expectations.
Use reasonable position sizes. Don't go "all in", no matter how good the report seems.
July 11
Reasonable and realistic expectations
One theme I've been harping on lately is reasonableness and having realistic expectations
about trading. Many, many traders have very unrealistic expectations. If you are a newer
trader, the goal in your head should not be to "get rich". Your first goal should not be to try
to be a "full-time trader" with 20k in your account. Your first objective is to not blow the
fuck up. Your goal should be to learn just one or two setups inside and out and execute
them consistently for 50-100 trades with very small size - I'm talking $5 or $10 of risk. Only
after you've proven to yourself that you can actually be consistent with small risk and 1-2
setups do you even consider increasing size. If you can't make positive returns with $5-10 of
risk, what the hell makes you think you can make money risking 10 or 100 times that?
Reasonableness and expectation management when it comes to returns. Most professionals
know that you don't make money every day, yet newer traders for some reason think they'll
extract money from the mkt daily, like it's a job. It doesn't work like that. Only in the rarest
of rare trading stories have I heard of traders who have rare down weeks or months. Maybe
they exist out there, but results like this are not the norm and certainly not for average joes
like us. There's a distribution of wins and losses not only trade by trade, but across weeks
and months. There will be down weeks, down months, and down quarters sometimes. It's
not reasonable to think gains will come every day, when the reality is gains are often
streaky, skewed, and highly mkt correlated, especially for anyone with a timeframe longer
than day trading.
Understand where you are in your learning curve and align your expectations with reality.
Maybe you're in a job you hate and trading is your ticket to freedom from the rat race.
That's a perfectly fine dream to have. However, the way to get there isn't taking massive
risks and having no idea what you're doing. That's called gambling. As someone who spent
almost 15 years in a perpetual boom-bust cycle before finally breaking out of it, I have a lot
of experience in the area of unrealistic expectations. At this point in my career, I can look
back and understand that it was the massive risks and unrealistic expectations that probably
kept my small account small from massive drawdowns and blowups. I'd be much much
further towards my goals if I had a better respect for risk and a better understanding of how
to modulate my aggressiveness based on cycles.
People point to guys like KK and Zanger who took massive risks early on to get where they
were. That's amazing for them and I have a ton of respect for them, but I'm not them
obviously. Maybe you have to start off as a gunslinger and then back off. However, their
road was not a straight line and they are far more conservative with risk now and not the
gunslingers they used to be. I found taking massive risks to be detrimental to my mental
health and my account balance. Maybe that's why they are legends in the trading world and
I'm just a guy on Twitter slowly grinding towards my goals. We all have to do what works
for ourselves.
July 12
Breath and other indications – when to step on gas or brake
For those using the breadth tracker and sector/industries RS, along the lines of the
expectation management thread:
1) These are lagging indicators - you likely won't be able to stare at them long enough to tell
you the future. This is simply due to the fact of how they are calculated. The NHs/NLs is
calculated based on the 20-day high/low. The sector/industry RS is based on the 1 month RS
- by the time it hits this list, things have already been moving, unless it's in the middle of a
correction. Similarly, by the time check marks start dropping off the sector/industry column,
that means it's already below the 10-day MA first, then the 20-day. That takes time.
2) These metrics tell you what the average stock is doing (with a lag), not what your
watchlist and stocks are doing. The point of these isn't in their predictive value, but in their
weight of evidence and confirming value.
3) As I've posted several times, your first line of analysis and defense is your own stocks.
That is about as close to "real time" as you're going to get. If you are consistently taking the
same setups and those setups start to struggle, that is your first warning sign.
4) If your watchlist of setups and potentials then starts to shit the bed, not breakout, have
poor action, etc that's warning number 2. You don't even have to risk any money to extract
value of the action of your watchlist. If your best of the best watchlist items are struggling,
then what do you think will happen after you buy them?
5) Usually by now, the NH/NLs breadth will start to wane. Maybe a few groups will have
flipped red. Maybe a few sectors/industries will have dropped below their 10-day MA. This
deterioration will continue until there's either a vary narrow pool of stocks holding the mkt
up, which happens a lot with institutional window dressing - or the correction is very
obvious, even in the indices, by virtue of them being below their 10/20 MA.
As the evidence piles up against the market, so should your aggressiveness reduce in direct
proportion. These are just guidelines to help modulate your aggressiveness. I wish I had
known this stuff in my earlier days. I feel I would have experienced a lot fewer busts after
my booms. Most of my drawdowns and blowups were directly related to the mkt conditions
deteriorating and me not taking the appropriate actions to reduce my risk and my activities
levels. I would either continue to trade with large size and on margin sometimes. Or I would
get chopped to 1,000 pieces in a choppy non-directional market. Both situations cause a
massive exodus of your capital base. I highly highly recommend that you learn how to step
on the gas and when to step on the brakes. It will shorten your learning curve a lot and help
reduce drawdown.
July 12
To get a different result, you literally have to become a different person
To make progress in trading, you almost have to become a different person. If you keep
approaching trading with the same mindset, you'll keep getting the same results. My
learning curve was longer than most - not because I'm stupid, but because I kept
approaching trading from the same broken mental framework. So, surprise, surprise - I kept
getting the same results over and over again. It wasn't until I released my need to control
the outcome and to stop making it about being "right" or "wrong" - started thinking in
probabilities and being ok with the fact that I have no control over the distribution of wins
and losses on any one trade or how far a trade will go or how long the mkt will rally - that I
started to undo some of my destructive habits. I read Mark Douglas' works many times over
the years, but the lessons didn't sink into my thick head. It's easy to read things and not
apply them. You literally have to become a different person to get a different result.
July 14
Multiple paths to positive expectancy
There are multiple paths to positive expectancy.
Avg gain * win % - avg loss * loss %
Large profit factor, low accuracy:
($5 * .3) - ($1 * .7) = $.80
High accuracy, low profit factor:
($1.5 *. 7) - ($1 * .3) = $.75
Mid accuracy, mid profit factor:
($2.5 * .5) - ($1 * .5) = $.75
While these are just hypothetical examples, it's important to understand the trade-offs. Low
accuracy system stops out A LOT. In many cases, the profit factor is so skewed because
these systems tend to employ very tight stops, so the avg loss is very small, but the 10-20%
of runners account for most of the profit. Think Qullamaggie or Zanger with very aggressive
stops, looking for those 5, 10, and 20:1 trades. Or the long-term trend traders that try to
ride large, multi-month/year trends.
Low profit factor systems, where the average gain vs avg loss isn't much different, make
money through high turnover and locking in gains relatively quickly. I've even seen systems
where the avg loss was bigger than the average gain, but the accuracy was very high, so
overall it was profitable. Scalpers and short-term day traders tend to fall into this category.
Mid-profit factor systems tend to be a balance of both. Think of Minervini's characterization
of a 2:1 50% trader. These systems focus a little more on timing, taking partial profits, and
tend to use slightly looser stops, which helps keep the BA higher. Swing traders tend to fall
in this category.
Personally, I can't stand low batting average methods. It fucks with my head and I start to
sabotage my trading. I've tried to force myself to do it a number of times and I just can't
handle it mentally. So I widen my stop a bit, which reduces my stop outs and increases my
batting average to stay in more trades. Is this optimal? I don't really care, to be honest.
What's the point of optimal if I can't stick with it? I'd rather make progress doing something
less than optimal than to force something that I do inconsistently just for the sake of
optimal. Maybe someday I'll do the work to handle tighter stops and lower BAs, but I'm in a
comfortable space where I'm at now and my math works. There's more than one way to
skin a cat.
July 14
Stop loss setting and batting avgs
Dave Landry: "If you are constantly getting stopped out right before markets make a big
move, then your stops are probably too tight. I have worked with many traders who have
done just this. All that stood between them and becoming profi table was to loosen their
stops a bit. This can be counter intuitive for many, especially since tight stops seem to be
universally preached."
It's quotes like this and seeing in Minervini's book that 48% gain vs 24% loss is "optimal" for
a 50%-win rate that made me stop thinking super tight stops were required. For some
reason, people think that if you use something more than a 3-5% stop, then you're doing
something stupid. I used to think the same thing, until I started playing with variables in the
expectancy formula.
Let's say you're batting 30% like KK and your normal stats look like:
($6 * .3) - ($1 * .7) = $1.10
Let's pretend you widen your stop from 5% avg loss to 10% avg loss, doubling your avg loss
from $1 to $2. However, since you get poked out a lot less on intraday noise and stay in
more trades, your batting average improves by 10% from .30 to .40:
($6 * .4) - ($2 * .6) = $1.20
These are notional examples, but there's not a significant difference in the outputs. 10%
improvement may not sound like a lot, but psychologically, it feels a lot better.
I'm not suggesting widening stops just for the hell of it or widening your stop after you take
a position just to avoid getting stopped out. It must be part of your plan and risk
management from the start. You still need an edge. The only way widening the stop works
is if it improves the batting average. Otherwise, you're just increasing your losses. That's
why I only do this during up trending markets, where a rising tide lifts most boats, and I can
reasonably expect my batting average and average gain to be high. My goal is to stay in as
many potential winners as possible and ride the trend while the trend is there. My goal is
not to see how razor-thin I can make my stop and get kicked out of positions on normal
intraday volatility. In trading you have to find a good balance in the expectancy formula
variables that not only produce positive outcomes, but you can consistently do as a trader.
Most traders don't have a Qullamaggie or Zanger like psychology to handle low batting
averages. Even if they do, those same traders also probably suck at trailing and holding long
enough to get that 5 or 6:1 profit factor. In the same way that widening your stop only
works if your batting average increases, super tight stops and low win rates only work if you
consistently average many multiples bigger winners to pay for all the losers. Otherwise, your
math doesn't work. This is also why most can't replicate Qullamaggie - they can't handle low
batting average or they suck at trailing or both. If you suck at both, then is it any wonder
why you can't even be slightly profitable trying to replicate him? You have to figure out
what you can do consistently. If the math works, then you'll make progress.
July 14
Trading is a probabilities and numbers game
Trading is a probabilities and numbers game. I bring up trading math a lot because you can
learn a lot about trading if you understand the variables and how to manipulate them. You
start to understand how it is possible that successful traders can use a variety of approaches
and get positive outcomes. You can change the expectancy variables a number of ways and
still get a positive output.
If you're not making money, you can look at your trading outputs and isolate the problem.
maybe your batting average is really low and your profit factor (avg win/avg loss) isn't high
enough to push you to positive. Ok, that's useful information. You either have to find ways
to improve your batting average or you have to find way to push your profit factor higher or
both. Maybe your timing of stocks sucks or you're trying to trade in a poor mkt - both of
these affects your batting avg. Focus on being more patient to wait for the right R/R setups
or favorable mkt conditions. Maybe you suck at trailing stocks and getting those higher
profit factor numbers. Focus on way to trail your trades better. Maybe you're getting
stopped out a lot right before big moves. Focus on putting your stop a tad outside the noise
to keep you from getting chopped out on intraday volatility and keep you in a few more
trades that add to your bottom line.
If your batting average is good, but you aren't making money, then it can only mean that
your profit factor is too low to make you profitable. You are likely choking off your winners
(to get a higher batting average) or you are letting your losers get out of control, wiping out
whatever gains you make on the winners. Understanding the expectancy formula variables
can help you quickly figure out your performance problems. You can then develop a plan to
fix things and put you on the road to positive performance. People who claim you must do
things a certain way are professing their ignorance of basic math.