Category: Commentary

Great performers are made, not born?

David Brook from NYT has an excellent article on how ingenuity is probably achieved in any field.

The key factor separating geniuses from the merely accomplished is not a divine spark. It’s not I.Q., a generally bad predictor of success, even in realms like chess. Instead, it’s deliberate practice. Top performers spend more hours (many more hours) rigorously practicing their craft.

Public discussion is smitten by genetics and what we’re “hard-wired” to do. And it’s true that genes place a leash on our capacities. But the brain is also phenomenally plastic. We construct ourselves through behavior. As Coyle observes, it’s not who you are, it’s what you do.

 

4 types of trades

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Stock trading consists of 4 major types of trades.

The range-bound trade: the stock is tied in a range and will remain there until there is a significant change in the supply/demand dynamics. For this trade you fade any move to the boundaries of the range with a tight stop a little bit below/above the range. If the range is broken, you will lose small amount. It is good for scalpers with shorter trading horizon.

The breakout trade: in order to break from a range, a stock needs to experience a major shift in supply/demand. A dramatic occurrence. News or expectation of news. The news doesn’t have to be connected with the individual stock. It might be something that impacts the whole industry or market. Sudden change in participants’ confidence. Not every breakout will be caused by clear news. Often it will happen at no news at all. In any case, volume should be your tell how genuine the move is. Buy several cents above the range with a stop several cents into the range.

The reversal trade: not every breakout is genuine. Ranges are often manipulated in order to deceive market participants and free them away from their money. Again volume or more precisely the lack of volume should assist you in taking a proper decision.  Once you notice that the breakout is fake and the move exhaust itself, fade it with a target the upper boundary of the old range and stop the high of the day.

The trend trade: high-volume breakout from an extended range often starts new powerful trend. Many traders complain that they have missed a certain breakout, without realizing that if that breakout was genuine there would be multiple other opportunities to jump on board as the new trend evolves. Trend trading consist buying/adding at the dips or selling/adding at the rips. Entries on pullbacks offer a lower-risk way to participate in an established trend.

All 4 types of trades occur on different timeframes. What looks like a breakout trade on a 10 min chart might be part of a range-bound trade on a 1 day chart. Traders should specialize in one type of trade and in one timeframe, depending on their personal skills and preferences.

Learning from your own trades

“The only real mistake is the one from which we learn nothing.” – John Powell

“Learning is not a spectator sport” – D. Blocher

Having a daily routine

Dr. Brett Steenbarger has an outstanding article on the importance of keeping a trading journal and how it should be used as a tool to improve your performance. I have been writing a trading journal for two months now and I find it exceptionally useful. I thought that I might share the basic structure of my journal. It might be helpful to someone or I might receive a constructive feedback on it.

My trading e-journal consists of 4 columns.

In the first one I describe the trade I took. For example I just write: “long 400 AMZN @70.23” or “short 200 AAPL @115”. I also put the approximate time I initiated the trade.

In the second column I answer myself: why did I take that trade. What made me do it. Did I follow my trading strategy for the day/week or I just got excited and emotionally initiated a position. For example, your entry might consist of the following: entered on a pullback, stock was within 15% of all time high, market was picking up; or whatever entry criteria you have; I mention what was my exit strategy, when I initiated the trade. It is essential to know what triggered a trade and where would exit if wrong. If done often and long enough, it will become a habit.

In the third column I deal with the problem: what happened with the trade. Did I close it the same day and why? Did I kept it overnight and why? Did I make a profit or I lost?

In the 4th column I ask myself what did I learn today/this week? What did I learn from my profitable trades? How could I repeat them or make them even more profitable? What did I learn from my losing trades? How to prevent them from happening again? I am very specific in my thoughts.

Have an open mind and be ready to react to any situation. Keep in mind that in trading the inevitable never happens and the unexpected constantly occurs.