The Reasons Why
|Edward Rooster||Jul 21, 2014|
I wanted to take a moment to explain something about the videos I've begun to post, my long form posts and all the charts I've posted on this blog.
The objective is two-fold: This blog is a form of note-taking for me, based upon my observations and the systems I use, to develop trade ideas, entries, and risk management related estimated costs per idea. The second objective is to share ideas to provoke thought with anyone generous enough to spend their time reading my blog.
In the Lefevere book, Reminiscences of A Stock Operator, a/k/a the traders' "bible" and investment classic, one notion that comes to mind is about how people love trading tips. People love ideas as if that is the entirety of the process of trading. In point of fact, ideas are just a beginning. The real work becomes finding out if a particular idea is suitable for an individual's trading "style", personality, bankroll and (both stated and unstated) objectives from trading.
Years ago, I began to adopt signal generating systems using rules evolved from the classic "turtletraders" rules which Michael Covel, noted commentator of the Richard Dennis trainees, shared, and which are still available online. But that was just a starting point, as I began to adapt the rules, based upon personal observations and many hours of spreadsheet tinkering. Later on, I studied the workings of William O'Neil proteges, adapting their studies of their trades to my evolving system. Lastly, I was very fortunate to become friends with a more experienced trader who in an act of generosity, took it upon himself to teach me a similar price-aware trading approach, which is a part of how I filter through the noise and find trading ideas but also helped me to refine my risk management rules even further. It's all mostly automated, and the final component is my discretionary selection of what are risk-equalized ideas (in terms of the risk of loss per trade idea).
What I share on this blog represents a fraction of what my systems, rules and disposition deliver to my eyes. I wanted to find ideas which were familiar or accessible. At the same time I want to share a message that you can focus on price and develop rules to give each "idea" a potential cost of risk, with the goal that you can make more from the wins than from the losses. Yes, there will always be losses.
I believe that a trading idea can be presented quickly. The key number I begin to focus on after the "finding" of an idea is the cost of being wrong. For stock trading, the cost would be derived from the difference between the entry price and the stop loss exit in case a stock stops its up-trend or down-trend. While I do surrender to the temptation to ponder the potential return (potential profit as a multiple of the anticipated cost of a loss), that gets close to "top" and "bottom" calling and other bad habits belonging to the "prediction" variety. I try to avoid as best as I can the idea of cutting short a winning trade still in progress.
The time frames in my approach have been primarily weekly data. When I use daily data, my eye gravitates towards periods which might as well be weekly in nature. Other stats are all derived from price, with a nod towards volume. Chart patterns, beyond the cup and handle which I was exposed to via O'Neill and Investors Business Daily, are generally beyond me. I don't trust my judgement when it comes to looking at patterns but I can rely upon price (and volume).
Finally, I admit that I still feel the allure of IBD/O'Neill-style earnings narratives and compelling macro-themes, based upon an earlier working life with some great professionals and from the inspiring narrative of some Market Wizard "gurus" but the "story" comes last. Without price, I can't go ahead with a trade idea, beyond watching. As an outlet for the "macro" side of my mental makeup, I will write long form posts or "retweet" like a madman stuff that I find interesting and it doesn't have to be actual trades, so much as ideas from social networks like twitter and/or tumblr. Nothing like a good "time suck" of the Interwebs to relieve me of the need to seek "meaning" in price movements. :)
There's more to say, but this is a starting point for more. Thanks for reading.