Why traders should focus on core concepts | stockbee


Why traders should focus on core concepts

I get lot of emails from readers about scans, specific chart patterns or entry and exits. All these things are about tactics. The more critical thing in trading is basing your trading strategy on a core proven concept. If the core concept is sound and based on proven anomalies rest is all about tactics. Tactics is the easy stuff.  
Everything that is traded here or discussed here is based on  core ideas like historical breadth analysis, factor  equity selection models, historic precedent analysis f biggest winners in market, proven anomalies like momentum anomaly and PEAD (post earnings announcement drift), and risk management. 

Core ConceptApplication

Market BreadthMarket Monitor
Equity selectionMomentum+growth+Event catalyst
Momentum AnomalyDouble Trouble
Momentum AnomalyModified Double Trouble
Historic biggest winners charactersGrowth stock+IBD 100 and 200
Momentum Anomaly IBD 100 + IBD 200
Post Earnings Announcement DriftEarnings Episodic Pivots
Post news announcement driftOther Episodic Pivots
Risk ManagementInitial stop placement 
Risk ManagementPosition Sizing Calculator
Risk ManagementFast exit on losing trades
Risk ManagementPartial exits
Risk managementExit in to euphoria
Risk managementHigher risk on conviction trades

If you feel these ideas can work for "you" and want to develop "expertise" at trading these ideas, you need to understand the core concepts in detail. The more you become knowledgeable at the core concept you will find it easier to trade methods based on that. You will be able to improve on them. The methods I trade are only "one of the ways to trade" these core concept. If you dig dipper you will find more possible ways to make them work. These are not the only core concept which work. Most of the things that work in he market are well researched and are in public domain. The latest book detailing many core concept that work in market is: Quantitative Strategies for Achieving Alpha (McGraw-Hill Finance & Investing)
Focusing on core concept that work in market is key to building a profitable strategy. As the  zen story  about learning goes, there are three types of people in the world. When they see a window or somebody shows them a window of opportunity:
  1. The first kind looks at the scene from the window admire it or criticise it and walk away or close the windows.
  2. The second kind piss all over the scene from the window
  3. Jump out of the window to explore more and then .......
they find more windows of opportunities.

1 comment:

Chad said...

Very true. Your one of the few traders I pay attention to because you understand that. I'm grateful that you're the first place I found when I first started looking for trading information. I learned some important concepts from you.

I daytrade using my own strategy. I started in August of last year, and for about 7 weeks now I've been consistently profitable -- more so each week. Before that I just about broke even before commissions. Which to me is very, very good. I think it's very rare to be consistently profitable that fast. I started trading based on one core concept I was curious about. For me it's vital:

Make sure every winning trade is twice as profitable as every losing trade.

That's gold for me. A license to print money.

Here are some other core concepts I feel are very important:

Simple is best, make it easy to know what to do.

Expect to take time learning how to trade, as you would if you want to learn guitar or any other skill. (I spent about 8 months getting an overview of trading before I started.)

Trade very small until I'm consistently profitable. Only then gradually raise position size so that any losses will only come out of winnings.

Develop a style for me and my personality and desires. (for example, I tried learning your methods, but I have to trade on smaller time frames then you do. Anything larger than 5 minute bars don't fit in my head:)

Move up stops as soon as it's safe.

Use stops.

Create scans that only show me the best stocks.

And very few, so I can focus on the best.

Only bet on a sure thing. Put the odds in my favor. Take only the trades that jump out at me and meet my specific criteria.(note on this, I found the ideas from the bestseller Bringing Down the House, particularly the section in the back, very useful.)

Create screen shots of all stock from my scan from each week and save them in a word document. This is for study so I build my experience quickly, and so I can look through it to investigate ideas I have.

Expect to make mistakes; develop such a good method that that's okay. (a very nice feeling, I'll add!)

Well, those are my core concepts :)