Currently profiling is in news and limelight. In the US the mere mention of word profiling has bad meaning. Racial profiling is the use of racial characters to determine how a person is likely to behave or to form conclusion about that persons occupation , income or likelihood of committing crime or buying products or services. There are laws banning racial profiling. But everyone in US , blacks, white, Hispanics, Chinese, Jews, Indians, or Koreans all get profiled in some way or the other. So police stop black driver more than white drivers, because based on past patterns they believe the likelihood of finding weapons or drugs is higher If there is a case of serial killing police starts looking for white lonely middle aged male. If you have to find an Indian in unknown city in USA, your probability is higher if you just find the nearest Dunkin' Donuts or Motel. If you see the flirting behavior in bars all around you it is also based on profiling. So using few pieces of information or past patterns we can quickly decide likely behavior of a person.
In reality profiling is all around us. Profiling is prevalent in all cultures. It is a deeply entrenched human behavior. In a world full of complexities it is our way of simplifying the world. It is more efficient way to handle information. It is based on past patterns we have seen and experienced. One of the biggest benefit of profiling to us is in improving our ability to make quick decision. That is why when it comes to trading profiling is good thing.
To quickly make a buy or sell decision or how much to risk on a trade decision in a fast moving market we must have "profiles" of:
- "good stock"/""bad stock",
- "lottery ticket stock"/"high conviction stock"
- "growth stock"/"value stock"
- "turnaround stock"/"cyclical growth stock"
- "100% plus mover stock"/"50% plus mover stock"/"20% plus mover stock"
- "junk stock"/"keeper stock"
- "one month hold stock"/"one quarter hold stock"/"hold for a year stock"
- "Chinese Stock"/"biotech stock"
If you have such profiles thought through based on historical behavior of stocks then you can make quick trading decisions. The effort involved in developing these profiles is one time effort. Once you develop, study, and internalize and embed such a profile in your brain, decision making is a snap. Given few pieces of information then you can make a quick decision. For example based on "biotech/drug stock'' profile when I see one in scan, I don't even bother to look at earnings or fundamentals, first thing I look for is whether there is a 250 million plus upfront deal with big pharma company. Or if I see a Chinese stock moving I know it is good for at least a 5 to 10% move.
Based on my past experience and study of the markets history I have such profiles embedded in my mind so when I see a stock reflexively I am trying to match it to right profile. Most of the time based on few pieces of information I would have profiled the stock in one slot or the other before I even look at earnings or news. This allows for quick ranking of opportunities, it speeds up information collection, and it improves speed of getting in and out of trades.
All successful traders use similar profiling techniques. Some are conscious of it and some are unconsciously doing it. If you study the process of expertise building in any field, it is more or less same. When you are novice, you have very few patterns or profiles of situation in your mind, as you develop expertise you have more and more such past patterns or studied patterns embedded in your mind as a result two things happen: first given a situation a novice might consider say 4-5 factors for decision making while a expert will bring in 1000's of factors to same decision making process and second the novice will take longer time to make a decision while expert will take less time.
Now if you spend years in trading you will gain such expertise or trading wisdom . But then it might be too late and costly way to gain expertise and wisdom. Like Og Mandino says about experience and wisdom : experience and wisdom is overrated usually by old men who nod wisely and speak stupidly. "In truth, experience teaches thoroughly yet her course of instruction devours men’s years so the value of her lessons diminishes with the time necessary to acquire her special wisdom. The end finds it wasted on dead men." The trick is to develop such expertise rapidly and systematically.
To do that you need to build profiles of kind of opportunities you want to find in your trading and document them and trade using those profiles. One such example of such a profile is :continued
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