8/09/2011

How focusing on methods help

Reprinted from Stockbee Members site.


Market was stuck in a range for last 5 months. Finally it had a decisive breakdown to the downside.


We are at extremely oversold level . But extreme oversold level by itself is not bullish. Oversold markets can become more oversold.

You will see that many people are expecting a bounce at this level. Which is likely because most bearish moves are punctuated by vicious counter trend moves.

As far as I am concerned based on 50 plus years of market data , a bottom is formed once breadth flips from bearish to bullish. From a breadth number of 96/2146 at this stage , for breadth to flip you would need a virtual buying stampede.

And the real buy signal is when there is breadth thrust where the 10 day breadth ratio goes above 2. Any bounce before that will be a bounce in bearish trend.

If a real bull market starts from such level, it will not be one day phenomenon and you will get several opportunities to get in to it. Because ultimately what we trade is stocks and breakout on stocks. If there is a bull market methods like Stockbee Trend Intensity Breakout will show several good buy setups.

Methods trump markets and opinions. The Market Monitor is a method to determine likely market direction based on underlying breadth trends. It is data driven and logical. Same way we have methods to identify good momentum stocks, methods to identify buy points and sell points on them and method to time entries and exit. All these things are under the traders control. The market is not under our control, but our methods are. If we do a good job of following our methods profit is an outcome.

If we follow our method market risk is taken care of. As you would see those who followed Market Monitor signal have not lost a single dollar in this market turmoil. We got exit signal well ahead of time and were in cash and watching the market implode. That has been the story for years. Look at 2008 the Stockbee members were on right side of trend based on Market Monitor. And we got back in to market on March 10th 2009 once we got buy signal and stayed in the market for the duration of the move. Same way during the flash crash we were out of market in anticipation. And we got back in to the new bull move that started in August end right at beginning.

All of those decisions are methodology driven. They are based on model which works and is logical. You will see several Stockbee members have gone on to build their own models based on same logic as Market Monitor. They have improved upon it. So the underlying logic is robust and is applicable to all markets (members from different countries have created MM for their own country market based on same logic).

Market Breadth is structural data. It is inherent in the structure of the market. Markets are composite of thousands of stock moves. Market Breadth tells you how any stocks are participating in the market move.  That data tells you important thing about likely market direction. This fact is known fact for more than hundred years and people have built breadth based timing tools for hundreds of years. If you do a systematic study of those tools you will find how those tools are used. Once you do that you can build your own timing model. The effort involved is one time. At best it will take you 2 to 3 months to do that. But the payoff would be for rest of your trading career. That is the essence of the core philosophy "Methods Trump Markets.". Your primary focus should be on finding and perfecting methods.

As against that you will see lot of opinions and "secret" methods used by people.  Oh I can not tell you my method because others would copy it. Oh this is our proprietary indicator and so on and so on. If your method is based on logic and underlying market structure, it will work even if you share it with 100 million people. Because unless the underlying market structure changes the method will be valid.

As most of you who are old time members know every single method we trade is based on structural market anomaly. There are no secrets. Momentum is well known phenomenon and has been consistently shown to work. The trick is to build robust methods around it and we have several methods like IBD 200, Double Trouble, Modified Double Trouble,  Top 30 breakouts, Stockbee Trend Intensity Breakout, and so on  based on it. Even the Stockbee Lemonade 401K investing strategy is based on momentum. The other structural phenomenon we trade is PEAD or Post Earnings Announcement Drift. It is extremely well researched and proven structural anomaly in the market. The earnings breakout method is based on it.

One of the advantage of method based focus is , it is step wise process and a new trader can learn it. As trading is about procedural memory a method focus allows a new trader to learn a method by following steps. It allows him to understand the step wise logic involved in complete trading process. It allows you to customize the process for your own constrains like no access to market during working hours for working people or choice of different funds in 401K and so on.

In short if you want to be consistently profitable trader and survive the market for years focus on methods not opinions and "secret" methods. Hunt for transparent methods based on market structure not some "proprietary screener, or proprietary indicator, or proprietary chart pattern, or proprietary trading machine ". Develop your own methods and take control of your own trading.

Methods trump markets. That is the daily underlying philosophy which guides this site. And it is one of the reason the members site attracts so many members and continues to grow, because it allows you to learn a method , internalize it, customize it and develop confidence in your own trading skills. The kind of people who get attracted to the site are method focused. That is why you will see so many methods being shared by successful traders on the site. And many have gone on to start their own sites after developing their own method.

Focus on methods. That will allow you to master the markets. 
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