Invest in a setup idea.... | stockbee


Invest in a setup idea....

What do I mean when I say invest in a setup idea.
It means go in to significant detail of the setup idea. In order to make a setup work you need to really internalize the setup and make it part of you.
That means studying historically how the setup worked. Studding 1000, 5000, 10000 past instances of the setup ideas. And then from that derive leanings. That process is what is the key to building a long term edge in trading a setup.
When Livermore had a setup idea, he would go back in to his price records and see how it worked in past. He would always have a pad and pencil next to his bed according to his biography. If some setup idea hit him in the night , he would write it down and then next day he would research it.
A good example of investing in setups is Mark Minervini. He trades a setup similar to setup we discussed in Livermore setups in concept term. But what he has done is to go in to significant and when I say significant it is really beyond extra ordinary efforts. He has gone back in to history and studied the range breakout setup in nanoscopic detail. He has studied every stock that made big move in history. After studying it on every single technical factor, volume factor, pattern factor, eps, p/e., margin, analyst estimates and you name it, he has found patterns that are unique. He has created his own taxonmoy to classify and name those setup. And then he built a vast databse of these setups and how stocks perform post these setups. Based on that historical study he finds setups in current market. The setup ideas he found are unique and not in public domain. But the only way he could find it was because he invested extra ordinary man hours in to the setup idea. That is the secret behind his SEPA methodology.
If you invest significantly in setup idea you will find unique patterns and nuances that others have not found.
William O'Neil did same thing. And many other traders do that.
The effort makes them expert on their setup and when trading the same setup in current market they can instantly in their mind compare the setup to 20000 or 50000 past setup.
This is like chess grand master. Scientist have studied the brains of grand master and what they found is a grand master when making a move can compare the current state of the game to 50000 or more past games.A grand master in his mind instantly can look at a move of opponent and see how the game will unfold over next 20 to 30 moves, while novice looks at only 2-3 possible moves.
As against that most novice traders will abandon a setup if it does not work for 2 to 3 trades. Instead of investing in one setup idea for long period of time they flirt from setup to setup.
Significant investment in setup ideas is a recurring theme in every successful traders biography.
Most of us are not born traders.There are some who can instinctively get a setup idea in few minutes or weeks but most of us are duffers when we get in to trading. The solution to us duffers is to put in significant effort and then our game will improve.
So if you are serious about trading Livermore or Darvas setup or STIB, or EP or any other setup, invest significant effort in to understanding and internalizing that setup.
There is no other short cut to that....
Unless you understand that you will continue to chase others ideas or recommendations and never have confidence in your own setups.....

Reproduced from the Stockbee members site. On the members site there is more extensive discussion on these setups and how to set them up in Telechart. 



ataraxia101 said...

I hate to disagree with Pradeep because I know he is a good trader.

This over emphasis on finding and mastering the "set up" is missing the point. There are no sure shot "set ups". None. Also, it is not about finding the right set ups. Someone could trade ALL the same set ups as Mark Minervini but still their performance could be vastly different compared to Mark.

The best traders (Tudor or Seykota) would probably not right on a trade set up 30 to 40% of the time. No amount of studying set ups will make you more accurate than that.

Focusing on "set ups" or being right in a trade is basically equivalent to focusing on wrong statistics the way it was portrayed in the movie Moneyball.

The idea is to instead, focus on trading a few patterns, expect to be right only 30% of the time but cut your losses when wrong. The right statistic might be to focus on risk / reward on trades rather than the percentage win number.

Just saying...!

Pradeep Bonde said...

Risk management is integral part of these setup ideas. Risk management by itself does not lead to superior performance, even though many claim that. All elements of trading, setup, risk management, equity selection, timing are critical to superior performance.

rmike said...

Read up about SEPA methodology since you mentioned it. I may be mistaken, but on the surface it seems to be an amalgamation of Neglect + EP (positive surprise) + Quarterly/ Monthly momentum + PEAD. This kind of a setup can only be traded after the fact based on PEAD and persistence of momentum after the fact of an EP. I guess it would be difficult to build up an anticipatory bias before the fact (of EP) unless one had access to insider info.


Pradeep Bonde said...

no it is not based on EP. It is a base breakout setup. But the buy point is based on unique patterns he has discovered that show up before the b/o.

rmike said...

Hmmm.... Well, I guess that would be Minervini's proprietary methodology :). However, some very interesting methodologies of analyzing bases and breakouts from them are documented in Dr Samir Elias's book, 'Explosive Trading strategies'. I found it to be an interesting read. Even though i am aware that you eschew classical TA. It still is worth one's time as it throws up a lot of food for thought.


Pradeep Bonde said...

I have that book. It has some good setup ideas.