Every day I get emails from readers of this blog asking how should they learn to trade. They ask about some newsletter, or site or course and what do I think of it. Over the weekend there was lot of discussion about trading sites and courses. In the novice stage I spent over 250k buying various books , courses and subscriptions, so I have some experience of this field.
The most important thing you have to do from a setup idea is to convert it in to trading method. Lot of sites, newsletters, trading rooms can give you setup ideas but not necessarily the complete picture. And they can not make you successful trader unless something crucial happens. And that is you narrow your focus to setup and spend significant effort on it.
Distilling the essence of a setup is key. Having survived in this industry profitable for last 12 years and studied methods of hundreds of traders, I see same setup ideas packaged in different manners. Everyone gives their own setup variation of basic idea a new label, new name and new illusion of secret sauce. Basic setup ideas like breakouts, pullbacks, fading extreme strength or weakness, volatility expansion and contraction, and event driven breakouts or breakdowns have been around for ages.
If you are new to trading or get easily excited by marketing claims, take a step back. Try and understand the setup idea first. Follow a reverse engineering approach. Every time a Ipad or any other new electronic device is launched you will see a bunch of people who will systematically take apart the product and try and understand how it works and why it works and they also estimate the cost of the product based on component prices.
That is the approach you should take to any setup idea you come across. Take a setup idea , study it, if it makes sense to you and you want to trade it then spend significant effort and invest in the 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. The setup needs to move from just an idea to a instinctive reaction and behavior for you. It has to become "your' setup.
In order to do that you can study historically how it has worked. Some people do that by backtesting. Some do it by manually checking history. 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.
Expertise is developed by extensive study of narrowly defined field. When you spend significant effort and time on the setup there are permanent changes that happen in your brain. It alters the way you think or act when the same setup situation happens next time.
Such extensive setup study is common theme among traders biographies.
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. Near the end of his career Livermore wrote a book about setups that made him big money and how he discovered them. It is a good summary of what worked for him.
Darvas did same thing, he extensively studied the market and tried styles ranging from day trading, scalping, penny stocks, to newsletters and the work. Once he found his setup idea he extensively studied it and then setup his own rules to trade it.
Richard Love in his book Superperformance Stock also explains how he studied every stock that tripled in last 30 to 40 years. Then went back to see what factors lead to super performance and then formulated his own setup ideas. He was an expert on his setup idea.
William O'Neil built on the work of Love and built his own model and setup based on study of historical best performers.
Every trader who makes it in the market and survives decades in the market goes through similar process consciously or unconsciously.
They take a simple setup idea and spend time , effort , and money to perfect it. Then the setup becomes part of them.
If you invest significantly in setup idea you will find unique patterns and nuances that others have not found.
The effort makes you expert on their setup and when trading the same setup in current market you 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.
Unless you understand that you will continue to chase others ideas or recommendations and never have confidence in your own setups..... You will get excited by every newsletter email, or video, or marketing scheme...
Narrow your focus to one setup idea and exhaust all your effort on it before flirting with other ideas. and when doing that first select ideas that have worked for 100 years or more.